Ukrainian economy teetering towards collapse

The Ukrainian economy is collapsing.

Ukraine is on the brink of economic collapse.

Its central bank raised benchmark interest rates from 19.5% to 30% as of Wednesday. The Ukrainian currency, the hryvnia, has lost almost 70% of its value against the dollar in just one year. GDP declined by 7% in 2014.

And while the war-torn country secured a $ 40 billion international bailout in February, the chances of recovery in the near future are slim.

Ukraine has been fighting for a year against Russian-backed separatists in the east of the country. The fighting contributed to the ravaged state of the economy.

Here are some of the main economic barriers:

1. Corruption

Corruption is depleting Ukraine’s economy – or what’s left of it. Ukraine ranks 142 out of 175 on Transparency International’s list of the most corrupt countries.

Even the government admits the situation is bad. Ukrainian Prime Minister Arseny Yatsenyuk said the government was losing around $ 10 billion every year due to corruption.

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2. Political risk

The International Monetary Fund agreed last month to provide Ukraine with a new emergency lifeline of $ 17.5 billion, demanding economic reforms in return for its money.

The government passed the first package of reforms this week, including hikes in gas prices and cuts in pensions. It must also reduce its debt, currently at 100% of GDP.

But the reforms demanded by the IMF are extremely unpopular in Ukraine.

“If Ukraine continues with its reform program, it will be able to overcome the difficulties,” said Liza Ermolenko, emerging markets economist, adding that it was not the first time that the Ukrainian government tried to reform its economy.

“But more protests could force the government to step back. It has happened before,” she said.

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3. Banks

The Ukrainian banking sector is one of the weakest links in the economy. Policy rates are the highest in 15 years, and experts estimate bad debts represent between a third and a half of all bank assets.

More than 40 banks have been declared bankrupt since the start of the war, with the country’s fourth-largest lender, Delta Bank, going bankrupt earlier this week.

4. The struggling industry

The Donbass region was once the heart of Ukrainian heavy industry. It is now among the toughest areas affected by conflict.

Almost all of the steel production, a major driver of Ukraine’s exports, is based in the east, as is much of its mining and energy sector.

Ukraine’s industrial production fell by more than 10% in 2014, as the war forced mines to close and cut factories off their supplies. The forecast for this year is not much better. GDP is expected to decline further by 5% in 2015.

ukraine national defense map
Ukraine’s most important industrial cities are in rebel-controlled territory

5. History lesson

The collapse took a long time to prepare. Like many former communist countries, Ukraine was not designed to function independently from the rest of the Soviet Union.

For more than a decade after the breakup of the Russian-led bloc, Ukraine struggled with hyperinflation and low productivity. The country never managed to properly switch from the Soviet model, unlike other countries with similar histories.

“Per capita GDP is actually lower than 1992 levels,” Ermolenko said.

The struggling economy is as much a cause as a consequence of conflict.

Ukraine was in recession for five consecutive quarters before protesters toppled the previous pro-Moscow government in February 2014, an event that ultimately led to civil war.

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CNNMoney (London) First posted on March 4, 2015: 12:01 p.m. ET

Christi C. Elwood