Ukraine - iuj.ac.jp · Donetsk 1,121 Odessa 1,087 Lviv 810 Climate Situated in the central part of the northern temperate zone, Ukraine has a moderate continental climate with four

COUNTRY PROFILE

UkraineOur quarterly Country Report on Ukraine analyses currenttrends. This annual Country Profile provides backgroundpolitical and economic information.

1996-97The Economist Intelligence Unit15 Regent Street, London SW1Y 4LRUnited Kingdom

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ISSN 1356-4196

Contents

April 1996

2 Basic data

3 Political background

11 Population and society

12 Currency

13 The economy

16 National accounts

18 Employment

19 Wages and prices

19 Agriculture

24 Mining and energy

26 Manufacturing

28 Transport and communications

30 Finance

33 Foreign trade and payments

36 Trade and exchange regulations

38 Select bibliography

1

EIU Country Profile 1996-97 © The Economist Intelligence Unit Limited 1996

Ukraine

Basic data

Land area 603,700 sq km

Population 52 million (mid-1994 estimate)

Main towns Population in ’000, 1993

Kiev 2,646Kharkiv 1,615Dnipropetrovsk 1,186Donetsk 1,121Odessa 1,087Lviv 810

Climate 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, average temperature -5.8°C, and thehottest July, 19.3°C. Precipitation in the Kiev region averages 600 mm

Language Ukrainian, a member of the East Slavonic group, is the official language; Russianis as widely spoken

Measures Metric system

Currency The karbovanets, the sole legal tender as of November 12, 1992. Plans toreplace the karbovanets with a fully fledged national currency, the hryvnia,may be implemented in 1996. Exchange rate March 1996, Krb188,700:$1

Time Two hours ahead of GMT

2 Ukraine


Political background

Modern Ukraine as a state was created in the aftermath of the First World War.However, the modern Ukrainian state views the principality of Kievan Rus,which flourished on what is now Ukrainian territory from the 9th to 13thcenturies, as its forbear. Kievan Rus was destroyed by the Tatars in 1240. There-after, the area now occupied by Ukraine was under Polish and Lithuaniancontrol. The name Ukraine means borderland, and the area was the fractureline between Slav Christians and Tatar Muslims until the late 18th centurywhen the last Tatar-dominated principalities were conquered.

As the kingdom of Poland-Lithuania began to weaken, the Ukrainian Cossacksled by Bohdan Khmelnytsky managed to stage a successful revolt in 1648which led to the creation of a Ukrainian Cossack state. To ward off threats fromthe Tatar and Polish-Lithuanian armies in 1654 Khmelnytsky accepted theprotection of the Russian Tsar. Tsarist Ukraine had autonomy until 1783,although this was progressively diluted.

A large part of the territory which was later included in Ukraine came underTsarist Russian control as a result of the partitions of Poland in 1793 and 1795.What was later to become the western Ukraine came under Habsburg controlin 1772 and remained separate from the rest of Ukraine until 1919.

Calls for independence Modern Ukraine made its first bid for independence in 1917-21 in the wake ofthe collapse of the Tsarist Russian and Habsburg empires. Two UkrainianPeople’s Republics were established in central and western Ukraine, and unitedin January 1919. However, the Ukrainian nationalists were no match for theBolsheviks, who forcibly reincorporated most Ukrainian territory into theUkrainian Soviet Socialist Republic (SSR), which in 1922 became a constituentpart of the USSR. However, today’s western Ukraine was kept out of Soviethands, instead being divided between Poland, Czechoslovakia and Romania.

In the 1920s, in an attempt to bolster the Bolsheviks’ support, Soviet Ukraineadopted policies to encourage the use of the Ukrainian language and Ukrainianculture, so-called Ukrainianisation. The language, which is close to Russian, hadbeen banned from study and publication under the Tsars. However, Stalin’sconsolidation of power in 1929 brought an abrupt end to Ukrainianisation.There then followed a series of bloody purges of both the Communist Party ofUkraine (CPU) and the Ukrainian intelligentsia. Still largely a peasant society,Ukraine suffered particularly badly in the collectivisation drive of the early1930s. Fuelled by an obsessive distrust of the peasants, in 1932-33 Stalin insti-gated a brutal policy of mass collectivisation. The programme was enforced bywholesale appropriations of grain, livestock and other foods, on the pretext that,while the cities were going hungry, the peasantry was hoarding food to drive upprices. Around 7 million people are estimated to have died as a result.

Western Ukraine was incorporated into Soviet Ukraine in September 1939following the Molotov-Ribbentrop pact. In 1940 a further Nazi-Soviet accordgave those parts of today’s Ukraine then under Romanian control to theUkrainian SSR. The Nazi invasion of June 22, 1941, turned Ukraine into abattlefield. Millions died in some of the worst German atrocities of the war,

Ukraine 3


with Ukraine’s large Jewish community singled out for extermination by theinvaders. The majority of the population opposed the invaders and sufferedreprisals. However, Ukrainian nationalists, whose main base was in westernUkraine, tried to use the German invasion to launch another bid for inde-pendence. Some collaborated with the Germans while others fought in theUPA (Ukrainian Insurgent Army) against the Red Army, as well as against thePolish resistance and on occasion against the Germans. The UPA was finallybeaten by the Red Army in the early 1950s.

