Ukraine: 25 mostly wasted years

19.09.2016
Dynamics of the state and state-guaranteed debt 770×370

An appraisal of the last quarter of a century is currently under way in Ukraine celebrating 25th anniversary of its independence. Unfortunately, it has squandered the major part of its potential, so  one of the potentially richest countries in Europe still is in trouble.

Ukraine is an economy based on raw materials which has functioned all this time under conditions resembling the Great Depression in the US at the beginning of the 20th century. One of the reasons for this state of affairs is the technological degradation which completely destroyed high technology sectors and reduced the economy to metallurgy, simple chemicals and agriculture. A huge army of unwanted engineers, technicians, mathematicians, physicists and chemists were thrown out on the street. As a result, Ukraine’s share of global GDP now amounts to merely 0.08 per cent and is as much as nine times lower than its share of the global labor market. This sad reality is described by the Ukrainian weekly Dzerkalo Tyzhnia.

Grim statistics

Since its independence in 1991, Ukraine’s GDP has shrunk by 35 per cent. This is the worst result in the world. According to World Bank’s data only five countries recorded negative economic growth during this period. The top five also include the post-soviet Moldova (with a 29 per cent fall) and Georgia (15.4 per cent), as well as two African countries – Zimbabwe (2.3 per cent) and the Central African Republic (0.94 per cent). Ukraine’s disastrous economic performance continued despite the fact that for several years it recorded annual GDP growth of over 20 per cent. It was all because of the gigantic collapse of the economy shortly after Ukraine regained independence at the beginning of the 1990s, when GDP shrank by as much as 60 per cent compared to 1991. At the same time, Ukraine’s debt grew drastically – from USD0.5bn in 1991 to approx. USD67bn in recent years.

The population of Ukraine fell from 52 million in 1991 to just 45.4 million in 2014 and 42.7 million at the beginning of 2016 (this year’s data omits residents of Russian-occupied Crimea). On the one hand, this is the result of the dying out of the population – every year the number of deaths in Ukraine exceeds the number of births – and on the other hand, due to mass emigration. Approx. 3 million Ukrainians have left for work, mainly to Poland and Russia. In total, they provide Ukraine with more foreign currency than foreign investment does – according to estimates migrant workers working in Russia sent USD1.1bn back to Ukraine, while those employed in Poland sent back almost five times that amount – approx. USD5bn.

Labor migration is not surprising, and we should expect more of it – the minimum wage in Ukraine is todayUAH1,450, or approx. USD56, while the UN defines the poverty line as an average salary of USD150 per month.

“Over the last quarter of a century, as an independent state, Ukraine has lost 40 per cent of its economy, got rid of 9.2 million of its citizens for various reasons, experienced several economic crises and piled up a huge foreign debt. In terms of standard of living, Ukrainians are among the poorest in Europe, including both citizens of working age and pensioners. Citizens of Ukraine form one of the largest armies of migrant workers in the European Union and other neighboring countries. For good measure, our country remains the most corrupt on the continent,” the news service Apostrof summarises the current situation in Ukraine in its annual economic analysis.

Seven disastrous decisions

The business news service Liga published a list of seven decisions which, in the opinion of Ukrainian economics journalists, had the biggest impact on the situation of the Ukrainian economy.

    1. The central bank has been dependent on political decisions. For the first 23 years of independence there was no independent central bank in Ukraine. The result was hyperinflation at the beginning of the 1990s, total unbalancing of state finances and significant devaluation of the hryvnia.
    2. State-controlled prices, licensing of broader and broader areas of economic activity and the introduction of centrally controlled export quotas. As a result, Ukraine’s industrial production collapsed, barter trade developed, and the first oligarchs appeared.
    3. Privatization allowed the Ukrainian oligarchy to grow out of two environments: the post-communist group of “red directors” and the criminal underworld. They acquired the privatization certificates issued by the state, and as a consequence, the key industrial facilities, for next to nothing. The final result of the privatization method adopted by the Ukrainian authorities was the cementing of Ukraine’s economic scene for many years, which resulted in emergence of the new caste of oligarchs.
    4. The creation of a series of special economic zones and the granting, by subsequent governments, preferential treatment for selected companies. As a result of these actions, “the Ukrainian economic landscape is woefully skewed: selected companies receive tax breaks costing the country tens of billions of hryvnia. Meanwhile, the remaining businesses operate under enormous tax burdens.
    5. The decision on the moratorium on the sale of Ukrainian agricultural land which for years has provoked a heated debate. Some see it as protecting villagers from expropriation for next to nothing, which in the conditions of a corrupt judiciary and justice system would not difficult. Others see it as a violation of property rights by the state, arguing for the possibility to freely dispose of property by the owner.
    6. Pension reform – or rather the lack of.
    7. The maintenance of gas tariffs that are detached from the reality of the economic system which started the gas oligarchy, dependency on Russian gas, the stagnation of Ukrainian production, and tens of billions of hryvnia of hidden subsidies transferred from the state budget onto the accounts of the oligarchs.

