Current Economic Status of Ukraine
Ukraine’s investment environment remains hostile and unpredictable. The ousting of former President Viktor Yanukovych in 2014, followed by the annexation of Crimea by Russia and Russia-supported war activity in eastern Ukraine, has severely heightened political and economic risks in the country, in turn impacting the business environment. For this reason, Ukraine will remain attractive only for the most risk-tolerant investors over the medium term, despite gradual structural reforms currently underway.
Evaluating the perspective that Ukraine presents to the foreign investors, it is important to analyze the following key factors in regards to the attractiveness of Ukrainian state of the economy: legal, government intervention, economic openness, and trade and investment risk.
Legal: The legal environment in Ukraine is not conducive to foreign participation in the economy, and has been further weakened by the breakdown of law and order in vast areas of the country’s east. A culture of corruption is entrenched in Ukrainian society, undermining the legal system and preventing effective enforcement of intellectual property rights. The rights of foreign investors are not clear, and they can be disadvantaged due to a lack of connections with local elites and an unwillingness to pay bribes which are often necessary for the most mundane transactions. The new government has enacted a number of reforms intended to improve the business environment, but implementation will be difficult due to the lack of state capacity and the deep-rooted nature of corrupt practices.
Government Intervention: Reforms to the tax system in recent years had streamlined payment procedures and lowered the rate of corporate income tax, but we nevertheless caution that the fiscal burden on businesses in Ukraine remains onerous. This is particularly the case since January 2015, when a number of further reductions and existing tax exemptions were abolished, and personal income tax was raised, in an attempt to boost government revenues. Businesses will also find considerable financial barriers in Ukraine which prevent easy access to credit. Banks have restricted lending since the global financial crisis significantly increased the ratio of non-performing loans, capital markets are underdeveloped, and further pressure on the sector has been exerted by the devaluation of the Ukrainian hryvnia currency.
Economic Openness: Structural impediments continue to inhibit market access for foreign investors. Though Ukraine offers well-established agricultural and industrial sectors and a large consumer base, which ostensibly provide numerous investment opportunities, the poor economic and security situation significantly weighs down the country’s trade and investment profile. Though Ukraine is expected to emerge from recession in the near term, economic growth will be sluggish and vulnerable to further deteriorations in the security environment.
Trade and Investment Risk: Ukraine’s trade deficit widened to an estimated 7.6% of GDP in 2016 (compared to 4.0% in 2015), and the deficit will increase to 8.3% by the end of 2017. This will primarily be reflected in a widening import-export gap, as import growth will accelerate amid the country’s consumption-driven economic recovery, while exports struggle to recover due to a variety of negative external factors. Specifically, ongoing bilateral trade sanctions with its biggest trading partner Russia (which accounted for 12.7% of total exports in 2015), the ongoing Russian military-backed conflict in the Donbas, and a weak global macroeconomic backdrop will continue to curtail the county’s investment attractiveness over the coming quarters.
This situation will put renewed pressure on Ukraine’s external financing needs, and therefore, Ukraine will have to rely on support from the IMF in the years ahead to avoid a new deterioration of its balance of payments of foreign loans.
Nikolay Megits, Ph.D.
March 16, 2016
The Problem with “Russian Experts” – A Book Review
Recently I began reading the most recent book by the veteran respected journalist Malvin Kalb entitled “Imperial Gamble” published by the Brookings Institution. I did not have to read much to realize that I as a reader was being indoctrinated with Russian disinformation and that the author was wittingly or not, its messenger. On the book’s front flap, the following appears: “Marvin Kalb brings to life the geography, power politics, and history of Ukraine – once known as Kievan Rus`, or the `First Russia.`” On the subject of Crimea in the introduction Mr. Kalb provides his own opinion: “Actually, Crimea has been in and out of Russian hands for more than a thousand years”.
On those two points alone I decided to write to Mr. Kalb:
“Dear Mr. Kalb:
I am reading your latest book. Kindly explain how Kyivan Rus` was the First Russia. Then explain what connection over a thousand years did Russia have with Crimea which it essentially occupied for the first time in 1783. I look forward to your response. Thank you.
