In Ukraine, citizens feeling war's toll on economy

In Ukraine, residents lash out at politicians over deepening hardships stemming from conflict

Galina Artemyuk doesn't bother with gloves even though the mercury never rises above freezing this time of year and her wind-chapped hands are as red as boiled lobsters.

She needs her fingers free to swiftly sort and wrap her daily consignment of 400 pastries from a commercial bakery near Kontraktova Square, where she arrives each day before sunrise to set up her booth at the tram terminal in time for the 7 a.m. start of rush hour.

On a good day, when she sells out of the sweet rolls filled with sour cherry jam or ground poppy seeds, she clears 300 hryvnia, or about $20. But sales are shrinking, as is the hryvnia's value. Even at 27 cents per pastry, customers who have seen their money lose more than half its value this year are cutting out breakfast on the run.

Millions of Ukrainians are confronted with mounting hardships this coming winter as the 8-month-old conflict with Russia-backed separatists drains the treasury of $5 million a day, corruption continues to deprive government coffers of badly needed tax revenue and Russia has canceled energy subsidies that made home heating affordable before relations between the two former Soviet republics took a sharp dive last year.

Artemyuk's daughter and son-in-law, who have paychecks of similarly diminishing value, have moved with their two school-age sons into her two-room apartment to save money.

"It's going to be a terrible winter, but what can we do about it? We can't count on our government for anything," Artemyuk, 62, says with a dismissive wave in the direction of the presidential palace and parliament. "People aren't getting their pensions. Food gets more expensive every day. If our money continues to deteriorate, I won't be able to make any profit at all."

The unemployment rate in Ukraine is officially less than 9%, but many workers struggle as their wages stagnate and the cost of living soars. Gross domestic product is expected to contract by 10% this year.

The war in eastern Ukraine, which President Petro Poroshenko said recently costs $5 million a day over budget, adds to double-digit-billion-dollar deficits that have long strangled Ukraine's state finances and now delay payment of salaries to government workers by weeks or months.

Twenty percent of Ukraine's prewar GDP is under the control of the separatists, who have been systematically destroying much of the production base in the regions they occupy, said Anton Gerashchenko, advisor to Interior Minister Arsen Avakov.

"They are blowing up rail hubs and flooding mines," Gerashchenko said of the separatists. "The Donetsk airport that cost $250 million to build for the soccer championships two years ago is ruined — it's worthless."

What coal is still being extracted from the Don River basin mines is being shipped to Russia or within rebel-held territory, not to government-controlled areas of Ukraine either for domestic use or export.

Because of the diversions, Ukraine will need to import as much as 4 million tons of coal in the last weeks of this year, then-Deputy Energy Minister Vadym Ulyda said in mid-October. That is depleting Ukraine's already-ravaged hard currency reserves, which was a paltry $12.6 billion in October, down 23% from September. That is down from a high point of $38.4 billion in 2011 and an average of $22.7 billion over the last dozen years, according to Trading Economics, which tracks financial data for 196 countries.

"Everything is interconnected," said Kateryna Markevych, an economic analyst at Kiev's Razumkov Center think tank. "Wages are not increasing, which is reducing demand as people try to save money and buy only the basic necessities."

That cuts into tax revenue, which is further diminished by chronic underpayments and an unnecessarily cumbersome array of filing requirements, she said. Tax-dodging in turn drives underground more of what commerce remains.

"The shadow economy is now about 50% of the total," Markevych said. And much of what used to form a cornerstone of the above-board income — trade with Russia — all but disappeared as the conflict sharpened.

To punish Kiev for seeking to shift its economic alliance westward, Moscow has imposed import bans on Ukrainian dairy products, chocolate, poultry and other foods from a republic that in Soviet times was called the breadbasket of the federation. Markevych calculates that losses will be at least $3.5 billion by year's end.

Ukrainian industry is dominated by a mere dozen oligarchs, whose chokehold on production has fostered the rampant corruption that has prevented a country with a skilled workforce, highly educated population, a wealth of natural resources and abundant farm output from achieving its potential. Transparency International ranked Ukraine 144th out of the 177 countries it surveyed last year for its pandemic of bribe-taking and influence-peddling. The CIA World Factbook lists Ukraine in 189th place among 193 countries in real GDP growth rate.

Cleaning up the tax-cheating, graft and kickbacks is the price demanded by the U.S. and other Western allies in exchange for aid and eventual membership in the European Union. But Ukraine's partners have been forced to retreat from deadlines set for showing progress in the fight against corruption and waste of state resources.

Russia demanded EU guarantees of payment for Ukraine's billions of dollars in arrears for previous gas shipments, holding up a deal to ensure deliveries to and through Ukraine this winter. In the end, the Europeans had to make credits available to already heavily indebted Kiev to seal the Oct. 30 deal.

"Europe and the United States are getting a little irritated that nothing is happening on corruption and reform. And they are not interested in excuses," said Jock Mendoza-Wilson, international and investor relations director for System Capital Management, the holding company of Ukraine's richest man, Rinat Akhmetov.

Even with the rescued gas agreement, Ukrainians used to subsidized utility bills face a cold reality this winter. Most homes are supplied with heat from a communal source; occupants of individual units are able to regulate the temperature only by opening windows when it's too hot. Officials have warned consumers that as costs have more than doubled because of the end of special discounts offered by Russia's Gazprom when Moscow was still an ally, the thermostats will be set at an abstemious 60 degrees this season.

Food imports have been slashed because of lack of buying power. Most urban families have relatives in the countryside who can keep them stocked with locally grown and raised basics: eggs, cheese, vegetables and fruit, as well as the nation's beloved salo, uncured pork fat that is thin-sliced and eaten raw as an accompaniment to soups, dark bread and vodka.

Provoked into a rant against what she sees as a succession of corrupt and incompetent leaders since independence, Artemyuk takes on a martyred air, lambasting the political forces making up the newly elected parliament and expressing a lack of faith in their ability to extricate Ukraine from its crisis.

"Just leave me with some hearty Ukrainian borscht, salo and garlic and I'll be OK," she concludes. "We Ukrainians are used to hardship."

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