At the end of the war Ukraine’s territory was further increased. Transcarpathia,also known as Ruthenia, which had been under Czechoslovakian control be-tween 1919 and 1939 and then under Hungarian occupation in 1939-1944, wasadded to the country. In 1954, on the 300th anniversary of the Treaty ofPereyaslav, Nikita Khruschev (a Russian born in Ukraine), gave the Crimeanpeninsula to Ukraine.

The growth of nationalism The experience of the war and fear of resurgent nationalism led the CPU tokeep a tight grip on the country until the late 1980s. Mass arrests of dissidentswere a recurrent feature of Ukrainian politics throughout the 1960s and 1970s.Use of the Ukrainian language was eroded after 1958 when the “voluntaryprinciple”, which allowed Ukrainians to be taught in Russian rather than intheir native tongue, came into effect. The leader of the CPU from 1963 to 1972,Petro Shelest, allowed a limited revival of Ukrainian culture and national ex-pression, but even this proved too much for Moscow. Mr Shelest was purged in1972 and replaced by the notorious conservative Volodymyr Shcherbytsky,who ruled with an iron hand until September 1989. Under Mr Shcherbytsky,Soviet reforms such as perestroika were consistently challenged and Ukraine wasone of the last Soviet republics to develop an opposition movement.Mr Shcherbytsky’s successor, Volodymyr Ivashko, a colourless economist whohad risen in Mr Shcherbytsky’s shadow, found it increasingly difficult to stemthe rise of the Ukrainian Popular Movement (Rukh), founded by leading mem-bers of the Ukrainian intelligentsia.

In the elections of March 1990 Rukh-backed candidates won 27% of the seats,most of which were in Kiev and in western Ukraine. Simultaneous local elec-tions also led to nationalists taking power in Galicia, the core region of westernUkraine. The CPU was now on the defensive, and in July 1990 communistdeputies were persuaded to join forces with the nationalists and to pass afar-reaching Declaration of Ukrainian Sovereignty (by 355 votes to four). Thedeclaration claimed the supremacy of Ukrainian over Soviet law, and assertedUkraine’s right to establish its own armed forces and issue its own currency. Italso promised that Ukraine would become a neutral and non-nuclear state.

Nationalist-communist cooperation proved to be shortlived, however. In July1990 Mr Ivashko left to become the number two to Mikhail Gorbachev in theCommunist Party of the Soviet Union (CPSU). He was replaced by two rivals,who personified the growing split in the CPU. Leonid Kravchuk becamechairman of parliament and began increasingly to cooperate with thenationalist opposition, and the dour Stanislav Hurenko took charge ofthe Communist Party apparat. Mr Hurenko and his ally, Oleksandr Moroz,who led the Communist group in parliament, organised a fightback by CPU

4 Ukraine


conservatives during the winter of 1990-91, frustrating the passage of reformistlegislation. Nationalist support, however, remained strong and Ukraine driftedinto political stalemate. The deadlock was broken by the failure of the January1991 crackdown in the Baltic republics, which discredited the conservatives,and by Mr Kravchuk’s success in turning the March 1991 referendum called byMr Gorbachev on the future of the Soviet Union into a vote in supportof Ukrainian sovereignty. A total of 70.5% of the population voted for thepreservation of the Soviet Union, while 80.2% approved Mr Kravchuk’s prop-osal that Ukraine be a part of the then proposed Union of Sovereign States. Thecollapse of the August 1991 putsch in Moscow was the final nail in the coffinfor local party conservatives, leaving Mr Kravchuk firmly in control.Mr Kravchuk resigned from the CPU and the party was banned. On August 24,1991, the Ukrainian parliament declared independence, with only one deputyvoting against.

Post-independencepolitical developments

Mr Kravchuk, having been transformed from a communist ideologue to a mod-erate Ukrainian nationalist, won a comfortable victory in the presidential elec-tions held on December 1, 1991, with 62% of the vote. A simultaneousreferendum to confirm the Declaration of Independence was supported by 90%of voters. Even areas of eastern and southern Ukraine, where Russians andRussian-speakers were a substantial part of the population, seem to havebelieved Mr Kravchuk’s promises that the Ukrainian economy would prosperafter independence and voted in favour.

However, Mr Kravchuk’s failure to introduce radical economic, political andconstitutional reforms led to growing dissension and splits among his formersupporters and increasing popular disillusion with the results of independence.Unlike Russia, which began significant economic reforms in January 1992,Ukraine tried to avoid “shock therapy”. Central controls were never fully aban-doned, monetary policy remained extremely loose and large-scale privatisationstalled. As a result, Ukraine’s economic problems continued to mount, com-pounded by structural problems of energy dependence and a growing tradedeficit.

The nationalist opposition, which had grown close to Mr Kravchuk in 1991,was the first to split. Leading nationalists formed the Congress of National-Democratic Forces in August 1992, which broadly supported the president,but Rukh fell under the control of Vyacheslav Chornovil (who had come secondto Mr Kravchuk in the December 1991 elections with 23% of the vote).Mr Chornovil began a campaign against both the president and parliament,accusing them of drift and indecision. Despite the fact that Rukh’s petitioncampaign in late 1992 to force the dissolution of parliament attracted only1.2 million of the necessary 2 million signatures, it did nevertheless reveal agrowing sense of popular discontent.

