The Ukrainian economy showed moderate growth in 2016, with GDP expected to increase 1.1% for the year. Inflation eased to an expected 12% for 2016. Exports stagnated due to relatively low commodity prices. Imports of goods continued to decline, while investment imports increased, signaling positive trends. However, exports declined faster than imports, resulting in a negative trade balance that is expected to widen to $4.9 billion, or 5% of GDP. Overall the recovery remains weak, with investment and domestic demand still low. Continued reforms are needed to strengthen energy independence and improve competitiveness.

1. The economy is demonstrating moderate growth, the situ-
ation on the currency exchange market has stabilized, and
the official inflation rate stays within the NBU target.
Reforms were conducted not intensively enough, but still
there are several positive outcomes. Particular attention
should be given to the reform of the energy market, as its
conduction is a prerequisite for the energy independence
of Ukraine.
This report is aimed at evaluating the current economic
situation in Ukraine, making a preliminary overview of 2016
and forecasting economic development in 2017.
A number of positive changes took place in the Ukrainian
economy in 2016.
A revival of economic growth, positive trends on the labor
market, and a renewal of consumer lending is observed.
ECONOMY OF UKRAINE. 2016 OVERALL RESULTS. FORECAST FOR 2017
Anatoliy Amelin
Head of Economic Programs, UIF
Yana Lavryk, Olga Khomenko
Economic Programs Experts, UIF.
2016 Results: TOP-10 Economic Events
From 38%-44% (average level) до 22% (unified rate)
Revival of economic growth
Reduction of the NBU refinancing
rate
From 22% (January 2016) to 14% (October 2016)
Receiving of the IMF tranche In September, the IMF granted a $1 billion tranche to Ukraine
UAH exchange rate stabilization The official exchange rate ranged within 24,25-26,40 UAH/USD.
Energy market reform Reduction of the ad valorem charge, increase in gas tariffs and gas prices of PJSC
“Ukrgazvydobuvannya”
Rise in Doing Business ranking
Reduction of the requirement criterion of compulsory sale of currency earnings from 75% to 65%,
repeal of a ban on repatriation of dividends for 2014-2015
The projected Budget 2017 made
public
$1 billion Eurobond emission against
US guarantee
Total amount - $1 billion, rate - 1,471%
An increase in the minimum wage by 2 times up to UAH 3 200
Currency liberalization
Upraise by 3 positions, 80th position among 190 countries
After declining during 2 consecutive years Ukrainian economy is back to reviving
Reduction of the unified
social tax
1

2. The growth in gas tariffs for the population up to the eco-
nomically feasible level allowed liquidating the hidden sub-
sidization of the industry. According to “Naftogaz”
estimations, the funding of schemes with “cheap” gas for
population amounted to $60 billion over 10 years. At the
same time, according to the Institute for the Future esti-
mations, Ukraine could have provided itself with gas
in 5 years with investments of up to $5 billion.
Increase in gas tariffs allowed tripling the gas selling price
of PJSC “Ukrgazvydobuvannya”. In a result of gas price in-
crease and drop of the rental rate the company generated
an investment resource. “Ukrgazvydobuvannya” announces
the doubling of gas-well drilling volumes for a prompt in-
crease in production (from 14.5 billion cubic meters to 20
billion cubic meters in 2020). However, the issue of further
reduction of ad valorem charge for gas producers
remains open.
The tax burden remains high: charge for private gas pro-
ducing companies is 29%/14%, for state ones - 50%. In our
opinion, for achieving energy independence the charge
should be reduced to 20% (for all types of companies).
Firstly, this would provide the increase in working capital
for generation of the investment funds of gas producers,
and secondly, this would create equal opportunities for
both private and state companies.
In September, Ukraine received a tranche from the IMF in
the amount of $1 billion. It allowed to replenish NBU FX re-
serves and provided a psychological support to the ex-
change rate. Although the amount was significantly lower
than the $6-7 billion planned at the beginning of the year.
The IMF tranche was followed by a $1 billion Eurobond
transaction with a US guarantee. The funds were allocated
for social support.
This year, Ukraine has risen by 3 positions in the Doing Busi-
ness rating and took 80th
place among 190 countries.
The project of the budget for 2017 was made public in au-
tumn. A doubling of the minimum wage is foreseen. On the
one hand, it is a tool of unshadowing the economy, and on
the other it is a potential increase in social spending of the
budget, business spending on payroll, and boost
to inflation.
2

