[aaus-list] Ukraine economic assessment (fwd)

[M T Znayenko]

Subject: Ukraine economic assessment

UKRAINE WOBBLES AS THE FINANCIAL GROUND BENEATH IT TREMBLES
Ukraine's economy is in trouble, there is no doubt about it.

ANALYSIS & COMMENTARY: by Edward Hugh, Macroeconomist, Barcelona, Spain
Global Economy Matters, Sun, Oct 12, 2008 & RGE Monitor, New York, NY, Sun,
Oct 12, 2008

        "The medium-term outlook is sensitive to external developments and
policy responses. A benign external environment, featuring even
        higher steel prices and FDI, could produce growth in excess of 7
percent, but inflation could prove hard to control under a peg. Under
        an adverse external outlook, by contrast, the peg could lead to
external sustainability problems."  IMF 2006 Article IV Consultation
        Staff Report (February 2007) (
http://www.imf.org/external/pubs/cat/longres.cfm?sk=20411.0)

UKRAINE'S ECONOMY IS IN TROUBLE, THERE IS NO DOUBT ABOUT IT. The cost of
protecting debt against a sovereign default by Ukraine's government soared
to a record on Friday, following the arrival of a twin storm of both
political and financial uncertainly.

The Ukraine president Viktor Yushchenko announced earlier in the week (only
to be challenged on Saturday by his perpetual rival Julia Tymoshenko) that
he was going to call what would be the country's third parliamentary
elections in as many years just as the central bank found itself forced to
step in and take control of the country's sixth-largest bank while the
country's currency - the hyrvnia - went for a nose-dive.

With the benefit of hindsight the IMF forecast cited in the paragraph above
has been extremely prescient. During the "benign external environment stage"
Ukraine's economic growth has been substantial, steel prices have been high,
and FDI flows (especially into the banking sector) strong.

As a result inflation went through the roof. Now we have entered the
"adverse external environment" stage, and steel prices are falling while
bank and other external finance flows reverse direction. The sustainability
issues are evident, and the coming days are going to be critical.

Ukraine is not alone in having problems at this point (but here there is no
strength or consolation to be found in company), and stock markets around
the globe fell dramatically last week. Ukraine's PFTS bourse was, thus, only
one among several that found themselves compelled to suspend trading.

Ukraine's stockmarket was closed for the second time in the week on
Wednesday (trading had previously been suspended on Monday) following an 11
per cent drop in shares on Tuesday (with banks plummeting between 22 and 26
per cent, and metal producers slumping from 13 to 16 per cent).

Trading did recommence again on Thursday, only to see an additional 14
percent in value wiped out, and the doors firmly barred again on Friday.
Markets will now remain closed until Monday, when, at the time of writing,
they are scheduled to open once more.

The PFTS index has now lost 41 percent since the start of September, when
the large scale investor pull-out from Russia really got underway, and is
down 73 percent since the start of the year, a rollercoaster performance
following the 130 percent rise last year. [To see the chart and a series of
charts go to http://globaleconomydoesmatter.blogspot.com/index.html]

CREDIT DEFAULT SWAPS SOAR
Credit-default swaps on Ukraine's $14.9 billion state debt jumped by 473
basis points to 1,700, the biggest one-day advance, according to CMA
Datavision prices in London. Ukraine now is priced as having the highest
risk of default among Europe's emerging markets.

Ukraine is highly dependent on foreign investment at a time when credit
markets around the world are frozen. Ukraine's current account deficit has
surged strongly this year to a projected $7.7 billion (up from about $2
billion). At the same time annual inflation soared to a record 31 percent in
May and was still stuck at 25 percent in September.

The central bank has already spent an estimated $1 billion supporting the
hyrvnia after it fell as much as 12 percent against the dollar during
September and early October. The intervention reduced foreign reserves to
$36.5 billion yesterday and pared the decline in the hryvnia, which
strengthened by 6.6 percent on Friday to reach 4.9987 per dollar. This
followed a drop to 5.9 to the dollar on Wednesday (or a cumulative 20%
devaluation since early the start of September).

