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Further Reading

Economy

One of the most disastrous consequences of the collapse of the Ukrainian communist system has been the wide-spread increase of economic crime. This phenomenon is self-sustaining, penetrating all levels of Ukraine's economy and administrative sectors. Criminal activity helps to sustain the shadow economy in Ukraine, which has been estimated by various sources to constitute 50-60% of the economy. Law enforcement and administrative efforts have been largely futile in curbing this corruption.

The loss of state organizational control over the economy, spurred by Ukraine's transitional period, has made it difficult for the government to implement effective measures to counteract the rise in economic crime. During the early stages of reform, the state's previously held monopoly on Ukraine's economic activities provided an environment in which economic crime could thrive. State assets became attractive to criminal groups because bureaucratic economic reforms of this period were carried out without supervision. As a result, organized crime groups aligned themselves with the few who controlled both political and economic power, forging close ties that would allow organized crime to both grow and receive bureaucratic protection.

Economic reform in Ukraine has not served to deter economic crime, but rather has encouraged the conditions under which it can thrive. Failed economic reform resulted in many undesirable activities and outcomes, including the unequal allocation of areas of the economy that yield superprofits. For example, public officials are gaining access to financing and crediting privileges in super-profitable economic areas - - areas that possess the highest level of liquidity and recoupment of capital investment such as distillery and tobacco production, foodstuff and oil-processing industry and etc.

On Transparency International's Year 2000 Corruption Perception Index, Ukraine ranked 87 (tied with Azerbaijan) out of 90 countries. Only Yugoslavia and Nigeria ranked worse. Corruption permeates much of Ukraine's court system, police, civil service and regulatory system. Conflict of interests abound as many public servants continue to own businesses while serving. Corruption is sometimes institutional, to the extent that certain government entities own or have close ties to businesses that compete with those they regulate. Government entities also use means that are off the balance sheet to pay for operations and expenses not funded by the state budget. A complicated, opaque, and unaccountable regulatory system has facilitated corruption.

The pervasiveness of corruption, connections between government officials and organized crime, and the political activities of organized crime figures often blurred the distinction between political and criminal acts. Politicians, politically connected businessmen, and journalists were the victims of attacks that sometimes were fatal and may have been politically motivated. According to officials, there were 12 contract killings as of May 2003; police had solved 25 of the 41 contract killings in 2002.

Perhaps no other country in the former Soviet Union (FSU) region has experienced such a large gap between economic performance and potential as Ukraine. Endowed with good natural resources, superb agricultural land, a well-educated population, ethnic peace, and a strategic location in Europe, Ukraine was positioned to be one of the most successful of the former Soviet states in attracting the foreign investment needed to restructure its economy. Yet with an annual GDP of $645 per capita as of the year 2000, Ukraine has one of the lowest levels of income in the FSU.

Ukraine has many of the components of a major European economy -- rich farmlands, a well-developed industrial base, highly trained labor, and a good education system. After eight straight years of sharp economic decline from the early to late 1990s, the standard of living for most citizens declined more than 50%, leading to widespread poverty. Beginning in 2000 economic growth has averaged 5-6% per year reaching 9.4 percent in 2003. Personal incomes are rising.

The economy is burdened by wage nonpayment and arrears, and the shadow economy (defined as activity deliberately unreported for purposes of tax evasion) accounted for a significant proportion of real income. Wage arrears increased by approximately 1.3 percent in the first 6 months of the year, as compared with the same period in 2002. Wealth was concentrated in the political elite and among directors of the state-dominated sectors such as metals, oil, and gas. The macro economy is stable, with the hyperinflation of the early post-Soviet period having been tamed. Ukraine's currency, the hryvnia, was introduced in September 1996 and has remained stable until quite recently. While economic growth continues, Ukraine's long-term economic prospects depend on acceleration of market reforms. The economy remains burdened by excessive government regulation, corruption, and lack of law enforcement, and while small and medium enterprises have been largely privatized, much remains to be done to restructure and privatize key sectors such as energy and telecommunications.

Ukraine is rich in natural resources. It has a major ferrous metal industry, producing cast iron, steel, and steel pipe, and its chemical industry produces coke, mineral fertilizers, and sulfuric acid. Manufactured goods include airplanes, turbines, metallurgical equipment, diesel locomotives, and tractors. It also is a major producer of grain, sunflower seeds, and sugar and has a broad industrial base, including much of the former USSR's space and rocket industry. Although oil and natural gas reserves are small, it has important energy sources, such as coal, and large mineral deposits, and is one of the worlds leading energy transit countries, providing transportation of Russian and Caspian oil and gas across its territory.

