Ukraine's post-euro blues

By Graham Phillips

There is no doubt Euro 2012 was successful on a sporting level. However, nearly six months later, Ukraine is saddled with heavy debts, hotel rooms it can't fill, and a rapidly devaluing currency, as the country's economy teeters on the brink of recession. GDP is going down, unemployment is rising, salaries are stagnating and fears on the future are mounting. So, did Ukraine shoot itself in the foot with Euro 2012?

The Economic Background

Ukraine's economy hit the buffers after the collapse of the Soviet Union, with GDP falling year-on-year as the newly independent Ukraine endured hyperinflation and a collapse in economic output while struggling to find its feet. In 1999, the Ukrainian economy fell to its lowest point, with GDP around half what it had been the year before independence.

Then, the turn of the century saw the start of an infectious economic boom, with fellow CIS states posting figures attesting to huge economic growth. Estonia and Latvia enjoyed year-on-year growth in excess of 10% pre-2008, as the former Soviet states came to the fore in a modern Europe. While Ukraine never quite enjoyed these numbers, the Ukrainian economy enjoyed a sustained growth period from 2000 up until 2008, posting an impressive 7.9% growth in 2007, and ranking 45^th in the world GDP table, with $188 billion.

However, 2008's global credit crisis knocked Ukraine for six. In Kiev, work on scores of ambitious apartment buildings and business centres literally stopped overnight. Meanwhile, a freefalling Ukraine hryvnia went from 5 to the dollar, to 8, with the government intervening to peg it at that rate. 3% unemployment in 2008 collapsed to near 9.4% in 2009. Inflation topped 26% as panicked investors withdrew from a country which seemed on the cusp of economic meltdown. Economic growth dropped to 2.1% in 2008, plunging to -14.8% in 2009.

In no small part due to IMF intervention, with the aid bailouts to the tune of $11 billion in 2009 and over $15 billion in 2010, Ukraine dragged itself back from the brink, to 4.2% economic growth in 2010. By that time, Ukraine was starting to look forward to hosting the Euro 2012 football tournament, as hopes started to crest on an event many believed would see huge capital flowing into the country.

Ukraine and Euro 2012

In 2008, with preparation work hit by the economic crisis, it had seemed Ukraine was set to have Euro 2012 taken from it, with UEFA President Michel Platini warning of "critical slippages" in preparation, and Scotland twice asking to take over as host. Euro 2012 was effectively rescued for Ukraine in 2009, with Yanukovych committing to UEFA President Michel Platini that his country could carry out all the necessary work.

To this end, $6.6 billion was pumped from the state coffers into the preparation project. Private investment saw the total figure stand at $13.4 billion, as Ukraine scrambled to build hotels, upgraded roads and city centres, and completed work on stadiums (in Kiev, just days before the event kicked off).

Most of Ukraine got caught up in what many thought would be a gold rush, with billions flowing into the country from wealthy European football fans. Certain hotels in host cities Donetsk, Kharkiv, Kiev and Lviv increased their prices by 1000%, with reports of some establishments going so far as an 8000% rise in tariff. Despite a campaign to end 'price gouging', reports of the rates hit back in Europe, and started to affect potential visitor numbers.

In the end, Euro 2012 passed off fairly successfully, with a reported 1 million overseas visitors coming to Ukraine in the month of June, generating a state-reported $1.5 billion. Some were sceptical about this figure, estimating $800 million and fewer visitors, with the spectacle of empty seats, even at the final, stalking the tournament. In any case, there are few who believe the numbers would not have been greater had it not been for the pre-tournament greed which seemed to afflict the nation's preparations. England, for example, traditionally one of the best-supported football teams at tournaments, returned over half of their allocation of 7,800 tickets to UEFA, taking their lowestnumberofsupportersevertoaEuropeanChampionship. France were followed by fewer than 1,000 fans at the event, sources claimed.

Any goodwill Ukraine had hoped to generate to boost future visitor numbers was undermined by what many, in Ukraine for the first time, viewed as profiteering both from accommodation and restaurants, where a 'foreigner double-price menu' passed from urban myth into fact. The Tymoshenko picture further complicated the picture, with many foreign leaders boycotting the event, and a spotlight being cast on the imprisonment of the former Prime Minister on what many believe to be politically motivated charges.

2012 was always going to be a challenging year for Ukraine. In June, Ukraine was due to repay a $2 billion loan to Russia's VTB Capital, and $500m in outstanding eurobonds. In the event, Ukraine issued a $1 billion eurobond to partially refinance the VTB $2 billion, putting off payment of the outstanding $1 billion to June 2014, and accepting increased interest payable on the deal.

Follies and Foreign Investment

On the streets of Ukraine, the evidence of one's eyes is a revealing barometer of the economic situation. Kiev is still ringed with buildings in various stages of non-construction. Caught up in the pre-2008 boom, many dozens of sizeable apartment blocks and business centres had started to go up around the city. To the construction investor, Ukraine offers a more relaxed climate than in much of Western Europe, often without requiring finance put in escrow to ensure the completion of any structure commenced. In the boom years, there was a scramble to pump money into constructing that very property which now gives even central Kiev the slight feeling of a work-in-progress, but not in progress.

