Ukraine - International University of Japan · edge” or “borderland”, and for most of the past millennium Ukraine has been exactly that—a frontier region split between neighbouring

COUNTRY PROFILE 2001

UkraineThis Country Profile is a reference tool, which providesanalysis of historical political, infrastructural and economictrends. It is revised and updated annually. The EIU’sCountry Reports analyse current trends and provide atwo-year forecast

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EIU Country Profile 2001 © The Economist Intelligence Unit Limited 2001

Comparative economic indicators, 2000

1


Contents

3 Basic data

4 Political background4 Historical background8 Constitution and institutions

10 Political forces14 International relations and defence

17 Resources and infrastructure17 Population18 Education18 Health19 Natural resources and the environment19 Transport and communications20 Energy provision

23 The economy23 Economic structure24 Economic policy28 Economic performance30 Regional trends

31 Economic sectors31 Agriculture33 Mining and semi-processing33 Manufacturing35 Construction35 Financial services38 Other services

38 The external sector38 Trade in goods41 Invisibles and the current account42 Capital flows and foreign debt45 Foreign reserves and the exchange rate

46 Appendices46 Regional organisations49 Sources of information50 Reference tables50 Population51 Labour force51 National energy statistics51 Consolidated government budget52 Money supply52 Interest rates52 Gross domestic product52 Gross domestic product by expenditure53 Gross domestic product by expenditure53 Prices and earnings54 Agricultural and livestock statistics

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54 Industrial production55 Sectoral origin of industrial production55 Banking statistics55 Trade in goods and services56 Main trading partners56 Main composition of trade56 Balance of payments, IMF series57 External debt, World Bank series58 Foreign reserves58 Exchange rates

Ukraine 3

© The Economist Intelligence Unit Limited 2001 EIU Country Profile 2001

Ukraine

Basic data

603,700 sq km, of which about 58% is cultivated

49.45m (January 2000)

Population in ‘000, 1995

Kiev (capital) 2,635Kharkiv 1,576Dnipropetrovsk 1,162Odessa 1,160Donetsk 1,102Lviv 806

Situated in the central part of the northern temperate zone, Ukraine has amoderate continental climate with four distinct seasons. The southern coast ofCrimea has a Mediterranean climate. The average yearly temperature in Kiev is7.2°C. The coldest month is January, when the average temperature is 5.8°C,and the hottest month is July, when the average temperature is 19.3°C.Precipitation in the Kiev region averages 600 mm per year

Ukrainian, a member of the East Slavonic group, is the official language;however, Russian is as widely spoken in eastern Ukraine, Kiev and parts of thecountryside

Metric system

The hryvnya replaced the karbovanets on September 2nd 1996 at the rate ofHRN1:Krb100,000. Average exchange rate in 2000: HRN5.44:US$1. Exchangerate on June 28th 2001: HRN5.38:US$1

Two hours ahead of GMT

January 1st (New Year); January 7th (Christmas, Orthodox Church calendar);March 8th (International Women’s Day); May 1st and 2nd (Labour Day); April13th and 15th (Good Friday and Easter, Orthodox Church calendar, variable);May 1st-2nd (Labour Day); May 9th (Victory Day); June 3rd (Holy Trinity,variable); June 28th (Constitution Day); August 24th (Independence Day).

Land area

Population

Main towns

Climate

Language

Currency

Time

Public holidays

Measures

4 Ukraine


Political background

Ukraine’s political system has developed from the legacy of the Sovietinstitutional structures it inherited—impinging on the role of the government,development of civic society and the pace of economic reform. The presentsystem is a based on a presidency and a unicameral parliament. The presidentappoints the government—ministers are not elected—and controls the keypower structures, including the security services. Although parliamentaryapproval is de jure required for major policy changes and governmentappointments, the legislature’s disparate factions have led to a steady ebb in itspower in favour of the presidency.

The current president is Leonid Kuchma, who was first elected in July 1994 andre-elected in November 1999. The prime minister, Anatoly Kinakh, securedparliamentary approval in May 2001. Ukraine’s legislature, the VerkhovnaRada, which was elected in March 1998, lacks any solid majority coalitionfollowing the de facto collapse of the loose centre-right majority that emergedafter the presidential election held in late 1999. The Communist Party ofUkraine (CPU) is the largest single faction and controls approximately one-quarter of the chamber. Most of the other groups in parliament generally fallinto two camps—right-wing parties that favour faster reforms and are critical ofMr Kuchma’s record, and a larger group of centrist factions that are mostlycontrolled by powerful business oligarchs and more closely aligned withMr Kuchma’s presidential administration. The next parliamentary election isdue by March 2002.

Historical background

Until the Soviet Union’s collapse in 1991, Ukraine had never existed as anindependent state. Literally translated, the country’s name means “on theedge” or “borderland”, and for most of the past millennium Ukraine has beenexactly that—a frontier region split between neighbouring powers.

From the ninth to the 13th centuries Ukraine was the centre of Kievan Rus, aloose collection of princedoms founded by Viking merchant-adventurers,which gave birth to Slav civilisation. With the arrival of a Mongol army undera grandson of Genghis Khan in 1240, Ukraine experienced the first of a seriesof invasions, which were to last for more than 700 years. In 1362 the Mongolswere driven out by the Grand Duchy of Lithuania, which in 1569 merged withthe kingdom of Poland to form the Polish-Lithuanian Commonwealth. Notuntil 1654 did Ukraine forge ties with Russia, when a peasant uprising led bythe Cossack leader Bohdan Khmelnitsky resulted in the handover of Ukrainianlands east of the river Dnieper to Muscovy. The last vestiges of Ukrainianautonomy were lost to the Russian empress Catherine II in 1781; two yearslater she annexed Crimea, previously an Ottoman protectorate. In 1795, underpressure from more Cossack rebellions and Russian expansionism, the PolishCommonwealth collapsed, leaving western Ukraine under the control of theAustro-Hungarian empire.

Early Slavdom was centredin Ukraine

Ukraine 5


Modern Ukraine’s national movement emerged in the 19th century. InRussian-ruled eastern Ukraine it centred on use of the Ukrainian language,which was developed as a literary medium by a poet, Taras Shevchenko. In theHabsburg-ruled west, Ukrainians were free to form their own cultural andpolitical institutions with the Poles, who dominated the region until thesecond world war. The movement came to a head in the chaotic aftermath ofthe Russian revolution, when Ukrainian nationalists, backed by volunteerarmies, declared independence in Kiev and in the western capital of Lviv. Bythe end of 1918, however, the Russian Red Army had swept away theUkrainian People’s Republic that was centred on Kiev, and the Poles hadregained control of the West Ukrainian National Republic based in Lviv—asituation that the victorious Allies were not inclined to reverse at the Parispeace conference of 1919.

Between the two world wars the territory of present-day Ukraine was splitbetween the Soviet Union in the east, and Poland, Romania andCzechoslovakia in the west. On the Polish side of the border, moderateUkrainian parties increasingly lost ground to the Organisation of UkrainianNationalists (OUN), an extremist group that provoked violent reprisals byassassinating government officials. In the east, Ukrainians under Soviet rulesuffered in the Stalinist purges. Between 1929 and 1933 deportations and anartificially induced mass famine are estimated to have killed 5m people.

A new wave of terror swept Ukraine with the German invasion of 1941.Whereas the vast majority of Ukrainians joined the Soviet army, in the westthe OUN and other nationalist groups initially supported the Nazis. However,when Germany’s unwillingness to back Ukrainian statehood became clear, thenationalists formed an independent partisan army, the remnants of whichsurvived into the 1950s. During the German occupation Ukraine lost one in sixof its population, nearly half of them Jews.

With the Soviet Union’s takeover of western Ukraine in 1945, and the transferof Crimea to the republic in 1954, Ukraine attained its present-day borders.The thaw under Nikita Khrushchev saw the beginnings of a dissidentmovement, centring, as under the tsars, on the language issue. The leader ofthe CPU from 1963, Petro Shelest, allowed a limited cultural revival in therepublic, but was replaced in 1972 by the more hardline VolodymyrShcherbytsky. As a result, Ukraine was one of the last Soviet republics to benefitfrom Mikhail Gorbachev’s policy of glasnost (openness), and it was not untilthe sacking of Shcherbytsky in 1989 that Ukraine saw large-scale anti-Communist demonstrations, led by Rukh, the newly formed opposition group.

As in the rest of the Soviet Union, events moved with bewildering rapidity in1989-91. The Uniate and Ukrainian Orthodox churches were legalised;environmentalists began to speak out on the 1986 nuclear accident atChernobyl; and historians spoke out about the terror and famine of theStalinist period. In Mr Gorbachev’s semi-free parliamentary election of March1990, Rukh won one in four seats, mostly in Kiev and western Ukraine. In Julyof the same year Communist deputies joined forces with the nationalists todeclare Ukrainian sovereignty and to claim the supremacy of Ukrainian law

Ukraine was dividedbetween east and west

Full incorporation into theSoviet Union in 1945

Dissoluton of the USSR andindependenc in 1991

6 Ukraine


over Soviet law, along with Ukraine’s right to its own armed forces andcurrency. The following January an emerging nationalist-communist blocwithin the CPU, led by Leonid Kravchuk, gained strength in opposition to theshooting of unarmed demonstrators in Lithuania. In March 1991 Mr Kravchukundermined Mr Gorbachev’s referendum on the maintenance of the SovietUnion by inserting into the referendum his own question on Ukrainiansovereignty. Although 70% of the population voted for the preservation of theSoviet Union, 80% also approved of Mr Kravchuk’s proposal that Ukrainebecome part of a looser union of sovereign states.

Events came to a head on August 19th 1991 with an attempted coup byhardliners in Moscow. Mr Kravchuk and his colleagues were faced with achoice: to declare for the Soviet Union and risk being undermined if the SovietUnion broke up, or to throw in their lot with the nationalists and stay inpower at the head of an independent Ukraine. After three days ofprevarication, Mr Kravchuk opted for the latter. On August 24th he banned theCPU and resigned his CPU posts; later that day the Ukrainian parliamentdeclared independence.

Having transformed himself from a communist ideologue into a Ukrainiannationalist, Mr Kravchuk won over 60% of the vote in the presidential electionheld on December 1st 1991. A simultaneous referendum to confirm parlia-ment’s declaration of independence was supported by 90% of voters. EvenRussian-speaking eastern Ukraine and Crimea seem to have believed that theUkrainian economy would prosper after independence and voted in its favour.

However, Mr Kravchuk failed to capitalise on the opportunity to implementpainful but crucial economic reforms quickly during the period of post-independence optimism. Ukraine, like other former members of the Councilfor Mutual Economic Assistance (CMEA, or Comecon), faced an enormouscollapse in output following the dissolution of the Soviet Union and ofComecon. Despite widespread use of price controls, large-scale direct monetis-ation by the National Bank of Ukraine (NBU, the central bank)—and indirectlyby the government, through the use of fiscal and quasi-fiscal instruments—ledto hyperinflation, a rapid fall in real incomes and rising poverty.

In October 1992 Mr Kravchuk replaced his unpopular prime minister, VitoldFokin, with a relatively unknown technocrat, Mr Kuchma, formerly the headof the Pivdenmash missile factory in Dnipropetrovsk. Mr Kuchma pressed forfaster economic reform, but never received Mr Kravchuk’s full backing and wasforced to resign in September 1993. Continued economic collapse and growingpublic discontent finally compelled Mr Kravchuk to agree to earlyparliamentary and presidential elections.

Mr Kuchma defeated Mr Kravchuk in the second round of the presidentialelection in July 1994, winning 52% of votes cast. Voting patterns split sharplybetween east and west. Nationalist western Ukraine perceived Mr Kuchma aspro-Russian, and therefore opted for Mr Kravchuk, whereas Russified easternUkraine voted overwhelmingly for Mr Kuchma. It is not clear to what extentthe Kuchma bid received financial backing from Russian interests. However,

Economic collapse followedindependence

The 1994 elections

Ukraine 7


once elected, it soon became obvious that Mr Kuchma had no intention ofbecoming a Russian puppet. During the first Kuchma administration (1994-99)Ukraine distanced itself from the Russian orbit and built new ties with the West,as well as favouring the formation of a new strategic grouping excluding Russia,such as the countries comprising GUUAM (Georgia, Ukraine, Uzbekistan,Azerbaijan and Moldova). Mr Kuchma was assisted in reducing Ukraine’sreliance on Russia by less coherent Russian foreign policy under the ailingpresidency of Boris Yeltsin, although under Vladimir Putin’s presidency Russiahas been using its economic leverage to increase its influence over Ukraine.

In November 1994, fresh from his electoral success, Mr Kuchma unveiled aradical IMF-approved economic stabilisation programme and promotedreformers within the government. However, reforms remained unpalatable toleft-wingers, who commanded a majority in parliament after the election ofMarch 1994. These included members of the CPU, the Socialist Party ofUkraine, the Agrarians and a number of independents. To overcome oppositionto his programme, Mr Kuchma sought to increase the president’s powersthrough the introduction of a temporary constitution in June 1995. Theagreement provided Mr Kuchma with limited special powers for a one-yearperiod until the adoption of a new, permanent constitution. Parliamentretained some powers, in particular the right to pass legislation and vetopresidential decrees, but promised to use them sparingly. In return, thepresident appeared to concede that his reform programme should bemoderated, and demoted important reformers.

Important recent events

March 1994: Socialists and communists win a majority of seats in Ukraine’sfirst post-independence parliamentary election.

July 1994: Leonid Kuchma defeats Leonid Kravchuk in a presidential election.

June 1996: Parliament approves a new constitution under which it maintainssignificant powers.

September 1996: A new currency, the hryvnya, is introduced, replacing thekarbovanets.

March 1998: The left consolidates its power in a parliamentary election heldunder a new semi-proportional system. A partnership and co-operationagreement with the EU signed in June 1994 comes into effect on March 1st.

September-December 1998: Financial and real sector instability increasessharply in the wake of Russia’s rouble devaluation.

March 1999: Ukraine’s parliament votes to join the inter-parliamentaryassembly of the Commonwealth of Independent States (CIS) and ratifies theagreement between Russia and Ukraine on the division of the Black Sea Fleet.This allows the bilateral Friendship, Co-operation and Partnership Treaty,finally ratified by the upper house of the Russian parliament in February 1999,to enter into effect.

November 1999: Mr Kuchma wins re-election to a second presidential term,and promises faster economic reforms.

8 Ukraine


December 1999: A new centre-right majority forms in parliament andapproves a pro-reform cabinet headed by Viktor Yushchenko, a former centralbank chief.

April 2000: Voters in a constitutional referendum appear to lendoverwhelming support to proposals for increasing the relative power of thepresidency and altering the structure of parliament.

November 2000: The release of secretly recorded audio tapes promptswidespread anti-Kuchma demonstrations by giving rise to allegations ofpresidential involvement in serious abuses of power, including thedisappearance and apparent murder of an opposition journalist.

April 2001: The popular reformist prime minister, Viktor Yushchenko, isdismissed by parliament and replaced one month later by Anatoly Kinakh, aclose presidential ally.

Constitution and institutions

Despite the initial constitutional compromise reached between the presidencyand parliament in 1995, the power struggle between the two institutions con-tinued, resulting in only slow, piecemeal implementation of the government’sreform programme. Reformist deputies became sceptical of Mr Kuchma’sability or will to push through changes, and, like their Communistcounterparts, opposed his plans to increase the powers of the presidency at theexpense of parliament. This resulted in the adoption by parliament of a newconstitution on June 28th 1996, under which parliament succeeded inretaining significant powers, in particular the right to initiate legislation and toveto key presidential appointments. The process of constitutional reformcontinued into 1997, when parliament adopted a law on the Cabinet ofMinisters. This streamlined decision-making and reduced the number ofministries—although powerful opposition from vested interests precludeddeeper reform of Ukraine’s inefficient bureaucratic structures, with officialsfrom the old ministries moved to other ministries or new committees—without any net reduction in public-sector employment.

In September 1997 parliament passed a new electoral law under which half ofits 450 seats were elected from single-seat constituencies, as previously, andhalf from party lists according to a system of proportional representation. Thislaw favoured parties with strong organisation, such as the CPU, and as suchwas initially opposed by Mr Kuchma. It was designed to reduce the number ofunaligned independent deputies and thereby consolidate Ukraine’s fledglingparty system. Mr Kuchma has vetoed subsequent efforts by parliament tointroduce further electoral-law changes. The threat exists that he will similarlyveto the latest set of changes, which were approved in June 2001 and wouldreduce the number of single-seat constituencies from 225 to 115.

Ukraine is divided into 24 oblasts (regions), as well as the autonomous republicof Crimea and the city of Kiev, which enjoys a special status on a par with thatof an oblast. Each region is further subdivided into raions (districts). Each oblast

The new constitutionof 1996

Electoral law reforms

Regionalisation

Ukraine 9


and raion has its own elected Council of Deputies and a parallel state admin-istration. The state administration in each region is headed by a presidentiallyappointed governor. Although Crimea has its own constitution, parliamentand government, these remain subordinate to the central government in Kiev.

Unlike in Russia, with its strongly presidential constitution, power in Ukraine isat present evenly divided between the president and parliament, although thejudiciary also plays an important role. Both the president and parliament retainthe right to initiate legislation, with the president retaining a veto overparliamentary bills. Although the president nominates candidates to the mostimportant positions of state, such as the prime minister, the chairman of theNational Bank of Ukraine (NBU, the central bank) and the chairman of theState Property Fund (SPF), these are subject to approval by parliament.Alongside its legislative role, parliament also oversees government activities.Accordingly, parliament must approve the state budget and an annual privatis-ation programme presented by the SPF. However, the presidency is likely tohave increased its control over the government with a decree issued in May2001 to establish “state secretary” positions in all ministries. These new postswould be appointed by and responsible to the president, and would take overmany of the responsibilities currently residing with ministers, including controlover ministry budgets. The constitutional court acts as the highest judicial bodyin the land and serves as arbiter of constitutional issues. The court comprises18 judges, of whom the president, parliament and the board of judges eachnominate six. Members of the court were chosen for the first time in 1996.