Growing nationalist frustration with the slow pace of change also led to theemergence of a number of fringe ultra-right groups, concentrated in westernUkraine. These groups drew on the area’s previous association with the UPA,anti-Semitism and hostility to Russia. The most powerful was the UkrainianNational Assembly, whose paramilitary wing conducted neo-fascist rallies, beat

Ukraine 5


up opponents, and sent troops to participate in the fighting in the Transdniestrand in Abkhazia.

At the same time, the former communist camp, forced to unite behindMr Kravchuk after August 1991, showed increasing signs of division. Mr Morozhad formed the Socialist Party of Ukraine as early as October 1991, but mostformer senior CPU officials kept their distance and began a campaign to revivethe CPU in mid-1992, riding a populist backlash against the president as eco-nomic difficulties mounted. Despite intense nationalist opposition, the CPUwas finally re-registered in October 1993 as the largest political party inUkraine, the day after the Russian president Boris Yeltsin’s troops crushed aneo-Communist uprising in Moscow.

In October 1992 Mr Kravchuk replaced the unpopular prime minister, VitoldFokin, with a relatively unknown technocrat, Leonid Kuchma, a former head ofthe massive Soviet missile factory in Dnipropetrovsk. Mr Kuchma soon beganto talk of the need for radical economic reform, but Mr Kravchuk was neverprepared to give him his full backing. A prolonged power struggle thereforedeveloped between Mr Kravchuk, Mr Kuchma and Ivan Plyushch, the newchairman of the parliament. This eventually led to the resignation ofMr Kuchma in September 1993. Meanwhile, the economy continued to dete-riorate, and public opinion grew ever more disillusioned, which finally com-pelled Mr Kravchuk to concede early parliamentary and presidential elections.

The 1994 elections Mr Kravchuk won the largest number of votes in the first round of the pres-idential elections in June 1994, against six other candidates, but he was beatenin the run-off in July by Mr Kuchma, who won 52% of the votes. The votingpattern was geographically pronounced, with nationalist western Ukraine per-ceiving Mr Kuchma as an advocate of union with Russia and hence opting forMr Kravchuk. The more Russified eastern Ukraine, which saw a restoration ofsome form of union with Russia as Ukraine’s only hope of economic salvation,voted overwhelmingly for Mr Kuchma. However, shortly after his election itbecame obvious that Mr Kuchma had no intention of moving Ukraine furthertowards the Russian position. If anything, Ukraine has distanced itself evenfurther from the Commonwealth of Independent States (CIS).

In November 1994, fresh from his electoral success, Mr Kuchma unveiled aradical IMF-approved economic reform programme and promoted reformers ingovernment. The conservative prime minister, Vitaly Masol, was replaced by themore reformist-minded Yevhen Marchuk in March 1995. However, the imple-mentation of Mr Kuchma’s reform programme was stalled by the Ukrainianparliament which, following the 1994 parliamentary elections, was dominatedby the left-wing deputies opposed to reform. In early 1995 the Left bloc, com-prising the Communist Party of Ukraine, the Socialist Party of Ukraine and theAgrarians, held 173 seats. Together with the support of independents the Leftbloc was able to secure a parliamentary majority and stall the president’s reformprogramme.

In order to overcome the opposition of parliament, and riding on his highpublic popularity, Mr Kuchma proposed the introduction of a special tempo-rary constitution, the Law on Powers, increasing the powers of the presidency

6 Ukraine


at the expense of parliament. With the parliament set against ceding morepowers to the president many expected Mr Kuchma to follow other leaders offormer Soviet states and dissolve parliament and rule by decree until theintroduction of a new constitution. However, eager to retain his image in theWest as a democrat, Mr Kuchma agreed a compromise with parliament and onJune 8, 1995, signed the Constitutional Agreement with parliament. This gavethe president special powers for a one-year period until the adoption of apermanent new constitution. Parliament retained some powers, in particularthe right to pass legislation and veto presidential decrees, but agreed to usethese sparingly. In return, the president also appeared to concede that hisreform programme should be moderated. Key reformers in government weredemoted and ministers with links in the industrial lobby promoted.

In the event parliament proved unwilling to take a back seat to the presidentand continued to stall the government’s reform programme. Even reformers inparliament became increasingly sceptical of the president’s ability to pushthrough radical reform and were willing to side with the Left bloc to defeatgovernment legislation. On the crucial question of the drafting of the newconstitution all sides in parliament opposed Mr Kuchma’s plans to increase thepowers of the presidency at the expense of parliament. With his reform pro-gramme stalling and his public popularity waning Mr Kuchma’s position vis-à-vis parliament weakened. That parliament would continue to play a centralrole in any future constitutional set-up was highlighted when in December1995, against the wishes of the president, the prime minister, YevhenMarchuk, was elected to the parliament in a by-election.

