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Ukraine – neither make nor break

Published on February 19, 2010 by: in: Politics

After 2000, Ukrainian GDP increased up to 7 percent per year. In Kiev the house, service and trading building industry flourished, although per capita GDP by 2008 has not reached yet the level before the transformation; in comparison to 1990 it was lower by 25 percent. The capital was vibrant with the cultural and social life. The contrasts between the metropolis and the rest of the country has increased. The standard of living in Kiev exceeded three times the national average. It is hard to meet with such a density Sequoya Toyota cars, Nissan Armada, Hammer II, Bentley and Lexus in any other European capitals. In this situation, the crisis found Ukraine more severely than elsewhere, except the Baltic countries. According to the IMF forecast the national income in 2009 will decline by 14 percent, exports will fall by 45 percent and imports by more than a half. Most developers have gone out of business, banks do not grant loans and the majority has not pay a deposit for a few months. The half of the Ukrainian steel mills has stopped working. Purchases of new cars fell in the first half of 2009 to 75 percent.ukraina

Causes of collapse

The fixed Hryvnia rate of exchange, declared by the Central Bank and maintained by a fast-growing exports of steel products and chemicals, 5 Hryvna per dollar, taking a double-digit domestic inflation, encouraged to take loans in currency, convertible into everything: housing, cars, refrigerators, televisions, etc.  Repayments in the real money were to be smaller and smaller. Nominal wage growth in 2007 reached over 20%. Meanwhile, in mid-2008 exports collapsed and quantitatively, and affordable. Within a few months the export of steel products dropped by 60 percent and chemicals by half. On the other hand, prices for gas imports, which declined in the world, for Ukraine increased. Russia resigned to treat Ukraine on concessionary price conditions. In 2009, world prices are valid minus 20%, and in 2010 there will be the normal world prices. Exchange rate during the month fell to 8 Hryvna per dollar. Some of the loans ceased to be supported. In turn, the banks were not able to either increase the reserves to the required level, or pay off foreign loans, which have been made to posses something to lend to retail customers.

The Orange Revolution brought great results in the broadening of the civil liberties and ensuring the freedom of the media on a scale incomparably greater than any other country in the former Soviet Union except the Baltic states, of course. It is noteworthy that the rules have not changed what the media and only President Yushchenko has ceased to guide them, leaving them the freedom to abuse over him.

By contrast, the economic reforms prepared with the participation of foreign experts remained largely on paper. The political instability contributed to that, resulting, first, amendment of the Constitution done in a slapdash way, which was the cost of the agreement of the Party of Regions to repeat the second round of presidential elections in 2004, which Yushchenko – representative of Orange – won. The powers of the president were reduced, but not consistently, because he has had the opportunity to issue decrees, which “require” the government to do various things, but mostly what the government does not execute. But confusion arises. The political culture is low. President carpeted the judges of the Constitutional Court, and two, from “the president pool,” simply dismiss, because they got in his bad books. Parliament was not being able to solicit request for President’s dismissal of the chairman of the Central Bank, adopted a declaration of the invalidity of their own decision from before five years to set up the same president. Deputies – once from one side, and then from the second one – are blocking on the Tribune of the Supreme Council for weeks, making impossible any debates.

According to the deputies, it is the instrument of pressure to force the opponent’s consent to some act or to prevent from passing another.

You cannot count on the protection of the property rights. Legal safeguards are not enough. Several investors, including Polish, had lost their businesses for unfair Ukrainian partners. They lose in the deeply corrupt courts. After many years of the trial runs, in 2008, the new code of commercial companies was passed, which narrowed the scope for abuse in the form of the fraudulent capture business. On the other hand, an obligation on the exchange of all limited liability companies and various other regulations impeding the action of companies, were introduced. There is far too the decent law on limited liability companies. However, the Economic Code of 1991 obligates, which is a socialist-market mixture and should be abolished long ago.

The constant state election campaign is still taking place and related to it the stoking populist expectations in the society, which in the vast majority is still convinced that  “the government gives everything”. Central Bank is ruthlessly attacked by the point of view of Mrs Prime Minister for the excessive devaluation of the Hryvnia. According to her opinion, the course should be at most 7 Hryvna per dollar.

