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Kiev - The main hope for Ukraine's shattered economy lies buried beneath the rubble left by months of fighting in two eastern regions which are home to much of its crippled industrial power.
Only when industrial production pulls out of a dive and achieves growth is the currency likely to stabilise, a step towards restoring confidence in the economy which is shrinking at its fastest pace since the global financial crisis year of 2009.
The separatist conflict has closed steel plants and coal mines and destroyed infrastructure in Luhansk and Donetsk, regions that together once accounted for a sixth of the national economy and a quarter of industrial output.
"Our mine is in a terrible condition. We're existing only on hope," said Yuri, a worker at Zhdanovskaya - Ukraine's fourth-largest colliery with coal reserves of 40 million tonnes that halted output in August.
The regions' economic clout means that the damage wrought by relentless artillery fire as government forces fight the pro-Russian rebels is felt nationwide.
The World Bank said last week that the government would have to shelve hopes of economic growth until 2016, forecasting a contraction of 8% this year and 1% in 2015 because of the disruption to activity in the east.
Alarmed by a crisis that has killed more than 3 500 people and poisoned relations between Kiev and Moscow, investors have dumped Ukrainian assets, pushing bond yields sky-high and the hryvnia currency to historic lows.
The hryvnia, which is trading at about 12.90 to the dollar, has lost almost 38 percent in value since the start of the year. In a Reuters poll, analysts have estimated the economy shrank 9.5 percent year-on-year in July-September. This year will mark its worst performance since 2009, when gross domestic product (GDP) tumbled about 15%.
While sporadic violence between government and rebel forces is testing a shaky ceasefire, the central bank is pinning its hopes for financial recovery on the very regions where the insurgency has pushed Ukraine to the brink of economic collapse.
"Only the situation on the industrial market, industrial growth, can stabilise our currency," central bank head Valeria Hontareva said on Monday, looking forward to a modest recovery in the hryvnia's rate. "As soon as we rebuild it (industry), we'll think of rates of at least 11.70 rather than 12.95."
Industrial output, which accounted for a quarter of GDP in 2013, plummeted 21.4% year-on-year in August and little has yet been done to restore production at the factories and mines, around half of which are standing idle.
"They're not suggesting anything, anywhere. We're just waiting," the miner Yuri said, describing how he and his family were temporarily driven from their home by mortar fire.
Ukraine's largest steelmaker Metinvest, several of whose plants are not operating due to the conflict, warned in August of the devastating economic impact of stopping metals production in the country.
The industrial shortfall is weighing heavily on Ukraine's already depleted foreign currency reserves. Normally a net exporter of thermal coal, the country has had to start buying the fuel from abroad as it battles a power crisis that threatens to cause rolling blackouts across the country.
As of September 1 2014, Ukraine had reserves of $15.8bn, 22% lower than at the start of the year.
Even before the fighting erupted last spring, the corruption and economic mismanagement synonymous with the presidency of Viktor Yanukovich, who fled Kiev in February after months of protests, had taken Ukraine to the brink of bankruptcy.
Kiev now says a $17bn International Monetary Fund (IMF) aid package will probably have to be increased because of the cost of the conflict. "When we started the programme with the IMF, it was a peace programme," Prime Minister Arseny Yatseniuk said at the end of September. "Today, this is a wartime government and a wartime programme."
Ukrainian dollar bonds have plunged to multi-month lows in recent weeks as investors priced in the growing probability of a debt restructuring.
Hontareva is flying to Washington on Wednesday for talks with the IMF to discuss an easing of loan conditions, a step the Fund has said it is willing to consider. "We will discuss how to stabilise the economy. We will say: help us eliminate (budgetary) imbalances so that we can resurrect our industrial potential within six months," she said.
However, Russia could use its economic power to jeopardise Ukraine's financial stability yet further, angered by Kiev's political U-turn towards the European Union since Yanukovich's flight.
A focus for investors is a $3bn Ukrainian bond held entirely by Russia. This carries a clause which may allow Moscow to demand immediate repayment should Ukraine's debt exceed 60% of economic output at the year-end.
"Russia may just prefer to just threaten so as to close Ukraine's access to international capital markets in the interim, and to keep the threat of default looming over the country," said Tim Ash, head of emerging market research for Standard Bank in London.
What's more, a stand-off between the two countries over gas - Russia shut off supplies to Ukraine over what it said were more than $5bn in unpaid bills - means Ukraine faces the possibility of energy shortages this winter.
Heavy industry accounts for 40% of Ukraine's gas consumption so it is likely to suffer further if the dispute is not solved before supplies from storage run out.
This, combined with a state of emergency on the electricity market under which power supplies to industry are being limited, would hinder any industrial comeback.
