A pivotal crisis: Understanding Ukraine’s economic free-fall

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Dec. 1 2014, Updated 8:00 a.m. ET

The economy of Ukraine

Ukraine is currently in a state of economic free-fall. Ever since the country became independent in 1991, it has been afflicted by poor governance and corruption. Years of poor governance and corruption have led the country to become one of the worst performers among former Soviet Union countries.

Growth prospects for Ukraine are getting dimmer amid the ongoing war with pro-Russian separatists on Ukraine’s Eastern border. The IMF (International Monetary Fund) has predicted that Ukraine’s economy will shrink by 6.5% in 2014.

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Ukraine needs stability

Ukraine’s economy needs to stabilize. A check on corruption and a reduction in government spending and subsidies could help the economy achieve its short-term goals. Despite efforts by separatist and national forces to reach a ceasefire, the war in eastern Ukraine continues to rage on. This is taking a toll on Ukraine’s military expenses, which have spiked ever since tensions emerged on the Ukrainian border.

IMF to the rescue

The government in Ukraine has brought forth a set of stringent economic reforms with the IMF in exchange for a $17 billion loan program.

In the past, the IMF has helped bail out several economies—including Greece, Portugal, Poland, Ireland, and Mexico—by extending stand-by arrangements, and credit lines to these economies. Economic stress in these countries reflects in the ETFs (exchange-traded funds) investing in them.

In Europe’s case, ETFs like the VanEck Vectors Russia ETF (RSX), the iShares MSCI EAFE Index Fund (EFA), the iShares MSCI EMU Index ETF (EZU), the Vanguard FTSE Europe ETF (VGK), and the SPDR EURO STOXX 50 ETF (FEZ) are affected.

However, in Ukraine’s case, the bailout depends on the country’s implementation of a “bold economic program,” as defined by the IMF. While the IMF loan could go a long way in providing budgetary support to Ukraine and also helping Ukraine pay its external debts, the loan’s terms combined with Ukraine’s current political and economic situation could sound the death toll for the country. Find out more in the next part of this series.

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