24. Economy of Ukraine

The economy of Ukraine is an emerging free market, with a gross domestic product that experienced rapid growth in from independence until the late 2000s. Ukraine's economy is ranked 45th in the world according to 2008 GDP (nominal) with the total nominal GDP of 188 billion USD , and 3,900 USD GDP per capita. Formerly a major component of the economy of the Soviet Union, the country's economy experienced major recession during the 1990s, including hyperinflation and drastic falls in economic output; GDP growth was first registered in 2000, and continued for several years. In 2007 the economy continued to grow and posted real GDP growth of 7%.^[4]

However Ukraine was greatly affected by the economic crisis of 2008 and as a result the World Bank expects Ukraine's economy to shrink 15% in 2009^[8] with inflation being 16.4%^[9]. The Ukrainian government predicts GDP growth of 0.4% in 2009, and a slowdown in inflation to 9.5% (also in 2009), although the overwhelming majority of economists consider this forecast to be excessively optimistic^[9]. In 2008 the hryvnia (Ukraine's currency) dropped 38% against the US dollar, eclipsed only by the Icelandic krona and the Seychelles rupee.^[10] There was 3% unemployment at the end of 2008; over the first 9 months of 2009, unemployment averaged 9.4%.^[11]

Overview

Ukraine has many of the components of a major European economy - rich farmlands, a well-developed industrial base, highly trained labour, and a good education system. At present, however, the economy remains in poor condition. While Ukraine registered positive economic growth beginning in 2000, this came on the heels of eight straight years of sharp economic decline. As a result, the standard of living for most citizens has declined more than 50% since the early 1990s, leading to a relatively high poverty rate. The macroeconomy is stable, and the hyperinflation of the 1990s has subsided. Ukraine's currency, the hryvnia, was introduced in September 1996, and has remained fairly stable. The economy has continued to grow since 2000. GDP in 2000 showed strong export-based growth of 6% - the first growth since independence - and industrial production grew 12.9%. The economy continued to expand in 2001 as the real GDP rose 9% and industrial output grew by over 14%. Growth of 4.6% in 2002 was more moderate, in part a reflection of faltering growth in the developed world. In general, growth has been undergirded by strong domestic demand, low inflation, and solid consumer and investor confidence. Growth was 9.3% in 2003 and 12% in 2004.

Ukraine is relatively rich in natural resources, particularly in mineral deposits. Although oil and natural gas reserves in the country are largely exhausted, it has other important energy sources, such as coal, hydroelectricity and nuclear fuel raw materials.

Ukraine has a major ferrous metal industry, producing cast iron, steel and pipes. As of 2005, Ukraine was the world's eighth largest steel producer. Another important branch is the country's chemical industry which includes the production of coke, mineral fertilizers and sulfuric acid. Manufactured goods include metallurgical equipment, diesel locomotives, tractors, and automobiles. The country possesses a massive high-tech industrial base, including much of the former USSR's electronics, arms industry and space program. However, these fields are state-owned and economically underdeveloped.

Ukraine is a major producer of grain, sugar, meat and milk products.

Since the late 1990s, the government has pledged to reduce the number of government agencies, streamline the regulatory process, create a legal environment to encourage entrepreneurs, and enact a comprehensive tax overhaul. Outside institutions — particularly the IMF — have encouraged Ukraine to quicken the pace and scope of reforms and have threatened to withdraw financial support. But reforms in some politically sensitive areas of structural reform and land privatizations are still lagging.

Ukraine encourages foreign trade and investment. The Parliament of Ukraine has approved a foreign investment law allowing Westerners to purchase businesses and property, to repatriate revenue and profits, and to receive compensation if the property is nationalized by a future government. However, complex laws and regulations, poor corporate governance, weak enforcement of contract law by courts, and corruption all continue to stymie direct large-scale foreign investment in Ukraine. While there is a functioning stock market, the lack of protection for shareholders' rights severely restricts portfolio investment activities. Total foreign direct investment in Ukraine is approximately $17.4 billion (17.4 G$) as of April 2006.

Most Ukrainian trade is conducted with Russia and the European Union. An overcrowded world steel market ^] threatens prospects for Ukraine's principal exports of non-agricultural goods such as ferrous metals and other steel products. Although exports of machinery and machine tools are on the rise, it is not clear if the rate of increase is large enough to make up for probable declines in steel exports, which today account for 46% of the country's overall exports.

