High Inflation Makes Ukraine’s Troubled Situation Worse

By June 5, 2015Bitcoin Business
Click here to view original web page at www.nytimes.com
The Petrivka market in Kiev. Across Ukraine, the price of everything seems to have gone up sharply, including tea, apples and fresh fish. Credit Brendan Hoffman for The New York Times

KIEV, Ukraine — Olesia Verchenko looked over a selection of blackened avocados at a supermarket here recently.

Their price has roughly doubled over the last year, notwithstanding the stickers on them advertising a 25 percent discount.

“I don’t think anybody takes avocado anymore, so they are basically rotting on the shelves,” said Ms. Verchenko, an economist.

While the rest of Europe tries desperately to shrug off low inflation, Ukraine has added rapidly rising prices to its long list of problems during its civil war with Russian-backed rebels. Official inflation figures showed that prices rose 61 percent in April compared with a year earlier. But many prices have doubled and tripled.

Ms. Verchenko, a 37-year-old mother of two boys and a professor at the Kiev School of Economics, specializes in arcane subjects like options pricing, but she took some time to explain less esoteric market dynamics. Like the price of candy.

She once bought chocolates from Roshen, the company owned by the Ukrainian president, Petro Poroshenko, for about 80 Ukrainian hryvnia a kilogram, or $3.89. Now they are 203.

“You can see inflation in those candies,” she said during a visit to a grocery store near her office.

The price of everything seems to have gone up sharply, including tea, apples and fresh fish.

At a glass display case, she pointed to slices of cake. The prices were quoted for every hundred grams, instead of per kilogram as they once were.

“Before it was always per kilo, but now you have too many numbers,” she said. “It looks better like that. You don’t want to scare your customers away.”

When she recently went shopping for a mattress, she noticed that prices were missing entirely.

For many bigger ticket items, she said, “They don’t really put price tags out anymore.”

“You choose what you want, you ask how much it is, and then you see whether you can afford it or not.”

High inflation is just one of the many problems befalling Ukraine at the moment.

Thousands have died in the war, many more have been displaced, and Ukraine has been cut off from parts of the industrial east. The crisis in Ukraine, where new violence has erupted, is likely to loom large over the Group of Seven summit in Germany that starts on Sunday.

Potential investors in Ukraine have been scared off. Output is expected to shrink 7.5 percent this year.

A lifeline came this year, when Ukraine negotiated a $25 billion loan package, including $17.5 billion from the International Monetary Fund. As part of that deal, the government is embroiled in contentious negotiations with Ukraine’s creditors in hopes of bringing another $15.3 billion of relief by restructuring the country’s debts.

Austerity measures and tax reforms have also been enacted in tandem with negotiations with the West; there have been cuts in energy subsidies, pension haircuts and tax increases aimed at the wealthy and businesses.

Two factors have worsened inflation. The value of Ukraine’s currency has plummeted since the war began, driving up the cost of imported goods. And energy prices have soared as the government has cut its historically high subsidies.

That has made life more difficult for average Ukrainians and for businesses, which face high borrowing costs.

“I’m not dreaming of credit,” said Yaroslav Rushchyshyn, who founded a garment manufacturer in Lviv, in Ukraine’s west, and is on the board of a coalition of entrepreneurs in the region. “It’s too expensive.”

Natalie Jaresko, Ukraine’s Chicago-born finance minister, said, “I think we’ll be able to bring inflation down over the course of the rest of the year.”

But she was blunt about the stresses inflation poses.

“For a business, it’s a challenge to have to borrow at 30 or 35” percent, she said in an interview. “Our goal is to have real growth again by 2016. That means the banking sector has to be lending to real business, and for it to be rending to real business, inflation has to come down.”

Another problem, she said, is that “when you have this kind of inflation, you have less confidence in your currency,” adding, “People will start pulling their money out of the banks. The deposit withdrawals weaken an already weakened banking system.”

One enterprising entrepreneur, Michael Chobanian, has opened what he calls a Bitcoin embassy and is evangelizing about the controversial virtual currency at a time when faith in traditional currencies is wavering.

“Considering the situation with the currency, it gave Bitcoin a huge boost, so, yes, there is definitely interest,” he said in a recent interview. “Although with Bitcoin, the first time you hear about it, you usually think it’s a scam or a Ponzi scheme.”

The strains of inflation are showing.

“Drugs in Ukraine cost as much as gold,” said Dmytro Sherembey, the founder of Patients of Ukraine, an advocacy group. “For patients, it was a catastrophe last year.”

Government subsidies for medications have not kept pace. They were based on a world where a dollar was worth about eight Ukrainian hryvnia. But the dollar soared to more than 30 hryvnia by February before settling back to about 21 at the end of May.

“Families go to the pharmacy and pay three times more, but the salaries are the same,” said Mr. Sherembey.

Many others are just trying to keep their heads above water.

Vitaly Nakonechnyi, 31, said the weakness of the hryvnia “influences the price of everything I buy” and led him to look for a job with higher pay. He found one as a barista at a coffee shop that looks like an old train car, in a central Kiev park dominated by a Soviet era statue of the Ukrainian poet Taras Shevchenko.

Victor Halavin, a 60-year-old bus driver, said, “In my flat, electricity, water, everything is up,” adding, “Bread used to be 4 hryvnia. Now it’s 7.”

He stood next to his yellow bus with a cigarette pressed tightly between thumb and index finger and reflected on the last year. “It’s too much revolution in our life,” he said.

Economic hardship is nothing new here. The transition after the fall of the Soviet Union to a market economy has been a rocky one, sapped by corruption and antiquated regulations. The contrast with neighboring Poland, which took a much more aggressive approach to transforming its economy, has been particularly stark. Poland’s per capita output is about three-and-a-half times that of Ukraine.

Ms. Verchenko keeps the inflation problem in perspective.

“I remember how it was in the early ’90s,” she said. “I was still a student in high school when we had 10,000 percent a year. That was hyperinflation! What we have now? It’s not that bad.”

When she was in high school, she had to carry millions of karbovanets, the local currency that temporarily replaced the ruble after the Soviet Union fell, just to buy bread.

“I remember jokes of everyone being millionaires,” she said.

For her, like many others, there are additional concerns while shopping. At the grocery store, she flipped over a package of crackers and pointed to the beginning of the bar code.

“This is not a Ukrainian code,” she said. The first numbers on a product’s international bar code indicate where it was registered, though it does not always coincide with where the product was manufactured. Still, some Ukrainian shoppers aren’t taking chances.

“Russia would be 46,” Ms. Verchenko said. “So 46, no, no. Don’t take 46.”

Everyone was reading bar codes now, she said.

“We don’t know all countries, but we know Russia is 46.” And Ukraine’s code starts with 482.

She turned over a bottle of juice and examined the code on the back label.

“I can’t promise it’s good, but it’s Ukrainian.”

Their price has roughly doubled over the last year, notwithstanding the stickers on them advertising a 25 percent discount.

“I don’t think anybody takes avocado anymore, so […]

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