Questions over the relative powers of the executive and legislative branchesremain a source of considerable dispute among Ukraine’s political leaders.Mr Kuchma has long advocated a bicameral parliament and other measures toreduce parliamentary powers and strengthen the role of the presidency—amove that many parliamentarians strongly resist. In the wake of his 1999re-election Mr Kuchma pushed for a popular referendum on amending theconstitution to shift the balance of power in favour of the presidency at theexpense of parliament. The April 2000 constitutional referendum that followedprompted criticism from domestic sources and West European institutionsfearful that Mr Kuchma intended to reduce parliamentary powers bypotentially extra-constitutional means. Despite protestations from hisopponents that the referendum had been marred by fraud, Mr Kuchma hasused the overwhelming support suggested by the referendum results tocontinue pushing for several major changes, including lifting the legalimmunity of deputies; reducing the number of deputies from 450 to 300;establishing a bicameral legislature; and granting the president the right todismiss parliament if it is unable to form a stable parliamentary majoritywithin one month or approve a budget within three months.

All four of these measures put Mr Kuchma into direct confrontation withparliament. Mr Kuchma’s doubts over parliament’s willingness to approve hisconstitutional amendments, combined with his political difficulties related toserious allegations of wrongdoing stemming from the release of secret audiorecordings in November 2000, have pushed the constitutional amendment

The balance of power

The 2000 constitutionalreferendum

10 Ukraine


question off of the top of the presidential agenda for the time being. However,Mr Kuchma has by no means abandoned his efforts to increase presidentialpowers and is likely to revisit the issue following the March 2002parliamentary election. Although constitutional amendments in line with thereferendum results could help to streamline Ukraine’s dysfunctional politicalstructures, they could prove ineffective (and potentially harmful) unlessaccompanied by wider-reaching political reforms. Presidential powers todissolve parliament and a reduction in the number of deputies will not ensurethe transparent and broad-based political parties needed for a stable andresponsive legislature. Similarly, eliminating the immunity of deputies willonly be a positive step if accompanied by reforms to Ukraine’s capricious legalsystem, and accountability of the unelected presidential and governmentalapparatus. A move to bicameralism is also not inherently problematic, but itleaves many questions unanswered, including how regional representatives tothe upper chamber would be chosen.

Political forces

Structure of parliament, Jun 2001

Party No. of seats % of total

Communist Party of Ukraine (CPU) 113 25.1

Trudova (Labour Ukraine) 46 10.2

United Social Democratic Party of Ukraine 36 8.0

Motherland (Batkivshchyna) Party 26 5.8

Democratic Union 24 5.3

Ukrainian People’s Movement (Kostenko) 22 4.9

Solidarity 21 4.7

Ukraine’s Regions 20 4.4

Green Party of Ukraine 17 3.8

Socialist Party of Ukraine 16 3.6

People’s Democratic Party 16 3.6

Reforms-Congress 15 3.3

Yabluko 15 3.3

People’s Movement of Ukraine (Udovenko) 14 3.1

Vacant or without factions 49 10.9

Total 450 100.0

Source: Unian News Agency.

The dynamics of Ukraine’s post-independence political scene were influencedto a considerable extent by the country’s unconsolidated political party systemand the strength of left-wing political groups. Left-wing parties have performedstrongly in the two parliamentary elections held since independence—although in both cases they failed to win the outright majority needed to gainfull control of the legislative branch. The left’s control over 25% of parliamentfollowing the 1994 election sufficed to block both reformers and centrists fromgaining the upper hand in parliament, given the right wing’s disunity and the225 seats captured by independents. With no group able to secure a stable

Parliamentary elections in1994 and 1998

Ukraine 11


majority, the more or less even distribution of power between reformers, anti-reformers and centrists paralysed the legislative process.

The failure of the March 1998 election to produce a stable majority led to fur-ther legislative ineffectiveness and minimal reform progress. Ukraine’s left-wingparties consolidated their strength even further in this election, with the CPUincreasing its share of seats from 91 to 122. Once again, the communistsrepeatedly benefited from centre-right disunity and the large number of indep-endents elected to form shifting coalitions capable of blocking reform proposals.

Main political figures

Leonid Kuchma: Formerly the director of the Pivdenmash missile factory inDnipropetrovsk, Mr Kuchma served as prime minister under Leonid Kravchukbefore winning election to the presidency in July 1994. Although Mr Kuchmafailed to live up to his promises to accelerate economic reforms, he won re-election in November 1999 by capitalising on his own tight control of themedia and state administration, and on divisions among left-wing candidates.Mr Kuchma increased his emphasis on economic reform during the first year ofhis new term by appointing a reformist government and pushing for theformation of a centre-right parliamentary majority. However, he refused toprovide the new cabinet with solid political support, and preferred to continuebalancing the various interests with which he needed to contend—includinganti-reformist interests within his own administration and the powerfulbusiness “oligarchs” in parliament. Since the release of secret audio recordingsin November 2000 Mr Kuchma has faced serious allegations of abuses ofpresidential powers, including involvement in the disappearance and murderof an opposition journalist. Although Mr Kuchma has outlasted sustainedstreet demonstrations calling for his ouster, these allegations havecompromised his administration and raised serious questions about hiscommitment to greater political transparency.

Viktor Yushchenko: As chairman of the National Bank of Ukraine (NBU,the central bank) until 1999, Mr Yushchenko’s sound monetary policy wonhim widespread respect both in Ukraine and abroad. Although he would haveenjoyed strong support among right-wing parties, he chose not to stand in the1999 presidential election. Following Mr Kuchma’s re-election in late 1999,Mr Yushchenko was chosen to head Ukraine’s most reformist cabinet to date.The Yushchenko cabinet achieved a number of successes—notably in fiscalconsolidation and reform of the energy sector that underpinned a rapid fall inthe non-cash economy—and independent Ukraine’s first year of economicgrowth in 2000, despite facing opposition from oligarch-led factions inparliament and enjoying only lukewarm support from the presidentialadministration. In April 2001 this lack of presidential support and a temporarycoalition of communists and oligarchs, whose energy-sector interests had beendamaged by reforms, finally secured Mr Yushchenko’s ouster. With aparliamentary election due by March 2002, Mr Yushchenko is seen as the keyto ensuring greater consolidation among the notoriously divided right-wing,pro-reform parties. Mr Yushchenko remains by far the most popular politicianin the country and represents the right’s best hope of beating left-wing andoligarchic factions in the election.

12 Ukraine


Anatoly Kinakh: Parliament approved Mr Kinakh to succeedMr Yushchenko as prime minister in late May 2001. A close ally of thepresident, Mr Kinakh served as a deputy prime minister in the government ledby Valery Pustovoitenko, and has headed the Union of Ukrainian Industrialistsand Entrepreneurs (UUIE), an industrial lobbying group previously led byMr Kuchma. Mr Kinakh has pledged to continue his predecessor’s reformprogramme, but has also pushed for greater state support and protection fortraditional industrial sectors. Despite parliament’s vote to approve hisnomination, Mr Kinakh lacks any solid parliamentary support base, especiallyas the oligarchic factions that voted for him subsequently saw their demandsfor greater cabinet control go unmet. Instead, his principle source of politicalsupport comes from the presidential administration, which will enjoy greatercontrol over government policy than during the Yushchenko cabinet.Mr Kinakh’s prime ministership is therefore expected to be less reform-driventhan Mr Yushchenko’s. With no political base and from an industrial back-ground, Mr Kinakh represents a “safe pair of hands” to the president, allowinggreater presidential control over policymaking and day-to-day decisions.

Mr Kuchma’s victory in the 1999 presidential election brought a decisive shiftin the left’s fortunes. Despite his unpopularity following years of economicdecline (culminating in the 1998 financial turmoil), Mr Kuchma successfullyused his tight control over the media and the state administration to capitaliseon the left’s disunity. The left’s inability to agree on an electable moderate jointcandidate assured Mr Kuchma of a second-round run-off against the relativelyhard-left CPU leader, Petro Symonenko. Mr Kuchma used his domination ofthe media to appeal to voters who, although not satisfied with Mr Kuchma’sfirst-term performance, were wary of a return to power by the far left. Thisstrategy allowed Mr Kuchma to win a decisive victory over Mr Symonenko.

The left’s poor showing in the presidential election sparked further party shiftsand significantly weakened the power of left-wing parliamentary factions. Themost important catalyst for the left’s demise, however, was Mr Kuchma.Shortly after his election victory Mr Kuchma threatened to call a referendum toreduce the legislative branch’s power unless deputies formed a pro-governmentmajority. This prompted greater co-operation among centrist and right-wingdeputies, many of whom were eager to prevent Mr Kuchma from carryingthrough with his threat—which would have greatly increased the chance of anearly parliamentary election. Within months of his re-election, therefore,Mr Kuchma had ensured an unprecedented degree of co-operation among thedisparate groups on the centre and right wing, and secured parliamentaryapproval for a pro-reform government led by the former central bank head,Mr Yushchenko. In January and February 2000 the new parliamentary majoritywrested control of the parliamentary leadership from left-wing factionsfollowing a dramatic political stand-off.

The new-found strength of non-leftist groups in parliament nevertheless failedto produce a victory for pro-reform political forces. Only a subsection of thenew majority was firmly in favour of reforms. The majority also includedopportunistic independents and former left-wing deputies eager to avoid the

1999 presidential electionand centre-right majority

The reformists have yet togain the upper hand

Ukraine 13


dissolution of parliament, as well as powerful factions less committed to thesuccess of the government’s pro-reform agenda than to their own business andregional interests. These fundamental divisions within the loose centre-rightmajority became increasingly evident by mid-2000, and finally split themajority once serious allegations of high-level wrongdoing on the part ofMr Kuchma surfaced in November 2000. Right-wing factions came out openlyin opposition to the presidential administration and, subsequently, toMr Yushchenko’s dismissal—and refused to back the vote in favour ofMr Kinakh in late May 2001. They have relied on ad hoc and fragile coalitionsin order to pass reformist legislation, and, more often than not, have foundtheir former partners among the centrist oligarch-led factions willing to join upwith left-wing factions to defeat these measures.

The Gongadze case

At the end of November 2000 the Socialist Party leader, Oleksandr Moroz,precipitated a political uproar by producing an audio recording that he claimsimplicates the president, Leonid Kuchma, and other top officials in thedisappearance in September of an outspoken opposition journalist, GeorgyGongadze. Mr Moroz claims to have received the secretly recorded tape froman officer of the Ukrainian security service.

The recording includes a discussion about Mr Gongadze that Mr Moroz claimstook place between Mr Kuchma, the head of the presidential administration,Volodymyr Lytvyn, and the interior minister, Yuri Kravchenko, shortly beforethe journalist’s disappearance. Ukrainian officials have since identified aheadless corpse found in December to be Mr Gongadze’s body.

Mr Kuchma has denied any wrongdoing and has dismissed the allegations as a“provocation”. The presidential administration subsequently agreed thatMr Kuchma’s voice is on the tapes, but asserts that the conversations werespliced together from isolated sentence fragments. The widespread attentionthat these allegations have received has damaged Mr Kuchma and hisentourage—both in Ukraine and abroad.

The Kuchma administration’s inept investigation of the Gongadze affairattracted considerable international criticism and even more attentiondomestically, despite the limited coverage it received in the state-run mediaand media outlets controlled by Mr Kuchma’s allies.

Despite widespread passivity and the country’s polarised political scene, theincident brought together grassroots activists and political parties of both leftand right in a sustained protest campaign called “Ukraine without Kuchma”.Between December 2000 and March 2001 this campaign dominated thepolitical scene by organising sustained public demonstrations in Kiev andregional centres demanding Mr Kuchma’s resignation. Although Mr Kuchmahas been seriously damaged by this crisis, he appears nevertheless to haveoutlasted his opponents. After a large demonstration to protest the dismissal ofthe popular prime minister in late April, widespread demonstrations havedisappeared from Ukraine’s political scene, and the fragile opposition coalitionhas been divided over disagreements on how to proceed.

14 Ukraine


International relations and defence

Since independence Ukraine’s foreign policy has reflected a delicate balancingact centred on strengthening ties with the West while avoiding a rift withRussia, Ukraine’s largest trading partner and supplier of much-needed energyimports. The rationale for this stance reflects concerns over Russian sensitivitiestowards Ukraine’s ties to Western institutions, particularly NATO, as well asUkraine’s sharp ethnic, religious and cultural divisions. Whereas the moreCatholic and nationalist population of western Ukraine is generally pro-reformand pro-Western, the more Orthodox, industrialised and Russian-speaking eastof the country still embraces closer ties to Russia. With left-wing parties inparliament generally leaning much closer to this position than the pro-Western,pro-reform and nationalist right, both Mr Kuchma and his predecessor,Mr Kravchuk, have sought to balance the two extremes. In the immediate post-independence years this balanced position proved vital in helping Ukraine toentrench its new-found (and surprisingly sudden) independence in the face ofwidespread opposition among political leaders in Russia.

Ukraine’s relations with Russia have remained sensitive. Squabbles over the fateof the Black Sea Fleet and its headquarters at Sevastopol resulted in repeatedpostponement of a friendship treaty reconfirming mutual borders. Only withlong-delayed ratification of the bilateral agreement on the status of the BlackSea Fleet by both countries’ parliaments in the first half of 1999 did thisfriendship treaty enter into effect. Nevertheless, a number of contentiousbilateral issues remain unresolved, in particular related to Ukraine’s significantaccumulation of debts for gas imports.

As in other former Soviet republics, this energy dependence presents one ofRussia’s most potent means of reasserting its economic and political controlover its neighbours—leverage that the Russian president, Vladimir Putin, hasexercised more concertedly than his predecessor, Boris Yeltsin. Combined withan acceleration in Ukraine’s privatisation of state-held assets and improvedliquidity among Russian enterprises since 2000, this has brought a notableincrease in Russian influence in a number of key Ukrainian sectors such asenergy and metals. The appointment of a less pro-Western foreign minister inSeptember 2000, most likely under pressure from Russia, and Mr Kuchma’sincreased political isolation since late-2000, as a result of Western concernsover serious allegations of high-level wrongdoing on the part of hisadministration, has accelerated this trend. The Putin administration has stoodby Mr Kuchma in the face of his growing isolation from the West—in returnfor which Russia appears to have extracted a greater openness by Mr Kuchmato accept Russian political and economic influence in Ukraine. This wasemphasised by the appointment of Viktor Chernomyrdin, a former Russianprime minister and head of Gazprom, as Russian ambassador to Ukraine.

However, this trend towards closer ties with Russia should not be overstated. Asin domestic politics, Mr Kuchma is aware of the gains possible from asuccessful balancing of competing interests. Particularly given the sizeable pro-Western and anti-Russian lobby that still exists in Ukraine, and the benefitspossible through continued financial support from the West and association

A delicate balance

Relations with Russiaare sensitive

Ukraine 15


with West European institutions, pro-European rhetoric remains central to theKuchma administration’s message. Ukraine continues to implement thepartnership and co-operation agreement with the EU that came into effect in1998, and has been the fourth largest recipient of US bilateral aid since 1994. Itcontinues to participate actively in NATO’s Partnership for Peace (PfP)programme and in GUUAM, a loose regional organisation that groups togetherthose former Soviet states most wary of excessive Russian dominance of theCommonwealth of Independent States (CIS), to which they all belong (seeAppendices: Regional organisations).

Nevertheless, Ukraine’s relationship to Western states remains far from smooth.In particular, patience on both sides has worn increasingly thin. The West—inparticular the EU—has continued to push for active engagement with Ukraineto foster economic and political stability on the EU’s eastern flank. Once theEU’s eastward enlargement takes place Ukraine will directly border the EU viaPoland, Slovakia and Hungary. Western frustration with the lagging reformeffort moderated as the Yushchenko reforms and a resurgence in externaldemand led to a rapid macroeconomic improvement. However, Ukraine hascome under criticism from Western institutions, such as the Council of Europe,for restrictions on freedom of expression and media rights. This criticismincreased in late 2000 as the Georgy Gongadze case indicated the scale of non-democratic tendencies emanating from the president’s office. Relations withthe West had been strained following the 1999 presidential election and in therun-up to the April 2000 constitutional referendum, when Ukraine came underconsiderable criticism from Western institutions dismayed by Mr Kuchma’sheavy-handed and seemingly cavalier approach to democratic practices.However, the West remains keenly aware of Ukraine’s strategic importance andhas resisted pushing the Kuchma administration even closer towards Russia.

Although it inherited a large stock of nuclear weapons from the Soviet Union,Ukraine is no longer a nuclear power. It surrendered all of its tactical nuclearweapons to Russia in 1992, and the last of its strategic weapons in June 1996,in accordance with the tripartite agreement arranged with Russia and the US inJanuary 1994, whereby Ukraine handed over its warheads in exchange for aid,nuclear fuel and vague security guarantees. The dismantling of missilelaunchers and silos, as required by the START-1 disarmament treaty, began in1996 and is due for completion in 2001. Ukraine’s conventional forces haveshrunk by around half, from 600,000-plus service personnel in 1992 to justover 300,000 in 2000—although this still leaves Ukraine with one of the largestmilitaries in Europe (along with Russia and Turkey).

