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Ukraine’s economy has turned a corner and started to grow. But there is Much More Work to be Done

Vladimir Osakovsky, Chief Economist for Russia and CIS at the Bank of America Merrill Lynch talks to Marta Dyczok about the accomplishments and challenges in Ukraine’s economy

Show hosts

Bohdan Nahaylo,

Marta Dyczok

Ukraine’s economy has turned a corner and started to grow. But there is Much More Work to be Done
Ukraine’s economy has turned a corner and started to grow. But there is Much More Work to be Done

Нello and welcome to Ukraine Calling, your weekly review of what’s been happening in Ukraine with a focus on a main issue. I’m Bohdan Nahaylo for Hromadske Radio in Kyiv.




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FOCUS INTERVIEW: Vladimir Osakovsky, Chief Economist for Russia and CIS at the Bank of America Merrill Lynch talks to Marta Dyczok about the accomplishments and challenges in Ukraine’s economy.

Dyczok: Hello, I am Marta Dyczok and you are listening to Hromadske Radio. Today in our program Ukraine Calling we focus on economy. We are very lucky to speak to Vladimir Osakovsky, Chief Economist for Russia and CIS at the Bank of America Merrill Lynch. Mr. Osakovsky graduated from the Georgetown University. He worked as a leading expert at the Institute for Open Economy, government of Sakha Republic and as the Chief Economist and Head of Macroeconomic Analysis and Research at UniCredit Bank. Mr. Osakovsky, thank you very much for finding time to speak to us.

Osakovsky: My pleasure.

Dyczok: Since 2011, you have been covering Ukrainian economy. You come to Ukraine pretty often to meet with Ukraine’s government and business representatives and participate at various forums such Ukrainian Financial Forum. You have perspectives on Ukrainian economy, which our listeners will be very much interested to hear. Let me start with a general question. In 2014 when Viktor Yanukovych fled Ukraine the economy was in pretty terrible shape. Here we are in July 2017. In your opinion, has Ukraine’s economy turned a corner?

Osakovsky: If we are talking about formal, real GDP, then “yes”. The economy seems to have reached the bottom at the beginning of the last year. Since then the economy has quite persistent real GDP recovery. From that perspective, the corner has been turned. The economy will be probably growing. There were quite fundamental changes in the structure of the economy. The quite significant artificial disbalances, which were created in the last 5 to 7 years, were removed. It was very painful process. It’s time to enjoy benefits of all these painful reforms, which Ukraine has gone through.

Dyczok: Investment. This is a topic which is often mentioned in regards to the economy. How would you evaluate investment climate in Ukraine today? Has this changed over the past years and in what ways? What are the most attractive sectors for foreign investors in Ukraine?

Osakovsky: Speaking of the investment climate I can see the main achievement of the past three years is that Ukrainian government has removed those artificial disbalances which were created previously.

Dyczok: Sorry to interrupt. Could explain what it means? Some of our listeners are not economists.

Osakovsky: For example, the gas or energy prices were kept artificially low. That was probably beneficial for some sectors but for the economy in general it was extremely costly. That was removed. Yes, it was a painful process for some sectors of the economy. But during the past one or two years all of those were put on a market bases. Market equilibrium has been achieved. The economy has turned a corner and started to grow. Another thing was that whole economy had quite artificially high exchange rate. Back in 2014 it was perceived as beneficial by a lot of people but for the economy in general it was extremely costly. That has been already removed. The Hryvnia, the national currency, is now pretty much market based. It has weakened massively but it is now market based and the economy has started to grow. There is no reason to expect any additional massive weakening of Hryvnia from now on.  We actually can see some reasons for currency to appreciate. That puts the whole economy on a very sound economic footing. So any growth, which goes forward, will probably be genuinely market based. It might not be massively strong but it will be quite healthy. 

Dyczok: Does Hryvnia needs strengthening and does the IMF play role in this?