3. Key problems of the Ukrainian economy in 2016 remained
the same. Firstly, it has a high dependency upon commod-
ity cycles (correlation between GDP and Commodity Price
Index amounts to 87%). Ukraine continues to export mainly
MMC and AIC products with low value added, maintaining a
status of a resource colony in the global economy. Ukrain-
ian products lose competitiveness on foreign markets.
The turbulence in commodity markets further strengthened
Ukraine’s dependence on external donors. IMF and EU funds
are the main sources of replenishment of FX reserves and
backing of the fiscal deficit. External loans increase the debt
burden. External direct and state guaranteed debt grew by
$3 billion up to $46 billion. Loans are mainly used for con-
sumption and do not stimulate economic growth.
The investment climate in the country remains unfavor-
able. The volume of foreign direct investments for 9 months
amounted to $3.8 billion, two-thirds accounted for by
banks’ recapitalization. Approximately $1.5 billion was allo-
cated into the real sector. For comparison, the volume of
FDI into the economy of Kazakhstan in the 1st
half of 2016
amounted to $9.3 billion.
Unfavourable external environment, increase in trade bal-
ance deficit and insufficient volume of FDI create high cur-
rency risks. Payments balance as of 10 months 2016
remained positive, but low volumes of NBU FX reserves cre-
ate a danger for exchange rate stability in the future.
2016 Results: Key Problems
IMF and EU funds are the main sources of replenishment of FX reserves and backing
of the fiscal deficit
High dependence on the external
environment
Trade deficit, low volume of FX reserves, external debt, debt owed to RF, public distrust in hryvnia
“Grey” economy 50% of envelope salaries, 40-60% of GDP is in the shadow economy
High currency risks
Weak recovery of the consumer
demand
Significant connection between GDP growth and Commodity Price Index (87%)
High tax pressure
Growth of the external debt
Dependence on external donors
Direct and state guaranteed debt increased by $3 billion up to $46 billion
Negative investment climate
Balance of FDI as of 9 months of 2016 is $3,0 billion, which is insufficient for reimbursement of the
trade deficit
Raw materials exports Products of MMC and AIC account for up to 70% of total exports
The rate of budget revenues and PF to GDP is 38% (in Singapore, Korea it is 22%)
Real growth in household consumption in 2016Е is only 2-3%
Poor investment activity Share of investments in GDP 2016Е is 15% (while the target is 30-40%)
3

4. 5,4 5,3
3,1
2,2
3,0
-1,0
0,0
1,0
2,0
3,0
4,0
5,0
6,0
9М
2011
9М
2012
9М
2013
9М
2014
9М
2015
9М
2016
-1%
0%
1%
2%
3%
4%
5%
6%64,4
59,1
50,6
35,4
31,9
62,4
0
10
20
30
40
50
60
70
2011
2012
2013
2014
2015
2016Е
60
80
100
120
140
160
180
200
CommodityPriceIndex
2016 Results: Macroeconomic Indicators
Economy of Ukraine shows a slow rise in 2016, which is mainly due to a
low comparative base effect. The GDP growth at 1,1% is expected at the
year end.
Level of FDI in the Ukrainian economy is increasing but its volume
remains insufficient for the acceleration of the economy
Increase in nominal and real wage stimulates the growth of
household consumption, but domestic demand still remains weak
Source: State Statistics Committee of Ukraine, the NBU (Data from 2014 without the Crimea, Sevastopol, and part of ATO area), the IMF; Institute for the Future calculations
Export is stagnating on the background of relatively low prices for raw
materials
Formally, the Ukrainian economy is out of recession. GDP
showed a positive trend during 3 quarters. At the end of
2016, GDP is expected to increase by 1.1%. The growth is
mainly due to the low comparison base: during the previous
2 years the Ukrainian economy was down by 16%, GDP in USD
terms halved, and returned to the level of 2005 (maximum
GDP was registered in 2008 - $188 billion).
Increase in nominal and real wage stimulates the growth of
household consumption, but domestic demand still remains
weak. Consumer lending is recovering at a slow pace. De-
spite reduction of the NBU refinancing rate, average rates
on consumer loans increased significantly compared to last
year. Without state support, household consumption will re-
main under pressure. The main factor of a slowdown in do-
mestic consumption is a growth in tariffs for the population.
Exports, which accounted for about 50% of GDP are stag-
nating on the background of relatively low prices for met-
als, iron ore and grains. Together, these products account
for 40%-50% of total merchandise exports from Ukraine.
Investment activity is slowly recovering. As for the first 9
months of 2016, the capital investment in Ukraine increased
by 163.4% up to UAH 204.5 billion ($8 billion). FDI in Ukraine
for 9 months of 2016 increased by 49% up to $3.8 billion;
however, as was mentioned above, the real sector input is
not more than $1.5 billion. The share of total investment in
GDP still remains low (12-15%), the peak values are 25% -28%
(2006-2008).
4

5. Inflationary pressure eased. CPI at year-end 2016 is ex-
pected to reach 12% - against 43.3% in 2015. The slowdown of
the CPI growth was mainly due to the stabilisation of the
hryvnia exchange rate, slowdown of imported inflation, slow
increase in prices for raw materials. Betterment of the in-
flation expectation and predictability both create more
comfortable conditions for business and positively affect
consumers’ sentiments.
The rapid depreciation of currency stalled, but the devalu-
ation risks remain due to low volume of international NBU
FX reserves - $15.5 billion (as of Nov.11, 2016). For the main-
tenance of macroeconomic stability as according to the IMF
estimations NBU FX reserves need to increase up to $23.7
billion before the end of 2017, which is unlikely to happen
without an IMF tranche and/or a significant improvement of
the external environment in the commodities markets.
Decline of the inflationary pressure allowed the NBU to con-
duct a softer monetary policy. Since April, the regulator
gradually lowered the refinancing rate (from 22% to 14%
in October).
Easing of monetary policy contributed to a moderate re-
duction in the cost of credits for businesses. However,
restoration of lending to the real sector of the economy
did not happen, the surplus of bank liquidity was concen-
trated in the financial markets, in particular the available
funds moved into the deposit certificates of the NBU.
The next step should be a further softening of NBU mone-
tary policy, decrease of the rates to 8-10%, stimulation of
the internal demand for domestic production including real
estate; increase in lending to small and medium business
up to $3.5-4 billion per year.
2016 Results: prices and value for money
The situation on forex market is stable, but the devaluation risks
remain due to low volume of international NBU FX reserves
Inflationary pressure eased, CPI at year-end 2016 is expected to
reach 12%.
Source: the NBU
0%
10%
20%
30%
40%
50%
60%
70%
Easing of monetary policy contributed to a moderate reduction in
the cost of credits for businesses
0%
5%
10%
15%
20%
25%
30%
35%
14%
Decline of the inflationary pressure allowed the NBU to conduct a softer
monetary policy, the refinancing rate as of October was reduced to 14%
10%
11%
12%
13%
14%
15%
16%
17%
18%
19%
31,8
24,5
20,4
7,5
13,3
15,5
0
5
10
15
20
25
30
35
2011 2012 2013 2014 2015 окт.16
6
10
14
18
22
26
30
UAH/USD
5

