With new lockdown looming, expect a dark winter for ukraine’s businesses

Dylan Carter, Kyiv Post

Ukraine faces extremely difficult times ahead — and it isn’t ready.  As COVID-19 cases spike around the globe, daily new cases are breaking previous records in Ukraine, too. Ukrainians have a “hard winter” to come, Health Minister Maksym Stepanov has warned.

Back on November 13, Stepanov said that the health ministry’s principal goal over the winter period will be to “get through this pandemic with minimal losses.” Losses here refers to “human life,” and worse economic fallout and more lockdown measures may be on the horizon, he added.

Since then, that prognosis has gone from likely to inevitable. Both Stepanov and Prime Minister Denys Shmyhal have now said the country will impose a lockdown, probably for three weeks, in January.  On December 6, Shmyhal announced that the Cabinet had polled city mayors and oblast governors about what restrictions they would support during the lockdown. Over 90% of them supported bans or restrictions on mass events, shopping centers, movie theaters, restaurants, gyms and more, he said.

Those are surprising numbers. In the past, regional leaders have been among the most active opponents of quarantine measures.  The growing support for a full lockdown — something the government previously tried to avoid — comes amid rapidly growing cases numbers. Ukraine has registered more than 800,000 cases of COVID-19 since the start of the pandemic. In some regions, hospitals are worryingly full, although the health ministry says they can last until the end of December.

Regardless of how and when the government imposes the second lockdown, it will be difficult for the country’s already suffering businesses. How difficult? That depends on both the measures the country imposes and the global economic situation, experts say.

Empty toolbox

The Ukrainian government is only resorting to a lockdown after wearing out its other options.  On November 11, the government announced a weekend lockdown for three weekends across Ukraine, doing away with its tiered quarantine system and replacing it with uniform national restrictions. These measures included the complete closure of restaurants, bars, and entertainment services on Saturdays and Sundays.

Many were skeptical of the weekend restrictions. The mayor of Cherkasy, Anatoliy Bondarenko, stated his intention to oppose the new measures. According to him, creating a lockdown on the weekends would just increase queues for shops during the week and increase infections further. The mayors of Lviv, Slovyansk and Rivne also said that they intended to ignore the weekend quarantine.

President Volodymyr Zelensky stated that he hoped that the weekend lockdown “might help us to avoid a strict lockdown.” Similarly, Minister of the Cabinet of Ministers Oleh Nemchynov, appeared on the Ukraine 24 TV channel to announce that, if the measure was not successful, the country would return to a full nationwide lockdown. This was a significant U-turn from Zelesnky’s comments in May, when he stated categorically that Ukraine would not reintroduce a national lockdown.

The changing attitudes of government officials appear to reflect the “damned if you do, damned if you don’t” situation the country now finds itself in. The government must effectively choose between economic destruction and an unhindered pandemic. The former scenario will be unpopular with many Ukrainians. The latter will be deadly to many. To make matters worse, the UN has forecast that Ukraine will face its most severe downturn since 2010 because of the COVID-19 pandemic. According to data from the OECD, Ukraine’s economy will contract by up to 8%, with wages dropping by more than Hr 2,000 ($70) — a significant amount in an already poor country — and inflation increasing by 3.2%.

For the most vulnerable members of Ukrainian society, price hikes and economic slowdown will result in increased hardship. Quarantine measures, while helping to shield some of the most vulnerable from disease, will likely accelerate Ukraine’s economic decline. The government will be forced to make tough decisions about how it intends to plan for this particularly difficult winter.

However, Ukraine’s economic problems may be more structural, according to Yuriy Sholomytsky, head of the Center for Macroeconomic Modeling at the Kyiv School of Economics.   “According to our estimates, only the direct effect of the suspension of individual enterprises and some industries (transport, retail, entertainment, etc.) caused an additional decline in (gross domestic product) in 2020 by 0.9 percentage points,” he told the Kyiv Post in a message.

Sholomytsky added that the small knock-on effect of quarantine measures in Ukraine would have a larger impact on 2021: “It should further be borne in mind that restrictions have also affected employment and labor productivity. Therefore, the next hard lockdown will definitely weaken economic activity in 2021.”

According to a report released by the Center for Macroeconomic Modeling, a strict  renewed lockdown in December is predicted to cause the economy to contract by another 5.4% of gross domestic product (GDP). The report was published before the government announced it would impose a lockdown in January.

Under the December scenario, the center also predicts that the government will fall short of state budget expenditures by a huge Hr 100 to 140 billion ($3.9-4.5 billion). That would be a gut punch for the government, which is unlikely to receive any further tranches of aid from the International Monetary Fund this year.

Meanwhile, the number of new COVID-19 cases registered daily remains high, bringing the country closer to a full lockdown. On November 28, the country reported a record of 16,294 new cases in the past 24 hours.  Since then, the number of new daily cases has decreased slightly, which the government has credited to the weekend lockdown — a measure that Health Minister Stepanov initially viewed as unsuccessful. Nonetheless, daily infections are still extremely worrying.

New lockdown, new problems?

Despite the tough epidemiological and economic conditions, experts remain optimistic about Ukraine’s financial recovery. Sholomytsky stated that, in case of a second lockdown, he expects the Ukrainian economy to recover quickly.

“It should be taken into account that in the second quarter (when the first lockdown took place), GDP decreased by 9.9% compared to the first quarter and, in the third quarter, GDP grew by 8.5%. The recovery was quite fast and significant, so we assume that a similar situation will happen with the second lockdown.”

Sholomytsky added that “economic growth largely depends on external demand, so if the world economy recovers quickly after the autumn quarantine, it will contribute to stronger growth of the Ukrainian economy.”  Moreover, the government still possesses some tools to mitigate the economic impacts of a renewed lockdown, Sholomytsky said. “In our opinion, the government will use the same tools that were used in the spring — tax benefits (exemptions from paying the single social contribution tax, certain types of taxes, etc.), direct subsidies to households (private individuals with children). Representatives of the Government also mentioned the possibility of expanding its 5-7-9% (interest) loan program.”  “Let us repeat that the nature of the rapid recovery in the third quarter indicates a margin of stability of domestic business, although it may not be enough for the second quarantine,” he added.

Indeed, on December 4, the Ukrainian parliament passed several measures offering support to businesses during the pandemic, including a one-time Hr 8,000 ($283) stimulus from the country’s COVID-19 fund to help businesses continue working and avoid layoffs, a tax holiday for private entrepreneurs and rent relief.

With the right combination of tax benefits, subsidies and welfare payments, Ukraine is likely to weather renewed lockdown, Sholomytsky suggests.   But it won’t be easy, and much remains uncertain.

Moreover, how well Ukraine will rebound will largely depend on the global economic climate and the government’s commitment to live up to international expectations and continue with Euro-Atlantic reforms — the key to unlocking further economic aid from the West. However, with the country’s battle with corruption floundering, that aid seems a long way off.