Global Politician, NY
Ukraine: The Crouching Tiger
3/15/2005
By Sam Vaknin, Ph.D.
Reading the Western media, one would think that Ukraine’s main products are
grotesquely corrupt politicians, grey hued, drab, and polluted cities, and
mysteriously deceased investigative journalists and erstwhile state
functionaries.
When another journalist was found dead in Odessa on New Year’s Eve 2002,
both the Prosecutor General and the Ukrainian Parliamentary Committee for
Fighting Organized Crime and Corruption have accused the entire Ukrainian
Cabinet of Ministers of collusion in shady dealings with Kazakhoil, the
Kazakh national oil monopoly.
The “Orange Revolution” in October-November 2004 the disorderly, though
popular, transfer of power from one group within the “Dniepropetrovsk
family”, headed by Leonid Kuchma and his henchman to another faction, headed
by the volatile and incompatible Viktor Yushchenko and Yulia Timoshenko led
to more deaths in unexplained circumstances.
Both Yushchenko and Timoshenko had served in senior positions (as prime
minister, for instance) in the ancien regime and, therefore, may have
skeletons in their cupboards. The spate of “suicides” committed by former
and knowledgeable functionaries came as no surprise – both parties, outgoing
and incoming, have a vested interest in suppressing embarrassing
revelations.
>From December 2001 onwards, the Legsi (the Lehman Brothers Eurasia Group
Stability Index) kept warning against a deterioration in Ukraine’s social
stability, owing to fiercely resisted austerity measures.
Until recently, things were not auspicious on the international front as
well. During the Balkan hostilities between Macedonians and Albanians in
2001, Ukraine supplied Macedonia with attack helicopters and other weaponry
over the strident objections of the State Department. Its strategy of ever
closer union with Russia and China was in ruins following the sudden shift
in Putin’s geopolitical predilections after the September 11 attacks. And to
spite the EU (which forced Poland to impose strict controls on its porous
border with Ukraine) – “starting from 1 January 2002, Kyrgyz citizens, like
the citizens of Azerbaijan, Armenia, Kazakhstan, Tajikistan and Uzbekistan,
may enter, leave and pass through Ukraine without visas” as the Kyiv based
UNIAN news agency jubilantly announced on January 4th, 2002.
Its parliament having failed to pass a government sponsored law against the
unlicensed production of CD ROM’s (piracy) – the Ukraine was subjected on
January 2, 2002 to much postponed US imposed stiff trade sanctions
(estimated to cost it $500 million per year). The employees of Ukraine’s
largest CD maker, Rostock Records, demonstrated opposite the US embassy
against the sanctions, denouncing them as “economic terrorism”. The
International Federation of Phonographic Industry (IFPI) countered by saying
that “Ukraine is the largest exporter of pirated CDs to Europe, with tens of
millions of high quality illegal copies shipped each year to markets
throughout Europe and as far away as South America.”
At any rate, following its blatant intervention in the political
machinations which led to the Orange Revolution in October-November 2004,
anti-American sentiments are running higher than usual in the eastern,
Russophile parts of the country.
Ukrainian discontent is further exacerbated by the American continued threat
to slap tariffs on steel imports despite a last minute agreement signed in
2001 with the EU and other major steel manufacturing countries to curb
worldwide production. Ukraine has agreed to cut its output by 11 million
tons annually (out of a total reduction of 97.5 million tons). Depressed
prices for gallium (used mainly in the recession-struck mobile phones
industry) have gravely affected Ukraine’s only alumina producer (Mykolaevsky
Hlynozyomny Zavod) which has just quintupled its capacity to 10 tons.
Ukraine is optimally located between Central Europe and Russia. It is the
largest polity in East Europe and the second largest country is Europe
(almost the size of Texas). It is rich in natural endowments, though
hopelessly polluted (Chernobyl is in the Ukraine) and deforested. In the
former USSR, it provided 25% of all agricultural produce. The Soviet mining
and oil industries relied on Ukrainian heavy industry for their equipment.
The literacy rate in Ukraine is 100% and many are polyglot.
Yet, these Ukrainian riches were squandered in the decade following
independence. Dependence on energy and a reform effort thwarted by
entrenched Communist era stalwarts led to a 60% drop in GDP compared to 1991
(the year of its independence). Frenetic money printing resulted in
hyperinflation in 1993. Inflation has still not been subdued and has topped
26% as late as 2000.
