ECONOMICS

Overview of the economic structure and the major industries

The workforce of the country is separated into various sectors. Agriculture employs 13.5% of the country’s workforce. With averagely a third of the arable land of the whole EU, Ukraine holds the 6th position in being the world’s largest grain exporter. Farms are low on working capital yet with further investment we could see a rise double in size in grain harvest within a decade. The manufacturing sector accounts for 15% of GDP and employs 12.4% of the country’s workforce. Industries in which the government has decreased its intervention, such as food processing have shown reasonable performance, however metallurgy and engineering have proven to be the backbone of the economy. Car part suppliers have closely integrated with the German automobile industry and a number of foreign companies have opened manufacturing plants in Ukraine. In 2017, the recovery of many industries has been delayed by the severance of trade ties with the territories of Donetsk and Luhansk. As per the banking sector, it is being reformed after liquidating 80 of the 180 banks in Ukraine. The latest nationalization of the largest bank of the country is portrayed as an important step towards safeguarding the financial stability in Ukraine. Nevertheless, banks still have some extent of reluctance when it comes to giving out loans and interest rates are high and rising. Minerals are very important for Ukraine, as the country has the largest supply of titanium in the world, the third greatest deposit of iron ore and 30% of the world’s magnesium ore. The metals industry accounts for two-thirds of all exports.   

Overview of the Economy

Once an agricultural leader, Ukraine's economy has come to depend mainly on steel and other heavy industries. The country was hit hard by the Great Recession when real GDP shrank by nearly 15% in 2009. Since the collapse of the former Soviet Union, this recession can be seen as being Ukraine's worst. Ukraine's per capita income is only about 21% of the EU average. The reorientation of trade towards Europe and Asia is progressing but has not been a straightforward process.

After taking a breath of relief in 2012 and 2013, the economy contracted in 2014 and 2015 due to the conflict in Crimea and eastern Ukraine. About 4% of Ukraine's GDP was represented by Russia's annexation of Crimea in 2014. Furthermore, Russian-supported armed forces have occupied territories in eastern Ukraine that represented another 10% of the country's GDP in 2013. In all, the economy shrank by almost one-fifth in the period after Russia annexed Crimea.

Moderate growth was evident in 2016. The welcome recovery was largely due to decisive reforms including a more flexible exchange rate and tighter fiscal and monetary policies. The economy continued to improve in 2017 when real GDP rose by 1.9%. The rebuilding of infrastructure along with a revival in bank lending provided further support.

Summary of the import and export volumes in 2017

The volume of Ukraine’s exports of goods and services in 2017 totaled $52,329.6 million, imports - $54.995 million. Compared to 2016, exports grew by 16.0%, imports - by 23.3%. Negative balance of the foreign trade made up $2,625.4 million (in 2016, positive balance - $541.6 million.

According to the State Statistics Service, in 2017, exports of goods amounted to $43.266,6 billion, imports - $49.598.5 billion. Compared to 2016, exports increased by 19.0% (by $6.904,9 billion), imports - by 26.4% (by $10.348,7 billion). Negative balance totaled $6.331,9 billion (in 2016, negative balance - $2.888,1 billion).

The export/import coverage ratio totaled 0.87 (0.93- in 2016). Foreign trade operations were carried out with partners from 223 countries.

According to the State Statistics Service, in 2017, exports of services amounted to $10.446,6 billion, imports – 5.359,2 billion. Compared to 2016, exports grew by 5.9% (by $578.6 million), imports - by 0.6% (by $32.7 million). Positive balance totaled $5.087,4 billion (in 2016, positive balance – $4.541,5 billion).

The export/import coverage ratio totaled was 1.95 (1.85- in 2016). Foreign trade operations were carried out with partners from 225 countries.

The data provided by the State Statistics Service excluded the temporarily occupied territories in the Autonomous Republic of Crimea, Sevastopol and some parts of the ATO zone in Donbas.