Other by-elections, and the splintering of the Agrarian group into a pro-reformfaction, Agrarians for Reform, and an anti-reform group, the Agrarians ofUkraine, strengthened the position of radical reformers in parliament, who wereunwilling to cede greater powers to the presidency. Thus by February 1995, theLeft bloc held just 149 seats (the Communist Party of Ukraine, 97; the SocialistParty of Ukraine, 27; and the Agrarians of Ukraine, 25) of the 416 electeddeputies. Other political groups represented in parliament included those in thecentre: the Inter-regional Bloc for Reforms (32); the Yednist (unity) party (34);the Centre Party (37); and the more radical Reform group (36). On the right ofthe political spectrum were the Ukrainian nationalists, the Peoples’ Party ofUkraine, formerly known as Rukh (29); and the Derzhavnist, or statehood, Party(30). Independents numbered 43 and 34 seats remained unfilled. On the ques-tion of constitutional reform it appeared that parliament would not accept theintroduction of a constitution increasing the powers of the presidency. Thepresident would instead have to accept a compromise solution.

Crimea The Crimean peninsula, presented to Ukraine as a “gift” by Nikita Khruschevin 1954, has been a political thorn for post-independent Ukraine. Two-thirds ofthe peninsula’s 2.7 million population is Russian, and the region’s support forUkrainian independence is at best lukewarm: only 54% of the peninsula’spopulation voted for independence on December 1, 1991, the lowest vote inthe country. Another 10% of the population are Tatars with a longstandingpolitical grievance against Moscow and a belief that the entire peninsulashould be Tatar territory. Since independence the Crimean and Ukrainian

Ukraine 7


parliaments have disagreed fundamentally over the interpretation of Crimea’sstatus as an autonomous republic. The Crimean side has feared that Kiev istrying to erode its autonomy, while Kiev is fearful of the threat of separatism.

These fears were heightened in January 1994 when the stridently pro-Russianseparatist, Yuri Meshkov, easily won the Crimean presidential election, whilehis Russia bloc scooped 54 of the 94 seats contested in the Crimean parlia-mentary elections two months later. Mr Meshkov then restored the Crimeanconstitution of May 1992. Crimea appeared to be heading towards anarchy assplits appeared within the pro-Russian bloc which in effect isolatedMr Meshkov and his native Russian supporters and shifted power towards theCrimean Russians grouped around Sergeiy Tzekov, speaker and chairman of theCrimean parliament. Throughout the second half of 1994 and the beginning of1995 Kiev tried to persuade Simferopol to return willingly to the Ukrainianfold. The Ukrainian government’s patience snapped after Simferopol startedpursuing its own economic policies, for example in privatisation, at the sametime that Mr Kuchma’s team was assembling a Ukrainian recovery programme.In March 1995 the Ukrainian government suspended Crimea’s constitution,annulled the president’s post and threatened to suspend the local parliament.Faced with the threat of dissolution the Crimean parliament backed down andin June 1995 agreed a new draft constitution which accepted the status of thepeninsula as an autonomous republic within Ukraine. As of March 1996 therevised constitution was being considered by the Ukrainian parliament.

Although Communists won the majority of seats in elections to the Crimeanparliament held on June 25, 1995, the parliament elected a new speaker,Yevhen Suprunyuk, who was considered to be relatively pro-Kiev. Since thenthe Crimean parliament has shown an increased willingness to toe the linewith Kiev. In return the Ukrainian government has signalled that it will allowSimferopol greater freedom in shaping economic policy at the local level.Russia’s primary interest in Crimea focuses on the status of the Black Sea fleetand the naval base of Sevastopol. Having itself invaded Chechnya, Russia hasnot been in a position to condone secessionism elsewhere, and Moscow hasmore or less stayed out of the conflict between Kiev and Simferopol, declaringthe crisis an internal matter for Ukraine.

International relationsand defence

After independence Ukrainian foreign policy was initially dominated by thefear of Russian power and the attempt to construct new international alliances.The fundamental problem for Ukraine is that its notion of statehood is linkedto its ability to separate itself from Russia, but at the same time to survive as astate it needs constructive relations with Russia. Anxiety about Russia meantthat Ukraine was internally divided between those who wanted a foreign policymore oriented towards central Europe and those who saw good relations withRussia as the main priority. Since his election as president Mr Kuchma hasdevoted a great deal of energy to raising Ukraine’s profile internationally.Ukraine joined the Council of Europe on October 18, 1995, and has expressedits long-term desire to join the European Union (EU).

Despite all the problems, particularly over the nuclear issue and the Black Seafleet, Ukraine has managed to sign a treaty with Russia which guaranteesUkrainian territorial integrity. What it has not succeeded in doing is signing a

8 Ukraine


treaty of friendship and cooperation. A document to this effect was initialled inFebruary 1995 but has yet to be approved at presidential level, and Mr Yeltsinhas repeatedly postponed an official visit to Kiev.

Although Ukraine allowed all tactical nuclear weapons to be removed from itsterritory to Russia, parliament started to take the view that it could use theremaining nuclear weapons as a bargaining tool. In July 1993 the Ukrainianparliament declared that Ukraine “owns the nuclear weapons on its territory”.In November 1993 Ukraine finally ratified the START-1 treaty, but with somany conditions as to make Ukrainian compliance almost meaningless. Inter-national pressure was brought to bear on Ukraine and on January 14, 1994, adeal was brokered by the USA with Russia and Ukraine under which Ukrainepromised to surrender all of its nuclear weapons to Russia for destruction. Inexchange Russia agreed to supply Ukraine with nuclear fuel to feed Ukraine’slarge nuclear energy programme and the USA agreed to provide $350m to assistthe process of nuclear disarmament.