Osakovsky: Speaking about the exchange rate in general, I would say the key condition and key target for policy makers should be not an exchange rate but rather an inflation. There are plenty of examples where inflation was kept artificially low by artificially strengthening the currency. Ukraine gives pretty good example of that. In 2013 the inflation was non-existent. The economy actually was in deflation. The main reason for that was that the exchange rate was kept artificially strong. That is not sustainable, was extremely costly for the economy and had to be corrected, which Ukraine was eventually forced to do, the National Bank was forced to do, in a very painful way. The key condition for the general long-term stability of the currency is a genuine monetary driven stabilization of inflation. With stable prices in the long-term, and a stable domestic money supply, there will be no reason for the currency to fluctuate massively. And there are plenty of examples for this positive transition from stabilization of inflation to the stabilization of currency. The best example would be probably neighboring Russia, where there was a huge devaluation of the currency but the Central Bank focused almost entirely on inflation and it achieved low inflation target. And this has started to benefit the Rouble as well. The National Bank of Ukraine is pretty much on the same track.

Dyczok: How does this affect investment, if it does?

Osakovsky: With the market based exchange rate, and market based pricing, there is no major disbalances in the economy. It all gives the investment a very predictable environment. Maybe not predictable per se but the level of predictability is comparable to other places in the world.

Dyczok: Does that make Ukraine an attractive place to invest?

Osakovsky: That gives a positive macroeconomic framework for investment. On the top of that we also need a regulatory, legal framework. If that would be comparable to other countries, then of course “yes.”  Because the general cost of production, and cost of economic activity in Ukraine is by several times lower than, for example, in neighboring Poland or other European countries or Russia. So why not? If those issues will be addressed and with the stable, robust, predictable macroeconomic framework, why not? But the regulatory framework is still yet to be corrected.

Dyczok: So that is still a work in progress. Recently there has been a number of agreements has been signed such as EU-Ukraine Association Agreement and Canada-Ukraine Free Trade Agreement. Are these agreements likely to have an impact on stabilization of Ukraine’s economy?

Osakovsky: Specifically the EU-Ukraine Association Agreement is a deep comprehensive free trade agreement and it is the most important one. Because its aim is exactly to address that regulatory framework issue, and harmonize it with the EU standards. The goal of this Agreement is to bring the Ukrainian regulatory framework in line with European standards. If this goal will be achieved one way or another, then in this case we would address that issue in terms of economic development. If you fix regulatory part, the things should be quite positive. This Association Agreement does specifically that.

Dyzcok: You have been watching Ukraine from a very close perspective. Can you give a look forward? What are the greatest challenges and opportunities? Where do you see Ukraine’s economy in, let’s say, five years? I know you are an economist and you cannot speculate but let me push you on that.

Osakovsky: Sure, speaking of opportunities if you just compare the level of development of European and Ukrainian economy, just pure GDP per capita in Ukraine and in the neighboring countries like Poland, Slovakia, Hungary, and even Russia or Belarus, you see that it is actually much, much lower. And there are no fundamental, inherent reasons for why this should be the case, so it should not be the case. And that gives you an opportunity, because provided the normalization of business condition in Ukraine to the level of other countries, then the Ukrainian economy could double or triple in size. Then it still have this a catch up momentum, to catch up with the Eastern members of the European Union. That is a huge opportunity of course. Plenty of room to go.

Dyczok: Sorry to interrupt. How does one grow the economy? How does one stimulate the economy? What is needed to make it grow?

Osakovsky: We have already discussed the macroeconomic framework, the market based exchange rate, no major disbalances in the economy. So, the macro-framework is OK. If you fix the regulatory framework as well, as we have also discussed, then why from the business perspective business in Ukraine be much cheaper than in the neighboring Poland, for example? So, from that perspective, if the business conditions in Ukraine will be harmonized or equalized to the rest of the European Union, for example, then it creates huge opportunity for Ukraine, because the economy, according to at least economic theory, will have to massively catch up with the European Union. At least with the Eastern neighbors of EU.

Dyczok: Is it up to Ukrainian businessmen, or is it a combination of Ukrainian and foreign investors to make this growth happen? Because, absolutely, the framework is getting there, parts of it are already there, but who is actually going to be the engine of the economy here?

Osakovsky: Well, what is up for Ukrainian and foreign businesses is actually their function is to do business, to make money, to explore the opportunities and do all best of this. If there is an opportunity, just go ahead and do it. Who creates these opportunities? I think it is the Ukrainian authorities, the government, the Rada and to some extent the National Bank. So yes, there are plenty of opportunities not only in Ukraine, but in many other countries. But if there are regulatory risk, corruption risk, and many other sources of political risk in Ukraine, then of course the business could pass on that opportunity and just explore them in a different place. But if you equalize those risks in Ukraine to the rest of the world, or at least to the neighbors, then these opportunities will be just attractive enough for businesses to do them, to explore them.

