Ukraine's Economy "Spinning out of Control." Could it Drag Russia's Down With It?

Political events in Ukraine and diplomatic tensions with Russia are filling the headlines this week, but behind these recent developments is a story of persistent economic weakness. Although a change of government in Kiev may eventually bring needed reforms, in the short run it can only worsen the economic situation. Bloomberg reports that Ukraine's interim president, Oleksandr Turchynov, has said that the country's economy is "spinning out of control" and has entered a "pre-default situation." All this raises the question of whether economic collapse in the Ukraine will drag the already faltering Russian economy down with it.

Let’s look at some data. The first chart below shows annual growth rates of real GDP for the two countries, including IMF preliminary data for 2013 and forecasts, made before the latest crisis, for 2014. As we see, both countries prospered in the early and mid-2000s but suffered sharp recessions during the global financial crisis. Neither has managed to return to its previous growth rate. In the past two years, growth has slowed further. The IMF thinks final data for both countries will show slight positive growth for 2013, but some other sources suggest that both are in or close to actual recession. Before the latest events, the IMF was moderately optimistic about recovery in 2014, but that hope seems less likely now.

Energy is a big part of the nexus between Russia and Ukraine. Russia is the world’s largest exporter of oil and natural gas. Ukraine is one of the world’s most energy-dependent economies, and one of the least energy efficient. Data from the World Resources Institute show that Ukraine uses 3.5 times more energy per dollar of GDP than Germany, 2.5 times more than the United States, and about 10 percent more than its also inefficient neighbor to the north. >>>Read more