Thursday, December 18, 2008

Ukrainian Economy Heads For Collapse

The Ukrainian economy is rapidly approaching a sharp downturn. The trigger of the decline is that the price of its main export good, steel, has been cut in half since August. And with Ukraine having a large trade deficit to begin with, and with investor distrust of smaller currencies increasing, this has caused a run of the Ukrainian currency, the hryvnia, something which is aggravating an already dire situation.

After actually strengthening somewhat earlier in the year, the hryvnia have more or less fallen off a cliff in the latest month, losing almost a third of its value. This decline have far more dreadful consequences for Ukraine than the declines in the pound or the Swedish krona has for the U.K. and Sweden, as Ukraine has a lot of foreign currency denominated debt (mostly U.S. dollar and euro), which are rising in value as the hryvnia falls. This creates a vicious circle more similar to the effects of the collapse of the Icelandic krona.

Meanwhile, real economic activity appears to be in a virtual collapse. Industrial production in November fell 15.2% compared to October and 28.6% compared to November 2007.


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