When it comes to economic reforms, #Ukraine is its own worst enemy

| August 31, 2017 | 0 Comments

Last week, Ukrainians celebrated 26 years as an independent state, but they didn’t have much to cheer about. Despite the country’s vast resources, it is still disproportionately poverty-stricken, with gross national income per person totalling $7,450 in 2015 – lower than Iraq, Mongolia, and 110 other states. According to a recent economic assessment, over the past 25 years, GNI per person has dropped by 23%. During this period, the country only managed to beat out one of its neighbours in terms of economic development: Europe’s poorest country, Moldova.

Following Russia’s annexation of Crimea, Kiev became embroiled in conflict with its biggest trading partner and was cut off from many of its most productive industrial assets. The country was soon teetering on the edge of economic disaster, with inflation ballooning to 60% and with the economy shrinking by nearly 10% in 2015, even worse than the Greek crisis. It’s only now that Ukraine has started to turn the corner towards recovery.

With growth rates expected to hover around 3% or less for the next few years, however, Ukraine doesn’t stand a chance of returning to pre-2014 real rates of GDP for decades – and that’s if everything goes perfectly. As of now, it’s more likely that the economy will stagnate at Moldova’s level than live up to its former moniker of the “bread basket of Europe.” What is worrisome is that such forecasts appear to be far more due to the destructive actions of Ukrainian authorities than to outside forces.

First, entrenched cronyism and corruption continue to infect nearly every corner of the economy. Earlier this month, the low-cost carrier Ryanair dropped plans to serve the Ukrainian market despite promising to new routes to Kyiv and Lviv earlier this year. The framework deal struck between Ryanair and Boryspil International Airport in Kiev was reportedly torpedoed by the airport’s largest customer, Ukraine International Airlines (UIA). Ihor Kolomoisky, the billionaire oligarch who owns a major stake in UIA, had balked at the prospect of more outside competition. He’s even gone so far as to file claims with the government, asking for compensation in case of future competition.

The government’s willingness to tolerate such antics means that it will be years before Ukraine ever evolves from oligopoly to open skies. And it’s not only in the aviation industry that Ukraine continues to struggle with lack of competition and corruption. Kiev has also been making slow progress with wider efforts to privatize some 3,000 state-owned enterprises. The government has already tried and failed twice to privatize the Odessa port. And while hopes are high for the independent National Anti-Corruption Bureau of Ukraine, which started work in 2015, it has only seized a middling $200 million in financial assets and no senior official has yet been sent to jail.

Second, such persistent cronyism and venality are major reasons why outside investors are still wary of putting stakes in Ukraine’ economy – a significant impediment to future growth. Unfortunately, instead of trying to improve its ranking of 80th in the World Bank’s Ease of Doing Business report, Kiev has been fumbling. The government has imposed exorbitant taxes on local oil and gas producers – 55% on natural gas from wells above 5,000 meters – causing a number of important investors, like Shell, to pull out of the country. The exits were terrible news for a country that had hoped to improve its domestic gas production abilities and gain more foreign investment. Additionally, much of the foreign investment that has continued to flow into the country has often served as a front for local and foreign oligarchs, which use special-purpose entities in tax havens like Cyprus to gain beneficial legal treatment, hide the identity of the investors, and minimize taxation. Such FDI serves only to enrich the pockets of a few rather than foster genuine economic growth.

On top of that, rather than cracking down on shady foreign investments, Ukrainian authorities have instead chosen to lead a counterproductive campaign to shut down businesses the government has deemed non-grata. Most recently, the Security Service has opened up legal proceedings against staff of Russian aluminium giant Rusal. They accused the firm of deliberately destroying Ukraine’s only aluminium plant – the Zaporozhye Aluminium Smelter (ZALK) – to the benefit of Russia. Rusal has called the move an attempt by the government to raise political pressure in response to a lawsuit it filed with the International Centre for Settlement of Investment Disputes following Zalk’s expropriation. The development comes on top of earlier meddling by Ukrainian authorities in other businesses active in the country. In May, Internet group Mail.ru found itself in the government’s crosshairs after the state shut off access to its sites. If this campaign continues, it will be no wonder if other foreign investors balk at opening up shop in Ukraine.

In the end, the success of Ukraine’s efforts to carry out the privatization drive, to empower the new Anti-Corruption Bureau, and to improve its reputation among foreign investors will be key in determining whether the country avoids the unwelcome title of Europe’s next failed state. Thankfully, the International Monetary Fund has been providing a critical push here, raising the pressure on Ukraine in line with the terms of a $17.5 billion lifeline.

The Fund has been the key driver behind Kiev’s continued efforts to sell off state-owned enterprises, crack down on corruption, and enact other reforms such as addressing the black hole in the national pension fund, which is one of the world’s largest. While many have slammed the IMF for pushing counterproductive neoliberal policies in the past, in this case, there’s no arguing that they’re pointing to legitimately serious economic weaknesses that demand attention. In the end, it’s paying heed to the advice of such key institutional investors – and attracting, not driving out, private foreign investment – that will be critical in balancing Ukraine’s still-wobbly economy.




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Category: A Frontpage, featured, Featured Article, Ukraine

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