The country is suffering from Corona, its aggressive neighbor Russia and now also from bad weather for agriculture. The cost of living is skyrocketing with high inflation rates – and the central bank is trying to prevent the worst.

Protester at a rally against the corona restrictions in front of a government building in the Ukrainian capital Kiev in 2020

IIn the Ukraine, the central bank raised the key interest rate by one point to 7.5 percent in view of the rising cost of living. In March, inflation rose to 8.5 percent from 6.1 percent in January. On an annual average, inflation could now rise to 8 percent. Therefore, the central bank was ready to raise interest rates further. In 2021, the inflation rate should reach the desired target of 5 percent. Kiev follows with the increase of the central bank in the neighboring country Belarus, which raised the key interest rate for the first time in 6 years – to now 8.5 percent.

The Ukrainian economy is hit hard by the rise in the cost of loans. The Russian military march on the border not only brought international diplomacy to the scene and helped America to impose new financial sanctions on Russia. The escalation of the conflict over the Russian-annexed Crimea and the occupation of Donbass also put the Ukrainian currency under pressure. On Friday it was quoted at just under 28 hryvnia per dollar, the euro was valued at 33.50 hryvnia. Seen over the year, this is a minus of almost 3 percent against the dollar and more than 13 percent against the euro.

Dramatic armament

“Russia’s dramatic military build-up in the occupied territories and near the Ukrainian borders has frightened market participants,” says Serhii Kolodii, an analyst at Raiffeisen Bank International. Growing concerns about Russia’s intentions and a drastic deterioration in the situation seriously threatened exchange rate stability.

There are also other factors such as the cold weather, which is delaying the start of spring sowing. Domestically, the effects of the corona pandemic with more than 16,000 new infections and 300 corona deaths a day in the country that is as big as Germany are above all. Last year trade with Germany amounted to 7.1 billion euros, a decrease of 8 percent.

The Ukrainian economy contracted by 4 percent in 2020. This year economists expect an increase of 3.5 to 4 percent. The Viennese Eastern Europe think tank WIIW cites private consumption and the jump in investments as drivers. High world market prices for food and raw materials should help.

However, structural deficits such as a lack of the rule of law and the fight against corruption remained. The new American administration has emphasized this with its crackdown on Ukrainian oligarchs. In addition to strict fiscal policy and a banking system that is independent of state intervention, both issues are key reasons why the International Monetary Fund only paid out less than half of the financial aid it promised in June 2020, amounting to 5 billion dollars.

The IMF also criticizes the government’s renewed intervention in market prices for supplying households with gas. However, at the end of 2020, the EU, World Bank and European development banks had granted the country loans and aid in the hundreds of millions. The low interest rates around the world also made it easy to borrow on the capital markets.