The tripartite agreement also provided for some of the security guarantees thatUkraine had demanded in return for surrendering its nuclear weaponry, al-though in rather vague terms. The following month parliament voted for ac-cession to START-1. However, although Ukraine had repeatedly promised tosign the Nuclear Non-Proliferation Treaty (NPT) eventually, it continued tostall because it was unhappy about the level of security guarantees providedunder the tripartite agreement. Mr Kuchma’s election as president in July 1994initially bode ill for Ukraine’s accession to the NPT; Mr Kuchma showed littleenthusiasm for the treaty either during his term as prime minister or in hiscampaign. However, the new president soon realised that as a consequenceUkraine was not only becoming diplomatically isolated but its access to inter-national funding was also blocked. In return for stronger guarantees onUkraine’s security in the case of attack Mr Kuchma persuaded parliament toratify the treaty on November 16, 1994. By the end of 1995 Ukraine haddeactivated 90% of its nuclear arsenal. According to its obligations under theSTART-1 treaty Ukraine is to destroy 36% (64) of its 176 missile silos (SS-19 andSS-24) by 1998.

The growth of the armedforces

Since 1991 Ukraine has built up powerful conventional armed forces by thesimple expedient of nationalising all troops and equipment stationed on itsterritory at the time of the collapse of the Soviet Union. As a result, Ukraine’sarmy is the second largest in the former Soviet Union, after Russia, at around450,000. At independence the armed forces, and their officer corps in partic-ular, were disproportionately Russian. A campaign of Ukrainianisation initi-ated by the defence minister, Konstantin Morozov, met with considerableresistance from conservatives, leading to his resignation in October 1993. How-ever, the proportion of Russians has gradually fallen. By late 1995 some 59% ofthe armed forces were ethnic Ukrainians and 37% ethnic Russians; this com-pares with 48% and 45% respectively in 1993.

An early conclusion to negotiations between Ukraine and Russia on the divi-sion of the assets of the Black Sea fleet was complicated by the desire of thelargely Russian crews to remain part of the Russian navy. A formal division ofthe fleet was agreed in June 1995 after a meeting between Mr Yeltsin and

Ukraine 9


Mr Kuchma at the Black Sea resort of Sochi. By February 1995 almost all the130 naval facilities, including ships, which were to be transferred to Ukraineunder the agreement had already been transferred into Ukrainian jurisdiction.The issue of the siting of the two fleets remains a problem, with both continu-ing to demand use of the Sebastopol naval base. The problem of the naval basehad delayed the signing of the friendship and cooperation agreement betweenUkraine and Russia, but in January 1995 the two sides agreed to de-couple theissues.

In the aftermath of independence, Ukraine’s attempt to bolster its diplomaticposition by constructing new foreign policy alliances made little headway.Ukrainian overtures to the neighbouring central European states of Poland,Hungary, the Czech Republic and Slovakia have been rejected because of theirpreference for links with the EU and NATO. Relations with Romania remaindifficult because of the territorial dispute over the Ukrainian regions of south-ern Bessarabia and northern Bukovyna, seized from Romania in 1940 by Stalin.Attempts to build a Ukrainian-led Baltic-Black Sea alliance have foundered onBelarus’s desire to remain on friendly terms with Russia, while the first priorityfor the Baltic states has been to cultivate links with Nordic countries andwestern Europe as a whole.

As a result, in the Kravchuk era Ukraine concentrated its diplomatic efforts onwooing Turkey, and prominent countries in the Middle East and the develop-ing world, such as Iran and India. Many of the talks have centred on Ukrainediversifying its energy supplies, but Russia’s views have loomed large here.Moscow is against any pipeline schemes initiated by former Soviet republicsthat bypass its territory and deprive it of valuable transit revenue. Mr Kuchma,by contrast, has made greater efforts to raise Ukraine’s profile internationally,particularly in North America. Mr Kuchma has visited Canada on G7 businessand has also taken advantage of the large Ukrainian émigré population toobtain aid pledges from Western countries.

Relations with the USA have assumed a far greater importance, with Washing-ton playing a supportive role in Ukraine’s negotiations with the IMF. TheRepublican-dominated US Congress has forced the president, Bill Clinton, toadopt a less Russocentric foreign policy towards the former Soviet Union,which has benefited Ukraine. The US president’s visit to Kiev in May 1995,after VE Day celebrations, not only acknowledged Ukraine’s strategic role inthe region, but produced pledges of economic support. Ukraine is now thelargest recipient of US aid among the former Soviet republics and while theoverall US overseas aid budget was cut in 1996, Ukraine’s allocation was held at$225m, compared with just $195m allocated to Russia. Relations with the EUhave also been strengthened with the signing of a Partnership and CooperationAgreement in June 1994 and an Interim Trade Agreement in June 1995.

