Ukraine’s Economic Prospects Improving


David Marples

After the 2008-09 recession and its enormously adverse impact on the Ukrainian economy there have been various forecasts of impending collapse of the Viktor Yanukovych administration. Of late these analyses have increased rather than lessened. But there is sufficient evidence that such prognoses are not merely premature, they are largely unfounded. That is not to say that Ukraine is not facing economic problems, like many parts of Europe today, but it has seen worse times and survived them.

Ukraine’s biggest issue is energy supply, which is partly a legacy from Soviet times. It remains heavily dependent on Russian oil and gas. Prices negotiated for imports by former Prime Minister Yulia Tymoshenko in the Yushchenko era are again under review.

Concomitantly, Russia is putting some pressure on Ukraine to join the Customs Union, which currently comprises also Belarus and Kazakhstan. Ukraine, however, has stood its ground on both issues, demanding new negotiations on prices for oil and gas, while remaining firmly outside the Common Economic Space of its northern and eastern neighbors.

According to figures of the World Bank, GDP is expected to rise by 4.5% this year and 5% in 2012, a consequence of a vibrant retail sales market and expansive building plans. Agricultural production increased by 3.5% in the first five months of this year. Inflation remains a problem, partly because of rising food and fuel prices. However, the financial situation has been enhanced by some promising privatization schemes such as that of Ukrainian Telecom.

On June 22, Interfax Ukrainy reported the conclusions of a TACIS program to support the Ukrainian coal sector, namely to privatize the moribund state enterprise Vuhillya Ukrainy (Ukrainian Coal) under the “strictest control” of an Anti-Monopoly Committee. Whether coal has a long-term future is debatable, but the abolition of the state company is a logical beginning.

In 2010, the IMF approved a $15.6 billion loan to Ukraine, and it continues to monitor the country’s performance. An IMF team will return to Ukraine in September, ostensibly to ensure that cuts to public spending remain in place, but its reports to date have not been negative.

Evidence suggests that the Ukrainian government is depending equally on Russian and on non-Russian backing, mainly from the European Union and potentially from China. On June 18-20, Chinese president Hu Jintao made a state visit to Ukraine, during which President Yanukovych announced that China should be an economic model for Ukraine. The two sides announced the “fast-tracking” of bilateral relations.

However, energy, as noted, remains the critical issue and there is no short-term solution to current dependence on Russia. Domestically, about 48% of Ukraine’s power supply derives from nuclear energy and electricity demand is expected to more than double over the next two decades. Nuclear power is considered to be the primary recipe to meet the increased needs.

However, no nuclear reactors have come on line in Ukraine in the past five years, although Rivne-4, a VVER-1000 (water-pressurized) reactor is anticipated to be operating by the end of the year. After the disaster at Japan’s Fukushima plant, which began last March, public opinion in Europe turned sharply against nuclear energy. The consequence has been a potential windfall for Russia, which is again a major exporter of nuclear technology.

In the case of Ukraine, Enerhoatom made an agreement with Russia’s Atomstroyeksport last year to complete two unfinished VVER-1000 reactors at the Khmelnytsky station. A third unit, which was 75% finished in 1990, should be in service by 2016; and a fourth, 28% completed in the Soviet period, by 2017. Russia is providing the financing, the construction crews, and the fuel supply. It has benefited from its position as the main reactor manufacturer in the Soviet period (starting in the late 1970s).

Even in this area, however, there is no obvious reason why the reliance solely on Russian technology, resources, and financing should continue. Notably, a French company is playing the key role in building a new roof for the destroyed Chernobyl-4 reactor, and Ukraine has indicated it will be open to international tenders for future nuclear power plants.

Ukraine is also a major producer of uranium, with about 3% of world supply coming from the Eastern Mining and Enrichment Plant in Vody, Dnipropetrovsk. On paper, the country is an attractive place for investment, particularly its steel industry, which benefits from the country having about 20% of the world’s supply of iron ore.

So what basically is wrong with this picture? Why are there so many doomsday scenarios about impending collapse?

The likely answer is that many analyses of contemporary Ukraine focus largely on corruption, the control over political life of a Donetsk-based clan or hierarchy that has undermined democracy, harassed opponents, taken steps to gain control over the media, and more than once made a mockery of parliament. There is no question that the Yanukovych regime, installed for some seventeen months, has a richly deserved unsavory reputation and at present it is not very popular.

Yet in terms of long-term economic health, such factors mean little. Moreover, the government continues to work with the EU and, despite some difficulties, with Russia, and there is every indication that the partnership with China will prove fruitful. It may need to tighten its fiscal policy to keep a handle on inflation, but it does not have the catastrophic debts of Belarus. Most financial sources agree that the economy is in a recovery mode, albeit without any “boom period” in sight.

Above all, Ukraine has the human and natural resources to thrive economically. And the visit of the Chinese president was symbolically significant even though the two economies cannot realistically be compared. Here was the leader of a country that has never been democratic, and in which enemies of the regime are dealt with in summary fashion; thus perhaps an ideal model for Yanukovych and his Regions cronies.

And, ironically, the conjoining of a more democratic model and economic decline or collapse has happened twice now in recent history: in 1991-92 after the collapse of the Soviet regime, and in 2008-09 under Yushchenko. Conversely, Ukraine’s economic performance improved under the sinister Kuchma and has begun to show similar signs under the current, equally anti-democratic leadership.

[This article appeared simultaneously in Kyiv Post, 23 June 2011]

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About DAVID R. MARPLES

Distinguished University Professor, University of Alberta

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