Ukraine's western neighbours (mainly Slovaks and Hungarians) are known to purchase products and presents that are cheaper in Ukraine than in their home countries.^[12]

Energy

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 its own gas, as well as the gas from Turkmenistan. Instead, Ukraine is transporting Russian gas to the EU through its well-developed gas pipelines system, being Europe's vitally important connection. The country's dependence on Russian gas supplies dramatically affects its economics and foreign policy, especially after the recent major gas dispute.

However, Ukraine is independent in its electricity supply, moreover, exporting it to Russia and other countries of Eastern Europe. This is achieved through a wide use of nuclear power and hydroelectricity. The recent energy strategy intends gradual decreasing of gas- and oil-based generation in favor of nuclear power, as well as energy saving measures, shortening of industrial gas consuming. Reform of the still inefficient and opaque energy sector is a major objective of the International Monetary Fund (IMF) and World Bank programs with Ukraine.

Ukraine is a partner country of the EU INOGATE energy programme, which has four key topics: enhancing energy security, convergence of member state energy markets on the basis of EU internal energy market principles, supporting sustainable energy development, and attracting investment for energy projects of common and regional interest.^[13]

Financing from international institutions

In 1992, Ukraine became a member of the IMF and the World Bank. It is a member of the European Bank for Reconstruction and Development.

In 2008 the country joined World Trade Organization. Ukraine applied for WTO membership in 1993, but its accession process was stalled for 15 years. The IMF approved a $2.2 billion Extended Fund Facility (EFF) with Ukraine in September 1998. In July 1999, the 3-year program was increased to $2.6 billion. Ukraine's failure to meet monetary targets and/or structural reform commitments caused the EFF to either be suspended or disbursements delayed on several occasions. The last EFF disbursement was made in September 2001. Ukraine met most monetary targets for the EFF disbursement due in early 2002; however, the tranche was not disbursed due to the accumulation of a large amount of VAT refund arrears to Ukrainian exporters which amounted to a hidden budget deficit. The EFF expired in September 2002, and the Ukrainian Government and IMF began discussions in October 2002 on the possibility and form of future programs.

A political crisis in the middle of 2006 was feared as a threat to economic and investment stability, however, despite the forecasts, the political situation has not scared investors. The GDP showed a good growth rate of 7% in 2007, compared to the previous year. Industrial output has increased. Car sales soared, while the banking sector has expanded, thanks to the arrival of European banks.

As of May 2010 Ukraine is the third largest borrower of the IMF, following Hungary ($11.6 billion) and Romania ($12.5 billion). The IMF granted Ukraine a $16.4 billion loan in October 2008^[14], of which the government has so far received $10.6 billion.^[15][16] Further payments were frozen late 2009 after Ukraine raised minimum wages and pensions contrary to IMF recommendations.^[17]

Environmental Issues

Ukraine is interested in cooperating on regional environmental issues. Conservation of natural resources is a stated high priority, although implementation suffers from a lack of financial resources. Ukraine established its first nature preserve, Askania-Nova, in 1921 and has programs to breed endangered species.

The country has significant environmental problems, especially those resulting from the Chernobyl nuclear power plant disaster in 1986 and from industrial pollution. In accordance with its previously announced plans, Ukraine permanently closed the Chernobyl Atomic Energy Station in December 2000. In November 2001, Ukraine withdrew an application it had made to the EBRD for funding to complete two new reactor units to compensate for the energy once produced by Chernobyl. Ukrainian concern over reform conditions attached to the loan - particularly tariff increases needed to ensure loan repayment—led the Ukrainian government to withdraw the application on the day the EBRD Board was to have considered final approval. Work on the so-called "object shelter" to permanently entomb the reactor where the world's worst nuclear accident occurred has been slower than anticipated but continues. Design work as well as structural improvements to the "sarcophagus" erected by the Soviet Union are largely complete, and construction on the new shelter is scheduled to begin in 2004.

Ukraine also has established a Ministry of Environment and has introduced a pollution fee system that levies taxes on air and water emissions and solid waste disposal. The resulting revenues are channelled to environmental protection activities, but enforcement of this pollution fee system is lax.

Agriculture - products: grain, sugar beets, sunflower seeds, vegetables, beef, milk

Exchange rates: hryvnia per US$1 – 7.97 (2009), 5.05 (2007), 5.05 (2006), 5.13 (2005), 5.33 (May 2004), 5.30 (October 2002), 5.59 (February 2000), 5.3811 (January 2000), 4.1304 (1999), 2.4495 (1998), 1.8617 (1997), 1.8295 (1996), 1.4731 (1995)

Minimum wage: 625 hryvnia per month (as of April 1, 2009),^[21][22] 649 hryvnia/month (Sep. 2008), 669 hryvnia/month (Sep. 2009)^[19]