Undercutting energy tariffs for households have four negative consequences:

1)

Saving energy does not pay off million of end-users, because it is cheaper than investing in insulation, thermostats, timers, etc.

2)

National gas supplier are unable to grow or even maintain output at its current level, because of the strangled domestic prices

3)

Only the foreign supplier (that is Gazprom) is paid at a world price (in 2009 still incomplete) so it has adequate resources for investment and payment of dividends.

4)

The excessive consumption and discrimination of the domestic suppliers increased dependence on Gazprom.

The proposal to increase tariffs on gas (with the introduction of social protection for the poorest) arises as an obvious, but it threatens the loss of millions of the voters. So no one has illusions that it will be placed before the presidential election, but had been written in the agreement with the IMF.

The role of the oligarchs

Ukrainian Parliament belongs to the world’s richest parliaments. The oligarchs headed by Rinad Achmetov, are the 2 / 3 of the parliament. Achmetov is the one of the richest men in Europe, whose fortune Forbes, valued by the 7.3 billion dollars. The oligarchs are a curse and a blessing of Ukraine. The companies record in Cyprus, which is the largest “foreign” investor in Ukraine. In Russia, politicians, or the KGB, ruled the oligarchs, but in Ukraine the oligarchs steer the politicians. They prevented a street confrontation, when the president dissolved parliament on the basis of the very dubious constitutional grounds. Heavy industry saved the oligarchs, who at least until the current crisis were the source of prosperity. Ukrainians support their country’s accession to the European Union, but at the same time they want to have the best relations with Russia, which is essential for doing business, but do not want to fall into the trap of the course services as happened with the Russian oligarchs. They guard their interests in the parliament. The Ukrainian businessman from the WAZ and Lanos cars that do not enjoy taking great even in a poor country like Ukraine, has led to the adoption contrary to the provisions of the WTO additives duties on imported cars, which are the rules in force for six months, until  WTO not quickly analysed, discussed and demanded their removal, which fortunately occurred. In such situations, an important role may play external anchors.

Some of them work. Ukraine has been a member of the WTO since May 2008. Harmful prohibitions on exports of grain and sunflower oil were stripped, tariffs were reduced, forms of agricultural subsidies were improved, different protectionist impulses, as in the example, are constrained. In October 2008, the standby agreement with the IMF was made. On its basis Ukraine is to receive over 2 years 16.4 billion dollars U.S. in 8 instalments. The loan allows to maintain the solvency of the country, helps individuals repay foreign currency loans, slows down the Hryvnia devaluation and helps to restore liquidity in the banking sector. The World Bank and EBRD awarded the additional credits. With a fall in the export earnings, foreign investment and retention of the private lending to sustain the liquidity of the international financial institutions is of great importance. However, the IMF has a dilemma prior to each tranche.

Ukraine performs some of the actions from the agreed plan: Hryvnia exchange rate was freed and the range of possible central bank intervention in the currency market was limited, a review of the banks’ situation was made and the banking sector has being recapitalized. However, the Ukrainian government leaves on the shelf – as long as possible – the implementation of the politically difficult conditions, such as pension reform, the increase in energy tariffs, particularly for residents and keeping in check the public finance deficit. So should the next instalment be held? The instalment, which will trigger a chain reaction: a further devaluation, weakening the liquidity of the banks, and stopping so weak flow of the new investments? Or turn a blind eye and pay and wait for the presidential elections scheduled for January 2010?

Pre-election speculation

In January presidential elections will be held. Yushchenko has virtually no chance even to enter the second round. This clearly pro-Western politician, anti-populist (calling for the withdrawal of subsidies and the increasing of the energy tariffs), did a lot for the construction of the historical consciousness of the Ukrainians (Holodomor, Poltava, historically justified the separateness of the Ukrainian Orthodox Church, the controversial honouring the UPA soldiers), but did not maintain the popularity from the Orange Revolution period.