The picture today, with apartment blocks in particular, is further muddied by the mid-2000s trend of selling apartments in blocks either in construction, or still in the planning stages. Thus, many of the complexes around Kiev, on which work stopped abruptly in 2008, belong in a labyrinthine financial category. Technically, many of the unfinished apartments are owned by the private individuals who had bought them, often lured by prices as low as $25,000 for an apartment. In most cases, though, the company they entered into the contract with is now liquidated. Were construction to start again, any company taking on project completion would potentially either need to honour the claims of the existing stakeholders, or face a series of legal challenges. Both of which would be inimical to any profit to be made. So billions of dollars currently lie tied up across Ukraine, particularly Kiev, in buildings which may never see completion, while statistics tell that the Ukrainian construction industry is down 9.1% year-on-year.

The 100-metre-plus intended partner to 2007-completed Business Centre Parus, Ukraine's third tallest building, on Baseina in central Kiev, had its outer frame completed long ago, and there is currently some work taking place on the site. But that work is essentially maintenance, with no date scheduled for outfitting of the empty shell once intended to be a monument to the commercial power of the third biggest city of the Soviet Union.

A key problem is falling foreign investment, which the State Statistics Service report as down to $4.6 billion in 2011, from $4.7 billion in 2010, both figures being significantly below the $8 billion Ukraine attracted in 2005. Investors were then rushing to pour money into the country in the aftermath of the Orange Revolution speculators had believed would make the country the next 'Baltic Tiger'. Corruption and infighting put pay to that idea, and now the Euro is over, Ukraine is at least under no illusions about the task going forward. One thing making that task the more difficult is the interest on debt repayments. Erik Nayman, Managing Partner at investment company Capital Times, estimated interest on Ukrainian foreign-currency annual debt at 12 percent, in the UK's Daily Telegraph, meaning almost $1.5 billion currently goes from the budget to simply servicing this debt, before starting to pay off the $12.4 billion, or 7.5% of Ukraine's $165.25 Billion GDP.  Ukraine's overall debt is currently at over$60billion,or36.5% of GDP,having been down at 12.3% of GDP in December 2007.

The Ukrainian Economy Today

Continuing falls in demand for Ukrainian iron and steel are having deep repercussions on industry, with production having decreased from a 2007 high of 42.8 million tonnes to 29.8 million by 2009, and industrial production down this October by 4.2% on the year before, that at least better than September's 7% drop. The prized agriculture sector, with Ukraine the world's largest producer of sunflower oil, had fallen by 4.6% year-on-year at the start of October, before a rally saw grain exports actually surpassing 3 million tonnes in November, a record. Employing as it does, 15.8% of Ukraine's workforce, or 3.5 million, the agricultural sector is highly significant and, for the moment, is at least staving off mass redundancies, seeming to have recovered somewhat from the bizarre trade sanctions earlier in the year, which saw Ukrainian cheese banned from Russia.

However, worries exist that at the rate Ukraine is currently exporting grain, the country will simply run out of produce. And with 57.9% of Ukrainian GDP coming from the stagnant service sector, GDP is down 1.3% in the third quarter, compared to 2011, with fears the GDP growth rate for the year could be as low as 0.5%. This is particularly disappointing when compared to earlier in the year, with Euro 2012 growing the economy by an estimated 3 percent, and GDP up 2.5%, hitting even 4.7% in June. Now, GDP growth is negative for the first time since the fourth quarter of 2009. Moreover, inflation, once the bane of the Ukrainian economy, has actually hit around zero, pushing the cost of credit up to 20-25%, as companies can no longer rely on inflation covering part of such costs.

Meanwhile, there are concerns that the continued pegging of the hryvnia is concealing its true value, and costing the economy billions, with the National Bank of Ukraine having reported a Ukrainian government spend of around $2 billion on gold in September, and $2.5 billion in October to keep the currency pegged at 8 to the dollar. If this support were to stop, the hryvnia could, analysts estimate, hit 10, or even lower. Such worries have had Ukrainians rushing to convert their currency into dollars, with banks struggling to keep up with demand. Ukraine currently languishes at 53^rd in international GDP tables, nestling near New Zealand and her population around 10% that of Ukraine's.

Factors such as the building of 19 new hotels in the first 9 months of the year, the Kyiv Post reported, adding more than 2,000 new rooms in total, and other mostly Euro-related factors, had fuelled a 6.5% year-on-year economic thrust in Q3 of 2011. In Q3 2012, hotel occupancy was down 10%, and the prospects for Ukraine reversing the tourism sector decline, bleak. The tourist industry saw numbers of visitors to Ukraine shoot up from 6.4 million in 2000, to a high of 25.4 million in 2008, down to 21.4 million in 2011. If each tourist trip to Ukraine is valued at a conservative $1000 to the economy, an extra million tourists equates to $1 billion coming into Ukraine, serious money in a country where 35% live below the poverty line and the average gross salary is a mere $319, around the level of Colombia or China. Financial website Friedlnews.com reported a buoyant retail sector, with turnover up more than 14% compared to 2011, providing little compensation for factors such as oil processing slumping by 30.4% year-on-year, in addition to an energy sector swinging from 6.1% year-on-year growth in September, to a 5.2% deficit in October.

Euro 2012 is not responsible for the current economic woes of Ukraine, and hosting the competition has certainly delivered benefits to the country. Ukraine now enjoys upgraded roads, infrastructure and facilities. If what lies at the end of those roads is another recession for a country still reeling from the global credit crisis, however, there will be searching questions about whether it could all have been done better.

Graham Phillips

Graham Phillips is an English journalist living in Kiev, Ukraine. Read his blog on http://gwplondon.wordpress.com/