The dire budget situation has provided considerable impetus to military cut-backs. Ukraine’s defence budget stood at 1.4% of GDP in 2000, or aroundUS$440m. Defence spending is targeted at around US$500m in 2001, and isexpected to fall below 1% of GDP by 2005. Approximately 80-90% of thedefence budget is spent on maintaining personnel. Unable to maintain currentlevels of equipment inherited from the Soviet era, Ukraine estimates it will bedown to around 300 combat aeroplanes (and 100 reserve aeroplanes) by 2005,compared to 600 at present, and will have to reduce significantly the numbersof combat helicopters and tanks. Nonetheless, further personnel cuts will be

Defence

16 Ukraine


anything but radical—and will ensure at best a gradual demobilisation thatbrings the total number of uniformed personnel down to 295,000 by 2005.

The military’s long-term planning follows a general European trend towards aprofessional army built on greater mobility and an end to generalconscription—although this will not be fully implemented before 2015 at theearliest. By December 2001 the government is to present the presidentialadministration with a blueprint on establishing a professional army. This willrequire far-reaching reforms, including cutting the number of uniformedpersonnel by over one-third, raising pay substantially and reducing the ratio ofofficers to enlisted men (currently at one-third).

Military forces, 2000

Armed forces 303,800 of which: ground forces 151,200 air force 96,000 navy 13,000

ParamilitaryMinistry of Internal Affairs 42,000Border guard 34,000National guard 26,600

Source: International Institute for Strategic Studies, The Military Balance.

Conscious of its highly sensitive geographical position, Ukraine has opted fornon-aligned status. Initially Mr Kuchma expressed fears that the plannedeastward expansion of NATO to include Poland, Hungary and the CzechRepublic would leave Ukraine squeezed between hostile military blocs.However, these fears were assuaged by NATO’s signature, at its Madrid summitin July 1997, of a “Charter on a Distinctive Partnership between NATO andUkraine”. This creates a consultative mechanism between Ukraine and NATO,although it falls short of Russia’s own privileged relationship with the alliance,forged two months earlier. Ukraine’s foreign minister, Anatoly Zlenko,although less pro-Western than his predecessor, suggested in July 2001 thatUkraine viewed NATO enlargement in eastern Europe as enhancing Ukrainiansecurity rather than as a security threat.

Ukraine is an active participant in NATO’s PfP programme, under which itfrequently joins in exercises with NATO troops. The “Sea-Breeze” naval exerciseheld in Odessa in July 2001, for instance, is the most recent in a series ofannual Black Sea exercises over the past five years, involving a number ofNATO members and Black Sea states, including Ukraine. In a trip to Kiev at thetime of the Sea-Breeze exercises, the NATO secretary-general, Lord GeorgeRobertson, reiterated NATO’s commitment to helping Ukraine with militaryreform—and is reported to have discussed with the Ukrainian government thepossibility of Ukrainian peacekeeping involvement in Macedonia. However,under the friendship treaty with Russia, finally ratified in 1999 after years ofdelay, Ukraine has committed itself to not joining any military blocs for theduration of Russia’s 20-year lease on Sevastopol—thereby ending speculationthat it might apply to join NATO itself. NATO’s air campaign in Kosovo in the

NATO

Ukraine 17


first half of 1999, when Ukraine was against NATO action, underlined thedifficulty of Ukraine’s efforts to balance closer NATO ties with strong pro-Russian sentiment within the country, but did not lead to any reduction in thelevel of Ukraine’s participation in PfP exercises.

Resources and infrastructure

Population

The most striking evidence of Ukraine’s post-independence collapse is itsrecorded decline in population. In 2001 the population stood at just above 49m,down by more than 2m since independence. The drop reflects the deteriorationin economic and social conditions associated with severe economic recession, aswell as emigration. Falling standards in healthcare, nursery provision andnutrition have led to a reduction in fertility and life expectancy (life expectancyin 2000 was 66 years), as well as an increase in infant mortality. (Historical dataon population and the labour force are given in Reference tables 1 and 2.)

Between 1991 and 1993 the decline in population caused by higher death ratesthan birth rates was offset by large net immigration from other former Sovietrepublics, in particular by the arrival of about 250,000 Crimean Tatars exiled toCentral Asia during the second world war (see Political background). However,the trend since 1995 has been towards net emigration, particularly to the US,Canada and Israel. Ukrainians are also migrating to work as guest-workers inother east European countries, including Russia, Slovakia, Poland and theCzech Republic, where wages are higher.

Population trends

1990 2000

Population (m) 51.6 49.4

Life expectancy at birth (years) Male 65 62 Female 77 73

Sources: UN Development Programme, Ukraine Human Development Report; press reports.

Despite its large Russian minority, ethnic relations between Ukrainians andRussians are good, thanks to cultural closeness, generations of intermarriageand the government’s sensitive handling of the issue. In contrast to thetreatment received by minorities in some of the other former Soviet republics,Ukraine automatically granted all non-Ukrainians full citizenship onindependence and did not force them to take language tests in order to beenfranchised. As a result, Ukraine’s ethnic Russians feel more at home inUkraine than many Russians elsewhere in the so-called near abroad, and haveremained remarkably quiescent politically, producing (save in Crimea) nonationalist leaders or political parties. The mix of smaller minorities haschanged since the census in 1989, with the emigration of over half of Ukraine’sJews and the arrival of about 250,000 Crimean Tatars.

Ethnicity

18 Ukraine


Ethnic composition of Ukraine, 1989

‘000 % of total

Ukrainians 37,400 73.6

Russians 11,400 22.4

Jews 486 1.0

Belarusians 440 0.9

Moldovans 325 0.6

Bulgarians 234 0.5

Poles 219 0.4

Hungarians 163 0.3

Romanians 135 0.3

Source: National census.

Education

The two main problems facing Ukraine’s education system are chronicunderfunding and a shortage of good teachers (and teaching materials inUkrainian) on subjects whose contents were revolutionised by the fall ofcommunism: history, economics, political science and international relations.The switch to Ukrainian-language teaching has taken place on an ad hoc basis,often at the instigation of parents, and in the Russified east and south the vastmajority of schools are still Russian-speaking. Although children throughoutthe country must take a basic Ukrainian-language test to enter university, oncethere many of their books and lectures are still in Russian.

Education spending has fallen sharply as a result of Ukraine’s long post-independence recession. Teachers’ salaries are far below the industrial sectoraverage and for several years have rarely been paid on time; teachers havefrequently resorted to strikes as a result, and many are quitting the profession.University professors do not fare much better, with Kiev-based faculty earningan average of HRN300 (US$55) per month. Demands by schools and collegesfor private contributions are increasingly common, with a sizeable minority ofstudents who study in public institutes and universities now paying for tuitionand textbooks. State support for university students’ living expenses remainslow, with monthly stipends in Kiev equal to only HRN25 and available to onlya small subsection of students. However, literacy is still almost universaldespite the severe lack of funding available for education in the post-independence period.

Health

The post-independence years have seen a sharp deterioration in the popul-ation’s health, owing to a drop in real health spending and the social dislocationrelated to economic collapse. The incidence of poverty-related diseases such asdiphtheria, cholera and tuberculosis has increased, as have alcoholism, suicideand homicide. The dramatic increase in tuberculosis provides a particularlynotable indication of the decline in health (associated with widespread poverty

Education is underfunded

A sharp deteriorationin health

Ukraine 19


and lack of preventative care) that has accompanied Ukraine’s post-communisttransition. The number of cases of tuberculosis has risen from 32 to 54 per100,000 inhabitants—with a total of around 640,000 cases nationwide in 2000.The rapid increase in HIV and AIDS-related illnesses and deaths has become agrowing concern, aggravated by the spread of intravenous drug use, particularlyin the south and east of Ukraine. This brought an increase in registered HIVcases from under 200 in 1995 to more than 38,000 by March 2001, almost three-quarters of which comprise intravenous drug users. Estimates of possible HIVcases in Ukraine by 2010 are as high as 1.5m.

Nutritional deficiencies have become widespread, as Ukrainians cut theirconsumption of expensive vitamin- and protein-rich foods in favour ofcheaper bread and potatoes, in response to a sharp drop in income. In 2000real incomes were over one-third lower than 1992 levels. Consumption ofmeat, for example, has fallen by around 50% since 1990, fruit by over 20%,eggs by 40% and fish by 75%. According to UN research, the energy content ofthe average diet fell from 3,597 kcal in 1990 to 2,752 kcal in 1996.

Despite the high number of hospitals relative to total population (over 2,700hospitals in total), underfunding has produced a drastic fall in actual health-care availability. Doctors commonly supplement their salaries by charging foroperations and maternity care, and drugs are often available only privately. Thenumber of in-patient beds decreased from 130 per 10,000 people in 1990 to109 per 10,000 in 1996. The UN recommends that in order to solve its healthfunding crisis the government should introduce mandatory health insurance;however, no such restructuring of the sector is likely in the near future.

Natural resources and the environment

With a land area of 603,700 sq km, Ukraine is comparable in size to France.Some 90% of agricultural land is suitable for arable production. Despite someof the richest soil in the world. Ukraine’s agricultural yields fell sharply duringthe post-independence period because of shortages of fertilisers and othercritical inputs. Moreover, fallout from the Chernobyl disaster contaminatedlarge tracts of land in the north of the country, leaving them unsafe for manytypes of food production. However, government plans to evacuate the areawere never implemented, such that residents continue to live on and work thecountryside as before. Although the decline in heavy industry has cut levels ofair and water pollution, they remain high by Western standards.

Transport and communications

Ukraine has about 23,000 km of railway track, just over one-third of which iselectrified; about 250,000 km of roads, only half of which are paved; and14 airports with runways more than 3,000 metres long. It has sevenwarm-water commercial ports, the largest of which is Odessa, and 4,400 km ofinland waterways.

Rail, road, air and shipping

20 Ukraine


As elsewhere in the former Soviet bloc, telecommunications infrastructure isunderdeveloped. By the end of 1999 Ukraine had just under 20 telephone linesper 100 people, compared with around 25 in Poland, 37 in the Czech Republicand an average of around 50 in the EU. The government has estimated itrequires around US$6bn in investment to modernise its telecoms network; todate almost two-thirds of investment (an annual total of around US$200-300m) in the sector has been self-financed by the existing telecoms firms.

Although the telecoms situation would improve with the privatisation of thenational telecoms monopoly, Ukrtelekom, parliamentary resistance toprivatisation has delayed this sale for years (see The economy). In preparationfor eventual privatisation, the state telecoms monopoly has been successfullyrestructured and now includes 30 branches providing basic telecoms services tomore than 9m subscribers. The state hopes to attract more than US$500mthrough privatisation. However, even though parliament approved a bill toprivatise Ukrtelekom in mid-2000, no sale is likely before 2002.

With the government now scrambling to plug the budget hole that will resultfrom this added delay, the cabinet has passed a resolution permitting theprivatisation of Ukrtelekom’s 51% stake in the lucrative Ukrainian MobileCommunications (UMC), a joint venture set up in 1991 with three WestEuropean telecoms firms. UMC is the largest mobile telecoms company in thecountry, with around 600,000 subscribers. The government hopes to attractUS$200m from the sale, but is facing resistance from Ukrtelekom’smanagement, which favours selling only a 25% stake in the company. Ukrainehas three other mobile telecoms providers, Kyivstar, Golden Telecom andWellcom, but is still only a relatively small (even by regional standards) mobiletelecoms market—with total subscription equal to only around 2% of thepopulation (or 1.13m subscribers) in April 2001.

Energy provision

Much of Ukraine’s industrial base was built on cheap oil and gas deliveriesfrom other Soviet republics, in particular from Russia and Turkmenistan.Natural gas is a particularly vital part of Ukraine’s bilateral trade with Russia:about 90% of Russia’s export gas passes through Ukraine, and gas hastraditionally accounted for around half of Ukraine’s imports from Russia.When newly liberalised Russian energy prices reached world prices in the early1990s, Ukraine’s dependence on Russian gas caused serious problems for itsenergy-inefficient industry. Although Russia has shown lenience overcontinued gas payment arrears, it has also benefited from its near-monopoly byforcing Ukraine to accept higher gas prices than those paid by its othercustomers in western Europe and has increasingly exerted pressure on Ukraineto repay its debts by allowing greater Russian control over key industrial assets.

In May 2001 Ukraine signed a gas deal signed with Turkmenistan that shouldhelp to alleviate its reliance on Russia. According to the agreement, Ukrainewill receive a total of 250bn cu metres of Turkmen gas in 2002-06 at a price ofUS$42 per 1,000 cu metres, 50% of which is to be paid in cash and 50% ininvestment projects. This represents a considerably lower price than was

Imports and build-up ofpayment arrears

Telecommunications

Ukraine 21


received from Russia in the past, and will enable Ukraine to avoid having toimport Russian gas in excess of what it already receives as payment for Russiangas exports to Western Europe.

Energy balance, 2000(m tonnes oil equivalent)

Elec-Oil Gas Coal tricity Total

Primary production 4.0 15.0 41.0 23.0 83.0

Imports 10.0 51.0 3.0 3.0 67.0

Exports –2.0 –2.0 –2.0 –3.0 –9.0

Stock changes 0.0 2.0 –1.0 0.0 –1.0

Primary supply 12.0 62.0 43.0 23.0 140.0

Losses & transfers –2.0 –14.0 –12.0 –27.0 –55.0

Transformation output 0.0 0.0 0.0 15.0 15.0

Final consumption 10.0 48.0 31.0 11.0 100.0

Source: Energy Data Associates.

Chernobyl

As a result of underfunding, strikes and mechanical breakdowns becameregular occurrences at all five of Ukraine’s nuclear power stations during thepost-independence period. The Chernobyl power station proved a particularsource of friction between Ukraine and the West until its closure in 2000.Citing its dependence on nuclear energy, which generates almost half of thecountry’s electricity compared with one-third in the early 1990s, Ukraine hadresisted closing Chernobyl for a number of years. On December 15th 2000Ukraine finally acceded to Western demands by closing down the Chernobylnuclear power station’s one remaining reactor. Two other Chernobyl reactorshad already been shut down, and a third had exploded in a 1986 accident thatsent a radioactive cloud over Ukraine, Belarus, Russia and much of Europe.

The closure of Chernobyl’s last reactor, which supplied Ukraine with around5% of its electricity supply, came despite vocal opposition from domesticgroups concerned about the consequences for Chernobyl personnel andUkraine’s power needs. On the day before the closure of the plant, parliamenthad adopted a resolution urging the government to postpone the shutdown atleast until April. The decision of the president, Leonid Kuchma, to proceeddespite domestic opposition indicated his unwillingness to alienate the West ata time when Ukraine hoped to attract foreign investors and persuade the IMFto resume a crucial US$2.6bn loan programme.

An agreement signed in 1995 by Ukraine and the G7 group of leading Westernstates promised international assistance in return for the closure of the plant.Western governments have argued consistently that Chernobyl’s RBMK-stylereactor, which lacks a safety shell for the containment of nuclear emissions,could not be upgraded to international safety standards.

The overall cost of decommissioning Chernobyl is estimated at some US$3bn.Half of this is needed to ensure social benefits for plant workers and todecommission the reactors—a process that will take up to 15 years. The other

22 Ukraine


half is needed to complete two new nuclear reactors at the Khmelnytsky andRivne nuclear power plants, in order to compensate for the energy lost as aresult of Chernobyl’s shutdown. Ukraine has still not secured all of the fundingneeded, even though in December 2000 the EU agreed to a 20-year loan ofUS$585m and the European Bank for Reconstruction and Development (EBRD)approved a 19-year US$215m loan in order to help finance the construction ofthe replacement reactors.

Ukraine’s energy sector is in dire need of substantial reform. During the late1990s, in particular, the possibility of an electricity-grid collapse has beenrepeatedly mooted, owing to the poor state of nuclear power plants and a lackof fuel for thermal generators—which have resulted in frequent blackouts forthe population and on occasion brought the electrical frequency below theminimum safe frequency for Ukraine’s system. (An historical breakdown ofnational energy statistics is given in Reference table 3.) In particular, Ukraineremains a wasteful energy user—consuming twice as much energy per unit ofGDP as the EU. Since 1998 the state has attempted to reduce consumption byphasing out energy subsidies, and finally raised utility prices by the first half of1999 to almost 100% cost recovery levels—up from only 5% of cost in 1992.However, these measures initially achieved little in the way of reducing energyconsumption, mainly because of endemic non-payment by energy consumersand distributors. Low salaries and substantial wage arrears reduce the ability ofindividual consumers to pay for energy usage.

Until 2000 an even poorer payments record existed among industrial users,which were caught in an economy-wide cycle of non-payments and which hadgenerally faced few (if any) consequences for not paying for energy use. Priorto the appointment of the cabinet led by Viktor Yushchenko, Ukraine’sgovernments had generally shied away from prosecuting end-users. Althoughinefficient, energy-intensive heavy industry enterprises were among the worstoffenders, they were also often major export earners and a community’s chiefsource of employment, and enjoyed high-level political connections. Whenpayment was actually offered, it often took the form of barter—anuntransparent and inefficient means of payment that did little to ease thesector’s cash crunch. With generators unable to pay for fuel, suppliers of coaland gas were reluctant to provide the inputs needed to ensure adequateelectricity supply.