More than 50% of the population are under the official, starvation level,
poverty line. Though only 5.3% are registered as unemployed, both
underemployment and hidden unemployment are rampant. Mercurial and default
prone Russia is still Ukraine’s main trade partner (c. 30% of its
international trade). Each of Ukraine’s 49 million citizens owes $200 to
foreign creditors – the equivalent of 30% of GDP per capita. Public debt has
doubled to c. 50% of GDP in the four years to 2000. Worse still, Ukraine is
increasingly used as a drug smuggling route and drugs growing area for the
CIS. Synthetic drugs are manufactured in the Ukraine and smuggled to the
countries of Western Europe.
Ukraine is a major target for Russian investors, especially from the energy
sector. Putin appointed Victor Chernomyrdin, a political heavyweight – a
former Prime Minister and, more importantly, a former chairman of Gazprom,
the Russian energy behemoth – as Russia’s ambassador in Kyiv. Ukrainians are
not against Russian investment – but they are averse to the political
strings it comes attached to. They also resent the bargain basement prices
at which their most valued assets are “privatized” to these old-new
“foreign” investors. Inevitably, they ask themselves “cui bono” – who
benefits personally from these questionable transactions. The answer is not
too hard to guess – but guessing has proven to be a dangerous occupation. At
least one muck-raking journalist has been (literally) beheaded and a senior
politician (now prime minister in the new regime) jailed for trying to
reform the energy sector.
Inevitably, Ukraine is socially and politically strained. Its western parts
are fiercely nationalistic and West oriented. Its eastern parts lean more
towards Russia and are USSR-nostalgic. But this apparent schism is no bad
thing. It provides Ukrainians with a secure foothold in both worlds – and no
one seriously considers secession.
Unnoticed by many, Ukraine is undergoing a seismic shift which may result in
an economic revival of Chinese proportions.
When Viktor Yushchenko, the popular Prime Minister and darling of the West
was brutally ousted in May 2001 by the authoritarian President, Kuchma
(himself hailed as a daring reformer by the IMF when elected in 1994),
everyone predicted a calamity. Yet, Yushchenko moved since then to the
centre in what appears to be an implicit reconciliation with the president.
His replacement, Anatoly Kinakh, surprised everyone by proving to be an
efficient and modernizing technocrat. Ukrainian bonds returned to investors
more than 60% net in 2001-2, making them the best emerging markets
investment by far. Its capital markets are gradually being
internationalized. The much maligned Kuchma introduced a sweeping anti-money
laundering decree (later to become law). Ukraine (since its 1998-2000 series
of de facto defaults following the financial meltdown in Russia) is now a
model debtor. In August 2000 it has even re-paid the IMF $100 million.
Possibly emboldened by his re-election in 1999, Kuchma seemed to be making
real efforts to streamline the government (which anyhow consumes a mere 18%
of GDP), cut red tape, consolidate the government’s fiscal stance (Ukraine
had small budget deficits, excluding privatization receipts, in 1999-2001),
become a WTO member, and create a legal environment conducive to private
enterprise and entrepreneurship.
A new Land Code – passed by a surprising ad hoc parliamentary alliance and
providing for the (limited) private ownership of land – took effect on
January 2, 2002. Payment discipline in the critical energy sector was
enforced, the agriculture sector was revamped, non cash revenue offsets and
cronyist tax exemptions were entirely eliminated, government arrears
(including pensions) were substantially reduced (though new arrears have
again accumulated thereafter), a privatization law was finally introduced,
and municipal finance was rationalized.
The government’s contractionary fiscal rectitude (a new Budget Code was
enacted and tax collection improved) was balanced by the central bank’s
(NBU) expansionary monetary policy aimed at increasing its dangerously
dilapidated foreign exchange reserves (c. $2.4 billion in 2001) and spurring
growth in the real sector. Rising demand for money and the propitious
existence of a thriving informal (cash) economy prevented the resurgence of
inflationary pressures – though inflation has picked up in December 2001,
forcing the central bank to tighten in 2002 (it disputes the government’s
official figure of 6.1% inflation for 2001).
