Date: 14th January 2020
Author: M. de Behar
Ukraine’s oligarch-dominated economy grew slowly from 2010 to 2013 but remained behind peers in the region and among Europe’s poorest. After former President Yanukovich fled the country during the Revolution of Dignity, Ukraine’s economy fell into crisis because of Russia’s annexation of Crimea, military conflict in the eastern part of the country, and a trade war with Russia, resulting in a 17% decline in GDP, inflation at nearly 60%, and dwindling foreign currency reserves. The international community began efforts to stabilize the Ukrainian economy, including a March 2014 IMF assistance package of $17.5 billion, of which Ukraine has received four disbursements, most recently in April 2017, bringing the total disbursed as of that date to approximately $8.4 billion.
Russia’s occupation of Crimea in March 2014 and ongoing Russian aggression in eastern Ukraine have hurt economic growth. With the loss of a major portion of Ukraine’s heavy industry in Donbas and ongoing violence, the economy contracted by 6.6% in 2014 and by 9.8% in 2015, but it returned to low growth in in 2016 and 2017, reaching 2.3% and 2.0%, respectively, as key reforms took hold. Ukraine also redirected trade activity towards the EU following the implementation of a bilateral Deep and Comprehensive Free Trade Agreement, displacing Russia as its largest trading partner. A prohibition on commercial trade with separatist-controlled territories in early 2017 has not impacted Ukraine’s key industrial sectors as much as expected, largely because of favorable external conditions. Ukraine returned to international debt markets in September 2017, issuing a $3 billion sovereign bond.
Ukraine has made progress on reforms designed to make the country prosperous, democratic, and transparent, including creation of a national anti-corruption agency, overhaul of the banking sector, establishment of a transparent VAT refund system, and increased transparency in government procurement. But more improvements are needed, including fighting corruption, developing capital markets, improving the business environment to attract foreign investment, privatizing state-owned enterprises, and land reform. The fifth tranche of the IMF program, valued at $1.9 billion, was delayed in mid-2017 due to lack of progress on outstanding reforms, including adjustment of gas tariffs to import parity levels and adoption of legislation establishing an independent anti-corruption court.
The SBU Security Service of Ukraine estimates losses from corruption in 2019 at over UAH 1.4 billion (US$58.5 million). “Over the year, officer of the Security Service of Ukraine blocked 497 attempts by officials to commit corruption-related crimes at various level – from municipal and state authorities to law enforcement and military structures”, according to SBU’s press center. The total amount of bribes demanded by corrupt officials is over UAH 65 million (US$2.7 million).
For Ukraine’s policymakers, there is no doubt that the country must attract direct foreign investment if the country is to transition to a market economy and to attract the investment needed to lay the infrastructural foundation to grow the country’s economy, meeting the target of 40% economic growth and attracting $50 billion over the next 5 years.
But as this ambition seeks to become a reality, Ukraine’s policy and legislative leaders are confronting what is becoming a major temptation and stumbling block to meet this end. That being: to what extent do they submit to the demands and political pressures of domestic economic players, those being entrenched oligarchic and monopolistic interests, with the fundamental needs of foreign investors who assume, and who have been led to believe, that Ukraine is prepared to adopt free and fair market principles in the running of their economy.