The Yushchenko cabinet made the energy sector one of its top priorities. Thecabinet’s reform efforts were led by an unlikely candidate, deputy primeminister Yuliya Tymoshenko, who had previously headed one of the major gastrading companies that profited from Ukraine’s untransparent energy sector inthe mid-1990s. Ms Tymoshenko proved to be the first high-profile governmentofficial willing to tackle the non-payment problem. Her success in tacklingbarter arrangements, and forcing energy distributors and end-users to pay incash for energy supplies, attracted intense opposition from oligarchicopponents in parliament (and their allies in the presidential administration)who were eager to protect their lucrative interests in the energy sector.Although these opponents succeeded in securing her dismissal in January

Ukraine’s energy useremains inefficient

Energy reform hasbeen slow

Ukraine 23


2001, the changes effected during her tenure proved critical to strengtheningthe energy sector and remonetising the economy. Cash collection rates forelectricity supplies increased from 10-20% at the start of 2000 to 50-80%during the second half of the year—and remained high through the first halfof 2001, despite her dismissal.

The economy

Economic structure

Main economic indicators, 2000

Real GDP growth (%) 5.7

Unemployment rate (official; %; year-end) 4.2

Consumer price inflation (%; year-end) 25.8

Consolidated budget balance (% of GDP; includes pension fund) 2.2

Current-account balance (% of GDP) 4.7

Exchange rate (av; HRN:US$) 5.44

Sources: IMF, International Financial Statistics; Ukrainian-European Policy and Legal Advice Centre (UEPLAC), Ukrainian Economic Trends.

Like much of the former Soviet bloc, independent Ukraine inherited aneconomy based on heavy industry reliant on technology that had largely beensuperseded in the West: steel, chemicals, shipbuilding, coal, machine-tools andweaponry. Ukraine’s main challenge since 1991 has been to diversify awayfrom many of these industries, which relied heavily on government subsidiesand which the collapse of traditional export markets had rendered even lessviable. However, restructuring has suffered from the continued power of vestedbureaucratic and economic interests eager to preserve elements of the centrallyplanned system, and from the related lack of consensus among political andbusiness leaders over the desirability of market reforms. Ukraine has thereforemet with only limited success in its efforts to diversify away from traditionalsectors. The recovery from the 1998-99 regional financial turmoil andeconomic downturn, for instance, has relied predominantly on a boost inoutput from traditional sectors such as metals and chemicals, which, startingin late 1999, benefited from strong demand in Russia and Asia. Althoughsectors in which the government has minimised its interference (such as food-processing) have recorded increasingly strong growth, the weight of thesesectors is still relatively small.

Privatisation and foreign investment have proceeded more slowly in Ukrainethan in former communist countries in central Europe, such as Poland andHungary, because of Ukraine’s greater suspicion of Western economicinvestment and influence, a less pro-Western and anti-communist outlook,and less exposure to market ideas. In particular, slow economic restructuringhas led to continued high levels of state interference and over-regulation, bothof which have dissuaded potential investors. A regulatory apparatus designedto protect existing enterprises from domestic competition and from foreigninvestment and tax reform remains in place. Punitively high taxes, organised

Restructuring hasproceeded slowly

24 Ukraine


crime and the government’s inability to ensure the rule of law have imposedfurther business costs. Studies by the IMF and the World Bank indicate farhigher levels of corruption in Ukraine than in other countries in the region,such as Poland.

Official figures put the overall size of Ukraine’s economy in 1999 at HRN173bn(US$31.8bn), only around two-thirds the size of Hungary’s economy inUS dollar terms, despite a population that is five times larger. Even calculated atpurchasing power parity (PPP) exchange rates, Ukraine’s GDP ranks well belowthat of its central European neighbours and Russia. GDP per head at PPP stoodat around US$2,300 in 2000, over three times lower than in neighbouringPoland and less than half the level seen in Russia. However, Ukraine’s low levelof GDP per head is somewhat mitigated by the existence of an unofficialeconomy that could be up to 50% as large as the official one, according toresearch that compares official GDP figures with changes in consumption ofelectricity (normally a good indicator of true levels of economic activity).

Comparative economic indicators, 2000

Ukraine Belarus Hungary Poland Romania Russia

GDP (US$ bn) 31.8 11.4 45.6 157.7 36.7 251.1

GDP per head (US$) 633 1,141 4,550 4,082 1,637 1,729

GDP per head at PPP (US$) 2,289 5,295 9,014 7,711 4,332 4,936

Consumer price inflation (av; %) 28.2 168.6 9.8 10.1 45.6 20.8

Current-account balance (US$ bn) 1.5 –0.2 -1.5 –10.0 –1.4 46.3 % of GDP 4.7 –1.7 -3.3 –6.3 –3.8 18.5

Exports of goods fob (US$ bn) 15.7 7.4 25.3 28.3 10.4 105.6

Imports of goods fob (US$ bn) 14.9 8.3 27.5 41.4 12.1 44.9

External debta (US$ bn) 12.1 1.1 29.1 58.8 9.8 113.0

Debt-service ratio, paida (%) 10.4 1.8 18.4 4.7 6.5 4.7

a EIU estimates based on World Bank data.

Source: EIU, CountryData.

Economic policy

In addition to the problems related to any move from a planned system to amarket economy, independent Ukraine has needed to build a whole hierarchyof state institutions. This has complicated and confused economic policy-making since independence. Disagreement over the constitutional powers ofthe president, parliament and bodies such as the National Bank of Ukraine(NBU, the central bank) has hindered reform and enabled left-wingers inparliament, local government and the industrial ministries to block or disablegovernment initiatives. Ukraine does not have many free-marketeers among itspolitical class—the result of decades of “brain drain” to Moscow—and thosethat exist had until recently rarely enjoyed the powers of, for example, AnatolyChubais in Russia or Leszek Balcerowicz in Poland. The appointment of ViktorYushchenko as prime minister in December 1999 marked Ukraine’s firstexperience with a proven reformer leading the cabinet. The intense opposition

GDP per head remains low

Inconsistent policyframework

Ukraine 25


that he faced throughout his tenure and his dismissal by parliamentaryopponents in April 2001 underline the lack of a reform consensus amongUkraine’s political class, and the continued strength of vested interests, both ofwhich continue to hamper more effective policy formulation.

During the presidency of Leonid Kravchuk the dislocation prompted by thecollapse of the centrally planned Soviet economy and politicians’ lack of resolveto push forward with reform brought hyperinflation, rapid currency deprec-iation and high annual budget deficits averaging around 9% of GDP in the firsthalf of the 1990s. With the population and political leaders sharply divided overthe merits of reform, Mr Kravchuk’s successor, Leonid Kuchma, and a successionof centrist governments introduced only gradual, piecemeal reform policies.Mr Kuchma signed a stand-by arrangement with the IMF in November 1994,promising to limit the budget deficit to around 7% of GDP in 1995, accelerateprivatisation and abolish a range of price subsidies and trade restrictions.

Despite stalling tactics by the left-wing opposition in parliament, thestabilisation programme proved a relative success—even if structural reform inseveral important areas, including privatisation, continued to lag. By 1997more prudent monetary policy had achieved currency stability and lowinflation, and attracted significant foreign interest in Ukraine’s nascentgovernment-debt market—which in turn permitted a sharp reduction in NBUcredits to the government and steadily increasing foreign-exchange reserves.However, the government’s ability to finance its still large budget deficitthrough foreign lending, including Eurobond placements and governmentsecurities, allowed it to avoid curbing its excessive spending and postponeswifter fiscal reform. Therefore, although Ukraine proved relatively successfulin tackling first-generation reforms, including stabilising runaway inflation,liberalising prices and the exchange rate, and completing small-scaleprivatisation, the country lagged in a number of the more difficult tasksrequired for broad-based financial stability and economic growth. Only withthe loss in external financing prompted by the regional economic crisis in1998 was the government forced to accept greater co-operation withmultilateral backers. This prompted further reform progress, despite powerfulresistance from left-wing opposition parties, and business and bureaucraticinterests eager to preserve their favoured position under Ukraine’s semi-reformed system.

Throughout the 1990s, the Ukrainian polity’s lack of reform consensus provedmost conspicuous in the field of privatisation—especially as regards land andlarge state-owned enterprises. Although over 80% of all enterprises (accountingfor over 60% of output) had been privatised by early 1999, controlling sharesin many so-called privatised enterprises remained in government hands, whichperpetuated the control of former communist directors and precludedsignificant productivity gains. Although multilateral agencies and,occasionally, the government pushed for the accelerated sell-off of state-ownedenterprises as a potential source of much-needed revenue, left-wingparliamentarians and vested interests repeatedly opposed their efforts—particularly in so-called strategic enterprises. The emergence of a centre-right

Hyperinflation leads toagreement with the IMF

Privatisation

26 Ukraine


majority in parliament in December 1999 brought greater privatisationprogress—especially as Ukraine had already shifted the emphasis of itsprivatisation policies towards cash privatisation earlier in the year (followingseven years of worker buy-outs and privatisation certificates). However,parliament’s mixed record on privatisation since the 1999 presidential electionunderlines the continued strength of vested interests eager to keep the non-transparent (and hence lucrative) status quo in place.

Even under the Yushchenko government Ukraine had to contend with lowforeign investor interest—particularly in the wake of several joint-venturefiascos and continued non-transparent privatisations, as seen in June 2001with a succession of scandals involving the takeover of debt-ridden state-owned companies (including the country’s largest electricity generator) inadvance of their official privatisation. Incidents such as these have done littleto improve investor confidence in Ukraine’s legal infrastructure, privatisationprocedures or commitment to transparency. Ukraine’s privatisation efforts,therefore, unlike those in several other east European economies, have notseen a major role being taken by foreign investors, who have complained of alack of contract enforcement and have balked at the high prices demanded forthe minority ownership stakes on offer.

Ukraine has yet to recover from the sharp drop in budget revenue experiencedafter the dramatic collapse in the official production sector and itsaccompanying tax base in the early post-independence years. Public financereform has proceeded slowly, and only made serious progress since the regionalfinancial crisis in late 1998. Prior to that, poor revenue planning and the powerof vested interests eager to maintain Soviet-era benefits brought chronicallyhigh budget deficits. (Historical data on government finances are given inReference table 4.)

In the mid 1990s the government relied predominantly on central bank creditsto finance its deficits, before moving to Treasury-bill issuances, which, by 1997,accounted for three-quarters of the funding for the deficit (up from 1% in1995). However, the government’s failure to address fiscal reforms led to a risein country-specific risk, which a general reduction in portfolio investmentflows to emerging markets then compounded. By the second half of 1998 thisculminated in a financial crisis that extinguished any interest among foreignand domestic buyers for Ukraine’s government debt. With its financingpossibilities greatly constricted, the government was finally forced to curb itsspending. Initially the government’s success in narrowing its annualconsolidated budget deficits to 1-2% of GDP, as seen in 1998 and 1999, reliedheavily on a considerable build-up of budgetary arrears and unfulfilledbudgetary obligations—rather than on more fundamental fiscal reform. By thefirst quarter of 1999 pension and public-sector wage arrears had reached ashigh as 2-3% of GDP (or 8% of annual consolidated budget revenue).Moreover, widespread tax exemptions (particularly in agriculture) remained amajor impediment to sounder fiscal policy—and actually expanded in the run-up to the 1999 presidential election campaign. Tax exemptions led to anarrowing of the tax base and intensified pressure on those enterprises notbenefiting from preferential treatment, which created a vicious circle by

Public finances

Ukraine 27


driving companies further into the shadow economy and encouraging thetransfer of profits into foreign accounts or private intermediary firms.

Under Mr Yushchenko’s leadership in 2000-01 the government started toimplement significant fiscal reforms. The Yushchenko government acceleratedfiscal consolidation by lowering the number of exemptions, forcing enterprisesto pay taxes in cash and eliminating mutual offsets, thereby raising budgetreceipts and increasing transparency by considerably reducing in-kindpayments (or mutual settlements). Combined with higher than expected GDPgrowth and inflation, this allowed the Yushchenko government to post aconsolidated budget surplus of around 2.2% of GDP in 2000, as well aseliminate pension arrears and significantly reduce public-sector wage arrears.

Consolidated budgeta

(% of GDPb)

1997 1998 1999 2000

Total revenue 42.4 39.8 37.0 40.4 of which: VAT 8.7 7.6 7.1 6.0 profit tax 6.5 6.7 5.6 5.3 excise tax 1.3 1.3 1.5 1.4 Chernobyl tax 2.0 1.5 0.2 0.1 income tax 3.8 3.8 3.7 4.1 pension fund 11.2 9.8 9.5 9.4

Total expenditure 49.6 41.9 38.4 39.1 of which: economy & foreign trade 6.6 6.7 6.5 5.5 education, health & culture 11.7 9.7 8.3 8.8 foreign debt service 2.3 0.8 1.5 1.9 social transfers & pension fund 17.6 15.2 12.9 12.8 defence & police 5.1 4.5 4.2 5.6

Balance –7.1 –2.1 –1.4 1.3

a Includes pension fund. b Uses the Ukrainian-European Policy and Legal Advice Centre’s income-based method of calculating GDP, which differs somewhat from official measures.

Source: Ukrainian-European Policy and Legal Advice Centre (UEPLAC).

Tax reform

Since independence parliamentary intransigence and limited governmentcommitment has led to (at best) sluggish reform of the country’s arbitrary andopaque tax system. The cabinet led by Viktor Yushchenko, backed by LeonidKuchma, sought to bring renewed impetus to long-delayed tax reform effortsin June 2000, by submitting a draft tax code to parliament that, if approved,would lead to significant tax restructuring. However, the draft tax code haslanguished in parliament since it was passed in a first reading later in 2000.With little chance that comprehensive tax reform will progress quickly,parliament is now directing its efforts towards passing a “small tax code” thatwould reduce income taxes and value-added tax (VAT) while introducingpotentially costly multi-year tax break for small entrepreneurs.

Further progress on tax reform is crucial for reinvigorating the business climateand reintegrating Ukraine’s shadow economy. The proposed changes assume

28 Ukraine


that increased compliance and a broadened tax base would compensate forlower tax rates—a valid argument given that the shadow economy continuesto flourish and at least one-third of all state enterprises are exempt fromtaxation. However, any tax code changes would require further substantialreforms in order to achieve the desired effect. It is unclear whether parliamentwill move decisively to eliminate exemptions, many of which exist as a resultof political favours or special interest. The risk is that parliament will push toreduce taxes without ensuring an adequate accompanying broadening of thetax base. The parliamentary debate on this issue to date has not yet prioritisedquestions about how to make up for revenue lost through lower taxes, and hasyet to undertake much of the technical work needed before voting on a secondreading of the draft code.

Economic performance

The break-up of the Soviet Union in 1991 sparked an economic collapseamong former Soviet republics, two-thirds of which have experienced a realdrop in output of around 50% compared with 1990. Ukraine’s decline provedthe steepest of all the transition economies not affected by war. Following asteady decline in output since independence, Ukraine’s recorded real GDP hadfallen to less than 30% of its pre-independence output by early 2000.(Historical data on GDP are given in Reference tables 7-9.) Ukraine’s first yearof real GDP growth finally came in 2000, as domestic producers benefited fromthe real depreciation of the previous two years, growing domestic demand anda buoyant external environment to post almost 6% annual real GDP growth.This trend accelerated even further in 2001, with growth climbing to 9% yearon year over the first five months of the year.

Gross domestic product(% real change)

Annual average2000 1996-2000

GDP 5.7 –2.0

Sources: National Bank of Ukraine; EIU.

The central bank’s relatively sound monetary policy has been one of the morepositive features of Ukraine’s transition—and in the mid-1990s played a crucialrole in eliminating the extremely high inflation seen in the early post-independence years. By tightening monetary policy and reducing credit topublic and commercial enterprises, particularly in the agricultural sector, theNBU brought annual average inflation down from almost 900% in 1994 toaround 10% in 1998—but at a considerable cost in terms of tight creditconditions and high real lending rates, which helped to delay industrialrestructuring, increase inter-industry arrears and reduce tax revenue. Moreover,the disinflationary trend that begin in 1994 was broken by the steep currencydecline and renewed inflationary pressures that followed the September 1998financial crisis. Combined with greater monetary emissions in the run-up tothe 1999 presidential election, rising fuel prices and further price liberalisation,

Ukraine’s recessionpersisted until 2000

The inflation ratehas fallen

Ukraine 29


this increased year-on-year inflation levels from under 10% in mid-1998 toover 30% by mid-2000. By mid-2001 nominal currency stability, sound fiscalpolicy and increased productivity had helped to reduce annual inflation below15%. (For historical data on prices and earnings, see Reference table 10.)

Consumer prices and money supply(% change, year on year)


Consumer prices (year-end) 25.8 22.6

Money supply (M2) 44.4 35.2

Sources: UEPLAC, Ukrainian Economic Trends; IMF, International Financial Statistics; EIU.

Ukraine’s experience with hyperinflation and its protracted economic declineproduced a predictably sharp deterioration in living standards. By 2000 realwages in Ukraine had plunged to under 40% of their 1992 levels, and a largeproportion of the workforce was being paid several months late or receivingpayment in kind. Only towards the end of 2000 did this trend begin to reverse,with real wages slowly rising as a result of the economic recovery and risingproductivity. This trend accelerated over the first half of 2001, when real wagesgrew in double-digits relative to the year-earlier period. Nevertheless, averagemonthly wages in US dollar terms were still only around US$53 in April 2001,just over half of the average level in Russia and still more than 40% down onpre-1998 crisis levels. Although widespread poverty clearly remains a signif-icant problem in Ukraine, this official wage data is somewhat misleading, giventhe large percentage of household income (around 50%) derived from non-wage sources. Total monetary incomes were up in real year-on-year terms byaround 2.5% in the first four months of 2001, and were at a level comparableat least to that seen before the regional financial crisis in 1998.

