Kyiv economy: free fall

I am now finishing presentation for RSA conference in Newcastle. Since over the last year I was fascinated by cities and their development I've decided to bring up the case of my home city. So I am going to talk about Kyiv and its transformations in the wake of the global crisis. This paper is only one element of a wider research I am doing on economy and governance of Kyiv and how it evolved over the last decade.

While preparing for the conference I was digging out some statistics to illustrate how badly Ukrainian regions were wounded by the crisis. We all know that Ukraine was one of the greatest victims of the crisis: in 2009 it lost 15% of its GDP comparing to 2008. With recently released data on Gross Regional Product in 2009 from State Statistics Service of Ukraine we can now see how various regions performed. The news are bad, especially for industrial centres and... Kyiv.

The thing is that despite its economy being very diversified and not dependent on 'classic' Ukrainian export staff (you know, metal, chemicals, agricultural products) the capital city's GRP has plummeted by 18.3%. Only 2 other regions performed worse - industrial strongholds of Donetsk and Zaporizhzia. Traditionally Kyiv was performing better than national economy - the growth rate over the last decade was always 2-4 percentage points higher (or even 12 pp in 2007). But when the national economy has experienced harsh recession Kyiv was the one in free fall.

But why? Services constitute 87% of Kyiv GRP and they are quite diversified. Though if we look closer we could see that city economy is dependent on retail, real estate/rent, and financial services that are responsible for more than half of GVA. Their expansion was fueled by rising personal incomes rather than business needs. And they were key ingredients in Kyiv property bubble, that burst so dramatically in 2008 (since then prices dropped by 50%). At the same time people's drive for shopping that made retail so important ingredient of the economy was undermined by falling incomes and devaluated Hryvnia.

So the diagnosis is harsh and simple; Kyiv relies too much on services that produce very little add value and are volatile. Financial sector was dependent on international borrowings that dried up as soon as liquidity crisis struck. Property market and construction were dependent on relaxed mortgages in foreign currency. Hryvnia lost 60% of its value at the end of 2008 so did people's real income.

Kyiv service industry is mainly built around satisfying personal needs rather than business needs. It uses too much borrowed money and not enough of locally available intellect and skills.

It is too early to say whether crisis has taught us a lesson. Preliminary estimations show modest 4% growth of GRP in 2010. But there are very few indications that the structure of city economy is changing. And there are definitely no indications that municipal government is doing meaningful steps to change the situation. To be frank, there was no city leadership at all from when the crisis has struck till summer 2010. Current mayor is complete failure and the whole governance structure is a mess.

But this is too interesting topic that deserves post on its own. So, to be continued :-)

P.S.: Logo by http://www.kiev.superheroes.ua/