Economic Troubles in Russia and Ukraine
Over the past couple of years, many of the world’s leading emerging markets have suffered from severe economic downturns that have had a major impact on investor confidence in many of the emerging markets that played such a vital role in boosting global economic growth rates in previous years. No significant emerging markets have had a more difficult 2015 than Russia and Ukraine, as both of these countries (with a combined population of 190 million) have fallen into deep recessions as they are locked in a conflict in eastern and southern Ukraine. For both countries, the conflict in Ukraine has been the catalyst for these deep recessions this year, but both economies were in very poor shape even before the conflict in Ukraine erupted in early 2014. Now, both countries face the prospect that, despite the severity of their current economic problems, the worst is still to come for each of their economies.
For Russia, it was expected that 2015 would be a very difficult year for that country’s economy due to economic sanctions, the sharp fall in the price of oil and other natural resources, and the high level of capital flight from Russia. Hopes were raised a little when the downturn in Russia was not as severe as expected in the first quarter of this year (-2.2% year-on-year GDP growth), but the 4.6% decline in GDP growth in the second quarter indicated that the health of the Russian economy was continuing to deteriorate. Moreover, recent developments such as the extension of the European Union’s economic sanctions against Russia into 2016 and the continuing fall in the price of oil suggest that this recession will continue to worsen in the second half of this year. In fact, the Russian economy is likely to contract by nearly 4% this year and growth is unlikely to return until at least the second half of next year. Even with a lifted of sanctions and an increase in the price of oil, Russia’s economy will struggle to record significant growth in the coming years.
While the economic situation in Russia is bad, the situation in Ukraine is far worse. In the two decades following the collapse of the Soviet Union, Russia was at least able to develop major natural resource export sectors that allowed the Russian economy to record healthy economic growth rates until recent years. In contrast, Ukraine’s heavy-industry-driven economy collapsed due to its inability to withstand international competition and this led to a sharp fall in the living standards of people in Ukraine when compared with their neighbors in Central Europe and Russia. In fact, Ukraine’s economy was shrinking for years even before the conflict in eastern and southern Ukraine erupted in early 2014. Moreover, Ukraine’s economy is forecast to shrink by more than 10% this year, having contracted by nearly 7% last year, giving Ukraine the worst performing economy in the world over the past two years. Looking ahead, the loss of much of the country’s industrial heartland (the Donbas) and the center of its tourism industry (Crimea) will prove to be major blows for the Ukrainian economy and will prevent the country from recouping its recent losses at any point in the coming years.
Looking further into the future, it is difficult to see how either Russia or Ukraine can achieve high rates of economic growth for a prolonged period of time. First, both countries are facing a very difficult demographic situation, with shrinking and aging populations resulting in lower potential demand levels at home. Second, both countries have failed to diversify their economies into more export-oriented manufacturing or high-tech sectors and this has resulted in low levels of economic competitiveness as well as very low inflows of foreign investment. Third, the conflict in eastern Ukraine remains unresolved and the potential for more fighting in that region remains high, as none of the combatants in this conflict have fully achieved their aims. Finally, crime and corruption remain rampant in both countries, leading to high levels of brain drain and low levels of investment outside of the public sector. As a result, both Russia and Ukraine face very uncertain economic futures, with the near-term situation remaining dire and the prospects for long-term growth continuing to be stifled by political and economic mismanagement in both countries.