High hopes were associated with 35-year Arsenim Jaceniukiem, a brilliant, pro-European politician of the new generation, who despite his young age, was the Acting President of the Central Bank, the Minister of Economy and Foreign Affairs and by the autumn of 2008 – put forward by President Yushchenko – the marshal of the Supreme Council. During the Orange Revolution, he has saved the banking system from the crisis. As the marshal, he kept neutral in the endless disputes between the Orange Camp and the Party of Regions. He favoured pro-Atlantic option but he also tried to maintain the good relations with Russia. His election campaign, however, caused a large disappointment to his followers. He had hired a Russian public relations company that created him as a strong man presented on billboards in the gloomy dark cold colours, which totally does not fit into his emploi, it could be popular in Russia, but not in Ukraine. To reconcile all he began to preach from the Atlantic to the Pacific the New Europe’s slogans, which would replace the European Union, and he also promotes other concepts, which nobody understands, like “new industrialization”. In a word he overdid and the ratings, which had grown great before the campaign since its launch, fall down.

On the battlefield remains Prime Minister Yulia Tymoshenko. After the election, the government of Yulia Tymoshenko promises to “accelerate reforms”. Mrs Prime Minister, invited, like 5 years ago, a group of the foreign and domestic economists to draw up an action plan to be ready in February 2010. But will Tymoshenko win the election? Will she gather a majority in parliament, which now she has not? Is her determination enough to go from populism to the necessary horse’s treatment for the economy? The foreign experts still believe in such a scenario, but hardly Ukrainian not. They however, see her as the guarantor of the independence of Ukraine. The second candidate leading in the polls, beaten in 2004, Viktor Yanukovych, who is considered to be conservative and pro-Russian politician. Not until the end is it accurate. As prime minister, he made his first visit abroad in Brussels and if the EU had opened up the prospect of Ukrainian membership, it would probably have navigated in this direction under the influence of the Donetsk oligarchs, who are his political base.

European Union fails

There is no country in the former communist bloc, which is to conduct an effective political and economic reforms with no prospects of the entry into the European Union. This perspective was the most powerful external factor encouraging reform in determining the direction of eliminating the good work of parliamentarians. The Union is not ideal, but somehow it works. For stability in the Balkans, all Balkan countries, including the FRY Macedonia, Albania, Kosovo and Montenegro have been invited to the Union. Negotiations will begin when they meet the Copenhagen criteria. Ukraine has not received such an invitation, although it is probably better prepared for membership than some of those countries. Several EU countries are, in fact, against the further spread. It was agreed at Eastern Partnership, which however, will not substitute for the membership. Negotiations on a free trade zone are being conducted, but the free food trade had been ruled out in advance. Ukrainian agriculture, which production – according to FAO experts – could be increased 2.5 times, will remain cut off from the European market. For the EU, more important is the interest of the richest European farmers’ groups, than a strategic interest in stabilizing the European values in Russia, the largest of area and population of the former communist bloc country, or even the interests of millions of European consumers, who would have a greater choice of quality and price, by letting in the food products from Ukraine to the European market, of course after meeting sanitary standards.

Such a situation has disastrous consequences for pro-European forces in Ukraine, weakens it seriously, precipitates the arguments from the hands in favour of the adoption of harsh, violating various individual and group interests, solutions. Russia benefits geopolitical, which maintains visa-free travel with Ukraine and buys military equipment and aviation, has a free trade agreement with Ukraine and urges it to create a common economic space, what would have ruled out the possibility of any Ukrainian-EU free trade zone.

Ukraine has to not only carry out the political and economic transformation, as well as all the former Soviet bloc countries, but also build their own nation from scratch, like other former Soviet republics except the Baltic states, which have spent “only” 45 years under communism and kept the traditions of the independent statehood . The piling internal difficulties and short-sightedness of the political class in the European Union have called into question the implementation of the triple task by Ukraine.

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About Marcin Swiecicki

Ph.D. in economics, also graduated from sociology; studied 2 years in the U.S., including a year at Harvard. He has published approximately one hundred articles on economic, local government and international issues. Minister of Foreign Economic Cooperation in the government of Tadeusz Mazowiecki (1989-91), co-author of the transformation of the Polish economy. In later years, President of Warsaw (1994-1999), Undersecretary of State in the Ministry of Economy (1999-2000), economic adviser to the Lithuanian and Ukrainian authorities.

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