In 2000 the economy grew for the first time (by 6%). Growth was export
driven and industrial output increased by 13%. The global recession has hurt
Ukraine’s export prospects but even so, it grew by 4-5% in 2001. It
continued to expand by 2-4% each year in 2002-2004.
With a labour cost of 30 cents per hour, Ukraine attracts the interest of
manufacturers in the US, in Central Europe, and even in Russia. Strong
import growth may swing it back to a current account deficit (in a surplus
of c. 5% of GDP in 2001, as it has been in the previous 2 years). Fiscal
shenanigans ahead of the March 2002 and October 2004 elections (and the
horse trading which inevitably followed) had ratcheted up the predicted
inflation rate of 9-12% – but the appreciation of the hryvna is set to
continue.
The economy is surprisingly modern. Only 24% are employed in agriculture
(and they produce a mere 12% of GDP). More than double that is produced by
industry (26% of GDP) and a whopping 62% of GDP is generated in services (in
which only 44% of the labour force are employed).
On December 2001, S&P upgraded Ukraine’s currency risk rating (both foreign
and domestic) to “B” with a “Stable” long term outlook. On the pro side, S&P
cited financial stability, partly the result of a rationalized and
rescheduled foreign debt structure. On the con side, it cited the usual
litany of corruption, weak legislature, problems with privatization and with
structural reform and malignant oligarchs. These flaws being noted, it did
upgrade Ukraine’s rating – as did Fitch, Moody’s and Japan’s Rating and
Investment Information Agency. The price of Ukraine’s (mainly dollar
denominated) Eurobonds appreciated dramatically on institutional buying
immediately following the announcement.
Ukraine’s image as bereft of Foreign Direct Investment is false. Moreover,
c. 80% of all FDI in Ukraine is Western – not Russian. USA investors compete
with Russian (cum “Cypriot”) investors – each holding 17% of the total stock
of FDI (c. $4.5 billion in early 2002).
Moreover, Ukraine is now in good standing with the IMF (after a difficult
2001 in which the IMF virtually suspended all communication with Ukraine due
to falsified data provided by the NBU). It has signed in 1998 a $2.6 billion
arrangement (of which $1.6 billion are used). Another tranche of c. $380
million was approved in September 2001. The IMF singled out the banking,
energy, and agriculture sectors as in need of continued, pervasive, reforms.
The World Bank has committed close to $3 billion (and disbursed $2.2
billion) to projects in Ukraine (mostly in the energy, mining, agriculture,
finance, and private sectors) since 1992. The latest Country Assistance
Strategy documents for Ukraine (2001-2003 and 2004-6) are unusual in that
they seek to circumvent the hopelessly venal and discredited administration
and work directly with the public, business, and NGO’s towards building a
civil society and its attendant institutions. “The strategy seeks to move
Ukraine closer to the European Union standards, fostering
environmentally-sustainable development” – says the Bank. though it hastens
to emphasize the success the government had in implementing its reforms.
As of June 2001, the EBRD (which has a mixed track record in Ukraine) has
approved 45 projects in Ukraine (34 of which in the private sector) worth
1.2 billion euro. This excludes the construction of a highly controversial
and politically inspired nuclear power plant.
Ukraine has gone so low in the world that its fortunes can only improve. It
is poised for a modest economic comeback as its mediating geographic
position between centre and east comes into play with EU enlargement. Kuchma
was eased out by the very oligarchs he nurtured. They now constitute an
element in a broad based coalition for reform. Having sated their appetite
for loot they now seek respectability and access to capital markets and
credits in the West. They want a functioning country and a larger cake.
Kuchma is a figurehead of a disfigured past. In the long run, a Putin style
robotic reformer is likely to succeed him. When it happens, Ukraine may yet
become the region’s first economic tiger.
Sam Vaknin, Ph.D. is the author of Malignant Self Love – Narcissism
Revisited and After the Rain – How the West Lost the East. He served as a
columnist for Central Europe Review, PopMatters, Bellaonline, and eBookWeb,
a United Press International (UPI) Senior Business Correspondent, and the
editor of mental health and Central East Europe categories in The Open
Directory and Suite101.
Until recently, he served as the Economic Advisor to the Government of
Macedonia. Sam Vaknin’s Web site is at
From: Emil Lazarian | Ararat NewsPress