10 Ukraine


Population and society

Demographic trends The population totalled 51.7 million in mid-1994. Between 1980 and 1990 thepopulation grew by 3%, as births exceeded deaths throughout the period. Since1991 this latter trend has been reversed which is a reflection of the worseningeconomic and social conditions associated with the recession. Health care, nurs-ery provision and nutritional standards have fallen which has reduced the birthrate and increased the death rate. Between 1991 and 1993 the decline in popul-ation caused by the higher rate of deaths relative to births was counterbalancedby large net “in-migration” from other former Soviet republics. In part this wasassociated with the worsening political situation in many of these states. How-ever, a significant proportion (250,000) of those migrating to Ukraine wereTatars returning to Crimea after being expelled by Stalin in 1944 for allegedcollaboration with Nazi Germany. Preliminary reports for 1995 indicate that therate of population decline has accelerated due to net “out-migration”. Emigra-tion to more developed economies has accelerated in 1995. Popular destinationsinclude the USA, Canada, and Israel (for the Jewish minority). There has alsobeen a trend for Ukrainians to migrate to work as guest workers in other eastEuropean countries where wage levels are higher, including to Russia, Slovakia,Poland and the Czech Republic.

Population trends

1989 1990 1991 1992 1993 1994

Total population (‘000) 51,452 51,584 51,690 51,802 51,989 51,667

Growth rate per year (%) 1.0 0.3 0.2 0.2 0.4 –0.6

Crude birth rate per 1,000 population 13.5 12.8 12.2 11.4 10.8 10.0

Crude death rate per 1,000 population 11.7 12.2 13.0 13.5 14.3 14.7

Life expectancy at birth (years)Men 66.0 66.0 66.0 64.0 63.0 62.8Women 75.0 75.0 75.0 74.0 73.0 73.2

Crude marriage rate per 1,000 population 9.5 9.3 9.5 7.6 8.2 7.7

Crude divorce rate per 1,000 population 3.8 3.7 3.9 4.3 4.2 4.0

Fertility rate (children per woman) 1.90 1.90 1.81 1.70 1.60 1.50

Abortion rate per 1,000 live births 153.2 155.1 151.7 156.2 154.5 148.0

Share of population (%)Aged 0-4 years 7.4 7.2 7.0 6.7 6.4 6.15-18 years 19.9 20.0 20.1 20.2 20.3 20.419-59 years 54.7 54.5 54.2 54.3 54.6 55.0Aged over 60 years 18.0 18.3 18.7 18.8 18.7 18.5

Net migration (1,000) 44.3 79.3 148.4 288.0 50.0 –144.0Source: Unicef.

According to the 1989 census, 72% of the population was ethnic Ukrainian and22% Russian. The same census reported, however, that 33% of the Ukrainianpopulation considered Russian to be its native language. The 1989 censusshowed Jews and Belarusians at 0.9% each, although the Jewish population fellto only 0.4% (250,000) by the end of 1993 as a result of emigration to Israel.Other smaller ethnic minorities, such as the Moldovans/Romanians, Bulgarians,Hungarians, and Transcarpathian Rusyns live on Ukraine’s western borders. Allhave made demands for local autonomy. To date, Ukraine’s large Russian

Ukraine 11


minority, concentrated in eastern and southern Ukraine, has been surprisinglyquiescent, although there have been signs that its loyalty to the state has weak-ened as a result of the deteriorating economic situation and the strained rel-ations with Russia.

Social conditions Health and social provision in Ukraine was similar to that of other Slav parts ofthe Soviet Union, with 43.9 doctors and 135 hospital beds per 10,000 people in1991. However, standards of health care were poor. According to a UN reporton Ukraine’s human development, the country’s living standards rank 45thout of 173 states surveyed in 1994. Living standards have fallen by 80% sinceindependence. As a result male life expectancy has declined from 66 years in1991 to just under 63 years in 1994, and for females from 75 years to just over73 years. Meanwhile, infant mortality has increased from 12.3 per 1,000 livebirths in 1990 to 14.3 per 1,000 live births in 1994. These increases are despitecampaigns to improve immunisation rates for young children. Thus, 91.5% ofchildren under two years of age had been immunised for DPT—diptheria,pertussis (whooping cough) and tetanus—in 1994, compared with only 65.5%in 1991. The comparable rates for polio increased to 95.2% from 35.1% and formeasles 95.5% from 37.1% in 1991. There has been an increase in the rates ofinfection of communicable diseases associated with the deteriorating healthinfrastructure, such as diphtheria and cholera. There have also been outbreaksof botulism and anthrax. Between 1989 and 1993 the number of reported casesof tuberculosis rose by over 20%. This latter increase can be largely explainedby the increasing tendency for farms to market milk direct, with inadequatepasteurisation. The Crimea and the port city of Nikolaev have been particularlybadly affected by the rising rate of infection.

Education has also been badly affected by the recession. Whereas under theSoviet system most parents had access to crèches provided by their employers,as the recession has taken hold companies have been forced to scale downsocial benefits provided to workers. Thus, nursery enrolment rates have fallenfrom 61.2% in 1989 to 44% in 1994. Meanwhile, by 1994 the primary schoolenrolment rate had fallen to 82.7% from 88% in 1989, and the secondaryschool enrolment rate had fallen to 46.9% by 1994 from 63.7% in 1989.

