Transcript Derek Young -- Ukraine Economy

Analysis of Ukraine’s Economy
History
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Previous to 1991, Ukraine was part of the USSR. It possessed a Classical Soviet-Type Economy:
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State Ownership
Hierarchical Structure
Rigid Administrative Planning/Centrally Planned Economy
Socialist Competition
Collective Farming
Low Morale
Intensive Defense Spending
Maximal resource utilization/formal rationing
Exhaustive Price Control
Etc.
The economy of Ukraine was the second largest in the USSR, due to its important industrial and
agricultural contributions to the empire.
1991-Independence
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In December 1991, the USSR was dissolved. Ukraine voted overwhelmingly for its
independence. Over 90 % of Ukrainians votes in favor of independence from the
Russian Federation.
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Although much of Ukraine is pro-Russian in its sentiments, subsequent analyses show
that the majority of voters in Ukraine came to support independence because they
believed that a separate existence from the USSR might be the best guarantee for their
economic well-being.
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1991-2004: Growing Pains
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Ukraine considered to be the most viable post-Soviet State, economically and socially. Many
analysts, from Deutsche Bank to the U.S. News and World Report predicted that Ukraine might well
be the only success story to emerge from the debris of the Soviet Union.
However, the Ukrainian euphoria of December 1991 soon turned to disappointment. Its attempt to
transition to a market economy was difficult. Ukraine went from one of the world’s most educated
and richest countries to rock bottom.
Reasons: The end of Ukraine’s subordination to Russia yielded no meaningful change in the makeup
or structure of the Ukrainian ruling elite. If anything, governance under the regimes of the 1990s and
early twentieth century deteriorated. Independence was brought about by the same old nomenklatura
(ruling class), who had no commitment to reform or independence.
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1991-2004: Growing Pains
(cont’d)
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Oligarch, Clan-style politics: The political scene was dominated by groups of powerful
politicians intermixed with powerful businessman.
Rent-Seeking: The rent collected in the ‘90s achieved parity with the country’s GDP.
In 1999, 89% of the population believed the gov’t to be corrupt.
Subsidized Energy and loans were received from Yeltsin’s Russia until 1999. The
continual high debt to Russia continued until the Putin era ushered in geopolitical
dominance.
 After Putin elected Russian President, Russia
took a tougher stance and pursued a more strict
economic policy toward Ukraine. According to
President Kuchma, “With Yeltsin, you could
reach an agreement, but with Putin it’s cash
upfront.”
Orange Revolution
Orange Revolution
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Orange Revolution. In 2004, hundreds of thousands of protestors took to the streets to protest the
declaration that Viktor Yanukovych won the presidency. It was widely believed that the elections
were rigged, and involved heavy Russian influence. Putin overtly supported Yanukovych.
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A runoff election was held, and the pro-West candidate Viktor Yushchenko won the re-vote by a
margin of 52% to 44%. He was inaugurated as President of Ukraine in January 2005.
 Yushchenko vowed to accelerate economic reforms in Ukraine and
integrate with the West. However, in the first few years, policy
disagreements within the government and a shifty parliament hampered
economic progress.
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The Yushchenko Years
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Despite the political infighting and competition, which has hampered some market
reform and progress, the Yushchenko years have been more successful overall than the
previous years since independence:
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Hryvnya stabilization
More Privatization
Growth in GDP
FDI
Market Reforms
Lower Inflation
Wage Increases
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Statistics
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GDP (PPP) : $399.86 Billion - ranks 35th. Grew 7% in 2007.
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GDP per capita: $8,624 for 2007
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GDP by sector: Agriculture (9.2%), Industry (32.6%),
Services (58.2%)
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Inflation: 16.6% in 2007
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Population Below Poverty Line: 19.5% in 2004
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Labor Force: 21.63 million in 2007
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Labor Force by Occupation: Agriculture (25%), Industry (20%), Services (55%)
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Unemployment: 2.5% officially, 7% according to
the ILO (International Labor Org) for 2007.
Main Industries: Coal, electric power, ferrous and
nonferrous metals, machinery and transport equipment,
chemicals, food processing (grain, sugar, meat, milk). Also rich in
hydroelectricity and nuclear fuel raw materials.
Source - CIA World Factbook
Statistics (cont’d)
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Exports: $46.68 Billion for 2007. Main export is steel, 7th largest producer of steel. High global
prices for steel have also helped boost Ukraine’s GDP.
Export Goods: ferrous metals and nonferrous metals, fuel and petroleum products, chemicals,
machinery and transport equipment, food products (especially sugar).
Main export partners: Russia (21.3%), Turkey (7.1%), Italy (6.4%) and US (4.1%)
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Imports: $54.3 Billion for 2007
Import Goods: Energy, machinery and equipment, chemicals
Main import partners: Russia (28.2%), Germany (11.7%), Poland (7.6%), China (7%), and
Turkmenistan (5.7%)
 Gross External Debt:
$65.38 Billion as of 2007
 In 2008, Ukraine joined
the WTO.
Source: CIA World Factbook
Economic Issues
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Ukraine's economy is 51.1 percent free, according the Heritage Foundation’s 2008 Index of
Economic Freedom, which makes it the world's 133rd freest economy. Its overall score is 0.6
percentage point lower than last year. Ukraine is ranked 39th out of 41 countries in the
European region, and its overall score is much lower than the regional average.
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Ukraine is very weak in business freedom, government size, monetary freedom, investment
freedom, property rights, and freedom from corruption. Inflation is high, and government
expenditures equal nearly two-fifths of GDP. While foreign investment is officially welcomed,
corruption and regulations are deterrents to capital. The judiciary does not always enforce
contracts and is tarnished with corruption. Corruption is a major problem throughout the civil
service, and bureaucratic inefficiency makes many commercial operations difficult.
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The agricultural sector is strong but overregulated through quotas and tariffs on grain
exports. Ukraine has benefited heavily from recent increases in the prices of metals. Despite
lucrative opportunities for foreign direct investment, economic progress in the near term may
be slowed by persistent corruption, steadily increasing gas prices, deteriorating
infrastructure, and political uncertainty.
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Corruption is perceived as widespread. Ukraine ranks 99th out of 163 countries in Transparency
International's Corruption Perceptions Index for 2006. Corruption pervades all levels of society and
government and all spheres of economic activity. Low public-sector salaries fuel corruption in local
administrative bodies such as the highway police and tax administration as well as in the education
system.
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Ukraine scored achieved a rank of 106 on the 2007 Failed State Index, and 108 on the 2008 Failed
State Index. Both were n the “Orange”, which is considered a “Warning” country.
Last but not least: Energy
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