6. In 2016, Ukraine has taken a step forward regarding re-
duction of energy consumption. Consumption and import of
natural gas are decreasing. This is partly due to an increase
in energy efficiency. Manufacturing plants are actively im-
plementing energy effective technologies. For example,
PJSC “Zaporizhstal” decreases monthly gas consumption by
7 times due to production processes optimisation.
Growth in tariffs results in a decrease in gas consumption
by the population. In 10 months of 2016, this decrease
amounted to 4%.
At the same time comparatively weak consumption is ex-
plained by slow pace of recovery of the Ukrainian economy.
This tendency can change only if Ukraine enters a trajec-
tory of sustainable economic progress.
Overall, the energy efficiency of the Ukrainian economy re-
mains low compared to our western neighbours. Ukraine is
still critically dependent on energy imports. Its share in
total imports is 18%. We continue importing petroleum
products, gas, and even coal while having our own huge re-
serves. In 6 years the energy resources import bill was
higher than $100 billion, which is higher than annual GDP.
The volume of investment which is required to achieve
complete self-sufficiency in oil and gas in Ukraine is equiv-
alent to 3-5 years of imports of those resources.
0
5
10
15
20
25
30
35
40
45
2016 Results: Energy Consumption
Import if natural gas is decreasing. Ukraine is not importing gas
from the RF for more than a year
Consumption of gas in Ukraine continues decreasing. The decrease in 9
months of 2016 10% y-o-y
Source: Ministry of energy and coal industries, State Statistics Committee of Ukraine (energy resources import since 2014 without the Crimea, Sevastopol, and part of ATO area)
Imports of energy resources creates pressure on the trade balance
and hryvnia exchange rate
Nevertheless, the total energy imports (gas, coal, petrochemicals)
remain high. Its share in total goods import is 18%
44,8
32,9
28,0
19,5
16,5
6,3
Volume of energy resources imports as of 9 months of 2016 is equal to
$5 billion (trade balance deficit – $4,2 billion).
Energy resources imports as of 6 years amounted to $100 billion.
80% of Ukraine’s demand for petrochemicals is provided by imports
Share of import in the liquid gas market is equal to 70%
Share on import in total consumption of natural gas is 30%
35,3%
31,5%
27,9% 27,8% 29,0%
18,3%
0%
10%
20%
30%
40%
2011 2012 2013 2014 2015 9 мес.
2016
0
10
20
30
40
50
60
6

7. 2016 is not over yet, but we can summarize the preliminary
results.
The Ukrainian economy is recovering, but growth is rather
weak, given the drop during the previous years. Investment
activity remains low.
Inflation has slowed. The increase of tariffs and expected
growth in commodities prices on the world markets create
new factors of risks. But the projected increase in harvest
should be a restrictive factor for inflation.
Decrease of merchandise exports slowed due to relative
improvement of the price situation in comparison with 2015,
as well as a good grain harvest.
Imports of goods continues to decline, energy imports
were falling for 9 months in a row, at the same time the in-
vestment imports (machinery, MMC products) showed
growth. These are positive signals.
However, exports declined faster than imports; trade bal-
ance remains negative, and the trade deficit is expected
to increase to $4.9 billion, or 5% of GDP.
Negative trade balance is partly offset by the inflow of FDI.
Net income on financial account provides a positive bal-
ance of payments. This is a fundamental factor of support
of the hryvnia exchange rate.
The surplus of balance of payments and IMF tranche al-
lowed the NBU to increase FX reserves by $2.2 billion and to
$15.5 billion (as of Nov.11, 2016). Overall, this corresponds to
the global benchmark of sufficient reserves (more than 3
months of imports). However, the net reserves of the NBU
(total reserves minus IMF tranches) amount to only
$3.9 billion, which is critically low. NBU reserves are a main
risk factor for exchange rate stability in the short-term
perspective.
2015 2016Е
Nominal GDP, UAH billion 1 979 2 280
Share of investments in GDP, % 15% 15%
Real GDP dynamics, % -9,9% 1,1%
CPI (compared to December last year), % 43,3% 12,0%
Rate of growth of merchandise exports, % -29,9% -9,9%
Rate of growth of merchandise imports, % -32,6% -2,4%
Balance of visible trade, billion $ -1,7 -4,9
Balance of visible trade as % of GDP -1,9% -5,5%
Foreign direct investment (balance), billion $ 3,0 3,0 (9М 2016)
FDI as % of GDP 3,3% 4,8% (9М 2016)
Balance of payments, billion $ 0,8 1,0 (9М 2016)
FX reserves of the NBU, billion $ 13,3 15,5 (as of 01.11.2016)
Annual average UAH/USD exchange rate 21,8 25,5
Official UAH/USD exchange rate as of year-end 24,0 26,0
2015-2016 Results
Indicators
7