All these numbers are large, whichever way you look at them. And this kind
of intervention is expensive, and while Ukraine is not on the brink of
bankruptcy (yet) it cannot continue for that long. Reserves already fell in
terms of months of next period imports from 4 months to 3.7 between Q1 and
Q2 2008 according to central bank data. At the same time Ukraine's external
financing requirements have risen sharply in recent years (see chart below).
[To see the chart and a series of charts go to
http://globaleconomydoesmatter.blogspot.com/index.html]

BANKS TAKE A BEATING
The National Bank of Ukraine also took over the management of Prominvestbank
during the week, and imposed a moratorium on payments to creditors for six
months, triggering generalised credit rating downgrades.

The move came after nearly a week of local media reports, which were
followed by queues outside banks and in front of ATMs, that Prominvestbank
was in difficulties due to heavy involvement in Ukraine metal and real
estate industries - both good earners until as late as last month, but now
sectors which face massive losses due to falling international commodity
prices and more costly credit.

Moody's investor services expressed concern about the ability of Kiev-based
Prominvestbank - which had a reported 27.6 billion hryvnia ($5.1 billion) of
assets as of Sept. 30 " to continue its operations as a viable stand-alone
entity".

In a report written by analyst Yaroslav Sovgyra, and was published Thursday,
the ratings agency said "Prominvestbank's franchise and the overall credit
profile have been significantly impaired in light of the recently
experienced run on deposits by the bank.'' Moody's cut its foreign-currency
deposit grade for Prominvestbank to Caa2, the fourth-lowest ranking, and
down from B2. Fitch Ratings cut Ukraine's credit outlook to "negative'' from
"stable'' on Sept. 25.

Ukraine's banks owed a total of $38.4 billion as of July 2008, according to
central bank data. To put things in perspective, this could be compared with
the estimated $61 billion owed by Iceland's three collapsed banks. But the
foreign indebtedness of Ukrainian banks has grown rapidly in recent years,
doubling in 2006 to $13.87 billion, from $6.75 million in 2005.

Much of the lending (around 50%) is forex denominated, and although the
total private debt to GDP ratio (65%) is comparatively low, lending has been
rising at a very fast rate (75% per annum).

Around 30% of Ukraine's total foreign debt ($128 billion or around 65
percent of GDP in 2008 according to IMF estimates) is owed by commercial
banks.
In an attempt to address the crisis, the Ukraine central bank has injected
7.795 billion hryvnia into the banking system since the beginning of
October, following 5.96 billion lent to banks during September.

The problem is much more extensive than Prominvestbank itself, with shares
in Raiffeisen Bank Aval, Ukraine's second-biggest bank by assets, also down
74 percent this year. Shares in AKB Ukrsotsbank, the country's
fourth-biggest bank, have slumped 79 percent.

Ukraine's banking sector appeared even more shaky following the Prominvest
decision than it did before it, with numerous banks formally applying for
government assistance. According to intefax a total of 25 loan institutions
have filed requests for low- interest credits or other state financing.

Local newspaper Kommersant-Ukraina named Narda bank (another in the top ten)
as one of the banks seeking government financing. Narda are set to receive a
290 million dollar bail-out package to cover approximately 230 million
dollars of external debt, according to the report.

Other Ukrainian banks reported to be asking for help on Thursday were
Rodovidbank, Alfa-Bank, Kreditprombank, and Finansi i Kredit bank, according
to an article in Economicheskie Izvestia. The article said that the central
bank had already approved 23 of 25 assistance package requests - and that
they were worth in total around 620 million dollars,. Banks applying for
cash injections account for something like 25 per cent Ukraine's banking
sector.

Apart from Kazakhstan, Ukraine is currently the only government among
Europe's emerging markets with credit-default swaps currently trading above
the 1,000 basis points level. But even Kazakhstan debt is way below the
Ukraine equivalent, with contracts on Kazakhstan jumping to 1,050 basis
points from 759 basis points on Friday as the government increased sevenfold
the limit on retail bank deposits guaranteed.

The problem is most certainly becoming a regional one, and extending across
Eastern Europe, with contracts on Russian government debt up 179 basis
points (to 559), their highest level since at least 2004. Credit-default
swaps on Turkey rose 138 points to 552 points, while those on Hungary
increased 116 points to 458.

As I have argued in a number of previous posts Ukraine is evidently
suffering from a wide variety of problems, including institutional chaos and
ongoing population decline, and it is not really surprising that it should
be singled out as the country destined to lie at the heart of the
forthcoming CEE "correction".