Currency

The rouble remained the official currency until November 12, 1992. In January1992 coupons were introduced to deal with the country’s cash shortage and asan interim currency before the planned introduction of the final currency, thehryvnia. On November 12, 1992, following Russian protests at the high level ofcredit emission in Ukraine, the country was forced to leave the rouble zone andthe coupon—known as the karbovanets (Krb) in Ukrainian—became the solelegal tender. The karbovanets declined in value from Krb5,970:$1 in August1993 to around Krb100,000:$1 in October 1994, earning the reputation ofbeing the most unstable currency in the former Soviet Union. The instabilitywas due largely to excessive credit emissions.

12 Ukraine


The closure in November 1993 of the Ukrainian Interbank Currency Exchange(UICE) exacerbated the problem, as did the use of dual exchange rates forUkraine’s exporters. However, in late 1994 the government and the NationalBank of Ukraine (NBU, the central bank) implemented a stabilisation pro-gramme, backed by an IMF Systemic Transformation Facility, reopening theUICE and unifying the exchange rate. The market was expanded to cover dailytrading in dollars and roubles, and bi-weekly trading in D-marks and poundssterling. The official rate is now set by the rate at the UICE. The move was quitesuccessful, as the official and street value of the karbovanets remained com-paratively stable in 1995, declining by just over 31% in nominal terms fromKrb130,000:$1 in January to Krb188,000:$1 by the end of 1995.

In real terms, given that inflation over this period amounted to 375%, thevalue of the karbovanets rose by more than 220%. Much of the nominaldecline in the value of the karbovanets occurred in August 1995 after the NBUannounced its intention to introduce the new currency, the hryvnia, later inthe year. However, the timing of the currency reform could not have beenworse because, as is traditional, in August the government released credits toagriculture to fund the procurement of the harvest. Money supply rose dra-matically which stoked inflation and brought a decline in the exchange rate.The NBU had to abandon its plan to introduce the new currency and now aimsto introduce the hryvnia some time in 1996.

The economy

Ukraine’s rich black-earth farm land made it an important agricultural pro-ducer in the Soviet Union, accounting for around one-quarter of Soviet grainproduction, one-fifth of meat and dairy output and more than half of sugarbeet production. Its varied agricultural production formed the base for majorfood-processing industries, part of a large and diversified industrial sectorwhich benefited from very substantial investment in the first decades of Sovietrule. Reflecting the priorities of Soviet industrial development, there was a biastowards heavy industry and a defence-oriented capital-goods sector. After theSecond World War, however, Ukraine received a smaller share of Soviet indus-trial investment, so that at independence its industrial plant was on the wholeoutdated, energy-intensive (reflecting low Soviet energy prices) and heavilypolluting.

The importance of theindustrial sector

Industry in Ukraine is dominated by metallurgy, machine building, miningand steel-making. The importance of the latter two categories has risen asUkrainian industry has increasingly had to face the rigours of world marketcompetition. Primary production has increased in importance relative tomanufactures, a reflection of the poor quality of the latter category and itsinability to meet the standards demanded by an increasingly competitive mar-ket place. Thus the share of machine building in total industrial output hasdeclined from 29.9% in 1990 to 18.9% in 1994. Meanwhile, the share of energyand steel rose from 38% to 47.6%. Defence-related industries account foraround one-quarter of the industrial base. Ukrainian industry is generallyenergy-intensive: in 1991 it is estimated to have consumed around six times

Ukraine 13


more oil per unit of GDP than the European Union (EU) average. In 1994 itaccounted for 65% of total electricity consumption. Ukraine’s capital stockvaries by sector. In light industry, especially textiles, Ukraine has some reason-ably up-to-date plant. In the steel sector, which produces large amounts of steelinefficiently, the capital stock needs large-scale replacement or simply closure.The military industrial sector is hampered by its large scale, its inefficiency, thecollapse in orders associated with the demise of the Soviet military and theobsolescence of much of its technology. Conversion to civilian production isproving slow and difficult given the lack of foreign investment.

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

1990 1991 1992 1993 1994

Power 7.3 7.7 8.6 9.8 12.7

Oil & gas 9.3 9.9 8.4 7.7 9.1

Coal 7.0 6.5 7.8 8.3 10.2

Steel 14.4 13.5 15.0 14.5 15.6

Machine building 29.9 30.2 28.6 27.8 18.9

Food 14.0 14.0 13.3 14.4 17.1

Others 18.1 18.2 18.3 17.5 16.3Source: Ministry of Economy, Ukrainian Economic Trends.

A further problem facing the Ukrainian economy is the skill level of its popul-ation. Ukraine claims, as do many other former communist states, that it has ahuman capital surplus. However, in practice many of the claimed skills areeither not relevant, as they are in obsolete industries, or have not been main-tained. Equally, the Ukrainian economy has little experience of the market.Before the communist era, Ukraine was either the poor eastern fringe of theHabsburg empire or the main agricultural zone of Tsarist Russia. Entrepreneurswere more often than not found among the minorities rather than among theUkrainian majority. The strength of anti-reformism in Ukraine has also madethe economy particularly difficult to restructure.