8. In 2017, we expect an acceleration of global economic
growth; it is evidenced by forecasts of international or-
ganizations and the majority of investment banks. Ac-
cording to the IMF, next year global economic growth will
accelerate to 3.4% compared to 3.1% in 2016. The rate of
growth of world trade and world imports of goods, ac-
cording to IMF forecasts, will rise from 2.4% to 4.0% with
the overall increase in demand and the weakening of
protectionism.
Revival of demand, as it is expected, will stimulate a mod-
erate increase in the cost of raw materials. However, the
cycle of low prices for raw materials, apparently, is not
over yet. The main negative factor for commodities is a
strong dollar. The IMF forecasts growth of Commodity
Price Index only by a few points, the World Bank expects
that prices for agricultural products, foodstuffs, and iron
ore will remain low during the next year, which preserves
the risks for Ukrainian exports and balance of payments.
80
100
120
140
160
180
200
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016Е
2017Е
Commodity Price Index (Fuel and Non-Fuel)
Commodity Industrial Inputs Price Index ( Agricultural
Raw Materials and Metals)
-12%
-8%
-4%
0%
4%
8%
12%
16%
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016Е
2017Е
Trade volume of goods and services
Volume of imports of goods
-4%
-2%
0%
2%
4%
6%
8%
10%
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016Е
2017Е
World
Advanced economies
Emerging market and developing economies
0
40
80
120
160
200
240
280
320
2013
2014
2015
2016Е
2017Е
2017: Global Economy
In 2017, an acceleration of the global economic growth is expected up
to 3,4% from 3,1% in 2016. The consequences of Brexit are the main
risk factor
Source: The IMF, World Bank Commodities Price Forecast
Global rise of business activity and the weakening of
protectionism will support the acceleration of growth of the global
trade.
2016Е
2017Е
2016Е
2017Е
4,6%
3,4%
1,8%
3,8-4,0%
2,3-2,4%
The IMF forecasts a slight growth of Commodity Price Index in 2017 World Bank forecasts that prices for most commodities will
remain low
2016Е
2017Е
2016Е
2017Е
8

9. The combination of the two factors (1 and 2) simultane-
ously is unlikely to happen as slowed economic growth will
help maintain low interest rates. However, this may be the
worst scenario for the economy of Ukraine, which could
lead to a sharp decrease in external demand for Ukrainian
products, reduction of exports, decrease in real GDP (-0.8%)
and in nominal GDP calculated in USD.
3. Freeze of cooperation with the IMF. Probability is
medium. IMF funds are a main source of replenishment of
FX reserves of the NBU. Despite the fact that the Fund’s re-
sources are mainly used for repayment of existing debts to
the IMF - and not on economic development, not even on
the foreign exchange market; these funds are one of key
psychological factors of stability of the hryvnia exchange
rate. Without the IMF tranche in case of stability of a trend
in commodity markets the risk of decrease in FX reserves
down to its critical minimum becomes extremely high. The
THREATS
Effect on Ukrainian economy and
business
Increase in FRS interest rates
(more than up to 1,00-1,25%), stronger
dollar, lower commodities’
prices
The slowdown in global
economic growth
(World GDP growth less 3%, import - 2%)
Freeze of cooperation with
the IMF
Other factors: Brexit, elections
in France, the Turkish policy, the policy
of the new US administration
2017: External Threats
$47,9
Exports from Ukraine,
billion $
30-35
UAH/USD$43,5
2015 2017Е
GDP 2017Е
(-0,8%)
$84 billion
FX reserves 2017Е
< $10 млрд.
Target - $23,7 billion 30-35
UAH/USD
Currency
restrictions
Commodity price shock,
decrease of exports
Investments Macro help
Exchange
rate
e
Exchange
rate
What are the external threats to the economic growth
of Ukraine in 2017?
1. Increase in FRS interest rates, stronger dollar, and lower
commodities prices. The decrease of quotations on com-
modity markets can happen only if the growth rates in 2017
are more significant than those which the analysts expect.
A moderate increase in rates is already included in devel-
opments of markets.
2. Slowdown in global economic growth in spite
of the forecast:
∙ cyclical slowdown in the growth of developing countries
backed by a decline in domestic demand, lower commod-
ity exports, and high debt burden;
∙ growth rates being weaker than expected, and lower
rates of growth of the developed countries against the
backdrop of a slowdown in labor productivity growth.
9

