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Russia is Suffering Economically but is it Enough to Stop its Invasion of Ukraine?

Sep 13, 2016 | Newpathway, Ukraine, Featured, Business

Starting from February 20, 2014, when Putin’s “green men” first set foot in Crimea, the war in Ukraine has now been ongoing for 2.5 years. The war has been exhausting for Ukraine, where Russia is occupying about 7% of Ukraine’s territory while the death toll, by the UN estimates, has reached 10,000. In the early stages of the war, fears were widespread that Ukraine’s economy would not survive the Russian invasion – Ukraine’s GDP plunged by 17.2% in the first quarter of 2015.

But, since then, Ukraine’s GDP has been improving. Ukraine’s National Bank estimates the country’s GDP growth in the second quarter of 2016 to be 1%, after a 9.9% decline in 2015. Different estimates for Ukraine’s GDP growth for 2016 range from 1% to 2% growth.

Russia’s economy, in turn, continues to decline. According to the Russian Ministry of Economic Development, in the second quarter of 2016, their GDP dropped by 0.6%, and in the first half of 2016, the decline reached 0.9%. For the year as a whole, the GDP is expected to drop between 0.2%-0.7%.

Other indicators also paint a similar picture: in the first half of 2016, Russia’s investments dropped by 4.3%, retail trade declined by 5.6% and the incomes fell by 5.3% in real terms. The real term incomes of Russians have been dropping for 21 consecutive months.

Underlying this poor economic performance are weakness in the price of oil and continuing sanctions by the West against Russia. However, what is surprising is that Russia’s ruble exchange rate has maintained some stability, where the RUB to USD rate has been in and around 65 rubles for 1 dollar since April 2016.

The exchange rate stability seems to have been achieved thanks to increased use of Russia’s Reserve Fund to prop up the value of the ruble – the Fund’s assets have plunged by 18% in August 2016. Many experts are saying that the Russian government has been supporting the ruble for political reasons, before the parliamentary elections scheduled for September 18. Given that oil and gas revenues remain stagnant and Western sanctions have recently been broadened, the ruble may well resume its downward trend following the Russian elections.

The Ukrainian hryvnia, on the other hand, has been weaker than the ruble since January 2016 (see the chart). Ukraine’s reserves, apparently, are even less abundant than Russia’s to support the national currency: the country’s hard currency and gold reserves stood at a modest level of USD 14.1 billion at the end of August 2016. The hryvnia’s recent softness has been attributed to the weak global wheat prices and to the instability in Crimea and the escalation of the war in the Donbas. Another factor for the hryvnia may have been the absence of the third tranche of the International Monetary Fund’s loan which was expected to arrive in early 2016.

The recent economic indicators, excluding the UAH to RUB exchange rate, are showing that Ukraine is, at the very least, not losing the economic war to Russia. At the same time, it has become clear that the difficult economic conditions facing Russia have not prevented it from continuing its invasion and killing Ukrainian soldiers and civilians. The West hopes that the current sanctions regime will eventually achieve the desired result of Russia leaving Ukraine’s territory. But when will that happen? Ukraine has already suffered for over 2.5 years and every new day of war is a day too many. The Ukrainian Diaspora has been calling on Western governments, including Canada’s, to dramatically increase the sanctions and go as far as to cut Russia off the global interbank system SWIFT. The questions remains: does the West have the political will to do it?

Michael Zienchuk, MBA, CIM
Investment Advisor, Credential Securities Inc.
Manager, Wealth Strategies Group
Ukrainian Credit Union
416-763-5575 x204
[email protected]
www.ukrainiancu.com

Mutual funds and other securities are offered through Credential Securities Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual funds and other securities are not insured nor guaranteed, their values change frequently, and past performance may not be repeated. The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This article is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell any mutual funds and other securities. The views expressed are those of the author and not necessarily those of Credential Securities Inc.®. Credential is a registered mark owned by Credential Financial Inc. and is used under licence. Credential Securities Inc. is a Member of the Canadian Investor Protection Fund.

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