Underlying Causes of the Ukrainian Recession

Ukraine’s economy has contracted ten of the last eleven quarters in an economic downturn that stretches back to 2012. In the first quarter of 2015 the economy contracted 18% compared to the same period last year, while Gross Domestic Product fell 7% in the same period. The underlying causes of this recession are both a downturn in the domestic market, as well as a struggle to sever its economic dependence on Russia and orient itself more towards the west, specifically the European Union.

Pertaining to the struggles in the Ukrainian domestic market, both supply and demand have been adversely affected. Many industrial plants in or around the combat zone in eastern Ukraine have suffered damage to their equipment and in turn have been forced to reduce, or even halt, production. Industrial plants that have not suffered physical damage from the battles with Russian-backed separatists have still faced disruptions in their supply chains, which has also hurt production. The domestic market also took a major hit in demand. The Ukrainian Currency, the hryvnia, was the world’s worst performing currency in 2014 with inflation upwards of 60%. This high level of inflation has reduced the standard of living across the country and caused the domestic market for many products to shrink drastically.

Ukraine’s struggle to move away from Russian dependence and align more closely with the European Union is a second major cause of the economic hardships facing the country. The Ukrainian people have sought closer relations with the EU for years, and the refusal to do so by the government in 2014 led to a violent revolution that ousted President Vikor Yanukovych. Since last year’s revolution, Ukraine has signed an association agreement with the EU, which reduced the tariffs on Ukrainian exports. Russia does not want Ukraine to align with the EU, and in response to Ukraine’s trade deal has “barred some imports from Ukraine, started tougher customs checks on others and encouraged Russians to buy domestically.”

These trade barriers have had a significant impact on Ukrainian industries and the economy as a whole. Ukraine's manufacturing industry has been tied to Russia since the Soviet Era and many factories were dependent on exports to Russia. In the first quarter of 2015, exports to Russia were down to $1 billion, a 61.3% decrease.  Essentially, Russia is doing everything in its power to stop Ukraine from aligning with the EU, and so far their efforts have had a dire impact on Ukraine’s economy.