10. negative consequences for the economy in case of the re-
alization of this scenario would be such as devaluation of
hryvnia to 35 UAH/USD, tightening of foreign exchange re-
strictions, growth of country risk, lack of access to exter-
nal borrowing, lack macro-help to cover the budget deficit.
4. Other external factors. Consequences of Brexit, elections
in France, the Turkish policy, the policy of the new US ad-
ministration may altogether have a negative impact on the
economy of Ukraine through shocks in commodity mar-
kets, a decline in international investors’ interest in the
high-risk assets where Ukraine belongs, and rolling back
the programs of macroeconomic help from the traditional
donor countries.
Effect on Ukrainian economy and
business
Slow reforms
Failure to comply with the
revenue side of the Budget
Escalation of a military
conflict in the East
A coup and a collapse
of the country
2017: Internal Threats
Currency
restrictions
Access on external
markets
Global rankings Investments
Access on external
markets
Investments
Outflow of human resources
and capital
Economy collapse Redistribution of property,
nationalization, self-
proclaimed republics
Stagnation of the
economy
Declining living
standards
Inflation Exchange
rate
Spending
sequestrum
30-35
UAH/USD
15-20%
Increase in taxes
THREATS
What are the internal risks of economic growth in Ukraine
in 2017?
1. Slow reforms. Until there is a lack of title guarantee, the
currency restrictions, and until the tax system remains
complicated and performs solely a fiscal function, there
will be no inflow of investments. The investment climate in
the country will remain unfavorable, and FDI will remain
critically low.
2. Failure to meet the revenue side of the Budget bears a
risk of covering the deficit at the expense of emissions of
currency, and as a consequence an increase of inflation,
and devaluation of hryvnia. An increase in tax rates and re-
taining of high ad valorem charge for oil and gas produc-
ers can become the most negative factor for the economy.
This in its turn would put Ukraine far from achieving en-
ergy independence.
10

11. 3. Escalation of military conflict in the East of the country.
The probability of this scenario is low, but its importance for
the Ukrainian economy is critical. In case of the military
conflict spreading the further economic recovery is un-
likely.
4. A coup and collapse of the country. We assume the
possibility of such a scenario in 2017, given the growing
political crisis, the increase of social tension and protest
public sentiments. Events in November indicate the de-
sire of certain political elites to destabilize the situation
in the country which together with the initiatives of the
external opponents of Ukraine can put the preservation
of territorial integrity of the country under question.
OPPORTUNITIES Effect on Ukrainian economy and business
Realization of effective
reforms
Government facilitation
of FDI and expansion
of market outlets
Completion of reform of the
energy market
Stimulation of import
substitution
2017: Opportunities
Currency and tax
liberalization
Full guarantee of
property rights
Investment
Investment
New markets,
exports growth
Transfer of Hi-Tech
production
17-18%
of GDP
$2-3
billion
internal and
external
InvestmentImport
$0,8
billion
Saving of $1-1,5
billion
26-27
UAH/USD
Import
Saving of $3-5
billion
Investment
$1,0
billion
Exchange
rate
26-27
UAH/USD
Exchange
rate
Opportunities for economic development in 2017
1. Completion of reforms: the concentration of political ef-
forts on creating a full guarantee of property rights, in-
cluding the completion of judicial reform; creation of an
environment favorable for investment inflows; the removal
of all currency restrictions; the reorientation of the func-
tion of taxes to stimulating function. As a result of suc-
cessful completion of key reforms the proportion of total
investment in GDP may rise to 17% -18% ($16-17 billion) al-
ready in 2017. And in 2-3 years growth could likely achieve
the targeted 30-40% ($35-45 billion).
2. Stimulation of import substitution. We import goods
worth more than $20 billion, which we could produce our-
selves: primarily fuel (18% in total imports), consumer
goods, engineering products, foodstuffs, medicine, house-
hold appliances and electronics. Only in the following year,
the savings generated by imports of these goods could
reach $3-5 billion, which could equalize the balance of trade
and reduce the risks of devaluation of the hryvnia.
11

12. 3. Completion of reform of the energy market is a main tool
of reduction of the dependence on imports and of a further
turn to energy independence. Firstly, it is the potential in-
vestment (around $0.8 billion in 2017, with a perspective of
growth up to $2-3 billion per year) which would give an im-
petus for the development of the whole economy. And sec-
ondly, this would mean an increase in oil and gas
production, which would lead to a reduction of energy im-
ports during the next year by $1.0- 1.5 billion.
4. Government facilitation of foreign investment inflows and
expansion of market outlets through diplomatic missions,
trade missions, participation of top officials in advertising
Ukraine. The growth of foreign investment and export ex-
pansion can significantly neutralize the risks connected to
the unfavorable external environment in commodity mar-
kets, the growth of imports, balance of payments imbal-
ances.
Effect on Ukrainian economy and business
Development of transport
infrastructure (Law on
Concessions)
Increase of products
competitiveness
Development of
entrepreneurship
Pension Reform
2017: Opportunities
Concession of transportation facilities
New market
outlets
Increase in number of
new entrepreneurs
Establishment of
middle class
10-30
thousand
Price of resources
$2,3-2,9 billion
Within next 5 years
Increase in private
consumption
+12% y-o-y
Growth of export, GDP
Investment
$500 млн.
Export of goods with high
added value
Investment Impetus for the economy
OPPORTUNITIES
5. Increase of competitiveness of Ukrainian products. In the
conditions of a loss of a certain share of the world market
(Russian market), Ukrainian exporters face the need to re-
orient to new markets, to expand into new product seg-
ments. This is possible due to qualitative transformations
of products, increase in the degree of its processing, cre-
ation of fundamentally new and innovative products. If we
want to compete in global markets, we need to export end
products rather than raw materials: e.g. flour and pasta in-
stead of grain. And the role of the state is particularly im-
portant in this matter, as it should be aimed at decreasing
the prices for resources in order to allow producers to mod-
ernize their facilities.
12