STRONG GDP GROWTH
         "The growth forecast for 2008 reflects strong performance during the
first half of the year, terms-of-trade gains, and indications of a
         bumper harvest," the October 2008 IMF World Economic Outlook report
stated. "Going forward, growth is projected to decelerate
         markedly, reflecting weaker export market growth, slowing real wage
increases, moderating terms-of-trade gains, and higher financing
         costs." [http://www.imf.org/external/pubs/ft/weo/2008/02/index.htm]

The current events in Ukraine may well take some observers by surprise,
since the general impression has been that the economic performance has been
solid and GDP growth has been strong in recent years, and this has given the
impression that the underlying reality was sound, which it basically hasn't
been.

The country has been bedevilled by constant infighting, while at the same
time a combination of strong migration of Ukraine workers to external
destinations and very long term low fertility has meant that the country
endemically suffers from acute labour shortages as the population both ages
and declines comparatively rapidly. Hence, in my view, the absurdly high
levels of inflation we have been seeing.

Nevertheless, real GDP has grown by 7.5 percent a year on average since
2000, in line with other CIS countries, and indeed that rate has been higher
than in most other transition economies: whether or not this growth was
built on sand is what we are now all about to find out. [To see the chart go
to http://globaleconomydoesmatter.blogspot.com/index.html]

GDP was up at a 7.1% y-o-y rate in the January to August period, and in fact
the expansion has even been accelerating in recent months largely, due to
the good harvest and the increase in agricultural output - up 24.4% January
to August. Manufacturing output has also been doing well, driven by a
seemingly unquenchable thirst for steel in Russia, and was up 7.3% y-o-y in
the January-August period.

Construction, on the other hand, has now been in recession for some time,
with output down 5.3% y-o-y in the first eight months of the year. The
decline in construction is a reflection of the growing credit difficulties
the economy has been having, and the slowdown has been making its presence
felt in domestic consumption generally, with the rate of retail sales
increase (while remaining strong) starting to taper off, falling from 10.4%
y-o-y in Q1 to 8.2% in Q2.

And as we know, the recent Russian tank excursion through the Roki tunnel
has meant that Russia is now nothing like so thirsty for steel (see below),
and as a result, we should expect to see headline Ukraine GDP growth
dropping fairly rapidly (we could be down to a 3 or 3.5% annual rate by the
end of Q4, with more downward movement to follow as we move into 2009), as
the country gets caught in the twin pincer of an internal credit crunch
(sudden stop) and a sharp drop in external demand for its key product.

OVERHEATING AND THE INFLATION PROBLEM
Evidently the Ukraine economy was pushed well beyond its short term capacity
limits by a combination of expansionary fiscal and incomes policies (real,
inflation adjusted, income was up 13.4% y-o-y in January-August) and high
steel prices (both of which fuelled very strong domestic demand growth), and
these were simply reinforced by very rapid money and credit growth.

These factors, together with rising food and energy prices, lifted CPI
inflation to a peak of 31% percent in May (see chart below), since which
time the rate has fallen back, but only as far as the 24.6% rate registered
in September. [To see the chart go to
http://globaleconomydoesmatter.blogspot.com/index.html]

Core inflation has also risen - with producer prices still rising at an
annual rate of 42.7% in September (having peaked at 46.3% in July, see chart
below), while real wage growth continues to be substantial, and inflation
expectations remain at a very high level. [To see the chart go to
http://globaleconomydoesmatter.blogspot.com/index.html]

CURRENT ACCOUNT DETERIORATION
The Ukraine current account deficit has deteriorated sharply because of the
very strong domestic demand growth and, more recently, the eroding
competitiveness of Ukraine manufacturing industry. This has loss of
competitiveness has occurred despite significant improvements in the terms
of trade. This favourable situation is now coming to an end and in all
probability even reversing as steel prices drop substantially.

Capital inflows, and especially FDI, which have been strong, may now well
reverse. Private external debt and debt rollover have risen sharply, leaving
the economy more sensitive to balance-sheet risks and deteriorating global
liquidity conditions, according to the most recent staff report by IMF
economists.