Widespread poverty has particularly affected pensioners without children, asthey receive minimal pensions and are often unable to attend their privateagricultural plots. Unemployed (or often unpaid) workers from the industrialcities of the east, who are less likely than their central and west Ukrainiancounterparts to have access to private plots on which they can grow their ownfood, have also been badly affected. Although the poor are partly insulated fromrecession by continued subsidies on housing and utilities, these are graduallybeing phased out. Amid the widespread poverty, a small section (5-10%) of thepopulation, located mainly in Kiev and other large cities, has prospered.

About 5% of the workforce is officially recorded as unemployed, althoughactual unemployment levels probably exceed 20%, as many workers have littleincentive to report their joblessness because of low unemployment benefits. Asignificant number of other workers are on unpaid leave for months, oftentrapped in their near-bankrupt firms, since leaving implies forgoing access tocompany housing, clinics and sanatoria. Despite these shortcomings, officialdata still provide a useful indication of employment trends. The number ofworkers in the industrial sector, for example, has continued its secular decline,and is now 6% lower than in the same period of 2000 and 10% lower than inthe same period in 1999 (and almost 30% down on 1997 levels).

Living standards continueto deteriorate

30 Ukraine


Regional trends

In both ethnic and economic terms, Ukraine is split between the Russian-speaking, heavily industrialised east and south and the Ukrainian-speaking,rural west and central regions. Although the popular nationalist movementthat took the country to independence originated in the west, the moredensely populated eastern provinces have enjoyed the most influence overpolicymaking since independence. Mr Yushchenko was the first prime ministerto have spent much of his working life in the western part of the country.

Among the regions that have fared best in economic terms since independenceare the Dnipropetrovsk and Zaporizhzhya oblasts in the east, whose Soviet-erasteel and chemicals industries have found ready export markets. They have yetto face serious restructuring, and are thus able to benefit from their favouredstatus, tax exemptions and, at least until recently, cheap or de facto free energysupplies. Kiev has also flourished as a result of Western business and governmentactivity, which is primarily centred on the capital. The old coal-producingregions in the Donbass (the Donetsk and Luhansk regions) have been among theworst hit by the country’s economic collapse, as mines, faced with subsidy cutsand cheaper imports, have closed. The quality of local government has beencrucial to a region’s economic performance: for example, communist-dominatedCrimea, whose tourist resources should have made it one of Ukraine’s moresuccessful regions, remains underdeveloped, whereas Odessa, which has nomanufacturing base, enjoyed a modest boom under a pro-market mayor.

Regional development, 2000

Average Industrial Gross capital Grainwages (% of Industrial output investment Grain crop

Population national production (HRN per (HRN per crop (% change(% of total) average) (% of total) urban capita) urban capita) (% of total) year on year)

Central regionsChernihiv 2.6 77.1 1.9 929.9 82 3.4 4.8Kiev city 5.4 175.3 5.8 819.9 250 0 n/aCherkasy 2.9 71.1 1.8 865.5 57 6.5 37.3Kiev region 3.7 99 2.7 939.8 104 5.9 27.3Kirovohrad 2.3 72.8 0.9 468.8 68 5.6 6.1Poltava 3.4 92.4 4.6 1767.5 238 5.8 –3.8Zhytomyr 2.9 69.4 1.1 514.5 30 3.0 3.1

Eastern regionsDnipropetrovsk 7.5 120 17.2 2100.5 123 6.4 1.7Donetsk 9.9 128.8 19.8 1678.9 135 4.1 0.8Kharkiv 6.0 97.9 5.2 834.3 116 5.2 –7.7Luhansk 5.3 104.2 6.7 1114.7 83 1.8 –5.1Sumy 2.7 81 2.7 1170.8 160 4.0 10.2Zaporizhzhya 4.0 124.9 8.7 2151.8 125 4.7 –17.5

Southern regionsCrimea 4.3 92.6 1.8 504.3 85 4.4 8.6Sevastopol 0.8 105.9 0.3 315.7 46 0 n/aKherson 2.5 70.8 0.8 382 46 4.8 –15.6Mikolayiv 2.6 104.7 2.2 976.8 103 3.8 –33.6Odessa 5.1 98.3 2.9 653.5 120 6.4 –17.7

continued

The eastern provincespredominate

Ukraine 31


Average Industrial Gross capital Grainwages (% of Industrial output investment Grain crop

Population national production (HRN per (HRN per crop (% change(% of total) average) (% of total) urban capita) urban capita) (% of total) year on year)

Western regionsChernivtsi 1.9 67.2 0.4 402.3 47 1.3 5.9Ivano-Frankivsk 2.9 87.4 1.7 1028 187 1.0 3Khmelnytskyy 2.9 66.6 1.5 738.9 81 5.1 16.3Lviv 5.5 87.4 2.7 609.3 72 2.0 –5.2Rivne 2.4 80.8 1.5 973.2 140 2.0 10.8Ternopil 2.3 59.3 0.6 407.6 61 3.0 11.6Vinnytsya 3.6 66.4 1.5 632.9 57 7.1 15.2Volyn 2.1 64 0.8 523.8 90 2.1 3.9Zakarpatya 2.6 77.3 0.5 397.5 56 0.7 –5.3

Source: UEPLAC, Ukrainian Economic Trends.

Economic sectors

Agriculture

Agricultural production


% real change 9.2 –4.0

Sources: Ukrainian-European Policy and Legal Advice Centre (UEPLAC), Ukranian Economic Trends; EIU.

Although Ukraine was once known as the “bread basket” of the Soviet Union,its agricultural production has declined by over half since independence. Theagricultural sector now accounts for roughly 11% of GDP, having made upover 20% of total GDP in the early 1990s. Even after over 9% annual growth in2000, agricultural output was still down by almost 20% compared with 1995levels. (For historical data on agriculture, see Reference table 11.) A number offactors have combined to bring about this dramatic collapse over the past tenyears, including the loss of major export markets; shortages of fuel, equipmentand fertilisers; a lack of progress on land privatisation; and the Ukrainiangovernment’s slowness in dismantling an inherited system of central procure-ment, processing and distribution that reduced incentives for collective farms.

The most significant step towards laying the groundwork for the sector’srecovery was taken in December 1999, when the presidential administrationissued a decree to break up collectivised agricultural enterprises into privatefarms. This, combined with additional reforms in 2000 designed to reduce thegovernment’s interference in the sector and support private-sector lending toproducers, helped to achieve Ukraine’s first year of positive agricultural sectorgrowth in 2000. With the change in management and reduced governmentinterference in both inputs and outputs that came as a result of these measures,the prospects for solid growth in the agricultural sector have improvedconsiderably. Now that state-owned collective farms have been broken up intoprivate entities, the emerging market for leased agricultural land is generating

Agriculture has declined

32 Ukraine


new businesses and joint ventures, and has fuelled lending to Ukrainianagricultural enterprises. Prior to 2001 commercial banks and foreign businesseshad proved extremely reluctant to lend to agricultural enterprises for seed,fertiliser and combines because of substantial and persistent non-payments.This changed markedly in the first half of 2001, when private lending to theagricultural sector surged, as a result not only of a government programme tosubsidise 50-70% of the interest burden, but also because of improvedrepayment prospects—as the new private producers adjusted quickly andsuccessfully to hardened budget constraints.

Over the first five months of 2001 Ukrainian banks loaned HRN1.5bn(US$280m) to agricultural enterprises, compared with HRN420m during theyear-earlier period and HRN818m in 2000 as a whole. Increased creditavailability permitted producers to more than double fertiliser use during the2001 sowing season, and should ensure sufficient access to inputs such asequipment and fuel during the 2001 harvest season. Nevertheless, parliament’sslow progress in passing a new land code will continue to act as a drag on thesector’s recovery by limiting the emergence of a proper land market andpreventing owners from using land as collateral. Led by deputies of theCommunist Party of Ukraine (CPU), parliament voted in May 2001 to reject, inits second reading, the draft land code presented to parliament in May 2000.Moreover, the government continues to impede sectoral restructuring throughtrade restrictions and export duties (such as a 23% duty on sunflower seeds)that distort incentives and prevent market signals from functioning.

Ukraine’s uneven move towards private land ownership

Agricultural land reform has proved one of the most contentious issues ofUkraine’s transition. Reform efforts since 1994 have done little to transformthe Soviet-inherited system or to halt the agricultural sector’s dramaticdecline—largely because of the desire of state agricultural officials andcollective farm managers to preserve the status quo. Although the privatesector accounted for as much as 60% of production in 1999, it is still largelydominated by household plots rather than by private farms.

Earlier reforms transformed state-owned collective farms into collectiveagricultural enterprises (CAEs) and issued land shares to collective farmmembers. However, the 6m agricultural workers (and pensioners) whoobtained land parcel certificates at that time failed to receive a clear landownership right. As a result, they could not operate their land parcel as aprivate farm or, in the absence of a well-developed land code, sell their shareson a functioning land market. By side-stepping the fundamental shift neededtowards private land ownership, therefore, these earlier reforms had little effecton the sector’s performance. Collective land ownership continued todominate, and CAE chairmen (management remained largely unchanged fromthe Soviet period) faced little incentive to increase efficiency—given softbudget constraints: readily available government subsidies, tax privileges andfrequent debt write-offs.

The decree issued by the president, Leonid Kuchma, on December 3rd 1999reinvigorated agricultural sector reform by deepening the principle of private

Ukraine 33


ownership rights. The decree provides members with the unrestricted right toexit the CAE with their land share and other assets in order to establish privatefarms, or else to lease their land parcel (selling it is still a problem). In theory,leaving the CAE had previously also been a possibility, but had generally beensuccessfully blocked by local state authorities.

Already by April 2000 Ukraine had implemented the first stage of Mr Kuchma’sdecree (despite resistance from local level officials) by restructuring almost allof the approximately 10,000 CAEs into new forms of enterprises.

Mining and semi-processing

Although Ukraine is the world’s fifth largest producer of iron ore and has theworld’s second largest reserves of magnesium, its most important mineralresource is the Donbass coal basin, home to reserves estimated at 45bn tonnes,60% of the former Soviet Union’s coal reserves. However, the seams are deep,and many older mines lack the necessary resources to exploit the coal.Although it still makes up about 12% of Ukraine’s industrial production, thecoal mining industry has suffered a sharp decline. Output fell from a peak of218m tonnes in 1976 to 57m tonnes in 1996, before increasing moderately toaround 62m-63m tonnes in 1999 and 2000. Ukraine has over 200 coal mines,which account for around 400,000 jobs and remain heavily subsidised by thegovernment. Despite a World Bank-funded project to close down more than80 lossmaking pits by 2000, well under half of that total have been closed.Ukraine’s coal industry has the world’s highest death rate, mostly attributed toobsolete equipment and ineffective safety standards.

Ukraine also possesses several underexploited oil- and gasfields. It producedunder 3.8m tonnes of oil (including gas condensate) and 18bn cu metres of gasin 2000, out of total reserves estimated by the State Geology Committee at1.3bn tonnes of oil and 6.4trn cu metres of natural gas. Although the size ofthe deposits has attracted the interest of international firms, investors havebeen put off by the lack of a stable regulatory regime for the sector, which hascontributed to high levels of corruption. A production sharing agreement (PSA)was approved by parliament in September 1999 with the goal of improving theprospects for sizeable foreign investment into the country’s energy sector.

Manufacturing

Industrial sector


Industrial production (nominal HRN m) 134,283 88,601

Index of real industrial production (1990=100) 46.6 43.2

Industrial production (% real change) 9.1 0.6

Source: Ukrainian-European Policy and Legal Advice Centre (UEPLAC), Ukrainian Economic Trends.

Coal mining has declined

34 Ukraine


According to government figures, Ukraine’s recorded industrial output declinedby over half between 1990 and 2000. (For historical data on industrialproduction, see Reference tables 12 and 13.) However, this data almostcertainly over-represent the actual drop in output, given that production wasover-reported in Soviet times (in order to gain access to additional resourceswithin the planned system) and under-reported during the post-Soviet era (asfirms sought to limit tax-liabilities). Official industrial production data also donot take into consideration the extent to which non-viable firms are beingpropped up that are actually subtracting value—as their soft budget constraintsallow them to ignore the cost of inputs.

The industries worst hit by the post-Soviet collapse were the defence sector,which still remains significant but has suffered from a region-wide collapse indefence spending, and the machine-building sector, which has been forced tocompete against higher quality imports and has been starved of investment.Primary production has increased in importance compared with othermanufacturing sectors, and steel- and energy-related industries have gainedprominence, at the cost of certain higher value-added sectors. The share ofmachine-building in total industrial output, for instance, declined from 38% in1993 to around 9% in 2000. Even the food-processing sector, which has seenstrong growth in recent hears and is the major recipient of foreign directinvestment (FDI) in Ukraine, has seen its share of industrial sector outputstagnate around 1990 levels for the past four years.

Traditional low value-added sectors, therefore, provided the driving forcebehind Ukraine’s economic recovery in 2000 and continued to be the largestcontributors to growth over the first half of 2001. This raises concerns over thelonger-term sustainability of the country’s economic recovery, which so far hasnot been a function of the sort of far-reaching reform and large-scaleinvestment needed to reorient the industrial sector towards higher value-addedoutput and stable Western markets. The metallurgy sector, for example, whichalone accounted for approximately one-quarter of the increase in industrialoutput recorded in the first four months of 2001, is still overdependent onstrong external demand, and hostage to volatile world prices and the threat oftrade restrictions. It has not seen significant investment in overhaulingoutdated production methods and equipment, and is unlikely to be acompetitive sector for Ukraine in the long term.

Nevertheless, data available so far for 2001 suggest some early signs of progresstowards achieving a broader and more sustainable basis for Ukraine’s economicrecovery. The increase in industrial output continued to accelerate despite farmore moderate expansion in the metallurgy sector, as a number of highervalue-added sectors picked up the slack to become increasingly importantcontributors to growth (including the engineering sector, food and lightindustries). Moreover, in many cases, such as in food-processing, increasinglyhigh growth levels reflect not only continued import substitution but also thebenefits of significant investments and reforms, and limited governmentintervention—which could help to sustain growth in these sectors even as thebenefits of the 1998-99 real depreciation unwind.

A post-Soviet contraction

A strong economic recoveryin 2000 and 2001

Ukraine 35


Industrial production(% change, year on year)

1999 2000 Jan-Apr 2001

Ferrous metallurgy 6.2 20.7 13.7

Non-ferrous metallurgy 8.9 18.8 10.0

Chemical & petrochemical industry –1.1 5.0 21.2

Machine-building & metalworking –0.8 16.8 26.5

Woodworking, pulp & paper 23.6 37.1 21.6

Light industry 5.7 39.0 21.4

Food industry 7.8 26.1 21.5

Total industry 4.3 12.9 18.4

Source: State Statistics Committee of Ukraine.

Construction

The collapse of investment throughout the economy has badly affected theconstruction sector, especially as reductions in budget expenditure havebrought state-funded capital projects to a standstill (the government budgetaccounted for just over 5% of construction projects in 2000). Construction’scontribution to GDP fell from approximately 7% in the early 1990s to under4% by the end of the decade. Real growth in the sector fell particularly sharplyin 1999, as investment and economic activity suffered from the after-effects of1998 regional crisis.

However, since the start of Ukraine’s recovery the sector has picked uprelatively quickly, including 9% year on year growth during the first quarter of2001. This reflects the extremely low base reached after years of decline, as wellas the solid increase in domestic demand that began in 2000. Fixed capitalinvestment, in particular, has increased rapidly, with the government reportingan 11% year-on-year increase in 2000 and a more than 20% increase over thefirst quarter of 2001.

In contrast to the official economy, construction in the shadow economyboomed even during the steep economic decline suffered in the 1990s, withself-built dachas (country cottages) becoming a common sight in city suburbs,and many foreign businesses paying a hefty premium for newly constructedWestern-style offices in the capital. Despite the continued reduction in interestrates seen in 2000, banking sector credit continues to finance only a minorityof construction projects. In 2000, over two-thirds of these projects were fundedby firms’ own profits.

Financial services

The banking sector is dominated by only seven banks—Prominvestbank,Ukraina Bank, Ukrsotsbank, the Savings Bank of Ukraine and two new post-Soviet private banks (Aval Bank and Privatbank). Between them these banksaccount for the majority of the sector’s assets. Aside from around 20 mid-sizedbanks, the rest of the sector consists of small undercapitalised banks, many of

Grey economyconstruction booms

The banking sectorremains fragile

36 Ukraine


which were formed by state-owned enterprises as a means to gain access tocheap credit.

During the 1990s industry arrears and economic stagnation brought significantlosses to Ukraine’s fragile banking system. High interest-rate costs make itdifficult for firms to borrow, invest productively and repay loans in a timelyfashion. (For historical data on interest rates, see Reference table 6.) Thebanking system was then further weakened by the financial crisis in 1998 andthe government’s de facto default on government debt that followed. Althoughmost banks survived, the banking sector’s already low capitalisation fell evenfurther and has only gradually recovered. The government’s efforts to stabilisethe currency in the months following the crisis, including high mandatoryreserve requirements and a ban on banks conducting foreign-exchangeoperations on their own accounts, weakened the banking sector further.

The National Bank of Ukraine (NBU, the central bank) raised capitalrequirements for commercial banks to Ecu1m (US$1.3m) in 1998 and thenagain to €3m (US$2.8m) in July 1999, but has moved slowly to revokelicences. Many of the most undercapitalised banks blame their difficulty inmeeting this requirement on the sharp 1998-99 currency depreciation—although if assets were properly valued these banks would probably prove to beeven more poorly capitalised than it appears at present. According to the NBU,the banking sector’s authorised capital stood at only HRN3.9bn as of May2001. (For statistics on the banking sector, see Reference table 14.)

