(This is an original version of the article “From Bread Basket to Basket Case: A Survey of the Ukraine’s Economy” that appears on The Kremlin Stooge blog.)
FROM BREAD BASKET TO BASKET CASE: A SURVEY OF UKRAINE’S ECONOMY
Overview of Ukraine since November 2013
Almost a year has passed since November 2013 when the former Ukrainian President Viktor Yanukovych decided to postpone signing the EU-Ukraine Association Agreement, to which decision individuals and groups favouring closer EU and Ukrainian political and economic ties (with a view to Ukraine gaining full EU membership and a visa-free travel regime allowing more or less unrestricted travel through other EU member countries) began assembling on Independence Square (the English translation of the Ukrainian name Maidan Nezalezhnosti – from here on, the square will be referred to as the Maidan) in the capital Kyiv to protest and call for European-Ukrainian integration and Yanukovych’s resignation. Demonstrations and protests escalated on the Maidan and culminated in the shooting of Berkut police and demonstrators alike by unknown snipers on the night of 21 February 2014. Yanukovych and several other government officials fled Ukraine and the Ukrainian parliament impeached Yanukovych’s government and replaced it with a temporary one led by Oleksandr Turchynov, the Speaker of the parliament (Verkhovna Rada), and Prime Minister Arseni Yatseniuk.
A number of new laws passed by the interim government antagonised the ethnic Russian-speaking minority in eastern and southern parts of Ukraine (and smaller groups of Hungarians and Czechs in far western parts). In March 2014, the Autonomous Republic of Crimea and Sevastopol held a referendum, deemed illegitimate by Kyiv and the wider world, in which voters overwhelmingly voted for accession to Russia. Russia responded to the referendum result and admitted Crimea and Sevastopol to the Russian Federation on 18 March 2014. Inspired by Crimea and Sevastopol’s actions, the eastern Ukrainian oblasts of Donetsk and Luhansk also tried to break away from Kyiv’s control by declaring themselves People’s Republics in April and holding their own independence referendums in mid-May. The response of Kyiv to Donetsk and Luhansk’s actions was to instigate military action against breakaway oblasts in April.
Since then, the Ukrainian military has thrown tens of thousands of soldiers against small militias of determined pro-Russian separatist rebels; in the fighting, hundreds if not thousands of Ukrainian soldiers have either gone missing, defected to Russia or died. The actions of the Ukrainian armed forces, starved since Ukrainian independence in 1991 of adequate funding for salaries, training and upgraded facilities and equipment, have been marked by incompetent leadership and management, and possibly bad military strategy.
What has now become a major political and existential problem for Ukraine, on which the country’s whole future as one entity depends, originally was an issue of deciding the country’s economic future so as to resolve its many and quite dire economic problems. What was the state of Ukraine’s economy when on that fateful day in November, Yanukovych nearly put pen to the dotted line on the paper? A general survey of Ukraine’s economy as of 2013, more or less, is in order as a foundation for us to get a grasp of issues involved.
A Brief History since Independence
On achieving independence in 1991, Ukraine inherited a centralised economy in which government planning was dominant from the Soviet Union and in which mining, heavy industry and agriculture were the main sectors. The country had a highly skilled labour force and a good education system that emphasised the acquisition of technical and scientific knowledge and skills. However from the mid-1960s up until independence, industrial growth and development slowed and stagnated due in part to lack of effective economic leadership at national and regional levels as the Soviet political elite aged. The system was also corrupt in the way economic plans and goals were set by government bureaucrats and the way goals and output figures were fudged by those charged with production and leading that production, resulting in ever more corruption (since the false figures were used as inputs for the next annual or 5-year plans) which must have reached surreal proportions in some industries.
For most of the 1990s, Ukraine’s economy languished in a deep recession marked also by hyper-inflation and the country’s gross domestic product (GDP) shrank alarmingly as the country’s leaders struggled ineptly to change its orientation from a centrally planned economy to a market-run economy with private enterprise. Industrial, agricultural and other enterprises that hitherto not only employed and paid workers to work but also managed some aspects of their leisure and health had to adjust to a new ideology and work culture and organisation in which maximisation of profit was the chief goal. After 1999, Ukraine’s GDP began to grow and to continue growing in fits and starts at least until the Global Financial Crisis of 2008 when the economy shrank again. In 2010 the economy began to grow again but stalled in 2012 and 2013.