Ukraine encourages foreign trade and investment. The foreign investment law allows Westerners to purchase businesses and property, to repatriate revenue and profits, and to receive compensation in the event that property were to be nationalized by a future government. However, complex laws and regulations, poor corporate governance, weak enforcement of contract law by courts and corruption stymie large-scale foreign direct investment in Ukraine. While there is a functioning stock market, the lack of protection for minority shareholder rights severely restricts portfolio investment activities. Total foreign direct investment in Ukraine is approximately $7.32 billion as of July 1, 2004, which, at $154 per capita, is still one of the lowest figures in the region.

While countries of the former Soviet Union remain important trading partners, especially Russia and Turkmenistan for energy imports, Ukraine's trade is becoming more diversified. Europe is now the destination of over one third of Ukraine's exports, while around one quarter of Ukraine's exports go to Russia and the CIS. Exports of machinery and machine tools are on the rise relative to steel, which constitutes over 30% of exports. Ukraine imports 90% of its oil and most of its natural gas. Russia ranks as Ukraine's principal supplier of oil and Russian firms now own and/or operate the majority of Ukraine's refining capacity. Natural gas imports come from Russia, which delivers natural gas as a barter payment for Ukraine's role in transporting Russian gas to Western Europe.

The Government of Ukraine signed a 12-month $605 million precautionary standby agreement with the International Monetary Fund (IMF) in March 2004. The IMF, however, failed to complete its review of the agreement in July-August, raising concerns about inflationary aspects of an increasing budget deficit at a time when revenues are growing (i.e. a pre-election spending surge), the accumulation of arrears of VAT refunds to exporters and ongoing structural problems, especially in the financial sector. Ukraine received just $75 million of the $250 million Programmatic Adjustment Loan, second tranche, in 2003. The World Bank may grant the remaining $175 million to the Government of Ukraine this year, subject to energy sector financial reforms. European Bank for Reconstruction and Development (EBRD) project outlays, which often are tied to nuclear safety, totaled $120 million in 2003 and $206 million in 2002.

In 1992, Ukraine became a member of the International Monetary Fund and the World Bank. It is a member of the EBRD but not a member of the World Trade Organization (WTO). Ukraine applied for membership in the WTO in 1995. Progress on its application has been slow, but picked up momentum in 2003 and early 2004. The government's stated goal is to accede by the end of 2005.

Despite a lack of economic reforms in early part of 2000's Ukraine's macroeconomic indicators had become quite stable, creating a good environment for further economic expansion. Ukraine had achieved high rates of economic growth with a relatively stable national currency (unofficially pegged to the U.S. dollar at different rates close to 5.0 Hryvnas(UAH)/$) and sustained a gradual increase in per capita income. Most of the economic growth (especially in 2006-2008) came with foreign direct investments (FDI) inflow and led to significant growth in personal consumption and imports growth.

Due to delayed tax, judicialand state governance reforms as well as widespread corruption, foreign and domestic investments in many real economy sectors were limited. Investments arrived predominately in banking, insurance, trade and service sectors. Availability of cheap credit from abroad facilitated further consumption and import growth. Inflow of foreign currency through the banking system created upward pressure on UAH (vis-à-vis US $ and EUR) provoking further import growth and sending wrong signals about the alleged health of the Ukrainian economy.

Exhausted by prudent consumption in th 1990's the population was happy to use loans and saw no risks in the future, observing slowly appreciating local currency. Consumption of many high value added agricultural products increased dramatically. The need for economic reforms was masked by high world prices for major Ukrainian exports in 2003-2008: ferrous metals and chemical products. Agricultural commodities joined this list inearly 2008 with a surge of the world's prices for grains and oil seeds.

All governments in recent Ukrainian history avoided unpopular reforms and preferred to use increased budget revenues for populist social programs instead of cushioning the negative aspects of much needed structural changes. Economic inefficiencies, corruption and hostile business environment exaggerated the world economic crisis consequences for the Ukrainian economy in 2008 and 2009. Although in 2008 the Ukrainian economy showed 2.1% GDP growth, most of it came in the first half of 2008 - the pre-crisis period of the year. A significant chunk of the outdated industrial sector did not survive the commodity price drop and contracted by 28-30% in late 2008 - early 2009. If in 2006 and 2007 Ukraine's GDP grew by 7.9% and 7.3% respectively, in 2009 it was expected to fall by 14-17% setting a regional record.

By 2010 Ukraine remained in a severe economic crisis - the Ukrainian Hryvna had depreciated almost 50 percent against the U.S. dollar since 2008, with GDP contracting 14% in 2009. In 2010, GDP is expected to grow by 2-3% only; unemployment and inflation rates remain high. These economic conditions continue to create conditions favorable to the criminal element, and despite the decrease in reported criminal incidents to the embassy in 2009, crime remains the most significant day-to-day threat facing American citizens resident in or visiting Ukraine. The root causes of the Ukrainian economiccrisis remain largely unaddressed