Floundering in COVID-19’s Third Wave
The growing number of COVID-19 cases, the mounting numbers of virus-related deaths, and the return to a strict nationwide lockdown are the top issues these days, while the country’s vaccination effort rolls out at a snail’s pace. Still, it does not look as though Ukraine will face the dramatic economic slump it saw a year ago, during the very first lockdown measures. Ukrainians are generally less scared of COVID-19 now, and restrictive measures are largely being ignored.
Relations with the IMF appear stuck, and Ukraine’s leadership seems in no hurry to get things moving in this area. Judicial reform, the anti-corruption infrastructure, concerns over the centralization of power at the NBU, gas prices and an audit of the COVID-19 Fund are the top items on the list the IMF is watching closely. At the level of the president, we do not see any intentional sabotage of reforms taking place, but it is clear that President Volodymyr Zelenskiy is being quite skillfully manipulated by his corrupt inner circle. Against this backdrop, any progress on the IMF front looks quite unlikely, until Ukraine faces really serious financial troubles.
“Wagnergate” and sanctions against oligarch Ihor Kolomoyskiy apparently are commanding far more of Zelenskiy’s attention than are the troubles with the IMF. The continued inflow of nonresident capital leaves the country’s financial officials relaxed, for now, about the delayed IMF program. At the same time, a Bellingcat investigation into potential treason in the president’s inner circle, which led to the failure of a secret operation by Ukraine’s military intelligence services, could have dramatic consequences for presidential Chief of Staff Andriy Yermak, and could put a cloud over Zelenskiy himself.
The gathering storm over Kolomoyskiy also portends considerable inconvenience for Zelenskiy, despite his apparent emancipation from his former sponsor. The president seems prepared to resist the oligarch’s ambitions and appetites, but it’s not so sure how ready he is to move on with return of $5.5 billion embezzled from PrivatBank, let alone to consider arresting Kolomoyskiy. For now, Zelenskiy will likely agree to tough action only under serious pressure from the West.
The economy is performing very unevenly. Industrial decline is deepening, down -4.6% y/y in February, despite good export prices. But consumption remains resilient, as retail trade sped up to +6.5% y/y in February. The farm sector is in the red, at -6.5% y/y in February, following poor results in the 2020 harvests. Inflation is on the rise, up +1% m/m or 7.5% y/y in February, on the back of global food prices. Budget collections are benefiting from rising inflation, and from a hryvnia that is weaker than it was a year ago. Prospects for external accounts have improved with the rising third wave of the COVID-19 pandemic, which promises to have an adverse impact on services imports for travels abroad. The hryvnia keeps hovering slightly above 28/USD, with only modest pressure, as an inflow of nonresidents buys up domestic government bonds.
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