13. 6. Development of entrepreneurship. Amid transition to full
automation of processes and growth of unemployment it
is extremely important to create conditions for the devel-
opment of private enterprise. It is necessary to realize
trainings on entrepreneurship and a creation of an Agency
for entrepreneurship development. It will provide employ-
ment, growth and alignment of incomes of the population,
the formation of a middle class and the establishment of
strong internal demand.
7. Development of transport infrastructure. Realization of
investment projects leads to an increase in consumption in
related industries, creation of new jobs, increase in in-
comes of the population and ultimately - to the growth of
the entire economy. According to research, creation of 1
job in the transportation sector results in creation of 6 new
jobs in other sectors of the economy, and $1 invested in in-
frastructure generates $2-3 of GDP growth.
Case of China. In 2009 in China as a measure to resolve the
crisis a program of transport sector development was re-
alized. Investments in the sector increased by 76% com-
pared to 2007 and amounted to 7.3% of GDP. There were
projects aimed at improving roadways, 12 high-speed high-
ways were built, 12 seaports were transformed into port
hubs. As is known, the Chinese economy coped with the
economic crisis, GDP growth in 2009 slowed to just 9.2%
from 14% in 2007, and in 2010 exceeded 10%.
Thus, the development of the transportation sector is a
main factor of domestic consumption stimulation in
Ukraine, which is critical given the high risks of downturns
in the external demand for Ukrainian products.
8. Pension Reform. A possible launch of the accumulated
pension system in 2017 would create a basis for further ac-
cumulation of investment resources in non-governmental
pension funds (NPF). Its prospected volume is estimated
at $3 billion, in which not less than 40% would be allocated
in the real sector, within the next five years.
13

14. 2017: Minimization of potential risks consequences
Сотрудничество с МВФ
Increase in FRS interest rates,
stronger dollar, lower
commodities prices
The slowdown of global
economic growth
Freeze of cooperation with the IMF
Other factors: Brexit, elections
in France, the Turkish policy, the
policy of the new US
administration
Freeze of reforms
Business shadowing, failure to
comply with the revenue side of the
Budget
Escalation of a military conflict
in the East of the country
Steering of entrepreneurship, creation
of jobs
State support of FDI inflow, widening
of export, exploration of the new
markets
Stimulation of import substitution
Acceleration of reforms:
juridical
tax
energy
currency
Uncontrollable RISKS OPPORTUNITIES
Decrease of export
Unfavorable external environment
Trade balance deficit, decrease
of FX reserves
Devaluation, inflation
Outflow of investment
Controllable RISKS
GDP and Budget revenue decrease
Energy market reform (decrease of
energy consumption)
Outflow of investment, stagnation
of the economy
Decrease of FX reserves,
devaluation
Emission, inflation
Absence of macro help
Outflow of investment
Poor internal demand
Tax increase
Shrinking of social expenses
Ensuring the safety of citizens,
involvement of IO
Attracting of investments into
infrastructure projects
CONSEQUENCES
2017: Minimization of potential risks consequences on business
Increase in FRS interest
rates, stronger dollar, lower
commodities prices
The slowdown of global
economic growth
Freeze of cooperation with
the IMF
Freeze of reforms
Budget 2017: increase
of the minimum wage, failure
to comply with the revenue side
of the Budget
Reorientation on high value added
products output
Exploration of the new markets
Creation of enterprises for import
substitution
RISKS OPPORTUNITIESCONSEQUENCES
Weaker external demand
Unfavorable external environment
Decreasing revenues
of exporters
Inflation, devaluation
Currency restrictions Hedging currency risks using futures
contracts with no physical delivery of
assets
Inflation, devaluation
Weak internal demand
Increased payroll costs
Increased tax pressure
Shrinking of foreign investments
in real sector
Shrinking of foreign
investments in real sector
Export orientation
Staff optimization, transfer
of non-core functions to outsource
Cooperation with international
companies
14

