Ukraine’s Economy Buoyed by Harvest as Russia Tensions Weigh on Recovery

(Bloomberg) -- Ukraine's economic growth accelerated in the fourth quarter on the back of a grain-harvest windfall, even as the pace of recovery from the pandemic fallout threatens to be dampened by high energy prices and a looming conflict with Russia.

Fourth-quarter gross domestic product rose a seasonally adjusted 1.8% after advancing 1.5% in the previous three months, preliminary data Friday showed. On an annual basis, GDP expanded 5.9% versus 2.7% in the July-to-September quarter, beating a median estimate in Bloomberg survey.

Agriculture, the former Soviet republic's leading industry, drove economic growth in the final three months of 2021 as the nation managed to take in a record grain harvest. The boom was compounded as soaring gas prices forced farmers to delay the threshing of corn, a major crop.

“The success of Ukraine's agriculture was more or less what we expected this year, but it beat my expectations,” said Vitaliy Vavryshchuk, head of macroeconomic research at the Kyiv-based investment firm ICU.

But looming over the economic data were rising tensions between the west and Russia, which has massed more than 100,000 troops and heavy weaponry at Ukraine's borders. While President Volodymyr Zelenskiy has played down the prospect of a full-scale invasion and Russia denies any intention to do so, the U.S. and its European allies have vowed to impose painful sanctions if Russia attacks its former Soviet ally.

Another check on growth is the aggressive monetary tightening by the central bank in Kyiv, which has hiked interest rates for six straight meetings -- and plans more. Even as inflation continued to ease in December, soaring energy price and war risk are keeping rate-setters focused on lifting borrowing costs further.

A full-year GDP growth data for 2021 isn't yet available, but the country's central bank estimates an annual economic expansion at about 3%. That will weigh on holders of a sophisticated instrument known as GDP warrants, since they'll receive payment from the Ukrainian government only if growth exceeds 3%.

Based on the data from the fourth quarter, holder's of Ukraine's VRIs will get as much as $52 million in an overall payment, according to calculations ICU that estimates an annual growth at 3.23%.