Truck and Barter: The Ukrainian Economy

November 26, 2004

The Ukrainian Economy

By Kevin

Many people are focusing their attention on the public resistance and uncertain revolution in Ukraine. We focus on the Ukrainian economy, which has lately been the fastest growing in Europe; after a seesaw economy in the 1990s, quasi-independence from Russia has brought a domestic investment boom and foreign investment slump. Two weeks ago, BusinessWeek had a must-read article on the entire economic affair:

But what's behind it? A combination of good luck and good macroeconomic policy. The luck is that metals, particularly steel, make up 60% of Ukraine's exports. Global prices have been high recently, thanks largely to demand from China and other Asian markets. The sound macroeconomic policy has been followed by successive governments since a financial crisis in 1998. The country has a 9.7% current account surplus, public debt is a low 24% of GDP, and inflation is in single digits. The wide-ranging privatization of the 1990s is bearing fruit: Some two-thirds of GDP is produced by the private sector, the main engine of Ukraine's growth. True, much of that is owned by a small number of tycoons. But these oligarchs -- the same term used in Russia -- are investing serious money in sectors such as agriculture, telecom, and banking. "Yes, privatization was dirty, but it has shown its effectiveness," says Olexander Paskhaver, president of the Center for Economic Development in Kiev.

Should Viktor Yushchenko manage to unseat the sitting Prime Minister through judicial decision or violence, what is at risk economically?

With Ukraine's economy booming, it's not only governments but also investors who have an interest in the poll. If Yushchenko, a strongly pro-Western politician who jump-started Ukraine's boom when he was Prime Minister from 1999 to 2001, pulls off a victory, Ukraine could see major reforms that will put the country on the international investor map like never before. But if the ruling elite rigs the election to ensure a Yanukovych win, as some foreign governments fear, Ukraine faces the risk of international isolation and serious political unrest.

The current PM and practically de-facto Presidential incumbent, Yanukovych, is actually an economically grey oligarch:

A former governor of the Donetsk region in eastern Ukraine, Yanukovych is linked to that area's powerful coal and steel barons. His government has openly favored the interests of these oligarchs, who are allied with Kuchma. In May it privatized Kryvorozhstal, Ukraine's largest steel producer, awarding the company to a business group headed by Kuchma's son-in-law, Viktor Pinchuk, even though the winning bid of $800 million was far less than a $1.5 billion offer from U.S. Steel Corp.

Still, the Yanukovych government has its share of economic achievements. It has slashed the top income-tax rate from 40% to a flat 13%, passed laws to facilitate land privatization, firmed up protection for intellectual-property rights, and pursued membership in the World Trade Organization, which is expected by 2006.

Two years ago, BW was worried that former President Kuchma's authorization to sell Iraq a sophisticated--and UN sanctions-violating--aircraft detection system would upend Ukrainian economic growth. It didn't. An article from Ria Novosti argues that, from the perspective of the Russian businessman, Yanukovych will give his own oligarchs with the best deals, while Yushchenko will break apart the old Soviet supply chains, hurting both Ukrainian and Russian oligarchs. This is why, despite the protests and media defection, Ukrainian oligarchs still support Yukanovych:

Most remain wedded to Mr Yanukovich, especially the barons of his political heartlands in the industrialised Donetsk region. But a few are beginning to wonder whether Mr Yanukovich still offers the best protection for their interests.

Many are also coming under pressure from employees who are openly supporting Mr Yushchenko - putting up posters in factories and workplaces and taking time off for demonstrations.

Much will hinge on the attitudes of the country's two wealthiest men. One is Viktor Pinchuk, Mr Kuchma's son-in-law and head of a business empire that ranges from manganese to media, including the Novy Kanal, STB and ICTV television channels.

The other is Rinat Akhmetov, the chief of a steel and coal empire based in Donetsk and Mr Yanukovich's main business backer.

To put the squeeze on these guys, Russia threatened to stop ALL foreign investment into Ukraine.

This would be comical if it weren't so damn serious.

Other Links:

CIA World Factbook - Ukraine
Institute for Economic Research and Policy Consulting - Historical Data 1991-2001
Ukrainian Business - Links to a number of interesting articles.

Posted at November 26, 2004 11:45 AM

Comments

this sucks! i need info on the economy for a report at school!

Comment by Bethany at April 15, 2005 08:16 PM | Permalink