Since the start of 2000 the banking sector has been strengthened by a consider-able drop in interest rates and an easing of the minimum reserve requirement.Around 90% of the approximately 150 commercial banks currently operatingin Ukraine reported profits in 2000 (Ukraine also has around 40-50 registeredbut not operational banks). The improved macroeconomic environment and ageneral increase in economic activity drove an increase in bank deposits,which rose from HRN12.2bn at end-1999 to HRN19.8bn in April 2001, as aconsequence of increased currency confidence and greater liquidity. Lendingto the real sector also picked up sharply, following years in which commercialbanks had seen little need to lend, owing to the dire state of most Ukrainianenterprises and (until 1998) the more lucrative possibilities available on thegovernment bond market. According to data provided by the Ministry ofFinance, the percentage of commercial bank credits to the real economy, as apercentage of total commercial bank credit, rose from 53% at the start of 1999to 64% by end-2000, and the total volume of credits to the real economy rosefrom around HRN11.8bn at end-1999 to HRN22.4bn by April 2001.

Nevertheless, this level of banking sector involvement in the real economyremains extremely low in comparative terms. In particular, the banking sectorcontinues to have little involvement with small and medium-sized enterprises,which have yet to emerge as significant contributors to economic growth, incontrast to more developed economies. Banking sector reform, therefore, is stillurgently needed and is progressing gradually. There are now some early signsof banking sector consolidation, and reforms in place since April 2001 havereduced the banking sector’s fiscal functions—whereby banks had been forced

The banking sector

Ukraine 37


to work for the state tax administration by making tax debtors’ accountsavailable to the authorities. Combined with high tax levels, this had played asignificant role in restricting the deposit growth needed for the sector toassume a greater lending role.

Perhaps the most pressing task still confronting the banking sector is torestructure two of Ukraine’s large banks, Slaviansky Bank and Bank Ukraina.These two banks alone accounted for over three-quarters of the significantlosses (more than HRN500m—US$92m) reported by the banking sector in2000. Although the liquidation of Slaviansky Bank is now under way, adecision on liquidating Ukraina Bank is proving far more difficult. UkrainaBank has suffered from bad loans carried out under government pressure, andis of major concern because of its size—it serves at least 200,000 companiesand well over 1.5m individuals, and is estimated to owe HRN450m (US$84m)to creditors and deposit account holders. Under pressure from the IMF and theWorld Bank, finance ministry officials suggested in mid-2001 that UkrainaBank could be restructured into a state-owned mortgage bank, and have calledon parliament to approve the additional Treasury-bill issuance needed for therestructuring to proceed.

Low transparency and liquidity, combined with considerable risk, haveimpeded the development of Ukraine’s stockmarkets. Stockmarket access forsmall or new companies is virtually non-existent, with most new stock issuescoming from sales of large, newly privatised companies. As these sales haveproceeded only slowly, total stockmarket capitalisation remains low—especiallyas Ukraine’s five stockmarkets were devastated by the Asian financial crisis atthe end of 1997 and the regional crisis that emerged the following year. In2000-01 stockmarket indices were still well below the levels recorded before theRussian crisis in 1998. Most companies listed do not trade on a regular basis,and their turnover is gradually declining. Energy companies continue todominate the market, with UkrNafta, which has the highest capitalisation ofUkraine’s “blue-chip” companies, accounting for a disproportionate share ofmarket turnover in 2000. According to Kiev-based Dragon Capital, Westerninstitutional investors have delayed their return to the Ukrainian stockmarketas a result of the volatile political situation, thereby leaving domestic andRussian investors as the major players on the market.

Ukraine’s government debt market emerged at the beginning of 1995, whenthe government began financing part of the budget deficit through the sale ofT-bills. T-bill purchases rose from around HRN300m (US$167m) in 1995 toaround HRN8.5bn in 1998. However, global emerging market instability in thesecond half of 1997 forced the government to raise yields and to rely increas-ingly on NBU purchases, owing to the disappearance of foreign investors—whohad taken on an ever-increasing role in the market by mid-1997. Virtually allinterest in the primary debt market (apart from occasional NBU purchases)disappeared following the government’s move, towards the end of 1998, tomaintain nominal yields at artificially low levels and to reschedule themajority of foreign and domestically held debt maturing in 1999 and 2000 intolonger-term bonds. The NBU, as the holder of the largest quantities of

Commercial banks wary ofTreasury-bill market

Stockmarkets are stillundeveloped

38 Ukraine


outstanding government debt (which it agreed to restructure in October 2000),is acting as a market-maker in an attempt to revive the secondary market forstate bonds. As of mid-2001 there were signs of limited, but growing, interestby commercial banks in acquiring the NBU’s restructured bonds.

Other services

Despite its considerable potential for tourism, Ukraine has yet to developadequately its decaying tourism infrastructure. Although Western-standardhotels exist in Kiev and some of the other major cities, hotels are of a far lowerstandard outside these centres. A similar situation exists in the retail sector.Western-style shops and imported goods are available in major urban centresbut are largely inaccessible to the vast majority of the population, whichcontinues to purchase most of its requirements at open-air markets.

The external sector

Trade in goods

The sharp region-wide economic contraction that followed the break-up of theCouncil for Mutual Economic Assistance (CMEA, or Comecon) in 1991 sparkeda collapse of both purchasing power and demand in Ukraine’s traditional Sovietbloc markets in the early 1990s. Even as the situation stabilised, Ukraine’s tradedeficit suffered first from a trade war with Russia in 1997 and then fromRussian economic collapse in 1998. Shocks such as these have affected Ukrainemore seriously than some of the other economies in the region, owing toUkraine’s particular difficulty in diversifying trade away from former Sovietmarkets. Exports to the former Soviet Union still accounted for 35% of allexports in 2000, down from over 50% before 1997 but still substantially higherthan the approximately 15-20% of exports that go to the EU. Imports fromRussia have continued to fluctuate between 40% and 50% of total imports, wellover double the percentage of imports coming from the EU. (For historical dataon merchandise and services trade, see Reference tables 15-17.)

Energy imports have accounted since 1995 for roughly two-thirds of allimports from Russia and over 40% of total imports. Payment for thesepurchases has posed a constant problem, and disputes with suppliers have onoccasion led to the suspension of deliveries. Turkmenistan, for instance,suspended gas shipments in April 1999 because of Ukraine’s inability to pay.Until 1998 the high gas import price charged by Russia (higher than thatcharged to West European countries) was a major contributor to Ukraine’sconsiderable trade deficit. Since 1998 a reduction of about 20% in Ukraine’s gasimport price enabled a significant reduction in Ukraine’s import bill andhelped to lower the trade deficit despite a deterioration in export revenue. Thetrend that emerged in late 2000 and early 2001 towards reduced natural gaspurchases represents a positive development—given Ukraine’s excessive

Russia is still the dominanttrade partner

Underdeveloped tourisminfrastructure

Energy purchases continueto dominate imports

Ukraine 39


reliance on energy imports. Although more data is needed, this trend is likelyto be attributable to the government’s renewed emphasis on forcing enterprisesto pay cash for the energy inputs. In previous years soft budget constraints,particularly regarding energy purchases, had provided little incentive forenterprises to curb their excessive energy usage.

Goods imports by commodity group and region, 2000(US$ m)

Food, beverages & agricultural products 908 Former Soviet Union 187 Rest of world 721

Fuel & energy incl ores 6,419 Former Soviet Union 5,925 Rest of world 494

Chemicals & related products 1,647 Former Soviet Union 471 Rest of world 1,176

Wood & articles of wood 436 Former Soviet Union 166 Rest of world 270

Textiles, footwear, stone, ceramic & glass 741 Former Soviet Union 176 Rest of world 565

Non precious metals 681 Former Soviet Union 341 Rest of world 340

Machinery & equipment incl vehicles 2,625 Former Soviet Union 965 Rest of world 1,660

Other 1,486 Former Soviet Union 475 Rest of world 1,011

Total 14,943 Former Soviet Union 8,706 Rest of world 6,237

Source: Ukrainian-European Policy and Legal Advice Centre (UEPLAC).

Although Ukraine has recorded a merchandise trade surplus with non-formerSoviet countries every year except 1996, this had until recently beenconsistently dwarfed by its trade deficit with former Soviet markets, and until1999 had never compensated for more than 30% of the trade deficit withformer Soviet states. Ukraine’s sharp import compression in 1999 bucked thistrend, with the surplus to non-former Soviet states more than making up for itsdeficit with former Soviet markets in both 1999 and 2000 (as measured bybalance-of-payments data). Nevertheless, Ukrainian exporters still facedifficulty penetrating non-Commonwealth of Independent States (CIS)markets, owing to the better quality products produced in Western Europe,North America and Asia.

40 Ukraine


Goods exports by commodity group and region, 2000(US$ m)

Food, beverages & agricultural products 1,378 Former Soviet Union 799 Rest of world 579

Fuel & energy incl ores 1,273 Former Soviet Union 115 Rest of world 1,158

Chemicals & related products 1,914 Former Soviet Union 834 Rest of world 1,080

Wood & articles of wood 419 Former Soviet Union 176 Rest of world 243

Textiles, footwear, stone, ceramic & glass 725 Former Soviet Union 167 Rest of world 558

Non-precious metals 6,468 Former Soviet Union 1,463 Rest of world 5,005

Machinery & equipment incl vehicles 1,859 Former Soviet Union 1,158 Rest of world 701

Othera 1,412 Former Soviet Union 771 Rest of world 641

Total 15,448b

Former Soviet Union 5,483 Rest of world 9,965

a “Other” includes furs and fur products, optical and other devices, musical instruments and arts,and also includes informal trade flows. b Total in source differs from UEPLAC and IMF data inReference tables 17 and 18.

Sources: National Bank of Ukraine; UEPLAC.

This has caused a major shift from an export mix based on machinery andother finished goods towards primary and semi-finished products such as steel,fertiliser, iron ore and chemicals. The traditional sectors of Ukraine’s Soviet-eraindustrial base do not provide a solid foundation for sustainable growth, giventheir obsolete capital stock, excessive energy intensity and inability to adjust tochanges on international markets. Moreover, an over-reliance on steel exportsbrings with it a high degree of vulnerability to volatile world prices and chargesof unfair trade practices—as seen most recently by a request from the USadministration to investigate surging Ukrainian steel exports to the US market.The demand for Ukrainian products in Russia, which is currently helping toboost production and exports, is also potentially volatile, given continued realappreciation against the rouble, the imposition of value-added tax (VAT) dutiesstarting in mid-2000, and pressure for trade protection from Russiancompetitors in key sectors such as steel. In April 2001, for instance, this alreadyresulted in an annual quota for Ukrainian steel pipes that will bring exportlevels to well below 2000 levels in volume terms.

Ukraine 41


Direction and composition of Russian and OECD trade, 2000a

(US$ m)

Derived exports Russia US Germany Italy France

Food, beverages & tobacco 548.8 2.6 30.4 4.0 1.8Mineral fuels 28.9 15.3 3.2 105.2 16.8Chemicalsb 461.0 151.1 56.4 74.4 14.0Paper & manufactures 123.5 1.4 0.1 0.2 0.0Iron & steel & manufacturesc 926.2 444.1 114.6 243.0 4.8Other metals & manufacturesc 131.3 26.1 174.4 37.0 1.9Machinery & transport equipment 794.7 87.2 54.6 9.0 82.5Clothing & footwear 35.7 77.3 204.7 45.6 37.4Total incl others 3,496.6 873.0 771.7 714.1 186.4

Derived imports Russia Germany Italy France UK

Food, beverages & tobacco 84.9 51.3 5.7 35.9 13.4 of which: cereals & preparations 32.2 4.0 0.6 3.1 0.9Mineral fuels 3,318.0 8.8 11.4 1.4 0.7Chemicalsb 185.6 202.1 35.5 75.3 40.8Hides, skins, leather & manufactures 3.9 10.9 22.5 0.4 0.2Rubber & manufactures 79.7 18.6 1.6 0.9 1.4Textile fibres, yarn, cloth & manufactures 63.3 159.9 33.5 24.1 14.8Non-metallic mineral manufacturesd 35.7 64.9 14.0 4.7 5.3Iron & steel & manufacturesc 107.8 29.4 11.1 3.2 11.7Other metals manufacturesc 62.8 36.8 6.7 4.1 11.6Machinery & transport equipment 728.5 548.1 114.9 159.5 82.9 of which: road vehicles & tractors 139.7 187.3 5.8 6.1 4.4 other transport 38.9 1.2 0.6 79.4 0.7Clothing 2.8 18.0 43.0 9.8 9.1Footwear 6.9 3.6 39.7 0.6 0.3Scientific instruments etc 50.6 35.1 6.8 7.8 24.0Furniture etc 3.6 9.0 49.7 1.6 2.4Total incl others 4,975.4 1,288.1 414.9 342.4 234.6

a Figures from partners’ trade accounts. b Incl crude fertilisers & manufactures of plastics. c Incl scrap. d Incl precious metals & jewellery.

Sources: Global Trade Information Services, World Trade Atlas; Customs Committee of Russia; US Department of Commerce, Bureau of Census; Eurostat; HM Customs & Excise.

Invisibles and the current account

Ukraine’s traditionally large merchandise trade deficit has generally benefitedfrom a surplus on invisibles, made possible by transit fees levied on Russian gasand oil exports to Western Europe. At its height in 1996 the services surpluscovered almost three-quarters of Ukraine’s record-high US$4.3bn merchandisetrade deficit. However, Ukraine’s services surplus has fallen considerably sincethen, and is at risk of being erased completely if recent trends continue. At firstthis decline in the services surplus came as a result of a 30% drop in the transitfee charged for Russian gas in 1998-99 relative to 1997 levels, but by 2000 wasbeing driven also by a sharp increase in services imports, which brought theservices surplus down to one-fifth of the level seen in 1996. This reflected theeconomic recovery under way since the end of 1999 and included a rise intravel-related services, as well as a significant rise in “other” services, includingtechnical assistance, advertising, royalties and license fees.

Invisibles surplus hascovered the trade deficit

42 Ukraine


However, owing to the significant adjustment undergone by Ukraine’smerchandise trade, the shrinking services surplus recorded in 1998-2000 had noserious repercussions for Ukraine. On the contrary, Ukraine recorded anunprecedented and sizeable current-account surplus in both 1999 and 2000,equal to around 5% of GDP. In 1999 this was attributable primarily to a sharpmerchandise import compression brought on by the hryvnya’s realdepreciation, a drop in domestic demand and reduced gas import prices. As thistrend began to reverse in 2000, a return to higher levels of imports was morethan compensated for by the strong exports sector sales facilitated by a buoyantexternal environment. A more ephemeral contributor to the 2000 surplus camefrom a surge in merchandise exports to Russia in the second quarter, relatedentirely to one-off transfers agreed in the 1999 Black Sea Fleet agreement. (Forhistorical balance-of-payments data, see Reference table 18.)

Balance of payments(US$ m)

2000a 20011 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr

Exports fob 3,627 3,675 4,103 5,301 4,000

Imports fob –4,015 –3,390 –3,379 –5,127 –3,843

Trade balance –388 285 724 174 157

Services exports 944 923 949 984 945

Services imports –589 –765 –851 –968 –906

Services balance 355 158 98 16 39

Income credit 30 35 37 41 48

Income debit –395 –254 –211 –225 –217

Income balance –365 –219 –174 –179 –169

Current transfers credit 250 280 287 319 265

Current transfers debit –9 –55 –34 –21 –14

Current transfers balance 241 225 253 298 251

Current-account balance –157 449 901 288b 278

Capital account –2 –2 –2 –2 2

Financial account 153 –489 –747 –240 52 of which: 0 0 0 0 0 direct investment 126 207 131 130 188 portfolio investment –482 471 –96 –94 –161 other investment 477 –1308 –748 261 62 reserves assets 32 141 –34 –537 –37

Capital & financial account balance 151 –491 –749 –242 54

Errors & omissions 6 42 –152 –46 –332

Overall balance 0 0 0 0 0

a NBU data for 2000 goods and services exports differ from IMF data. b Does not sum in source.

Source: National Bank of Ukraine.

Capital flows and foreign debt

In December 1994 Russia assumed liability for all Soviet debt allocated toUkraine after the dissolution of the Soviet Union (equivalent to just over

Foreign debt

Ukraine 43


US$10bn) in return for Ukraine’s share of all former Soviet assets. By the end of1999 Ukraine’s debt stock had risen from zero to US$14.1bn, according to thelatest available World Bank data, but is estimated to have fallen to just aboveUS$12bn by the end of 2000, equal to a debt/exports ratio of just over 60%.(For historical data on external debt, see Reference table 19.) Ukraine’s chiefoverseas creditors remain the IMF, the World Bank and Russia.

Although Ukraine successfully gained access to the Eurobond market in 1997,its precarious economic situation and the regional financial crisis of 1998forced it back out of international capital markets and limited its ability to rollover debt. Since then Ukraine has struggled to keep an IMF financingprogramme operational, as it weighs heavily in decisions by other multilateraland bilateral creditors regarding other official loan disbursements—Ukraine’sonly sizeable source of external credits. Ukraine’s slow reform progress hascomplicated this relationship and has led to repeated disruptions in IMFdisbursements under its US$2.6bn extended fund facility (EFF). The longestsuspension in IMF financing began in September 1999, following furtherreform slippages in the run-up to the presidential election, and lasted until theIMF agreed to a US$242m disbursement in December 2000. Since thenUkraine’s political uncertainty and slow implementation in a small number ofreform areas has prevented any further disbursements.

