Can the Ukrainian economy resist Russian pressure? It’s better prepared this time around.

As Russia mustered tens of thousands of troops near the border with Ukraine last fall as a possible prelude to an offensive, military experts warned the invading forces would face an army much stronger than the one Kiev had in 2014, when Moscow seized Crimea and supported separatist forces in the Donbass region.

While most analysts argue that the much larger Russian military would prevail in the event of a major escalation, Ukraine’s armed forces have turned a corner: they are bigger, better trained and better equipped than they were at the beginning of the war in the Donbass. , which is simmering after more than seven years.

And what about the economy? Similarly, experts say that despite its many structural problems, lingering corruption and the impact of COVID-19, it is much healthier than it was on the eve of Russia’s aggression in 2014, which allows him to better deal with the problems triggered by the increasing pressure from Moscow.

“If you just look at the buffers – Ukraine’s foreign exchange reserves and budget deficit – I think it’s in good shape and the resilience has improved” compared to 2014, said Tatiana Orlova, economist at the British consulting firm Oxford Economics. .

In February-March 2014, when pro-Western and anti-corruption protests in Maidan ousted Moscow-friendly President Viktor Yanukovych from power and Russia responded by seizing control of Crimea and fomenting separatism in the Donbass and beyond, Ukraine was already on the brink. on one’s last legs.

Yanukovych’s government had mismanaged the economy and wasted the country’s foreign currency reserves to prop up the Ukrainian hryvnya. It ran a large budget deficit caused in part by subsidized natural gas prices and a large current account deficit fueled by the overvalued hryvnya.

As a result, the central bank had only $18 billion in foreign exchange reserves at the start of 2014, less than the equivalent of three months of imports, and billions of dollars in foreign debt are coming due soon.

Russian aggression later that year contributed to a sharp decline in Ukraine’s economy. He contracted one-sixth over the next two years.

Today, Ukraine has $31 billion in foreign exchange reserves, as well as reduced budget and current account deficits, in part thanks to reforms, including the liberalization of the gas market.

Ukraine’s foreign exchange reserves are equivalent to about five months of imports, well above the three months recommended experts reduce the threat of a financial crisis due to external shocks.

“Ukraine doesn’t have this big double deficit problem anymore, so it’s much easier for them to avoid a sovereign default, even if events follow a negative scenario,” Orlova said, referring to a possible invasion or attack.

A sovereign default occurs when a government is unable to pay its debts on time. A default makes it harder and more expensive for a country to borrow money in the future.

Whether or not Russia launches a new invasion, its military buildup may be part of an effort to destabilize Ukraine from within, including by undermining its economy, in the hopes that President Volodymyr Zelenskiy’s government could s weaken or collapse, potentially paving the way for more Moscow. – friendly forces.

Russian President Vladimir Putin has repeatedly castigated Zelenskiy and his government, and some parts of the political opposition are advocating closer relations with Moscow. Earlier this month Britain said it had information indicating that Moscow was ‘seeking to install a pro-Russian leader in Kiev as it considered invading and occupying Ukraine’ .

Russia recently halted coal exports to Ukraine for power generation amid the global energy crisis, forcing Kyiv to source worldwide for additional supplies.

It also roughly halved the volumes of natural gas flowing through Ukraine to Europe. Natural gas transit generates a significant source of revenue for Ukraine, totaling up to $2 billion per year.

The threat of war has also put foreign investors on edge.

Debt yields in Ukrainian dollars jumped in adolescence, making it prohibitively expensive for the country or its companies to borrow in international markets, which could affect the government’s ability to refinance maturing debt.

The hryvnya has lost more than 10% of its value since Russia’s rise began as foreign investors dump Ukrainian bonds. The national currency was trading at 28.6 to the US dollar on January 28, near a record low.

Meanwhile, strategic foreign investors — such as energy, manufacturing and retail firms — could suspend any planned investment in Ukraine amid the crisis stemming from Russia’s military buildup and sweeping geopolitical demands, officials said. economists.

