Gas issues dropped as Ukraine’s economy plummets

Russia and Ukraine say they have overcome all their disagreements on supplies of gas in light of Ukraine’s increasingly crippled economy.

Vladimir Putin met with Ukraine's Prime Minister Yulia Timoshenko in Poland, where they agreed that Kiev can import much less gas without being fined for breaking existing agreements.

Ukraine's economy has been one of the worst-hit by the global recession, and a dramatic fall in industrial output has led to a sharp decrease in energy use. Its economy has contracted by a jaw-dropping 18% in the last 12 months.

In the same period, the national currency has collapsed, falling by nearly half against the US dollar. The banking sector is in the eye of the storm – not only has lending dried up, but many banks are struggling to repay their existing clients.

Extreme times call for extreme measures, and the National Bank of Ukraine hasn’t been short of those lately.

To shore up its currency, the grivna, it has suggested paying interest on foreign deposits in the local currency. It has temporarily banned withdrawals from some of the most troubled financial institutions.

This avoids an almost inevitable run on vulnerable banks, but means ordinary customers have no way of getting their hands on their money. Three of the worst-off banks have also just been nationalized, with more likely to follow.

Elena Bilan, an economist from Dragon Capital, elaborated on the situation:

“The government is doing the right thing, but not as fast we would like. The main thing is to survive until the presidential elections, until then we will likely see a lot of provocations and squabbling.”

Ukraine goes to the polls in less than six months. With Prime Minister Yulia Timoshenko and the leader of the biggest parliamentary party Viktor Yanukovich the front-runners, all sides have used the economic turmoil to make political capital.

Kiev is adorned with pro-Timoshenko posters claiming “Others just talk. She does the work”, but the government’s handling of the crisis isn’t to everyone’s liking. Surveys say four out of five Ukrainians already distrust the banking system.

There have been public protests in response to the ban on withdrawing money. Nelly Bosieva, the chief of the Depositors Association of Ukraine’s Zaporozhye region thinks the measures will bring more harm than good:

“The poorest will suffer the most in these situations. To impose moratoriums, to prevent people in times of unemployment and instability from accessing their own savings is to commit genocide against your own people,” she explained.

Ukraine’s government does not have much leeway, and it simply cannot afford to let its banks go under. It doesn’t have much money to support them either, having already borrowed over $16 billion from the IMF to fight the crisis.

For ordinary Ukrainians things look like they will get much worse before they get better. And with the elections ahead, the government’s crisis performance will not only affect its immediate future, but also the public’s choice of leader for the next few years.