Ukraine’s ability to meet its foreign debt-service requirements was a seriouscause for concern between mid-1998 and the first quarter of 2000, when cur-tailed access to international capital markets coincided with rising debt-serviceobligations on early Eurobond issues and IMF loans. The surge in debt-serviceobligations scheduled for the first half of 2000 finally forced Ukraine toconsider a comprehensive restructuring bid, in contrast to the piecemealrestructuring of individual loan repayments seen since mid-1998. In January2000 the government announced its desire to restructure around US$2.7bn incommercial debt falling due in 2000-01, and then proved extremely successfulat securing over 98% agreement from Ukraine’s widely diffused pool ofcommercial creditors, who accepted the government’s replacement Eurobondsscheduled to mature in 2007. In early 2000 the government stopped servicingits Paris Club debt and announced its desire to restructure this as well—aprocess that began in early 2001 but was then interrupted as Paris Club debtorsinsisted on an active IMF programme being in place. This restructuring wouldinvolve just over US$1bn, and would include debts to both Paris Club creditorsand gas-related debts to Turkmenistan.

Ukraine has attracted less than 3% of all foreign direct investment (FDI) intocentral and eastern Europe since the start of the post-communist transition.This amounts to a total of only around US$3.3bn since independence—roughly comparable in absolute terms with Croatia, Slovakia and Azerbaijan.

Foreign direct investment inflows(US$ m)

1993 1994 1995 1996 1997 1998 1999 2000

Net FDI 198 159 267 521 623 743 496 595

Source: IMF, International Financial Statistics.

Foreign direct investment

44 Ukraine


Foreign direct investment, Apr 2001

US$ m % of total

Cumulative FDI 3.92a 100.0 of which: food industry 740.5 18.9 internal trade 518.8 13.2 engineering 330.6 8.4 finance, lending & insurance 301.8 7.7 transport 252.8 6.4 chemicals & petrochemicals 221.4 5.6 metals & metal-processing 169.9 4.3

a US$ bn.

Source: Interfax News Agency.

In terms of FDI as a percentage of GDP, Ukraine, with FDI at 1.9% of GDP, lagsfar behind central Europe, which averages around 4%. The major stumblingblock to greater investment has come from Ukraine’s high levels of corruptionand contradictory regulatory and legal regimes (see The economy). Ukraine hasoften been accused of violating foreign investment agreements and of notenforcing investors’ rights.

Foreign direct investment by country of origin, Apr 2001

US$ m % of total

US 664.4 16.9

Netherlands 367.2 9.4

Cyprus 357.8 9.1

UK 310.7 7.9

Russia 284.1 7.2

Germany 241.3 6.1

British Virgin Islands 214.0 5.5

Switzerland 174.9 4.5

South Korea 170.4 4.3

Source: Interfax News Agency.

As a result of the regional financial crisis and political instability (in advance ofthe presidential election), foreign investment inflows in 1999 fell to theirlowest point since 1995, at just under US$500m. The government counted ona substantial increase in FDI in 2000, based on greater investor confidence andan ambitious privatisation programme—but saw total inflows remain wellbelow 1998 levels owing to slow implementation of privatisation plans andcontinued investor wariness. Investment has been concentrated primarily inthe food industry, internal trade, and machinery and metal-processing, withthe largest investor since independence being the US, followed by theNetherlands and, as of 2000, Cyprus. Cypriot investments (and British VirginIslands investments) consist overwhelmingly of offshore Russian andUkrainian capital, and as such suggest a partial return of capital into Ukraine—as well as a significant increase in Russian privatisation purchases.

Ukraine 45


Foreign reserves and the exchange rate

Ukraine’s foreign-currency reserves increased relatively steadily between 1993and the beginning of 1998, although they remain consistently low by inter-national standards, equal to around one months’ worth of goods and servicesimports. Currency weakness starting in the second quarter of 1998 forced asharp drop in reserves as the National Bank of Ukraine (NBU, the central bank)attempted to defend the hryvnya. This decline in reserves accelerated consid-erably with the financial turmoil in the third quarter, following unsuccessfulefforts to stabilise the currency and the need to deplete reserves in order tomeet foreign debt-service obligations. By March 1999 the NBU’s reserves hadfallen below US$650m (around two weeks of import cover), down by almostUS$2bn from the preceding year. A return of relative currency stability sincemid-1999 has allowed the central bank periodically to purchase foreigncurrency to boost reserve levels—a trend that accelerated in 2000 as buoyantexport growth permitted the NBU to make considerable purchases of foreigncurrency. Despite this, reserves in the first half of 2001 still remained exceed-ingly low, at around US1.6bn, equal to only around five weeks’ worth of importcover. (For historical data on foreign-exchange reserves, see Reference table 20.)

In September 1996 Ukraine introduced a new currency, the hryvnya, to replacethe hyperinflationary karbovanets, or coupon, which had been in place sinceNovember 1992. Because of relatively tight monetary policy, the hryvnyaproved reasonably stable until weaknesses emerged with the start of theemerging markets crisis towards the end of 1997. (For historical data onexchange rates, see Reference table 21.) More serious instability came with thedevaluation of the Russian rouble in August 1998—which coincided withdaunting Ukrainian debt-service obligations and resulted in further flight fromthe hryvnya. After the depletion of reserves to critical levels, the NBUabandoned its currency market intervention and introduced substantialadministrative currency controls, which stabilised the currency.

During the course of 1999 it became increasingly obvious that the NBU’s statedpolicy of maintaining target currency “corridors” for the hryvna existed inname only. The hryvnya followed up its 1998 real effective depreciation ofalmost 40% with a further 8% real depreciation in 1999, based on a nominaldecline of over 50%, as the NBU lacked both the currency reserves and theinclination needed to support the hryvnya. The NBU’s announcement inFebruary 2000 that it would introduce a free-float exchange-rate regime for thehryvnya therefore took few observers by surprise—as it merely formalised the defacto exchange-rate policy in place since the second half of 1999. The hryvnyahas appreciated in nominal terms since the abandonment of the currencycorridor policy, as a result of reduced debt-service pressures and the significantincrease in hard-currency revenue brought on by rising exports and cash sell-offs to foreigners. This has amounted to a real effective appreciation of around25% between early 2000 and mid-2002, and a gradual unravelling of thecompetitiveness effects gained from the 1998-99 real depreciation. Nevertheless,in mid-2001 the hryvnya still stood around one-third lower in real effectiveterms compared with its level before the 1998 regional financial crisis.

Foreign reserves

The exchange rate

46 Ukraine


Appendices

Regional organisations

The Commonwealth of Independent States (CIS) was established on December8th 1991 by the Minsk Agreement signed by the heads of state of the Republicof Belarus, the Russian Federation and the Republic of Ukraine. The Agreementbetween the three republics sealed the end of the Soviet Union. The formalclause stating the dissolution of the Soviet Union was included in thesubsequent treaty signed in Almaty, Kazakhstan, by all former Soviet republicsexcept the Baltic states and Georgia. Azerbaijan initially refused to ratify thetreaty, but by December 1993 both Georgia and Azerbaijan had joined thecommonwealth. The CIS thus includes all the former Soviet republics exceptthe Baltic states.

The CIS sought to fill the institutional vacuum resulting from thedisintegration of the Soviet Union. The main organ of the CIS is the Council ofthe Heads of State, the supreme body of the organisation; it is convened no lessthan twice a year. The Council co-ordinates the co-operation of the executiveauthorities of the states in economic, social and other spheres. The activities ofthe CIS are logistically supported by the Executive Committee, which acts as asecretariat and has its seat in Minsk, Belarus. The organisation also has anInter-parliamentary Assembly. The perception of the CIS and its role variesconsiderably among the participating states. Those that have an alternative toRussian leadership and prospects for economic independence tend to favour aloose framework. States that are reliant on Russia are more inclined to want theCIS to be a close alliance. Belarus, as an exceptional case, follows a policy ofcloser integration with Russia, which is intended to lead eventually to are-unification of the two states.

The CIS introduced a certain order into post-Soviet affairs. It has also served asa useful forum for discussion and “networking” of the former Soviet elites.However, the overall record of the CIS has been disappointing. Integration andlevels of co-operation have lagged behind some initial expectations. Manymembers remain wary that a closer union could become the instrument ofRussia’s post-imperial ambitions. Moreover, Russia has been reluctant andincapable of bearing the costs of a more ambitious reintegration process. TheCIS has also been unable either to prevent or resolve numerous regionalconflicts. On the economic front, the CIS has also fallen short of theexpectations of many of its members. After almost ten years of existence, theCIS has not implemented a customs union or a free-trade area covering allmember states. In 1995 Belarus, Kazakhstan, the Kyrgyz Republic and Russiaformed a Customs Union, which was joined by Tajikistan in 1999. A treaty onthe setting up of a Eurasian Economic Community was signed by the five inOctober 2000.

The European Bank for Reconstruction and Development (EBRD) was set up in1991 to help finance the development of central and eastern Europe after the

Commonwealth ofIndependent States

European Bank forReconstruction and

Development

Ukraine 47


fall of communism. By contrast with most other multilateral organisationsinvolved in the region, the EBRD’s mandate compelled it to focus on the privatesector, as it was allowed to commit no more than 40% of its funds to public-sector projects. It received an initial capital of Ecu10bn (US$12bn at 1991average exchange rates), which was doubled in 1997. The EBRD initially foundit difficult to carve out a niche for itself, and was in its early years beset byscandals and a leadership crisis. Although it recovered from these, in 1998 theRussian financial crisis resulted in heavy losses for the Bank. Russia has been theEBRD’s largest client, accounting for one-fifth of all funding in 1991-2000.

Nevertheless, over the past decade the EBRD has invested substantial sums inthe region and has helped to encourage private-sector investors. By 2000 it hadrecovered from its 1998 losses, and by the end of 2000 had disbursed €12.1bn(US$11.5bn) of its €20bn capital. If co-financing from other lenders and theprivate sector is added, the EBRD has been involved in investment worthUS$50bn. Of this, some US$12bn came in the form of foreign directinvestment (FDI). The Bank’s clientele has grown from just a handful oftransition countries in the early 1990s to 27 countries today, with Yugoslavia(Serbia-Montenegro) being the most recent addition to the Bank’s list ofpotential beneficiaries. The EBRD has funded hundreds of projects, rangingfrom bank privatisation to road-building.

The US has long wanted the Bank to shift its focus further east from the moreadvanced countries of east-central Europe to the Commonwealth ofIndependent States (CIS) and the Balkans. The east-central European countriesare seen to have “graduated”, to be able to rely on private-sector finance and tono longer need the EBRD’s support. However, West European governmentswant the Bank to stay engaged in central Europe and help these countries toprepare for EU accession. The EBRD is to boost its annual lending from €2.7bnin 2000 to €3.5bn in 2001 and thereafter. Whereas funding of the advancedEU accession candidates is to remain constant, at around €1bn per year, mostnew business will be directed to the CIS and the Balkans, where the Bank hashad trouble in the past in finding viable investment projects.

This loose regional organisation groups together the five members of the CIS(Georgia, Ukraine, Uzbekistan, Azerbaijan and Moldova) that have traditionallybeen most wary of Russia’s strong influence in the region. GUUAM wasestablished with US encouragement in 1997 (with Uzbekistan joining in 1999),with the unstated aim of excluding Russia from the exploitation and transportof Caspian Sea oil. The group hopes to establish an east-west trade corridor andenergy transportation routes, deepen political co-operation, and foster closerties with NATO.

However, GUUAM’s significance has remained limited. GUUAM has served atmost as an important consultative forum, but has met only infrequently andhas no formal structures. Although GUUAM heads of state agreed in September2000 to deepen economic co-operation and to meet at least once a year, theoutlook for further integration among the member states does not lookpromising. GUUAM members lack a broad-based convergence of interests andeven differ in their stance vis-à-vis Russia—especially given the communists’

GUUAM

48 Ukraine


recent return to power in Moldova and Uzbekistan’s growing dependence onRussian military co-operation. All of the GUUAM states are constrained bytheir considerable economic dependence on Russia. Russia remains theprincipal energy supplier in the region, as well as a dominant export marketand, in most cases, a sizeable creditor.

The Organisation of the Black Sea Economic Co-operation (BSEC) beganoperating in 1999, several years after regional leaders established a frameworkfor co-operation at a summit in 1992. The organisation’s supreme body is thePresidential Summit, which comprises the heads of states and government ofthe member states (Albania, Armenia, Azerbaijan, Bulgaria, Georgia, Greece,Moldova, Romania, Russia, Turkey, and Ukraine). The main decisions in theBSEC are taken by the Council of Ministers of Foreign Affairs, which meets onan annual basis.

The BSEC was formed with the goal of extending economic co-operation byfacilitating contacts between businesses and eliminating barriers to trade. BSECmember states have set up a number of bodies to meet these goals, althoughresults to date have been limited. The Black Sea Trade and Development Bankwas set up in 1998 to finance and implement joint regional projects. A BSECCo-ordination Centre was established in Ankara to promote the exchange ofstatistical data, and the Istanbul-based BSEC Business Council is charged withidentifying private and public investment projects.

Initially a non-institutionalised multilateral forum for Cold War East-Westdialogue, the Conference for Security and Co-operation in Europe (CSCE)gradually expanded in aim and strengthened its organisational structure in the1990s. Established in 1972, the CSCE served for almost twenty years as aconvenient and flexible arrangement for easing Cold War tensions. After theend of the Cold War the role of the CSCE started to change quickly, and inDecember 1994 the conference was officially renamed the Organisation forSecurity and Co-operation in Europe (OSCE). With 55 member states, theOSCE is the only inclusive pan-European security organisation. Canada andthe US are also members of the organisation.

The OSCE has played a key role in conflict prevention and resolution, as wellas post-conflict reconstruction in Europe. Its activities embrace threedimensions: security, economy, and human rights. The OSCE is engaged inpreventive diplomacy, arms control and confidence-building activities. Itundertakes fact-finding and conciliation missions and crisis management. TheOSCE is a component of the European security architecture. It is a “regionalarrangement” in the sense of Chapter VIII of the UN Charter, which gives itauthority to try to resolve a conflict in the region before referring it to the UNSecurity Council. In the course of the 1990s the OSCE has been heavilyinvolved in the Balkans and the Transcaucasus.

The activities of the OSCE are performed by a web of specialised agencies. TheHigh Commissioner on National Minorities, based in The Hague, is theprimary source of “early warning”, with responsibility for identifying ethnictensions that might endanger peace. The Office for Democratic Institutions

Organisation of the BlackSea Economic Co-operation

Organisation for Securityand Co-operation in Europe

Ukraine 49


and Human Rights (ODIHR), based in Warsaw, focuses on promoting humanrights, democracy and the rule of law. It monitors elections, assists atdeveloping national electoral and legal institutions, promotes the developmentof non-governmental organisations (NGOs) and civil society, conductsmeetings, seminars and special projects. The Office of the Representative onFreedom of the Media, based in Vienna, assesses the implementation of themember states’ commitments concerning freedom of journalism, broadcastingand access to information.

Sources of information

Although a range of government ministries, alongside the National Bank ofUkraine (NBU, the central bank), produce their own statistical bulletins andreports, these are difficult to obtain. Officials view information as a commodityand tend to limit its circulation. The most comprehensive and up-to-datereview of available data is Ukrainian Economic Trends, published by theUkrainian-European Policy and Legal Advice Centre (Kiev), with funding fromthe EU’s TACIS programme. Reliable information can also be obtained fromEastern Economist, a weekly Kiev-based English-language magazine published byMatlid Publications.

The IMF, World Bank, the OECD and the European Bank for Reconstructionand Development (EBRD) are the main international providers of statistics onthe Ukrainian economy.

Energy Data Associates, Bishops Walk House, 19-23 High Street, Pinner,Middlesex HA5 5PJ

EBRD, Transition Report

IMF, International Financial Statistics

World Bank, Global Development Finance; Statistical Handbook: States of theFormer USSR; Trends in Developing Economies; World Tables

Tor Bukkvoll, Ukraine and European Security, The Royal Institute of InternationalAffairs, London, 1997

Peter K Cornelius and Patrick Lenain (eds), Ukraine: Accelerating the Transition toMarket, IMF, Washington, 1997

Paul Magocsi, A History of Ukraine, University of Toronto Press, 1996

Anna Reid, Borderland: A Journey through the History of Ukraine, Weidenfeld &Nicolson, 1997

Websites providing current news in English, Ukrainian and Russian can beaccessed through Brama at: http://www.brama.com/news

Zerkalo Nedeli, a relatively independent major newspaper by Ukrainianstandards, is available in English at http://www.mirror-weekly.com

The National Bank keeps a well-maintained website, including data on bankingsector, financial markets, and balance of payments: http://www.bank.gov.ua

National statistical sources

International statisticalsources

Select bibliography andwebsites

50 Ukraine


Thorough analysis of policy issues is available in English from Ukraine-based policy institutes such as the Ukrainian Centre for Economic andPolitical Studies and the International Centre for Policy Studies:http://www.uceps.com.ua and http://www.icps.kiev.ua/english/index.htm

Official ministerial websites are generally not well developed. Two exceptionsare the Ministry of Finance, which provides data in Ukrainian on its website(http://www.minfin.gov.ua), and the Ministry of the Economy, which providesuseful and timely economic data, some of it in English, athttp://www.me.gov.ua. The results of a presidential administration project toconsolidate a wide range of economic data since independence are available atwww.kuchma.gov.ua

Useful details of the government’s privatisation plans are available from theState Property Fund’s website: http://www.ukrmassp.kiev.ua

Current and historical exchange-rate data are available in English from theUkrainian Financial Monitor: http://www.ukrainet.lviv.ua/ufm/eng.html

The most thorough English-language source of macroeconomic data andanalysis is the Ukrainian-European Policy and Legal Advice Centre:http://www.ueplac.kiev.ua

Reference tables

These reference tables provide the most up-to-date statistics available at the date ofpublication.