The IMF estimate (October 2008, WEO) that this years current account deficit
will rise from 3.7% of GDP in 2007 to 7.2%. [To see the chart go to
http://globaleconomydoesmatter.blogspot.com/index.html]

Fiscal policy has been dangerously expansionary in the face of the rising
inflationary pressures and the deteriorating current account position.
Nominal spending has risen by an average over 30 percent a year since 2003,
stimulating domestic demand and increasing the size of the government
sector. This growth reflected rapidly rising public-sector wages and social
transfers and, in 2008, partial restitution of Soviet-era bank deposits that
had been wiped out by hyperinflation.

Deficits have been moderate, as spending growth has been paid for by
inflationary revenue windfalls that fiscal policy itself has helped bring
about. Nevertheless, the fiscal stance has been procyclical and Ukraine is
one of the few countries in Eastern Europe to have increased its fiscal
deficit as capital inflows have surged.

STEEL DEPENDENT ECONOMY
In what is now a sign of the times Ukraine's biggest steel mill, owned by
the ArcelorMittal group, reduced steel output by 10.5 percent to 5.471
million tonnes in January-September 2008, according to Ukraine news agency
reports last week.

The reports suggested the ArcelorMittal mill had decreased rolled steel
output by 12.4 percent to 4.663 million tonnes so far this year, while pig
iron output fell by 9.3 percent to 4.935 million. The company had previously
increased steel output to 8.103 million tonnes in 2007 from 7.6 million in
2006.

Just over the border, OAO Severstal, Russia's largest steelmaker, also
announced last week plans to slash output in Russia, the U.S. and Europe by
as much as 30 percent in October and review full-year forecasts. Production
is to be cut 30 percent in the U.S. and Italy, and 25 percent in Severstal's
home town of Cherepovets in Russia.

Steelmakers from China and South Korea to Austria and Russia are curbing
output as demand for cars and buildings weakens, and as banks withdraw
funding for new plants. OAO Magnitogorsk Iron & Steel, Russia's
third-largest producer, Posco, Asia's biggest stainless steel maker, and
Voestalpine AG, Austria's top steel company, all signaled cuts in production
plans this week.

The production and export of steel is an important pillar of the Ukrainian
economy, and steel production accounts for more than a third of total goods
exports (equivalent to some 12 percent of GDP). Thus real GDP growth in
Ukraine is closely linked to steel prices. During the global economic
upswing of the past few years, along with a wider surge in metals
valuations, steel prices have risen dramatically, thus underpinning
Ukraine's mostly favorable export performance and impressive GDP growth
ever.

Although steel prices had been holding up till very recently, the current
global financial turmoil is having a dramatic impact on car, construction
and investment activity, all of which impact steel prices and we may
therefore expect significant adverse effects on Ukraine growth and export
receipts. A key issue for the future is, of course, how Ukraine's economy
can be made less dependent on such global price volatility in one key
product.

SHARP STEEL DOWNTURN
As recently as Sept. 4 OAO Severstal had been suggesting that output would
rise 31 percent to 23 million metric tons this year, so the slowdown has
been very rapid indeed. Goldman Sachs Group Inc. yesterday cut its 2009
steel price forecast by 29 percent. Global export prices for hot-rolled coil
steel, a benchmark, have declined 19 percent since July, according to
Bloomberg Metal Bulletin data.

And the slump doesn't only affect current output, investment is also
affected. Thus Austrian steelmaker Voestalpine announced during last week
that it is considering delaying a decision on building a new steel plant on
the Black Sea due in part to the financial crisis. Voestalpine had been
planning to build a plant with a 5.5 million tonne capacity in either
Bulgaria, Romania, Turkey or Ukraine, with a cost which investment analysts
estimate to be in the 5 to 6 billion euros ($6.7-8.2 billion) region.

HYRVNIA UNDER PRESSURE
       While the official exchange rate is set as Hr 4.95 – plus or minus
eight percent – to the U.S. dollar, some exchange booths were
        offering Hr. 5.5 to Hr 6 for $1. Kiev Post Report

The hyrvnia - Ukraine's national currency fell to an eight-year low last
Wednesday, following the decision of the National Bank of Ukraine to widen
the currency's trading band. The National Bank, which has $38 billion in
foreign exchange reserves, is now engaged in a delicate balancing act since
while on the one hand officials are promising "strong interventions" to keep
the hryvnia at roughly five to the dollar, international financing sources
are drying up and Ukraine is running a growing current account deficit,
which hit nearly $8 billion in July.