In 2012, Ukraine’s GDP (Gross Domestic Product which measures the market value of all final output including services produced by a nation in a calendar year) was US$176.3 million, putting the country on par with Vietnam and Romania, and lower than Egypt, Kazakhstan, Peru and the Philippines.
A Survey of Ukraine’s Economy 2012 – 2013
As of 2013, Ukraine depended in the main on mining (based mainly in the south-central and the eastern parts of the country), heavy industry and manufacturing (concentrated around Kyiv and in the east) and agriculture.
Mining
The Donetsk region contains large reserves of coal and Kryvy Rih has iron ore reserves. Other mineral resources in the country include manganese, bauxite, nickel, titanium (Ukraine has the world’s largest supply) and salt. As of 2012, metals accounted for about 40% of the country’s exports.
There is some production of crude oil and natural gas but not enough to supply the country’s own industrial and domestic needs. Ukraine is highly dependent on Russia for its oil and gas needs. Until June 2014, Ukraine had been receiving a 30% discount on imported gas from Russia; the discount was discontinued by the supplier Gazprom as Ukraine had an outstanding debt of $4.5 billion. Ukraine is now required to pay upfront for Russian gas. There have been ongoing disputes between Ukraine and Russia over gas supplies and gas supply negotiations and treaties, especially over price and supply issues and the linking of gas supplies with Russia’s leases of naval ports in Crimea (when the peninsula was still part of Ukraine).
Ukraine’s geographic position between Russia and much of Europe makes the country a corridor for natural gas and oil to pass from Russia and the Caspian Sea region to the European Union. There have been issues with the amounts of gas passing from Russia through Ukraine to Europe which leads this writer to believe that private companies in Ukraine, a number of which are owned by oligarch politicians, regularly siphon off gas in secret and store and use it in ways that profit the companies and their owners.
Agriculture
Almost two-thirds of Ukraine is made up of fertile chernozem (black earth) soils in the central and southern areas, and agriculture plays a large role in economic output and as an employer of labour. The country produces wheat, potatoes, sugar beets (it is the world’s largest producer), barley, maize, rye, cabbage, tomatoes and sunflower seeds, and its livestock includes pigs, cattle, goats, sheep and poultry. Beekeeping is a significant industry and Ukraine produces more honey per person than any other country in the world. During the Soviet period, Ukraine produced up to 25% of the union’s entire agricultural output, mainly in cereals, and was known as the bread basket of Europe. After 1991 though, agricultural production declined as a result of declining government and other investment in necessary capital such as tractors and combine harvesters, fertilisers and pesticides. Privatisation of agricultural land began in August 1995 and by 1996 over half the arable land being worked was in private or collective hands. As of 2012, agriculture employed 16.8% of the workforce and Ukraine was the world’s sixth largest exporter of grain. The sector still needs investment if it is to increase production and harvests.
Manufacturing and Secondary Industry
Industrial production includes iron and steel-making, mineral fertilisers, sulfuric acid, transport vehicles including passenger vehicles, aircraft including hang-gliders and para-gliders, ship-building and aerospace vehicles. Consumer goods that are an extension of iron and steel manufacture (in many countries, the same companies that make iron and steel also produce items that incorporate iron and steel) which are made in Ukraine include refrigerators and washing-machines. As of 2012, steel accounted for about 40% of total exports and manufacturing made up 14.6% of the country’s GDP and employed 13% of the Ukrainian workforce.
Tertiary / Service Industries
Ukraine has a well-developed IT sector – in part a legacy of the Soviet period during which aircraft, transport vehicle and aerospace manufacturing were developed, requiring technical and engineering knowledge and education – spread across the country with most firms concentrated in and around Kyiv and Kharkiv in the east: according to the Wikipedia article on the Ukrainian economy, the country had the fourth largest number of certified IT professionals in the world in 2013 after the US, India and Russia. In 2013, the value of the IT outsourcing industry in Ukraine was US$2 billion.
Access to the Internet in Ukraine is good, particularly in the cities, and Ukraine has one of the highest Internet access speeds in the world. Broadband services and WiFi hot-spots are available in cities and mobile data services are available in urban areas, airports, roads, railways and coastal waters. Online retail, ticketing and banking services are available and Ukraine is one of the fastest growing E-commerce markets in Europe. The popularity of online retail and trading might suggest it compensates in part for deficiencies in other sectors of Ukraine’s economy in the same way that in some Third World countries, mobile phone usage compensates for the lack of traditional telephone landline networks. The country’s largest Internet access provider, Ukrtelecom is owned by an Austrian investment company.
