Both Russia and Ukraine stabilised by the early 2000s. Capital flowed back, attracted in part by relatively high interest rates (the early 2000s, when the Fed pushed its main interest rate down to 1% for an extended period, were a rehearsal of sorts for the post-crisis environment). As foreign cash flooded in the money supply grew rapidly: from 2001 to 2010 broad money increased at an annual rate of 35%. In 2006 and 2007 credit growth averaged 73%. Assets began to look extraordinarily bubbly and high inflation damaged Ukraine's export competitiveness.
After the global crisis, and as the euro crisis intensified, Ukraine suffered from a drought in capital flows (along with much of central and eastern Europe) which placed strong downward pressure on the hryvnia. Protecting the currency drained the central bank’s reserves, which tumbled from a high of $40 billion in 2011 to about $12 billion today. Last month the central bank admitted defeat and let the currency go. Currency depreciation, while necessary, will be an economic headache for Ukraine in the short term. About half of its public debt is in foreign currencies: as the hrvynia loses value, Ukraine’s debt burden rises. Debt financing has also become more difficult as a result of the Federal Reserve's "taper", which has wrong-footed many emerging markets by stanching the previously steady flow of capital in their direction.
Ukraine has proven reluctant to engage in reform. For a while it felt as if it didn't need to: high commodity prices during the 2000s supported growth. Many of Ukraine's exports went to Russia, a country that was also doing well on the back of high oil prices. But Ukraine was badly hit by the financial crisis and plummeting steel prices. GDP fell by 15% in 2009. That made it a prime candidate for economic streamlining. In 2010 the IMF agreed to loan Ukraine $15 billion—with conditions attached. A major target for reform were Ukraine’s cushy energy subsidies. The state gas company, Naftogaz, only charges consumers a quarter of the cost of importing the gas. Cheap gas discourages investment: Ukraine is one of the most energy-intensive economies in the world and domestic production has slumped by two-thirds since the 1970s. The IMF ended up freezing the deal in 2011 after Kiev failed to touch the costly subsidies.
In other areas reform has been half-hearted. The government did meet its public deficit target of 2.8% of GDP in 2011. Yet this was achieved by skimping on capital expenditures while overspending on wages and pensions: hardly the recipe for sustainable economic growth. Progressively lowering the rate of corporation tax has also weakened the state’s finances.