The strategy appears to be not to waste foreign exchange reserves, defending
an arguably un-defendable exchange rate, but to conserve reserves to support
banks and corporates to meet external debt service payments falling due and,
also, to more generally prop up the banking sector. The problem is that the
NBU can either support the currency, or support the banks and corporates but
it does not really have enough foreign exchange reserves to do both at once.

Ukraine's central bank has weakened the currency's official rate against the
dollar and widened its trading limits on October 7. The currency's new
official rate until the end of the year was weakened to 4.95 per dollar from
4.85 and it will be allowed to rise or fall 8 percent from that level,
compared with the previous 4 percent.

The hryvnia has slumped 18 percent against the dollar since Sept. 2, when
President Viktor Yushchenko's party broke from its coalition with Prime
Minister Yulia Timoshenko. Yushchenko dissolved the parliament yesterday,
calling for new elections.

The managed currency is also being pushed down by demand for dollars from
local banks and companies who need to pay down debt which they can't
refinance so they have to buy dollars and pay back now. Exporters seeing
this situation are also postponing selling dollars hoping for more local
weakness down the road.

Nationalnyi Bank Ukrainy, which kept the hryvnia little changed against the
dollar throughout 2007 and 2006, allowed it to trade more freely this year
to help combat inflation, now at 26 percent. The bank strengthened the
hryvnia's official rate by 4 percent to 4.854 per dollar in June, after
leaving it at 5.05 per dollar since April 2005.

DECLINING POPULATION THE ROOT OF ALL EVIL?
One of the things we should all now be learning as we look out across what
is currently happening right across Eastern Europe (and I do mean right
across) is that what we have is an environment where a number of long term
underlying problems persist.

These range from a lingering and heavy state presence in the economy, high
and enduring inflation which steadily eats into the export competitiveness
of manufactured goods and services, wage pressures which stem from labour
supply shortages produced by out-migration and long term low fertility, and
heavy balance sheet exposure due to an extensive euro- or dollarization of
the banking sector (the later being the Ukraine case).

The large current account deficits which follow from the above, and the
consequent ongoing dependence on the arrival of substantial capital inflows
can create a vulnerability to short term shocks which puts the entire
macroeconomic framework at risk. The current credit crunch is, of course,
almost a text book example of just such a short term shock.

This danger of a strong correction in adverse times becomes even greater (as
we are now seeing) if measures are not taken (which they weren't in
Ukraine's case, see this post) to drain excess liquidity from the system (by
running a fiscal surplus for example), to loosen labour supply constraints
by facilitating inward migration of unskilled workers, and to accelerate the
pace structural reforms - and particularly those which facilitate the
development of "greenfield" investment sites which help channel capital
flows towards productivity-enhancing uses and in so doing raise exports.
Unfortunately, at least this time round, it would seem it is a little late
in the day for this kind of advice.

So to answer the question I somewhat provocatively inserted at the head of
this section, Ukraine's declining population is not 100% of the problem, not
by a long stretch it isn't, but it is an important component, and does form
a context in which the other parameters need to be situated, and this
dimension of the current crisis in Ukraine is all the more important since
it is one which is normally ignored, and even more to the point, has been
left unattended for so long that it has become an issue which it is very
hard to address.

A DECLINING AND AGEING POPULATION
According to data from the State Statistics Committee , Ukraine's population
fell by 290,220 in 2007. That is a rate of only just short of a million
people less every 3 years. Simply there are more people dying every year
than are being born, with 472,657 births being registered (up 12,000 from
460,368 for 2006) and 762,877 deaths (down slightly from 758,093 in 2006).

What this means is that Ukraine's population is now falling very fast, at an
annual rate of 0.675%. And remember this is the natural decline, not
counting out migration. As we can see in the chart below the Ukraine
population peaked in 1993, and has been in some sort of free-fall ever
since. [To see the chart go to
http://globaleconomydoesmatter.blogspot.com/index.html]

There are a number of factors which lie behind this dramatic decline in the
Ukrainian population.