Corruption like war

However, all the problems of Ukraine fade in comparison with the most important one – the pervasive corruption. In opinion polls almost half of Ukrainians reiterate that the priority for Ukraine should be anti-corruption reform. The short list also includes the replacement of the politicians currently running the country, reform of the health care, the development of the entrepreneurship and reform of the judiciary.

Although almost every day in Ukraine there are reports about politicians, civil servants and judges caught accepting bribes, the “fat cats” can still feel safe. On June, 16th the specialist anti-corruption prosecutor sent to the parliament a request for a waiver of immunity of Alexander Onishchenko, a parliamentary deputy and the gas magnate. Onishchenko had been accused of involvement in gas fraud resulting in a loss of UAH3bn to the state budget (approx. USD112m). Despite pressure from both the prosecutors and Ukrainian anti-corruption organizations, the parliament delayed waiving the politician’s immunity, which in turn prevented the filing of charges and his arrest. The decision to waive his immunity was finally taken on July, 5th, when Onishchenko had left for the United Kingdom.

Despite the decision of the parliament, the attorney general, who must approve the decision of the specialist anti-corruption prosecutor, delayed the formal filing of charges against Onishchenko. He did this only at the end of July, when the Ukrainian media informed that the politician had applied for political exile in the United Kingdom. This means that the chances of extraditing and prosecuting him are practically close to zero. >>more

The judge of the Kiev court, Nikolai Chaus, who on August 9th, was arrested by officers of the National Anti-corruption Bureau of Ukraine, while accepting a bribe of USD150,000, will also escape responsibility. During the Euromaidan protests, Judge Chaus issued false sentences against the participants. Although a formal application was made to remove him from his position due to his actions towards the protesters, he remained in his position, issuing sentences in political cases, among others, putting behind bars the leader of the opposition party Ukrop. He also annulled the arrest warrant for one of the godfathers of the Donetsk mafia, Yuri Ivanyushchenko, who thanks to this decision was able to settle in Monaco. The corrupt judge could not be arrested without the agreement of the parliament – he was protected by immunity – but the MPs were away on summer recess. Chaus escaped to Russian-occupied Crimea. >>more

There are many such stories, but the measurable financial results of Ukraine’s fight against corruption are derisory. The National Agency for the Discovery, Search and Management of Assets Derived from Corruption, which was created in February 2016 in order to manage the property seized during criminal prosecution proceedings, managed to recover less than UAH78,000 instead of the expected UAH7.7bn.

Small dose of optimism

According to Olexander Kramarenko, editor-in-chief of the business bi-weekly Hroszi, despite all the shortcomings, Ukraine has still made enormous progress.

“In 1991 we had an economically dependent country which was part of the ineffective Soviet economic organism. Our GDP at that time was derived from supplying steel and ore to the cogs of the communist economy, in which huge amounts of ore were extracted in order to produce steel used to build machines for extracting yet more ore. We cannot take this as a reference point,” Kramarenko commented in a radio interview for Holos Stolycy.

In his opinion, the real success can be understood as building the layers of medium-sized businesses which saved Ukraine after the crisis of 2008 and are saving it now. The real strength of the Ukrainian economy is shown by the scale of financing of the Ukrainian army by SMEs which have taken upon themselves the responsibility of the state in this area.

Among the positives he also mentions that Ukraine has managed to make agriculture much stronger than it was in Soviet times. As a result, Ukraine is one of the world leaders in the export of grain, sunflower oil and honey.

Kramarenko also argues that Ukraine has also created a strong IT cluster. “Soviet-educated professors train today’s IT specialists and let’s hope this will not be destroyed” he says.

He admits there are some negatives. “We have virtually lost the chemical sector which over the years was drained by the owners and as a result has been turned into scrap metal. The same has happened to the oil refinery sector,” he commented.


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