Citizens could also seek to withdraw money from banks or convert to dollars, which would put pressure on the banking system and the currency. Ukraine earlier this month rincreased interest rates to fight inflation and support the currency.

Ukraine was on the verge of bankruptcy when Russia seized Crimea and backed anti-Kiev forces in the Donbass in 2014, wrecking the country’s economy. While still suffering from structural problems and persistent corruption, the economy is doing better as the threat of a new Russian offensive hangs over Ukraine.

And earlier this week, Ukraine said it would request $5 billion from international organizations and countries to offset the impact of closing debt markets.

Nevertheless, Ukraine’s economy can withstand the shocks caused by Russian aggression much better today than in 2014, as it has carried out crucial reforms over the years and has significantly decoupled from its larger neighbor, said economists.

It also has clear financial support from the International Monetary Fund and Western governments.

Prior to 2014, Ukrainian banks had poor risk control management and quickly went bankrupt when the country fell into a deep recession following the Russian invasion.

Just as we are strengthening Ukraine’s security, we are also exploring how we can support its economy beyond the significant assistance we already provide. Our European allies and partners are doing it too.”

The government has since cleaned up the sector and pumped money into lenders to make them more resilient to shocks, Orlova told RFE/RL.

He also largely liberalized the natural gas sector for businesses and households after decades of Soviet-style subsidies that gouged a hole in the budget and stifled incentives for energy efficiency measures.

Ukraine now imports around 10 billion cubic meters (bcm) of gas, down almost two-thirds from 2013, as rising prices resulting from liberalization forced businesses and households to cut consumption . The loss of control of Crimea and parts of two eastern Ukrainian provinces also explains part of the decline in natural gas use.

Ukraine, which sought to reduce the Kremlin’s influence on its economy, now imports natural gas through its western neighbors rather than directly from Russia.

As a result, Russian trade with Ukraine has decreased significantly, reducing the threat of supply chain disruptions, Tymofiy Mylovanov, a former economy minister and now chairman of the Kyiv School, told RFE/RL. of Economics.

Ukraine has failed to make many policy changes that Western governments and international institutions such as the IMF believe are necessary to further strengthen its economy.

China and Poland have exceeded Russia as Ukraine’s largest trading partner.

Ukraine, however, is still connected to the same power grid as Russia and Belarus, so it remains dependent on them in the event of a shortage.

Ukraine plans to synchronize its electricity transmission system with the European Union by 2023, a move that will increase its energy security and further weaken the Kremlin’s hand, Mylovanov said.

Despite its progress in some areas such as banking, gas consumption and, more recently, agricultural land reform, Ukraine has failed to implement many policy changes that Western governments and international institutions such as the IMF are needed to further strengthen its economy.

Anders Aslund, an analyst at the Stockholm Free World Forum who follows Ukraine closely, said in a recent blog post that the country needs to implement long-delayed reforms to the judiciary, security service (SBU) and office. of the Attorney General. , as well as to improve the management of public enterprises which occupy an important place in the economy.

Ukraine extended its financing program with the IMF last year, allowing it to draw funds if international markets do not reopen soon for the country.

The United States and Europe have also said they are ready to help Ukraine financially to stem the impact of Russia’s military buildup and the threat of further military action beyond the ongoing conflict in the Donbass.

“Just as we are strengthening Ukraine’s security, we are also looking at how we can support its economy beyond the significant aid we are already providing. Our European allies and partners are doing it too,” US Secretary of State Antony Blinken said on January 26.

Blinken did not give details of the financial assistance being considered by the United States.

The US government backed bonds issued by Ukraine in early 2014, at a time when international markets were essentially closed to the country.

Elina Ribakova, an economist at the International Finance Institute in Washington, said debt markets could reopen for Ukraine within six months if Russia withdraws its forces.

“If we have a credible de-escalation, I can see investors almost forgetting that in six months. That’s part of the reality of investing in Ukraine or Russia,” she said.

Christi C. Elwood