Dyczok: What are the attractive sectors in Ukraine’s economy for foreign investors? Are there any areas that are particularly strong or looking optimistic?

Osakovsky: Well, in general, given that the Ukrainian economy has gone through quite a significant stress over the past few years, the whole economy, actually, is pretty full of so-called distressed assets. There are plenty of companies and businesses, which came under massive pressure and are extremely cheap and things like that, so there are plenty of those across pretty much whole sectors. But again, from the fundamental GDP recovery perspective, I would say, that the sectors that are hurt the most will probably see the biggest up-side potential. Like retail sector, for example, has suffered a lot, maybe some construction, banking sector is one big distressed asset, unfortunately. So surprisingly there are quite significant big pocket investments. If you bring this expertise to Ukraine, then you can get some good assets. I mean not good, but very cheap assets.

Dyczok: Mr. Osakovsky, what are some of the challenges that Ukraine’s economy is facing today and over the next few years?

Osakovsky: I would say that the main challenge to the economic policy makers is actually some kind of complacency. Because in order to do this catch up — which we have been discussing — with the neighbours and with other countries, the economy has to grow much, much faster than average and much, much faster than it is growing now. It does require quite a huge work to be done to fix that regulatory framework. It’s not an ordinary task, it’s very difficult. It could face serious opposition and that’s what IMF continues to show in all of their reviews. Then again, if the economy starts to grow, as it is actually growing now already, there could be some complacency on behalf of the policy makers just to relax and enjoy the recovery. Fundamentally, as the economy will be growing one way or another, but this growth might not be sufficient and the Ukrainian economy could take to that poverty trap or something like that, which is possible right now.

Dyczok: ‘Poverty trap,’ can you explain that?

Osakovsky: Not a ‘poverty trap’ per se, but basically the Ukrainian economy is very small relatively to others, and there are reasons for that. Of course, the main reason is the regulatory framework is much weaker and much more risky for business than in neighbouring countries. If it stays, then there will be relative gap between the Ukrainian economy and that of neighbours.

Dyczok: Could it expand or just stay as it is?

Osakovsky: Could stay as it is or could expand. It has expanded over the past 10-15 years. If you look at the history, it’s possible also, unfortunately. There are good examples where this gap is closing, there are bad examples where it’s widening. For example, countries like Georgia did a pretty good job in terms of narrowing the gap. The country did massive reforms, addressed the corruption and the regulatory framework, brought about a very robust macroeconomic framework and they’ve been enjoying quite a robust growth despite all the headwinds.

Dyczok: Corruption — the word that is always in the news here — you just mentioned corruption as a problem. Do you see, from your perspective, is there an attempt to really tackle corruption, or is this just sort of words that you’re seeing?

Osakovsky: Well, I see very mixed messages. On the one hand, yes there are people who say there are very positive changes on the ground. I also hear others who say actually the situation is getting worse. So, I do want to believe in the first part that there is some work being done, but this mixed message does suggest that there is plenty of work to do and the general outcome, which very few would doubt, unfortunately.

Dyczok: So, looking forward, it’s positive, negative, cautiously optimistic, what’s your take on moving forward?

Osakovsky: If you look at economic fundamentals, there are reasons to be at least tentatively positive. The economy will be growing, at least due to simple basic effect after the huge recession, which the economy had. The economy will be growing and that is of course positive. But again, this one big task is not to fall into complacency trap and just relax and enjoy the ride. There is much more work to be done, because growth has to be much stronger for much longer in order to catch up, like we discussed.

Dyczok: Thank you very much for that insight. We’ve been speaking with Mr. Vladimir Osakovskiy, the Chief Economist for Russia and CIS at the Bank of America Merrill Lynch. Thank you very much for joining us.

Osakovsky: Thank you.


Poroshenko visits Georgia

At the beginning of the week, Ukraine’s President Poroshenko paid an official visit to Georgia which, despite political changes in recent years, has remained a friend and ally of Ukraine.  During the visit, the leaders of the two countries signed a declaration on mutual support of sovereignty and territorial integrity.

Donetsk separatist proclaims Ukraine is dead and to be replaced by “Little Russia”

On 18 July the leader of the Russian-backed forces occupying part of Donetsk Oblast Oleksandr Zakharchenko made headlines by proclaiming a new state “Malorossiya,” (or pejoratively “little Russia” in English) which he claimed will “succeed Ukraine”. Previously, the separatists had called themselves the “People’s Republic of Donetsk”, and before that as “Novorossiya.” Zakharchenko claimed that Ukraine had failed as a state and that representatives from various regions of Ukraine had endorsed the idea of creating an alternative “Malorossian state” on the territory of present-day Ukraine.

