Global downturn hammers Ukraine's economy

The yard of the Vetropack factory in this small provincial town is piled high with unsold production.

None of the plant's 750 workers has been laid off yet, mainly because management is reluctant to take the costly decision to shut down any of the three glass furnaces that churn out tens of thousands of bottles each day. But space on the factory grounds is running out – and Ukraine's economic crisis just looks to be getting worse.

"Some of our best customers are unable to pay, and demand is dropping off sharply," says Alexander Petrov, information manager of the Swiss-owned company, one of Ukraine's biggest glass producers. "We've been hit by a double whammy, because of rising gas prices and the sharp devaluation of the Ukrainian hryvna."

The fact that even Vetropack – an ultramodern facility with a much-needed product – is facing serious challenges speaks volumes about the perilous state of Ukraine's economy.

The global downturn is hammering the export-oriented Soviet-era steel and chemical industries that account for 30 percent of Ukraine's gross domestic product. Its financial system is in chaos and, some experts warn, facing imminent default. The bank accounts of millions of Ukrainians have been frozen, unemployment is spiraling, the hryvna has lost half its value since last summer, and the price the country has to pay for its main energy source, Russian gas, has just doubled.

Perhaps worst of all, the political system is paralyzed, with the populist Prime Minister Yulia Tymoshenko locked in a bureaucratic war with liberal President Viktor Yushchenko.

"The situation is deteriorating very badly, and it's quite possible that people could be taking to the streets in mass protests by spring if something doesn't change for the better soon," says Oleksiy Kolomiyets, president of the independent Center for European and Transatlantic Studies in Kiev. "With the sharp increases in the price of gas, following the recent conflict with Russia, it might be impossible for many of our industries to survive. Worst of all, the politicians are blaming each other instead of working together to find a way out of the crisis."

According to a deal signed last month between Ms. Tymoshenko and Russian Prime Minister Vladimir Putin, Ukraine will pay $360 per thousand cubic meters of Russian gas in the first quarter of 2009, up from an average of $180 last year. Even before that blow, Ukraine's energy-intensive steel industry reported a 53 percent slump in exports in the second half of 2008. Most of the country's chemical plants were reporting major slowdowns and 80 percent of construction projects in Kiev, Ukraine's formerly prosperous capital, have ground to a halt, according to the English-language Kyiv Post.

The accord has been challenged by Mr. Yushchenko, whose spokesman said that Kiev will seek to renegotiate the contract, but will not renew the gas war with Moscow, which left 18 European nations without gas for two weeks.

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