Mr. Kalb answered:
Delighted you are reading Imperial Gamble, all of it. The reference to the First Russia was made many times by historians of Russia, historians from all over the world. The reference has rarely been accepted b y Ukrainians or Poles, but it has historical validity. Re Crimea–Russians have been in and out of Crimea since the 10th century. Wasn’t Vladimir Christianized there? They gained control there, as you said, in the late 18th century.
In fact, in his introduction, Mr. Kalb characterizes these historians as “responsible historians”. I suspect that Mr. Kalb includes Vladimir Putin within this list of “responsible historians.” On page 25 he quotes Vladimir Putin:“We are not simply close neighbors, but, as I have said many times already, we are one people. Kiev is the mother of Russian cities. Ancient Rus` is our common source, and we cannot live without each other.”
This statement by Putin is entirely self-serving and inaccurate. By assuming as its own Ukrainian history as Russia subjugated Ukrainian territory, Putin and his predecessors attempted to steal three hundred years of history, culture and religious tradition which simply had no relationship with Muscovy and to include almost 50 million people who are not Russian, nor do they have any desire to be Russian. In fact, Russia’s imperialistic behavior has resulted in an overwhelming choice by Ukrainians not to have anything to do with Russians.
Regarding Crimea, in order to support his own fallacious position of Russian thousand year connection, Mr. Kalb proposes a single argument that Prince Volodymyr of Kyiv was baptized in Chersonesos, a Greek colony in Crimea in the X century. But Prince Volodymyr of Kyiv had no connection with Russia. He was the ruler of Kyivan Rus,`which did not include Muscovy or the territory of today’s Russia. In fact, the city or state of Muscovy did not exist until some two hundred years later and the term Russia did not exist until several more centuries later.
The book is replete with historical inaccuracies and distortions. Authority for much of what is presented as factual information comes from Russian writings. Kalb quotes Lenin, Stalin, Khrushchev and the like. Perhaps to feign “responsibility” Mr. Kalb does provide some balance with real facts and legitimate authority. Unfortunately, the trust is misplaced.
I choose to believe that Mr. Kalb is not a willing participant in Russian disinformation. However that, unfortunately, does not clear his name. Otherwise, he is a “useful idiot”. And while publishers are not always responsible for the content of their publications, Mr. Kalb in his introduction makes it quite clear that his book was commissioned by the Brookings Institution. I choose also not to include Brookings in the list of willing participants in Russian disinformation but deem them “useful idiots” as well. But that is only part of the problem.
In his introduction, Mr. Kalb bemoans the fact that today’s U.S. government lacks the necessary “Russian experts”. He writes “During the cold war, Western governments benefited from the advice of `Russian experts` who were consulted on policy choices. No longer…”
Mr. Kalb concludes his book with the following advice purportedly as a “Russian expert” himself since he reminds the reader in the book that in the early 1950’s he was a Ph.D. candidate in Russian history at Harvard: “The United States has other problems that demand its attention, directly affecting its vital national security interests, and Ukraine at the moment is not one of these. Declaring Ukraine to be such an interest would – inevitably—mean that the United States will slide into a confrontation with Russia.”
The notorious Russian propaganda machine like “Russia Today” or Vladimir Putin himself could not have provided more damning advice than this “Russian expert” for Ukraine and global security. Through disinformation, outright lies and “useful idiots” Russia continues to be a global security menace.
Askold S. Lozynskyj
President of The Ukrainian Free University Foundation
August 28, 2016
Ukrainian Transformation Achievements
As of March 2016, Ukraine is still undergoing economic transition affected by opaque privatization deals that resulted in billions of dollars redirected from state resources. After decades of underinvestment and mismanagement, Ukraine’s economy is inefficient which directly influencing Ukrainian government stability. The current government faces a number of challenges as it works to raise standards of living and modernize the economy while mitigating the consequences of economic contraction and inflation. The cost of war and the resultant loss of large swaths of the heavy industry sector have compounded these challenges. As a multi-party democracy, the economic and political hurdles Ukraine faces have contributed to political turnover as there is a diversity of opinions on how best to address the needs of the Ukrainian people.