[1] One of these is fertility, which is currently in the 1.1 to 1.2 Tfr
range. In fact Ukraine's fertility actually dropped below the 2.1
replacement level all the way back in the 1980s, but somehow people haven't
seen fixing this "bust" as being in any way particularly important.

[2] A second factor which is also important is life expectancy, and in the
Ukraine case the trend in male life expectancy has been most preoccupying,
since it has been falling rather than rising in recent years. In particular
male life expectancy which is currently running at around 64.

Apart from stating the obvious here, we should note that the deteriorating
health outlook which this low level of life expectancy reflects places
considerable constraints on the ability of a society like Ukraine to
increase labour force participation rates in the older age groups, and this
presents a big problem since increasing later life employment participation
is normally though to be one of the principal ways in which a society can
compensate for a shortage of people in the younger age groups.

[3] The third factor influencing population dynamics is obviously migration.
Ukranian out-migration since the turn of the century is distinguished by two
key tends: a) a reduction in intensity when compared with the very dramatic
population movements which were so characteristic of the 1990s, and b) a
significant change in destinations. From migrating East the Ukrainians are
now moving West.

There is little in the way of systematic data here, but there is national
level data on the numbers of Ukrainians who now live and work in Portugal,
Spain and Italy, together with plenty of anecdotal information about
Ukranian migrant workers in Latvia, the Czech Republic, Poland and elsewhere
in the EU 10.

According to information provided by Ukrainian diplomatic missions, 300,000
Ukrainian migrants may be working in Poland, 200,000 each in Italy and the
Czech Republic, 150,000 in Portugal, 100,000 in Spain, 35,000 in Turkey, and
another 20,000 in the US.

According to official information based on the number of permits issued by
the Russian Federal Migration Service, some 100,000 Ukrainian citizens
currently work in Russia, although the real number of Ukrainians working
there is often estimated to be more in the region of 1million.

WITH FEWER AND FEWER PEOPLE AVAILABLE FOR WORK
This out migration is very significant from the economic point of view,
since the majority of those working abroad send money back on a regular
basis (see chart below which shows World Bank estimates for Ukraine
remittance flows) while at the same time are not present in the country to
offer themselves for the work which this extra money creates.

So out migration and the accompanying remittances are one thing in a high
fertility, growing population like that which is to be found in Ecuador or
the Philippines, and quite another in the long term low fertility, declining
population environment of Central and Eastern Europe. Hence all that demand
driven wage inflation.

As we can see from the data in the chart below (which the World Bank
Economists themselves recognise if surely a substantial underestimation) the
flow of remittances into Ukraine has increased steadily in recent years. [To
see the chart and a series of charts go to
http://globaleconomydoesmatter.blogspot.com/index.html]


According to the World Bank remittances amounted to approximately 1% of
Ukraine GDP in 2007, a number which seems rather small given the number of
migrants involved, and one may suspect here that the data is rather
underestimating the scale of the flows, but even as it is this amounts to a
fiscal stimulus of 1% of GDP as a minimum.

As a result unemployment has been falling steadily over the last two years:

According to data from the Ukraine statistics office the official rate of
unemployment stood at 1.8% of the economically active population in August
2008 (down from 2.4% in January).

Now these numbers are undoubtedly an underestimate of the true levels of
unemployment (the ILO compatible rate is the much higher 6.2%, but given the
very special health situation in Ukraine we need to ask ourselves just how
many of those who are formally included in the ILO classification are
actually fit for work in a modern economy) but they do give an indication of
the trend, and it is clear that some parts of the Ukraine labour market have
been suffering from acute labour shortages, and hence the wage-push
inflation the country has been experiencing.

Wages have been rising (see chart below) [To see the chart go to
http://globaleconomydoesmatter.blogspot.com/index.html] at a rate which has
been way above the combined inflation and productivity increase levels for
many years now, and although wages did start from a very low level, and some
degree of "catch up" was not only inevitable but also desirable, the
complacency of the relevant authorities (both nationally and
internationally, IMF, World Bank etc) in the face of such levels AFTER
inflation really started to take off really does strike the external
observer as quite extraordinary.