15. Scenarios of Ukrainian economic development in 2017. A key
influence on the economy of Ukraine in the next year will
be provided by the growth rates of the global economy, the
dynamics of prices in raw materials markets, the political
situation and investment climate in the country, the effec-
tiveness of reforms.
1. The most negative scenario for Ukraine (pessimistic)
foresees deterioration of the external environment, de-
crease of internal demand and decrease in prices on raw
materials markets. In addition, this scenario takes into ac-
count the risk of slowing down or even stopping of reforms
against the backdrop of the political crisis in the country,
and therefore a freeze of cooperation with the IMF. As a re-
sult of these factors, it is expected a reduction in business
activity, lower exports and production in export-oriented
industries, the outflow of investment, decrease in real
wages and population incomes. The growth of the trade
deficit, which will not be covered by the inflow of foreign
investment, along with the absence of the IMF funds is ex-
pected to lead to a devaluation of the hryvnia to 35-40 per
dollar by the end of 2017, and an increasing inflation
processes.
Under the pessimistic scenario, real GDP in Ukraine in 2017
will drop by 0.8% to $84 billion. The probability of this sce-
nario is estimated as less than 20%.
We believe that even in the event of a sharp deterioration
in external conditions, GDP decline could be avoided by the
1180
1132
990 887
93 96
84
00
20
40
60
80
100
120
140
160
180
200
22013 2014 2015 2016Е 2017Е 2017Е 2017Е
00,0%
--6,6%
--9,9%
11,1%
3,6%
2,3%
-0,8%
--12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
22013 2014 2015 2016Е 2017Е 2017Е 2017Е
Forecast of the GDP of Ukraine for 2017
Nominal GDP, billion $
Source: State Statistics Committee of Ukraine, the NBU, forecasts of the Institute for the Future
Real GDP developments, %
93 96
84
2017Е 2017Е 2017Е
3,6%
2,3%
-0,8%
2017Е 2017Е 2017Е
Pessimistic scenario:
Further drop in commodity prices (CIIP Index - 113
2005 = 100)
Reduction of exports (-1.2% y/y)
Devaluation (UAH / USD = 30,5)
Inflation - 13%
Low investment activity, FDI outflow (decrease in
the share of total investment in GDP to 14.5%)
Decline of real incomes
Change of attitudes to Ukraine from Europe and
America
Freeze of the IMF tranches
Realistic scenario:
Moderate price increases in commodity markets
(CIIP Index - 116 2005 = 100)
Export growth (+ 8% y/y)
Moderate depreciation (UAH/USD = 27,6)
Inflation - 8.5%
Continued reforms
Increase of investment activity (increase in the
share of investment in GDP up to 16%)
Support for Ukraine from Europe and the US,
cooperation with the IMF
Optimistic scenario:
Rising prices in commodity markets (CIIP Index -
120 2005 = 100)
Export growth (+ 12% y/y)
Stable exchange rate (UAH / USD = 27,2)
Inflation - 9.5%
Increase in investment activity (increase in the
share of investment in GDP to 17-18%)
Growth of real wages and domestic demand
Restoration of the banking sector and lending
15

16. maximum concentration of efforts on the implementation
of measures to stimulate domestic demand and invest-
ment. This is possible by stimulating domestic investment
through tax reform, the development of import substitu-
tion by providing privileges and preferences for producers
of import-substituting products, stimulating of the do-
mestic demand by lowering interest rates and affordable
loans for Ukrainian products, including real estate. Criti-
cally important will be the attraction of investment in trans-
port infrastructure, including public-private partnerships.
The total range of these activities can provide about $ 8
billion of additional GDP next year, even while reducing ex-
ports.
2. The optimistic scenario assumes a significant improve-
ment in external conditions, growth in commodity prices
against the backdrop of the more active than expected
global growth and world trade. In case of implementation
of this scenario, the trade deficit, according to our estima-
tions, will reduce, and the volume of foreign investment will
increase to $ 7 billion; the positive balance of payments will
allow increasing the NBU reserves and will enable to main-
tain stability in the foreign exchange market without IMF
funds.
Of course, the growth of exports in case of the implemen-
tation of this scenario would stimulate production, invest-
ment demand in the country, increase of real incomes and
consumer demand.
In the optimistic scenario, we expect real GDP growth of
3.6%, nominal GDP at $96 billion, the exchange rate of UAH
/ USD at 27.2 UAH / USD, which corresponds to the ex-
change rate incorporated in the Budget 2017. The likelihood
of the realization of this scenario in our opinion is no more
than 20-30%.
3. The basic or the most realistic scenario, according to our
opinion, foresees a compilation of the above-mentioned
factors, an increase in economic growth by 2.3%, and nom-
inal GDP growth up to $93 billion.
Most likely is that the situation on foreign markets next
year does not change significantly. The world economy has
entered a long cycle of low commodity prices, although we
wait for a moderate increase in the value of most com-
modity groups. This will facilitate the recovery of Ukrainian
exports (8% y/y), the inflow of foreign exchange earnings,
increased business activity in general, and moderate
growth in real incomes.
The government, according to the basic scenario will con-
tinue to conduct reforms, mostly following the require-
ments of the IMF. Next year Ukraine will receive a part of
the planned tranches, and the connected macro-economic
assistance to cover the budget deficit. This would allow
keeping NBU reserves above the critical 3 months of im-
ports and observing targets of inflation at 8-9%. We expect
a moderate devaluation of the national currency, as ac-
cording to the baseline scenario, to 27.6 USD/USD.
16