It was unclear what Zahkarchenko’s declaration represented – bluff, bluster, or a testing of the waters by the Kremlin in light of the long-stalled Minsk Tripartite Consultations and attempts by France and the US to revamp them. The Minsk accords uphold the independence and territorial integrity of Ukraine and the Donbas separatist leader’s move challenges the principles on which they are based. Germany, France, the USA and the EU condemned Zakharchenko’s proclamation and called on Russia to bring its proxy into line. While stopping short of criticism, the Kremlin has depicted the proclamation of a “Malosussian” state as Zakharchenko’s personal initiative. Meanwhile, the other self-proclaimed separatist entity in the Donbas, the so-called “Luhansk People’s Republic” has distanced itself from the declaration.

Speaking at a press conference in Tbilisi, President Poroshenko commented that «Zakharchenko is not a political figure, but a puppet transmitting the Kremlin’s messages.”  He expressed certainty that Ukraine would in time restore its control over the Donbas.

Belarus’s Lukashenko received in Kyiv

On Thursday and Friday President of Belarus Alexander Lukashenko paid an official visit to Ukraine and was received by President Poroshenko. Lukashenko, is an ally of Moscow and planned joint Russian-Belarusian military exercises on Ukraine’s northern border have given rise to concern.  He remains a relatively isolated international figure because of Belarus’ human rights and democracy record.  The Belarusian leader has nevertheless sought to steer something of an autonomous line as regards Russia’s aggression against Ukraine and improving relations with the European Union and Minsk also hosts the ongoing tripartite consultations on finding a settlement for the conflict in the Donbas.


Over the last week the fighting between the Ukrainian army and the pro-Russian forces has intensified and resulted in the largest casualties for a long time suffered by Ukrainian forces during a 24 hour period. According to the press-service of the Ukrainian Ministry of Defense, anti-Ukrainian forces were using heavy weapons, including mortars and tanks. On July 16th pro-Russian forces have reportedly shelled the residential sectors of Zolote, a settlement near the town of Popasna, Luhansk oblast. No casualties among civilians were registered there. On June 18th pro-Russian forces shelled the residential areas of the town of Avdiivka, Donetsk region, two civilians were wounded. 8 Ukrainian military were killed and one tken prisoner on 19-20 July. Overall during the last week 13 Ukrainian servicemen were killed in action, 16 wounded and 1 taken captive.

The United States condemned the upsurge in the violence in eastern Ukraine, calling it the deadliest 24-hour period so far this year. It called for international monitors to have “full, safe and unfettered” access to the conflict zone.




In recent years, summer festivals in Ukraine have really developed. As Odesa International Film Festival came to a close, this week saw a number of music festivals begin. The city of Dnipro hosted an Island Jazz Festival. Ternopil hosted Faine Misto, a festival of rock, jazz, reggae and poetry. Another rock festival took place in the picturesque town of Zalishchyky. And L’viv was home to two classical music festivals at the same time: аn international festival of Chamber Music and Organ Music, and a national gathering of Tsymbalysty, or zither players. Meanwhile, Kyiv was enjoying a week of open-air Jazz and Poetry on the Roof. In other words, a wide variety of music to choose from in numerous locations across Ukraine.


It’s summer. We all want to relax. But in parts of eastern Ukraine people can’t. Because war continues to fall on their heads. A band called Incomer from L’viv in the west of the country, far from the war, recently recoded this song. It’s called Spectre. The line that sticks in my mind after hearing this is, ‘they have guns.’

Looking Forward

Next week we’ll have a new feature for you – an expert panel discussing the main events of the month. And as always, the latest news. Tune in for a new episode write to us at [email protected] I’m Bohdan Nahaylo for Hromadske Radio in Kyiv. Thanks for listening.

Interview transcribed by Larysa Iarovenko, Nykole King, Ilona Szieventseva, Max Sviezhentsev. News by Bohdan Nahaylo. War by Max Sviezhentsev. Culture by Oksana Smerechuk. Music selected by Marta Dyczok. Sound engineer Andriy Izdryk. Web support Kyrylo Loukerenko.