The country’s transport infrastructure is run-down and imposes a number of costs on the economy in terms of safety, quality, fuel usage and environmental impact. Bad roads mean longer journey times for cars and trucks (translating into more petrol use if certain roads have to be closed and vehicles need to find alternative routes) and more accidents which themselves impose a burden on medical and social services, and the infrastructure that supports these. Companies absorb the transport costs by passing them on to their customers who in turn pass these and other transport costs they accumulate on to their customers, and so on all the way down to the end users: the general public. In this way, everyone ends up paying the price for an inefficient transport network. Even so, the network is adequate for Ukraine’s basic economic needs – its problem is that it needs upgrading and for that, capital investment is required. Railway stock in particular needs to be modernised.
According to Wikipedia, Ukraine is the 8th most popular destination in Europe for tourists, and tourism accounted for 2.2% of the country’s GDP in 2012 and employed 1.7% of the workforce in the same period. Tourists are classified as shopping tourists (mainly from neighbouring countries where prices are higher than what they are in Ukraine for the same items), dental tourists (those tourists seeking dental care that is cheaper than in their home countries), and classic recreational / sightseeing tourists.
The banking industry is overseen by the National Bank of Ukraine and consists of over 180 banks, both state-run and private. Large local private banks include PrivatBank, the largest commercial bank in the country, owned by oligarch-politician Ihor Kolomoisky; Imexbank, owned by Leonid Klimov; and System Capital Management Holdings, owned by Rinat Akhmetov, another oligarch-politician. A number of foreign banks including Sberbank (Russia), Prominvestbank (Russia), PravexBank (owned by Intesa Sanpaolo Group in Italy) and BNP Paribas (France) also have offices in the country.
Other Observations
Most Ukrainians have become poor since 1991 and there are many social problems such as alcoholism and AIDS. The poverty and social stresses are reflected in life expectancy which decreased during the 1990s. Infant mortality rates increased during the same period. Infrastructure such as roads and utilities are in a poor state; the water supply and its quality in the country are a major concern and diseases such as cholera, typhoid, dysentery and hepatitis are present.
Economic Issues and Problems
The fact that a number of major commercial banks (plus other enterprises in other industries) are owned by wealthy politicians either directly or indirectly poses not just a conflict of interest for the country’s governing elite but also a threat to good governance, financial transparency and accountability, and ultimately Ukraine’s long-term development potential as local and foreign investors will view the country as hopelessly corrupt. This affects all other sectors of the Ukrainian economy: if Ukrainian business practice and government enforcement of laws that regulate business and finance are seen to be compromised because of the extreme concentration of business ownership and wealth in the hands of a few who also happen to dominate the country’s politics, much-needed foreign investment will avoid the country altogether and all major sectors of Ukraine’s economy will shrink and starve for lack of capital.
In a country that is virtually a plutocracy, the efficient collection of taxes may well be a pipe-dream and the taxation laws a laughing-stock: if the rich who pull the purse-strings as well as the puppet-strings don’t pay their share of tax or they resort to tax evasion and don’t care that others will notice, ordinary people will follow their example. Essential services and infrastructure that rely heavily on taxation revenue for funding end up undeveloped and run-down, and become ripe for privatisation (which may have been the original intention all along). There’s the possibility that in some parts of the country, wealthy oligarch-politicians may spend money on services that would normally be funded by government at national, regional or local level but this means that the people who benefit from this are basically bought by their benefactor and eventually owe him (maybe her) protection money or its equivalent.