In many ways Ukraine could be considered to be a rather important strategic
component in the whole Eastern labour supply and demographic puzzle, as we
are no about to see, since many have been hoping against hope that as the
recent expansion steadily drained labour supply resources across the whole
region, then Ukraine would simply be able to step up to the plate and offer
countries as diverse as the Baltics, Poland, Hungary, the Czech Republic and
Russia the labour they needed to keep their own inflation in check.

This view implied, in my opinion, that Ukraine was to become some kind of
"fish farm" for the rest of Eastern Europe, and that view as we are seeing
was always based on a huge misunderstanding, since a low fertility society
simply cannot export labour indefinitely, and if it does try to do so, then
internal wages simply explode.

IN CONCLUSION
Of course, such demographic considerations may well seem to be rather
distant from the very real and pressing drama which is breaking out in
Ukraine.

Obviously there are a great many lessons to be learned from the current
"undoing" of the Ukraine economy. One of these is undoubtedly the
desirability of moving away from dependence on one or two key commodities
(steel, agriculture) whose prices are known to be very volatile and tied-in
intimately with the global business cycle.

Another would be the belated recognition that while FDI inflows are vital,
such flows into the banking and financial sectors are not the same as
inflows to fund greenfield industrial site development, and that an economy
which is dependent on one or two primary commodities on the one hand, and
construction associated business and financial services on the other simply
is not a balanced or a stable one.

It is also clear that, whatever the well-wishing we would all like to make
towards a rise in living standards for the Ukranian people, it is now
abundantly clear that this cannot be achieved via a lack of vigilance
towards the dangerous impact of spiraling wage-cost inflationary pressure,
not can policy be adequately conducted under such circumstances by a central
bank whose main priority is steering the value of a currency.

Laxity and tolerance towards the inflation menace ultimately comes at a very
high price, especially when it is allowed to get out of control in the way
it has been in the Ukraine.

Finally, even if in fighting the short-term battle for survival which is now
going to confront the Ukraine economy and its banking sector longer term
demographic concerns are inevitably going to take a back seat, I think we
need constantly to keep in mind that a failure to come to grips with this
key ingredient in Ukraine's problem set will surely only lead to more of the
same at some point in the future. So if you don't especially like suffering
- and who does - then act, and act now.
------------------------------------------------------------------
FOOTNOTE: Edward Hugh is a macro economist, who specializes in growth and
productivity theory, demographic processes and their impact on macro
performance, and the underlying dynamics of migration flows.

Edward is based in Barcelona, and is currently engaged in research on aging,
longevity, fertility and migration, and the impact of all of these on
economic growth. He is currently working on a book "Population, The Ultimate
Non-renewable Resource?" He is a regular contributor to a number of
economics weblogs, including India Economy Blog, A Fistful of Euros, Global
Economy Matters and Demography Matters. He was, in fact, a founding member
of all these weblogs.

Mr. Hugh follows in detail the Indian, Italian, Spanish, German and Japanese
economies. He has a more than a passing interest in the economies of Turkey
and Brazil and in the emerging economies of Eastern Europe. E-mail:
ed.hugh at gmail.com
-----------------------------------------------------------------------
LINK: http://globaleconomydoesmatter.blogspot.com/index.html
LINK:
http://www.rgemonitor.com/euro-monitor/254001/ukraine_wobbles_as_the_financial_ground_beneath_it_trembles
-----------------------------------------------------------------------
NOTE:  If you do not wish to be on the USUBC distribution list please send
an e-mail to ususb at usubc.org.
=============================================
Mr. E. Morgan Williams, Director
Government Affairs, Washington Office
SigmaBleyzer Private Equity Investment Group
President/CEO, U.S.-Ukraine Business Council (USUBC)
Publisher & Editor, Action Ukraine Report (AUR)
Trustee: "Holodomor: Through The Eyes of Ukrainian Artists"
1701 K Street, NW, Suite 703, Washington, D.C. 20006
Mobile in Kyiv:
mwilliams at sigmableyzer.com; mwilliams at usubc.org
www.sigmableyzer.com; www.usubc.org

-- 
Myron O. Stachiw
Director, Fulbright Program in Ukraine
4 Hrushevskoho Street, Suite 305
Kyiv  01001  Ukraine
tel.: ; 279-2324
mobile tel.:
fax:
e-mail: mstachiw at fulbright.com.ua
www.fulbright.org.ua