17. The GDP structure according to our estimates will not bear
significant changes next year.
At a time when domestic demand is quite weak and in need
of stimulation, only investment can become a driver of eco-
nomic growth. Its share in GDP according to our estimates
will vary between 16-18% ($16-17 billion depending on real-
ization of the scenario).
In order to reach sustainable economic development, ac-
cording to our estimates, the share of investment in GDP
needs to increase in 2-3 years to 40%, and $20-25 billion of
foreign investment not taking to calculations the internal
ones is needed to be attracted into the economy of Ukraine
to reach the level of sustainable economic development.
Without an inflow of investments the economic growth will
be in the range of 2.5-3.0% within the next 10-15 years. Given
such growth rates, Ukraine will be able to reach the level of
peak value of nominal GDP in USD (2008) only in 2025.
2017: GDP Structure
Source: forecasts of the Institute for the Future
ПоказателиGDP structure 2017Е (realistic scenario)
100%
69%
20%
16%
-5%
Private
consumption
State expenses
Investments
Net export
Domestic private demand in 2017 will recover slowly.
Contribution to real GDP growth at 0,8%-1,5%
(depending on the scenario).
The contribution of government spending to GDP growth in
2017 will be insignificant
Only investment can become a driver of economic
growth in 2017. Contribution of this indicator to GDP
growth in 2017E is expected at 1,5%-2,0%
(depending on the scenario)
FDI 2017Е – $4-$7 billion (depending on the scenario).
The 2017 budget provides for large-scale infrastructure
investments - $460 million.
A negative value of net exports in 2017 will make a negative
contribution to GDP.
17

18. The total public debt of Ukraine is approaching 80% of GDP.
Herewith, the foreign debt becomes critical, since it is nom-
inated in foreign currency and creates the risk of default.
The external debt of Ukraine also remains high, at 53% of
GDP. This is even higher than in the countries which have
high debt pressure - Belarus (30%), Columbia (20%), Mexico
(21%), Turkey (15%).
The total amount of payments on foreign currency debt in
2017 will be approximately $3.6 billion.
Generally, even if Ukraine is not able to receive external fi-
nancing, the volume of FX reserves ($15.5 billion) allows for
the repayment of foreign currency debt in 2017. From this
perspective, the risk of default is minimal.
However, without the IMF tranche next year, the possibility
of reduction of the FX reserves escalates to a critical level
(less than 3 months of imports), and same risk refers to
the devaluation of hryvnia. The IMF tranche of $5.4 billion
expected in 2017 is questionable.
It is highly probable that in 2017 Ukraine will not be able to
meet the IMF requirements of volumes of the reserves till
the end of 2017 up to $23.7 billion. Given the condition of
the net reserves of the NBU (less than $4 billion), the risk
of default in 2-3 years is rapidly increasing.
It is crucial to encourage the inflow of foreign investments
in Ukraine, which will cover the current account deficit and
at the same time will create the grounds for sustainable
long-term growth of the economy. This will enable mini-
mization of the dependence on the IMF, formation of insti-
tutional independence of Ukraine, and eventually taking
geopolitical decisions in the region.
0
5
10
15
20
25
As of 31.12.2016
$15,5
2017: External Public Debt and FX Reserves
Forecast of developments of FX reserves
of the NBU in 2017, billion $
Currency debt
repayments
2017Е
Deficiency
payments of
current
account of PB
in 2017Е
- $3,0
- $3,6
$8,9
2017Е
$14,8 IMF
tranches ($5,4
billion)
Investments
Foreign
currency of
the population
IMF requirement-$23,7
?
External public debt* of Ukraine and
FX reserves of the NBU, billion $
* Public and government-guaranteed foreign debt
** Reserves 2017Е –IMF forecast
Source: Ministry of Finance of Ukraine, the NBU, the IMF, calculation and forecasts of the Institute for the Future
Net reserves
38,7
37,6
38,8
43,4
46,4
48,3
51% ВВП
0
10
20
30
40
50
2012 2013 2014 2015 2016Е 2017Е**
18

19. Currently, Ukraine is more attractive than ever for invest-
ment. The Ukrainian economy has more than halved, and
has significant growth potential within the next 3-5 years.
The Ukrainian hryvnia in recent years devalued significantly
compared to many currencies; the cost of labor in Ukraine
is several times lower than in neighboring countries. At the
same time reforms are implemented in Ukraine which upon
successful completion will create a foundation for
a maximum effect of the traditional basic industries, will
give impetus to the development of the new sectors
of the economy, and for the development of the internal
potential of Ukraine, which in a result will stimulate
a sustainable development in a long term.
1 010
950
900
880
530
520
490
230
3,4%
3,3%
2,8%
2,8%
2,7%
2,5%
1,1%
3,6%
Why can Ukraine be attractive for investors in 2017?
Ukrainian economy growth rates given the realization of the
optimistic scenario in 2017 will be higher than in the neighboring
countries
Ukrainian hryvnia has considerably devaluated during recent years
comparing to the national currencies of other countries
Country risks are decreasing. Fitch Ratings upgraded Ukraine to
«В-» from «ССС»
Implementation of the significantly important legislative
changes is expected next year:
Adoption of LAW ON CONCESSIONS
Removal of MORATORIUM on cession of land
Decrease in AD VALOREM RATES for gas producers
Cost of labor in Ukraine is significantly lower
Source: the IMF, https://en.wikipedia.org/wiki/List_of_European_countries_by_average_wage, forecasts of the Institute for the Future
Ukraine has a greater export growth potential in 2017 than the
neighboring countries
UKRAINE
UKRAINE 2017ЕReal GDP growth 2017Е
Average salary 2016 – EUR
per month
8,8%
5,7%
5,4%
5,2%
4,9%
3,9%
1,6%
8,0%UKRAINE
Export growth rates 2017Е
19