Reference table 1

Population(‘000 unless otherwise indicated; Jan 1st)

1996 1997 1998 1999 2000

Male n/a 23,523 23,342 23,342 22,978 % change, year on year n/a n/a –0.8 0.0 –1.6

Female n/a 27,116 26,903 26,509 26,478 % change, year on year n/a n/a –0.8 –1.5 –0.1

Total 51,079 50,639 50,245 49,851 49,456 % change, year on year –0.8 –0.9 –0.8 –0.8 –0.8

Urban 34,542 34,231 33,981 33,727 33,506 % change, year on year –0.8 –0.9 –0.7 –0.7 –0.7

Rural 16,537 16,408 16,264 16,124 15,950 % change, year on year –0.7 –0.8 –0.9 –0.9 –1.1

Under working age 10,996 10,686 10,384 10,036 9,608 % change, year on year –2.4 –2.8 –2.8 –3.4 –4.3

Working age 28,527 28,345 28,208 28,199 28,279 % change, year on year –0.6 –0.6 –0.5 0.0 0.3

Over working age 11,556 11,608 11,653 11,616 11,569 % change, year on year 0.3 0.4 0.4 –0.3 –0.4

Sources: US Bureau of Census; UN Development Programme, Ukraine Human Development Report.

Ukraine 51


Reference table 2

Labour force(‘000 unless otherwise indicated)

1995 1996 1997 1998 1999

Agriculture, forestry & fisheries 5,335 5,094 4,988 5,060 4,961 % of total 22.5 21.9 22.1 22.6 22.7

Industry 5,909 5,478 5,016 4,863 4,454 % of total 24.9 23.6 22.2 21.8 20.4

Services 12,481 12,660 12,594 12,427 12,409 % of total 52.6 54.5 55.7 55.6 56.9 of which: construction 1,485 1,366 1,194 1,097 974 transport & communications 1,449 1,398 1,308 1,281 1,229 trade 1,634 1,552 1,542 1,448 1,510 healthcare 1,516 ,482 1,443 1,434 1,446 housing, communal & personal services 820 770 817 776 814

Total 23,726 23,232 22,598 22,349 21,824

Source: Interstate Statistical Committee of the CIS, Statistical Yearbook, 2000.

Reference table 3

National energy statistics

1996 1997 1998 1999 2000

Natural gas production (bn cu metres) 18.4 18.1 18.0 18.1 17.9

Coal production (m tonnes) 57.0 58.6 59.5 62.7 62.4

Electricity generation (bn kwh) 183.0 178.0 172.8 172.1 169.5

Oil & gas condensate (‘000 tonnes) 4,098 4,134 3,903 3,798 3,687

Oil product output (‘000 tonnes)Petrol 2,787 2,838 3,089 2,485 2,124Diesel fuel 3,862 3,827 4,003 3,283 2,658

Source: http://www.kuchma.gov.ua/tables/tab05.html.

Reference table 4

Consolidated government budget(HRN m unless otherwise indicated)

1996 1997 1998 1999 2000

Revenue 30,142 36,890 37,702 43,827 64,806

Expenditure 33,759 43,086 39,720 45,325 61,048

Balance –3,617 –6,196 –2,018 –1,499 3,759 % of GDP –4.4 –6.6 –2.0 –1.2 2.2

Note. Pension fund has been included in all series. Consolidated budget comprises state and localbudgets.

Source: Ukrainian-European Policy and Legal Advice Centre (UEPLAC), Ukrainian Economic Trends.

52 Ukraine


Reference table 5

Money supply(HRN m unless otherwise indicated; end-period)

1996 1997 1998 1999 2000

Money (M1) incl others 6,316 9,050 10,326 14,082 20,710 % change, year on year 34.9 43.3 14.1 36.4 47.1

Quasi-money 3,046 3,485 5,002 7,575 10,563

Money (M2) 9,361 12,535 15,329 21,657 31,273 % change, year on year 35.4 33.9 22.3 41.3 44.4


Reference table 6

Interest rates(%; period averages unless otherwise indicated)

1996 1997 1998 1999 2000

Short-term lending rate 79.9 49.1 54.5 55.0 41.5

Short-term deposit rate 33.6 18.2 22.3 20.7 13.7

Refinancing rate (end-period) 40.0 35.0 60.0 45.0 28.0

Money market rate n/a 22.1 40.4 45.0 20.0


Reference table 7

Gross domestic product(market prices)

1996 1997 1998 1999 2000

Total (US$ m)At current prices 44.6 50.2 41.9 30.8 31.8

Total (HRN m)At current prices 81.5 93.4 102.6 127.1 173.0At constant (1993) prices 904 876 860 858 907 % change, year on year –10.0 –3.1 –1.8 –0.2 5.7

Per head (HRN)At current prices 1,588 1,835 2,032 2,509 3,442At constant (1995) prices 17.6 17.2 17.0 16.9 18.1 % change, year on year –9.3 –2.2 –1.2 –0.6 6.6

Sources: IMF, International Financial Statistics; State Committee of Statistics; UEPLAC, Ukrainian Economic Trends; National Bank ofUkraine; EIU.

Reference table 8

Gross domestic product by expenditure(HRN bn at current prices)

1995 1996 1997 1998 1999 2000

Private consumption 30.1 47.4 53.9 61.4 76.5 101.9

Government consumption 11.6 17.7 22.3 22.1 24.1 30.9

Gross fixed investment 12.8 17.0) 18.7 20.2 25.3 36.0

Stockbuilding 1.8 1.5 1.3 1.1 –0.1 –0.2

Exports of goods & services 25.7 37.2 37.9 43.0 66.8 100.0

Imports of goods & services –27.3 –39.3 –40.8 –45.3 –65.5 –95.7

GDP 54.5 81.5 93.4 102.6 127.1 173.0


Ukraine 53


Reference table 9

Gross domestic product by expenditure(HRN m at constant 1995 prices; % change year on year in brackets unless otherwise indicated)

1995 1996 1997 1998 1999

Private consumption 592.0 554.0 553.0 538.0 525.0 (–15.1) (–6.4) (–0.2) (–2.7) (–2.4)

Government consumption 84.0 79.0 76.0 71.0 69.0 (–12.5) (–6.0) (–3.8) (–6.6) (–2.8)

Gross fixed investment 231.0 185.0 168.0 176.0 180.0 (–14.4) (–19.9) (–9.2) (4.8) (2.3)

Stockbuilding 102.0 90.8 85.5 80.6 78.5 (–1.4)a (–1.1)a (–0.6)a (–0.6)a (–0.2)a

Exports of goods & services 341.2 357.4 360.8 367.7 305.8 (15.4) (4.8) (0.9) (1.9) (–16.8)

Imports of goods & services –346.2 –362.4 –366.8 –373.7 –300.8 (3.2) (4.7) (1.2) (1.9) (–19.5)

GDP 1004.0 903.8 876.5 859.6 857.5 (–12.0) (–10.0) (–3.1) (–1.8) (–0.2)

a % contribution to real GDP growth.

Sources: State Statistics Committee; National Bank of Ukraine; EIU.

Reference table 10

Prices and earnings(% change, year on year)

1996 1997 1998 1999 2000

Consumer prices (av) 80.3 15.9 10.6 22.7 28.2

Consumer prices (end-period) 39.7 10.1 20.0 19.2 25.8

Average nominal wages 70.9 13.6 7.8 19.3 37.7

Real wagesa –5.2 –2.1 –3.1 –5.5 1.9

a Excludes collective agricultural enterprises.

Sources: UEPLAC, Ukrainian Economic Trends; IMF, International Financial Statistics; EIU.

54 Ukraine


Reference table 11

Agricultural and livestock statistics(m tonnes unless otherwise indicated)

1996 1997 1998 1999 2000

Agricultural production (HRN m at 1996 prices) 28,643 28,112 25,360 23,606 25,781 % real change, year on year –9.5 –1.9 –9.8 –6.9 9.2

Potatoes 18.4 16.7 15.4 12.7 13.0

Sugar beet 23.0 17.7 15.5 13.9 13.2

Sunflower seed 2.1 2.3 2.3 2.8 3.5

Fruits 2.4 3.1 1.4 1.0 2.6

Vegetables 5.4 5.3 5.5 5.7 6.0

Total cereals 23.5 34.4 25.7 24.0 23.8 of which: wheat 13.5 18.4 14.9 13.6 10.2 barley 5.7 7.4 5.9 6.4 6.9 maize 1.8 5.3 2.3 1.7 3.8 rye 1.1 1.3 1.1 0.9 1.0 oats 0.7 1.1 0.8 0.8 0.9

Milk 15.8 13.8 13.8 13.6 12.6

Eggs (‘000 tonnes) 500 473 476 508 484

Meat 2.1 1.9 1.7 1.7 1.7 of which: beef & veal (‘000 tonnes) 1,037 930 793 791 803 pigs (‘000 tonnes) 789 735 675 656 675 chickens (‘000 tonnes) 220 186 200 204 200

Source: UN Food and Agriculture Organisation (FAO).

Reference table 12

Industrial production(1990=100 unless otherwise indicated)

1996 1997 1998 1999 2000

Total 42.9 42.2 41.4 42.7 46.6 % change, year on year –5.1 –1.6 –1.9 3.1 9.1


Ukraine 55


Reference table 13

Sectoral origin of industrial production(% of total at world market prices)

1996 1997 1998 1999 2000

Power 15.9 15.8 16.0 16.7 15.5

Oil & gas 10.8 10.7 11.3 10.1 8.5

Coal 10.1 11.5 12.1 11.5 10.8

Steel 21.9 25.1 24.5 25.8 28.2

Machine-building 9.9 9.0 9.6 8.3 9.4

Food-processing 17.0 13.6 12.7 13.2 13.5

Others 14.3 14.2 13.8 14.4 14.0


Reference table 14

Banking statistics(HRN m unless otherwise indicated; year-end)

1996 1997 1998 1999 2000

Reserves 848.6 925.5 1,454.6 2,613.3 4,749.6

Foreign assets 1,779.7 1,829.0 3,107.6 4,429.7 5,007.8

Claims on general government 774.5 1,815.4 1,530.5 1,133.3 804.5

Claims on non-financial public enterprises 4,932.0 5,549.0 1,440.9 1,782.4 2,633.8

Claims on private sector 1,128.2 2,259.1 7,922.1 11,046.0 18,098.5

Claims on non-bank financial institutions 5.5 0.0 129.4 153.5 219.0

Demand deposits 2,253.9 2,887.3 3,145.5 4,489.3 7,898.2

Time, savings, & foreign-currency deposits 2,887.1 3,462.8 4,971.4 7,552.2 10,505.7 of which: foreign-currency deposits 1,558.6 1,635.8 3,181.9 5,306.7 7,110.9

Bonds 0 0 220.2 305.0 642.0

Foreign liabilities 631.6 1,803.8 1,738.2 1,766.6 2,514.0

General government deposits 795.5 805.0 544.2 487.7 1,358.8

Credit from monetary authorities 699.7 979.8 1,237.2 1,569.4 1,604.9

Liabilities to non-bank financial institutions 3.4 5.8 227.3 211.4 334.6

Capital accounts 3,018.1 4,261.4 5,462.2 7,497.7 9,182.9

Other items (net) –821 –1,828 –1,961 –2,721.1 –2,527.8


Reference table 15

Trade in goods and services(US$ m; balance-of-payments data)

1996 1997 1998 1999 2000

Exports 20,346 20,355 17,621 17,058 19,522 Goods 15,547 15,418 13,699 13,189 15,722 Services 4,799 4,937 3,922 3,869 3,800

Imports 21,468 21,891 18,828 15,237 18,116 Goods 19,843 19,623 16,283 12,945 14,643 Services 1,625 2,268 2,545 2,292 3,473


56 Ukraine


Reference table 16

Main trading partners(% of total)

1995 1996 1997 1998 1999

Exports fob to:Russia 40.0 35.6 25.4 21.2 19.2China 5.3 4.9 7.2 5.4 5.9Turkey 3.2 2.6 4.3 5.1 5.4Germany 2.4 2.7 3.8 4.7 4.5Italy 3.0 2.2 2.7 4.0 3.7

Imports cif from:Russia 48.7 43.1 39.9 43.4 47.9Germany 5.7 5.1 6.7 7.8 7.3Turkmenistan 4.0 8.1 5.0 0.0 3.7US 2.5 2.7 3.3 3.6 3.1Belarus 3.1 1.9 2.0 2.2 2.6

Source: IMF, Statistical Appendix, 2001.

Reference table 17

Main composition of trade(US$ m; fob-fob)

1996 1997 1998 1999 2000

Total exports 15,547 15,418 13,699 13,189 15,722 of which: non-precious metals 4,628 5,904 5,336 4,874 6,468 chemicals 2,207 2,015 1,735 1,384 1,914 machinery & equipment 2,081 1,970 1,786 1,388 1,859 food, beverages & agricultural products 3,045 1,802 1,379 1,418 1,378

Total imports 19,843 19,623 16,283 12,945 14,943 of which: fuel & energy incl ores 8,868 8,280 6,170 5,441 6,419 machinery & equipment 2,990 3,687 3,409 2,255 2,625 chemicals 1,954 2,151 1,821 1,459 1,647 food, beverages & agricultural products 1,447 898 1,052 902 908


Reference table 18

Balance of payments, IMF series(US$ m)

1996 1997 1998 1999 2000

Goods: exports fob 15,547 15,418 13,699 13,189 15,722

Goods: imports fob –19,843 –19,623 –16,283 –12,945 –14,943

Trade balance –4,296 –4,205 –2,584 244 779

Services: credit 4,799 4,937 3,922 3,869 3,800

Services: debit –1,625 –2,268 –2,545 –2,292 –3,173

Income: credit 102 158 122 98 143

Income: debit –673 –802 –993 –967 –1,085

Current transfers: credit 619 942 868 754 1,136

Current transfers: debit –110 –97 –86 –48 –119

Current-account balance –1,184 –1,335 –1,296 1,658 1,481

continued

Ukraine 57


1996 1997 1998 1999 2000

Direct investment in Ukraine 521 623 743 496 595

Direct investment abroad 5 –42 4 –7 –1

Inward portfolio investment 199 1,605 –1,379 –75 –197

Outward portfolio investment –1 –2 –2 –11 –4

Other investment assets –821 –1,583 –1,321 –2,264 –449

Other investment liabilities 414 812 615 918 265

Financial balance 317 1,413 –1,390 –879 –321

Capital account nie credit 5 0 0 0 0

Capital account nie debit 0 0 –3 –3 –10

Capital account nie balance 5 0 –3 –3 –10

Net errors & omissions 259 –781 –818 –953 –148

Overall balance –603 –703 –3,457 –3,457 –1,004

Financing (– indicates inflow)Movement of reserves –903 –387 1,566 –301 –383Use of IMF credit & loans 778 285 382 638 251


Reference table 19

External debt, World Bank series(US$ m unless otherwise indicated; debt stocks as at year-end)

1995 1996 1997 1998 1999

Public medium- & long-term 6,580 6,647 7,015 8,966 10,027

Private medium- & long-term 84 184 627 830 988

Total medium- & long-term debt 6,664 6,832 7,642 9,797 11,015 Official creditors 4,346 4,525 4,422 4,743 6,167 Bilateral 3,687 3,360 2,892 2,725 3,780 Multilateral 659 1,165 1,531 2,018 2,387 Private creditors 2,318 2,307 3,220 5,053 4,848

Short-term debt 223 444 1,089 479 316 of which: interest arrears 35 41 43 53 78

Use of IMF credit 1,542 2,262 2,402 2,795 2,806

Total external debt 8,429 9,538 11,133 13,071 14,137

Principal repayments 636 791 689 1,452 2,123

Interest payments 501 466 669 575 677 of which: short-term debt 12 18 40 39 22

Total debt service 1,137 1,257 1,358 2,027 2,800

Ratios (%)Total external debt/GDP 17.5 15.4 21.1 31.0 37.6Debt-service ratio, paida 6.6 6.1 6.6 11.4 16.3

Note. Long-term debt is defined as having original maturity of more than one year.a Debt service as a percentage of earnings from exports of goods and services.

Source: World Bank, Global Development Finance.

58 Ukraine


Reference table 20

Foreign reserves(US$ m unless otherwise indicated; end-period)

1996 1997 1998 1999 2000

Total international reserves excl gold 1,960.0 2,341.1 761.3 1,046.4 1,352.7

Gold (valued at 75% of 4 qtr London price) 8.92 17.30 31.04 45.82 127.98

Total reserves incl gold 1,968.9 2,358.4 792.3 1,092.2 1,480.7

Memorandum itemsGold, national valuation 12 18 32 47 124


Reference table 21

Exchange rates(HRN per unit of currency unless otherwise indicated; annual averages)

1996 1997 1998 1999 2000

US$ 1.830 1.862 2.450 4.130 5.440

Rb 0.357 0.322 0.252 0.168 0.193

RMB 0.220 0.225 0.296 0.499 0.657

DM 1.216 1.073 1.392 2.253 2.570

¥ 0.017 0.015 0.019 0.036 0.050

€ 1.443 1.642 2.187 3.780 5.663


Editors: Rupinder Singh (editor); Michael Wright (consulting editor)Editorial closing date: July 9th 2001

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected]

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Ukraine - International University of Japan · edge” or “borderland”, and for most of the past millennium Ukraine has been exactly that—a frontier region split between neighbouring