Ukraine has far to go to affirm its place in the European community of nations. The Ukrainian government has had a mixed track record in working towards this long term goal. Some positive first steps include:
- The country redirected its higher education system toward the European Bologna Process. This provided Ukrainian universities with more administrative independence and academic freedom in preparing the nation’s future leaders.
- Reformed of the police force expanding from the capital Kyiv to 27 cities nationwide.
- Some progress in automation of government services to decrease opportunities for graft.
- The democratization of Ukrainian political system which has the potential to ensure that elections and political decisions are subject to greater transparency and public oversight.
- The creation of anticorruption agencies tasked with identifying corruption.
The general focus of the Ukrainian government on eliminating graft and corruption is laudable and necessary, though no less difficult. The biggest challenges revolve around the pace of reforms, the lack of anti-corruption cases from the General Prosecutor’s office, and the potential for impropriety in naming administrators of government owned companies.
However, only embracing Western values of transparency will attract investors seeking stability and security from the government. Further, the modernization of the economy and transition from heavy industry to development of the tech sector is crucial. Ukraine must capitalize on the opening up of the EU market in order to spur considerable job growth. Finally, the long-term transition to alternative energy that can be produced in Ukraine will also be essential for Ukraine’s future economic and political stability. While all this is a tall order, the Ukrainian people have demonstrated that they will no longer be satisfied with the status quo of rampant corruption and economic stagnation that has been a hallmark of former Soviet countries since its collapse.
Nikolay Megits, Ph.D.
March 16, 2016
Fateful Year, Crucial Task
2014 marked a watershed for countries covered by the Journal of Eastern European and Central Asian Research. The past year witnessed mass demonstrations in Ukraine in favor of the EU Partnership program; the sudden toppling of President Viktor Yanukovych; Russia’s seizure of Crimea and instigation of conflict in Eastern Ukraine; and several rounds of U.S. and European sanctions against Russia which, coupled with the precipitous decline in the world oil price, sent the Russian economy into a tailspin.
These developments have brought Ukraine and relations with Russia to center stage in global affairs. They have also created a double threat to other countries bordering Russia. First, fears are growing that Russian pressure could take new forms as Moscow lays claim to “privileged interests” in the former republics of the Soviet Union. Second, the sharp downturn in the Russian economy has had a negative impact on many neighboring states. Add to this the sharp rise in the value of the U.S. dollar during 2014 and problematic economic trends are only compounded.
As 2015 gets underway, signs are mixed regarding the depth of Western solidarity against Russia’s aggression and the prospects for adequate Western economic support for Ukraine. Russia clearly has violated the 1994 Budapest Memorandum under which Ukraine gave up all nuclear weapons on its soil in exchange for assurances of its security and territorial integrity. Western credibility is now on the line as Russia continues to flaunt this accord to which it was a signatory.
Beyond the crisis in Ukraine, events last year at the other end of the Eurasian landmass carried with them important implications for Europe and Central Asia as well. In November, China announced an array of new programs on infrastructure investment and finance that focused not only on Asia, but also on Central Asia and beyond. Xi Jinping’s plans for a New Silk Road Project and a Maritime Silk Road have been presented to the Chinese people as essential pillars of the “China Dream” of a prosperous society by 2049, the 100th anniversary of the PRC.
Despite U.S. pressure to the contrary, major European countries – among them Germany, Italy, the United Kingdom, and France – have announced that they will participate in China’s newly-created Asian Infrastructure Investment Bank. Meanwhile, Russia is a key partner in ambitious Chinese plans for high-speed rail and other transportation links across Eurasia. Once again, such projects have the potential to influence the economics and geopolitics of countries in Eastern Europe and Central Asia.
At the heart of the events that shook 2014 lies the region to which this journal devotes its analytical and scholarly attention. How the confrontation with Russia plays out will reverberate through Eastern Europe and Central Asia for years to come. And as this drama unfolds, it will be more important than ever to produce accurate assessments of emerging trends. The Journal of Eastern Europe and Central Asian Research remains committed to providing a platform for international scholars and practitioners to participate in this effort. We look forward to an active collaboration with our authors and readers in addressing the challenges that lie before us.
Diplomat in Residence, Alworth Institute for International Studies, University of Minnesota – Duluth
April 25, 2016