Global downturn hammers Ukraine's economy

Ukrainians are hurting as gas prices soar, unemployment rises, and currency value plummets.

The yard of the Vetropack factory in this small provincial town is piled high with unsold production.

None of the plant's 750 workers has been laid off yet, mainly because management is reluctant to take the costly decision to shut down any of the three glass furnaces that churn out tens of thousands of bottles each day. But space on the factory grounds is running out – and Ukraine's economic crisis just looks to be getting worse.

"Some of our best customers are unable to pay, and demand is dropping off sharply," says Alexander Petrov, information manager of the Swiss-owned company, one of Ukraine's biggest glass producers. "We've been hit by a double whammy, because of rising gas prices and the sharp devaluation of the Ukrainian hryvna."

The fact that even Vetropack – an ultramodern facility with a much-needed product – is facing serious challenges speaks volumes about the perilous state of Ukraine's economy.

The global downturn is hammering the export-oriented Soviet-era steel and chemical industries that account for 30 percent of Ukraine's gross domestic product. Its financial system is in chaos and, some experts warn, facing imminent default. The bank accounts of millions of Ukrainians have been frozen, unemployment is spiraling, the hryvna has lost half its value since last summer, and the price the country has to pay for its main energy source, Russian gas, has just doubled.

Perhaps worst of all, the political system is paralyzed, with the populist Prime Minister Yulia Tymoshenko locked in a bureaucratic war with liberal President Viktor Yushchenko.

"The situation is deteriorating very badly, and it's quite possible that people could be taking to the streets in mass protests by spring if something doesn't change for the better soon," says Oleksiy Kolomiyets, president of the independent Center for European and Transatlantic Studies in Kiev. "With the sharp increases in the price of gas, following the recent conflict with Russia, it might be impossible for many of our industries to survive. Worst of all, the politicians are blaming each other instead of working together to find a way out of the crisis."

According to a deal signed last month between Ms. Tymoshenko and Russian Prime Minister Vladimir Putin, Ukraine will pay $360 per thousand cubic meters of Russian gas in the first quarter of 2009, up from an average of $180 last year. Even before that blow, Ukraine's energy-intensive steel industry reported a 53 percent slump in exports in the second half of 2008. Most of the country's chemical plants were reporting major slowdowns and 80 percent of construction projects in Kiev, Ukraine's formerly prosperous capital, have ground to a halt, according to the English-language Kyiv Post.

The accord has been challenged by Mr. Yushchenko, whose spokesman said that Kiev will seek to renegotiate the contract, but will not renew the gas war with Moscow, which left 18 European nations without gas for two weeks.

"This crisis has touched almost everyone already," says Yury Danilenko, a worker in Vetropack's mold shop. Though he's happy he's still working, he says his wife recently lost her job as a service worker, the family's bank account is frozen, and many neighbors are unemployed. "I'm really worried about the future. We haven't seen anything like this before," he says.

Officially, unemployment is around 5 percent. But that greatly understates the problem, says Volodymyr Gryshchenko, head of the Federation of Employers, whose members employ about a third of the country's workforce. "Employers are trying to find ways to avoid firing workers outright, and so they're cutting hours or sending workers on unpaid leave," which doesn't show on official unemployment rolls, he says.

Ukraine's chemical industry, which employs hundreds of thousands, continues working even though orders have fallen drastically because, he says, "if you shut down a chemical plant it is extremely difficult and expensive to restart it." But if gas prices remain high, he adds, "our chemical enterprises will no longer be competitive."

In December, amid the collapse of some of the country's leading banks, Ukraine's central bank ordered all savings deposits frozen in a bid to prevent a panic. That move may have been successful, but many citizens watching the hryvna dive and unable to get at their money are crying foul.

Those hit the hardest are the country's fledgling middle class, whose political ideals tend to be liberal and who were quickest to adopt modern economic habits, such as trusting banks and taking out consumer loans, says Viktor Nebozhenko, director of Ukrainian Barometer, an independent Kiev think tank.

He adds that he sometimes wishes he'd stuck to the Soviet-era habit of keeping his cash in a mattress. "Middle-class disillusionment is very dangerous, because these are the people most capable of self-organization," he says. "Everyone is suffering from this banking crisis, and some are getting very angry."

"As long as the factory is working, I can keep up with my loan payments for house and car," says Yelena Brexler, who works near a mechanized glass blower that spins out hundreds of red-hot bottles per hour at Vetropack. "But banks are raising loan costs, things are getting harder, and we're all very concerned."

Some experts warn that Ukraine, which has already received $16.5 billion in emergency funding from the International Monetary Fund, could default on its national debt, which could have catastrophic political consequences.

"We are in a pre-default situation, and it looks like Ukraine has already lost its chances to reform its economy and industry," says Vadim Karasyov, director of the independent Global Strategies Institute in Kiev. "The worst thing is, people are starting to feel disillusionment in the idea of democracy itself. The demand for a strong hand, to fix this mess, is growing."