MOSCOW BLOG: Russia’s output will slump sharply in 2015, but what about Ukraine?

By bne IntelliNews January 20, 2015

Ben Aris in Moscow -


"Russia’s GDP is likely to plunge in 2015. Indeed, it would be prudent to expect a slump on the order of 10%. In many ways, Russia’s financial situation is eerily similar to the fall of 2008, when then-Prime Minister Vladimir Putin called his country a safe haven in the global financial crisis. In 2009, Russia’s GDP dropped by 7.8%."

So starts an op-ed in The American Interest by Anders Aslund, a senior fellow at the Peterson Institute for International Economics, who is emerging as the most hawkish on Russia's immediate future.

A GDP contraction of 10%, really? As Aslund himself points out, this is worse than the crash of 2008, which was acknowledged as a full-blown global financial firestorm and the worst crisis in living memory for most countries.

This time round, growth is slowing in most of the major markets (except notably the US), commodity prices are slumping and currencies in Europe are falling relative to the dollar, but this is hardly a global crisis. The only countries that could be said to be in a proper crisis now are Russia and Ukraine, and perhaps Belarus, which has been hit by the spill-over from Russia's currency devaluation in the last few weeks.

The only way to justify the claim that 2014 is worse than 2008 for Russia is the fact that it has been cut off from the international capital markets and so cannot go to London or New York to refinance debt. That makes a difference. Some $40bn of 2014’s estimated $120bn capital flight was simply Russian companies unable to roll over debt, so were paying the principle down instead. Russian companies are due to pay off another $100bn-150bn in 2015, according to the various estimates, but with $388bn in reserves as of January 1, the state still has enough in its back pocket to cover this at least two-times over. Is the lack of access to international capital markets really enough to cause a complete collapse of the economy?

Aslund's 10% prediction stands out against the other predictions. The Russian government's official estimate for GDP contraction this year is 4.5%, which also seems to be the consensus amongst most investment banks. The European Bank for Reconstruction and Development (EBRD) on January 19 in a new forecast put the recession at 4.8% in 2015. And the World Bank had an even milder forecast of a 2.9% contraction in 2015 before returning to growth in 2016. Aslund's forecast of 10% is right at the end of spectrum.

Rather than drill into the details of Aslund's arguments (some of which bne IntelliNews has already covered here), lets ask a simple question: how can Russia's GDP contract by 10% if the most pessimistic prediction for Ukrainian growth this year is the EBRD’s forecast of 5%, which was also made on January 19? For any Russian economic problem you care to mention, Ukraine has the same – with bells on.

Lets put the main numbers side by side.





GDP forecast for 2015



Hard currency reserves ($bn)



Hard currency reserves (months of import cover)



Current account estimate 2015 ($bn)



FDI ($bn)



Debt redemptions/refinancing debt of all kinds ($bn)



External/internal capital flight ($bn)



Budget deficit/surplus ($bn)




Adding up these numbers and you get a grand total for Russia of $218bn and for Ukraine -$34.6bn.

These two numbers are not supposed to represent the actual amount of money each country will have at the end of 2015 or need to get through the year, because both are going to get some outside help to meet their costs.

For example, the table assumes that the Russian state will have to cover the entire $150bn of debt redemptions and refinancing of mainly corporate debt. However, as about $90bn of this belongs to Gazprom and Rosneft, which earn dollars from their exports, both should be able to meet the bulk of their debt out of cash flows. Likewise, Ukraine is due to receive about $8.5bn from the IMF bailout package and has also been offered an extra $4bn from the US and EU in just the last weeks.

And Ukraine if Russia is cut off from external financing, then so is Ukraine; not because of any sanctions, but because it is increasingly likely that it will (unlike Russia) default or restructure its debt this year. Ukraine needs to raise an additional $21bn in 2015 on top of its International Monetary Fund (IMF) programme to stave off complete collapse, estimates SP Advisors in Kyiv (the government estimates a more modest $15bn), which is three-times its total international reserves of $7.5bn. It’s currently unclear where this money will come from.

The comparison of the two sets of numbers shows that even with outside help Ukraine can't get through 2015 without some significant extra help from somewhere else. Even under the worst-case scenario Russia can easily cover all its obligations and still have enough money left over to comfortably finance at least another year under the same conditions.

Even if you start to build a more accurate and complete picture of the two countries, anything you add only makes Ukraine's case seem worse.

Russia’s banking sector has already had RUB1 trillion ($15bn) of cash from the state to recapitalise a few banks and could need as much as RUB3 trillion to deal with another 25 troubled financial institutions? But non-performing loans (NPLs) in Ukraine's banks are already much higher than official figures suggest, at 50-60% according to some experts. “And while [capital adequacy ratios] appear high on paper, the quality of capital in many banks is very poor due to issues such as related party lending," Tim Ash, head of emerging markets research at Standard Bank, said following a trip to Kyiv at the end of 2014. Ukraine’s banking sector alone needs a bailout on the order of several billion dollars.

Inflation in Russia is going to reduce real incomes in Russia for the first time since 2000 and hurt consumption, which has been the main economic drive in recent years? "In Ukraine, disillusionment caused by the lack of reforms and the worsening economic situation is rising; up to 94.2% of those surveyed by [Democratic Initiatives Foundation] said that Ukraine's economy is in much worse shape than last year. At the same time, the deepening crisis is being increasingly felt by society; 84.3% of respondents said that their material wellbeing had deteriorated," the East West Institute said in a note in January.

A recent survey from the independent pollster Levada Center found that about three-quarters of Russians are satisfied with their situation. And Russia had a per-capita income of $23,200 at the start of 2014 (in price purchasing parity terms according to the IMF), which probably saw some (albeit anemic) growth, whereas Ukrainians only had $8,960 before the economy contracted an expected 7.5% in 2014, a fifth less than they had in 1991 before the collapse of the Soviet Union.

Russia is wasting all its money investing into the military? Russian President Vladimir Putin has boosted military spending to an unaffordable 4.3% of GDP, more than twice Nato levels? Ukrainian President Petro Poroshenko is proposing to spend 5% of GDP on re-armament.

Given all this and more, how is it that analysts are predicting that Ukraine's economic contraction will be even milder this year than last year, while Russia's will more catastrophic than in 2008?

Kyiv-base SP Advisors predict a contraction in Ukraine's economy of 4.8%, the World Bank says -2.3%, and the Ukrainian Finance Ministry even thinks economic growth will be flat this year.

The difference, if there is one, will be in the Ukrainian government's commitment and success in implementing deep structural reforms. Certainly Ukraine is talking about making these reforms, but it hasn’t actually done anything yet. And so far its form is not good: one of the reasons Ukraine is in so much trouble now is that expectations for change at the start of 2014 were wildly optimistic, says Ash. Kyiv was predicting a mild 3% contraction in 2014, but then Russia's military incursion into eastern Ukraine didn’t help.

Russia is doing even worse on this score, as the glaring omission in Putin's state of the nation speech in December was any big new economic policy ideas. Likewise, during the Gaidar forum in January in Moscow, attended by a who's who of government officials, no mention was made of any radical reform plan of any sort either. The lack of reforms will have two every different effects on the two countries: Russia will slide slowly into stagnation, whereas Ukraine will collapse completely.

But not according to Aslund, who is convinced this is the year that Russia falls into a black hole. But despite a stream of op-eds on Russia's fate, he has yet to address the problems Ukraine is facing with anything like the same energy. 

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