Imports and export destinations

Major export destinations 2017
Share (%)
Major import destinations 2017
Share (%)
Exports (fob) to Europe 61.6 Imports (cif) from Europe 70.6
Exports (fob) to Asia Pacific 18.8 Imports (cif) from Asia Pacific 19.6
Exports (fob) to Africa and the Middle East 16.6 Imports (cif) from North America 5.5
Exports (fob) to North America 2.0 Imports (cif) from Africa and the Middle East 2.5
Exports (fob) to Latin America 0.9 Imports (cif) from Latin America 1.6
Exports (fob) to Other Countries 0.1 Imports (cif) from Australasia 0.3


Foreign Trade

In 2017, the share of all exports in GDP represented 39.7%. Following a sharp fall in 2016, exports in 2017 rose by 18.8%. An increase of 5.7% is expected this year. Ukrainian exporters are turning to the EU as their main export market, with the EU accounting for 40.5% of the total exports in 2017. The recent trade deal with the EU has significantly boosted exports. However, Russian export still accounts for 9.5%. The current account deficit was 3.5% of GDP in 2017 and the same result is expected in 2018. The larger imbalance is due to an increase in imports of intermediate and investment goods.

Economic Prospects

The economy of the country is gradually improving. In 2018, real GDP is expected to rise by 2.7% after an increase of 1.9% in 2017. Private consumption is expected to be the main driver, yet a rebound in agricultural production will also benefit the economy. As the impact of the recent trade blockade diminished exports should continue to grow. The failure to implement another round of structural reforms is seen to be delaying an IMF loan. High rates of inflation have proven to be one of the struggles of Ukraine, however, the authorities have lately managed to achieve a more stable exchange rate and have imposed more expedient monetary policies. In terms of inflation, prices rose by 14.4% in 2017 while an inflation of 11% is expected for this year. Interest rates rose in January 2018, while the central bank's medium-term target for inflation is 5%. Private final consumption rose by 3.6% in 2017 and growth of 3.7% is expected in 2018. Household spending is supported by rising wages (minimum wage was doubled in 2017). The rise in the minimum wage is also said to boost consumer spending. Unemployment in 2017 was 9.6%, this year estimated a drop in this figure to 9.1%. However, since Ukrainians were granted visa-free access to the EU in June 2017, a trend of many well-qualified workers leaving for Poland has been witnessed. 

Evaluation of market potential

A lasting solution to the conflict in the east is essential for an improvement in the country’s outlook. Growth of GDP is anticipated to average about 3% per year in the medium term. Faster growth rates are attainable if crucial structural reforms are implemented. There are several positive developments that could yield additional growth, namely large-scale privatisation, forex liberalisation and the opening of the land market. The trade-enhancing effects of Ukraine's agreement with the EU will boost the economy but only in the long run. The government has passed laws that tighten budgetary discipline, liberalise energy markets and amend pensions. However, deeper structural reforms are needed to bolster investor confidence and productivity.

Business environment

The government has made several actions to appease investors. Some of the actions include tax changes, specifically a new tax code built a flat rate of 20% for corporate and personal incomes, VAT and payroll taxes. Excise taxes on goods such as alcohol and tobacco were raised in 2017. A special VAT regime for taxes on agriculture was terminated in 2017. Additionally, the doubling of the minimum wage last year made it feasible to increase the Pension Fund and pull a number of firms out of the informal sector. Domestic fuel prices have been raised by officials yet despite the raise, heating and gas prices are considerably low compared to the whole region. It is expected that a new formula for increasing domestic gas prices to market levels will be introduced shortly. The resulting pension fund deficit (5% of GDP) is a major fiscal vulnerability but a major reform has been passed by parliament. This will lift the minimum contribution period to qualify for a state pension from 15 years to 25 years. There has been little progress in terms of privatization, the development of a land market or the reform of the large state-owned enterprise sector. The government has faced some criticism from the IMF regarding its fight against corruption, postponement of the adoption of the law on privatisation and the establishment of an anti-corruption court.