It’s true that manufacturing in Ukraine does suffer from inefficiencies which make it uncompetitive with Western manufactures; in the early 1990s, such inefficiencies could be blamed on the country’s inheritance of centralised state planning which by its nature of top-down decision-making was slow to respond to consumer and enterprise demands. However other European countries that were formerly part of the Soviet orbit, and which gained independence only a couple of years before or at the same time as Ukraine, have passed through their baptism of fire faster and successfully as well, though they continue to struggle with problems arising from their transition to market economies. The issue is that in adjusting to market economics and in becoming a market economy, Ukraine was compelled to undergo the kind of neoliberal economic shock treatment (yes, I have read the Naomi Klein book “The Shock Doctrine”) that other countries like Poland and Russia had to swallow. The kind of steady transition that a Sweden or a France could afford was not an option offered to Ukraine by a West enamoured of Thatcher-Reaganite economic policies. While many eastern European countries were able to transition successfully to market economies thanks to historic links with Germany or Sweden (which meant that German and Swedish companies invested in those countries and passed on aspects of their corporate, managerial and industrial cultures), Ukraine did not have that kind of luck due in part to its peculiar origin as a patchwork nation of peoples with different cultures, religions and histories. Western Ukraine looks to the West because of its historic links to the Poland-Lithuanian Commonwealth and the Austro-Hungarian empire and Eastern Ukraine looks to Russia due to long-standing historical and ethnic links with that country. In addition, the political elites who have governed Ukraine since 1991 have often proven incompetent, corrupt, arrogant and self-serving.
The country has significant environmental issues including industrial pollution and radiation issues that are a legacy of the 1986 Chernobyl nuclear reactor explosion which released a huge cloud of radioactive particles that drifted as far north as Finland in the immediate aftermath and contaminated soils in and around the town of Chernobyl itself.
Conclusion
From the foregoing, we can see there is tremendous potential for Ukraine to regain its role as bread basket for Russia, much of eastern and central Europe, and even beyond; the main thing holding back the country is its political leadership which seems to be in a permanent state of crisis and chaos. This has many deep consequences that affect the country in many ways: lack of clear political and economic goals translates into lack of investor confidence in the country’s leadership which itself means desperately needed local and foreign investment is lacking. As a result, several economic sectors, all of which depend on one another, suffer stymied development. An efficient transport network is needed to transport agricultural and industrial output and the machinery and other capital needed by the relevant sectors to produce goods.
It has to be said also that cronyism is rife and is probably Ukraine’s biggest political and economic problem. While President Viktor Yanukovych (2010 – 2014) was associated with cronyism in the Western news media, other politicians in Ukraine – former Prime Minister Yulia Tymoshenko and PrivatBank owner Ihor Kolomoisky come to mind – are equally, if not more so, up to their eyeballs and beyond in corruption. Kolomoisky in particular is an unsavoury character who does not hesitate to use armed thugs in launching takeovers of companies he takes a shine to. Tymoshenko spent time in jail for acting without authority from the Ukrainian government as Prime Minister in negotiating a gas deal with Russia in 2009.
With the overthrow of Yanukovych in February 2014 and his government’s replacement by one led by Turchynov and Yatseniuk until mid-May of the same, when presidential elections brought Petro Poroshenko, owner of a major confectionery business, to power, the crony capitalist order seems set to continue. As of this time of writing, Poroshenko still has not divested himself of his interests in the confectionery business despite pledging during his election campaign that he would do so. As Ukraine slides deeper into all-out civil war that began in April 2014, the transformation from bread basket to basket case is almost complete.
Sources
“The Europa World Yearbook 2013” (Volume 2: K – Z) (24th edition), Routledge: Taylor & Francis Group, Oxford
Ilan Greenberg, “A Ukrainian Brain Drain”, The New Yorker, June 20 2014, http://www.newyorker.com/business/currency/a-ukrainian-brain-drain
James Nadeau, “Ukraine’s real problem: crony capitalism”, The Hill, January 15, 2014, http://thehill.com/blogs/congress-blog/foreign-policy/195549-ukraines-real-problem-crony-capitalism
Sara Pendergast and Tom Pendergast (editors), “Worldmark Encyclopedia of National Economies (Volume 4: Europe)”, Gale Group, Farmington Hills, 2002
Barry Turner (editor), “The Statesman Yearbook 2014: the Politics, Cultures and Economies of the World”, Palgrave Macmillan, London, 2013
“Ukrainian IT Market 2013: Fresh Stats and Forecasts”, Intersog.com, http://intersog.com/blog/ukrainian-it-market-2013-fresh-stats-and-forecasts/
Andrew Wilson, “The Ukrainians: Unexpected Nation”, Yale University Press, London, 2000
“The World Economic Factbook 2014” (21st edition), Euromonitor International (Australia) Pty Ltd, Sydney, 2013
Wikipedia Source Articles
Banking in Ukraine / Beekeeping in Ukraine / Economy of Ukraine / Internet in Ukraine / List of Countries by GDP / National Bank of Ukraine / PrivatBank / Transport in Ukraine / Ukrtelecom