Privatisation In the early post-independence years privatisation seemed to be high on thegovernment’s agenda. The privatisation legislation introduced in 1992 wasconsidered progressive by the standards of other former Soviet republics. InLviv the International Finance Corporation (IFC) sponsored a major pilot pro-gramme which was supposed to set the pace and standards in Ukraine in muchthe same way as an earlier IFC programme in Nizhny Novgorod had done forRussia. However, the privatisation programme fell victim to arch conservativesin parliament who considered it a breach of socialist principles. Parliamentimposed a moratorium on privatisation in July 1994 (which some enterprisingcompanies managed to bypass) although it was lifted in December of that year.Even so, parliament succeeded in maintaining around 6,000 enterprises understate control. These are enterprises deemed to be of strategic importance to thecountry and include those in heavy industry, defence, energy, transport andcommunications. Unfortunately they are also the very sectors which wouldbenefit the most from foreign investment and technology transfer.

By the end of 1994 the privatisation programme had fallen well short of itstargets. Of the country’s 80,000 small enterprises, less than 8,000 had been

14 Ukraine


privatised by the end of 1994. Meanwhile, only 2,650 medium- and large-scaleenterprises had been privatised, less than 10% of the total.

Undeterred, in November 1994 the Kuchma administration announced anambitious programme to privatise 8,000 large and medium-sized enterprisesand 12,700 small businesses, such as shops and restaurants, over the course of1995. The programme was modelled on the mass privatisation programmeimplemented in Russia and was supported with technical assistance providedby the EU, the World Bank and the US Agency for International Development(USAID). The population was issued with vouchers, which could be used topurchase shares in the enterprises being sold off. Voucher auctions were organ-ised whereby the population bid for shares in enterprises subject to privatis-ation. The workers and managers of the enterprises subject to privatisationwere also given preferential access to shares. In addition to voucher auctions,enterprises could be sold through closed subscriptions, competitive tenders,investment tenders, lease-buy-outs and occasional cash sales. In April 1995parliament rejected the 1995 privatisation programme but the president,Leonid Kuchma, overruled opposition to it and pushed ahead with the pro-gramme. However, progress has been disappointing, with only 2,710 large andmedium-sized enterprises privatised over the course of 1995—one-third of thetotal. Progress with the privatisation of apartments has been more successful,with one-third of the stock of apartments privatised by the end of 1995.

In November 1995 parliament again attempted to disrupt the programme byvoting to transfer the local administration of privatisation to local councils andaway from the State Property Fund (SPF). In response Mr Kuchma vetoed themove, arguing that local councils had slowed the programme. Parliament alsovoted to cancel the privatisation of the gas and oil industry, which the govern-ment had been promoting. The opposition of parliament brought an imme-diate reaction from international donors and financial institutions. The USgovernment, the World Bank and the IMF threatened to scale down theirprogrammes in Ukraine unless the government accelerated the pace of privat-isation. Mr Kuchma therefore suggested that privatisation would be a priorityin 1996, although as of March 1996 uncertainty remained as to whether thepresident could carry his plans through.

Privatisation

Privatised Privatised Privateenterprises flats farms

1992 30 n/a 14,681

1993 3,585 903,800 27,739

1994 11,552 1,812,300 31,983

19953 Qtr 19,800 2,236,300 34,149Source: Ministry of Economy, Ukrainian Economic Trends.

Ukraine 15


National accounts

Ukrainian economic statistics are often unreliable, incomplete, or contradictory.However, the available data show that the economic disruption within theformer Soviet Union in 1990-91 had a major impact on Ukraine’s output. Themodest growth recorded in previous years was followed by a decline in both1990 and 1991, as industrial disputes took a heavy toll on coal production(down one-fifth on 1990) while agricultural output was depressed by adverseweather conditions and the continuing effects of the Chernobyl disaster. Sinceindependence, economic decline has continued, compounded by economicmismanagement and Russian demands that Ukraine pay world prices forRussian gas and oil supplies. Official data suggest that real GDP declined by13.7% in 1992, 17% in 1993 and by 24.3% in 1994. As the monetary situationbegan to stabilise in 1995 the rate of decline in production appeared to slow.Real GDP is estimated to have fallen by 11.8% in 1995. On a cumulative basisreal GDP is estimated to have fallen by 58.5% between 1990 and 1995.Ukrainian statistics do have to be treated with some caution. In all likelihoodproduction and output in the early years were exaggerated to meet the demandsof central planners; subsequently, as the country moves towards a marketeconomy there is evidence that companies are under-reporting to avoid taxesand customs duties. This would account for the striking discrepancy betweenoutput and electricity production, which in a heavily industrialised countrysuch as Ukraine should broadly correlate. Thus, while industrial output declinedby 11.5% in 1995, electricity production actually rose slightly, a trend alsoapparent in the period 1991-94.

Net material producta

1989 1990 1991 1992b 1993b 1994b

Total (Rb bn)At current prices 108.9 118.0 224.3 3,887.1 118,237 967,046 At constant prices 105.4 101.6 88.0 70.2 60.2 45.5 Real change (%) n/a –3.4 –13.4 –20.2 –14.3 –24.5

Per headc (Rb)At current prices 2,106 2,276 4,318 740,670 1,953,353 18,716,898 At constant prices 2,038 1,960 1,694 1,349 1,185 881 Real change (%) n/a –3.8 –13.6 –20.4 –12.2 –25.5

a Net material product (NMP), the measure traditionally used in the former Soviet Union, ex-cludes “non-material” sectors such as services, health services, education and public transport.b Karbovanets from 1992. c Derived from World Bank mid-year population estimates.

Sources: World Bank, Statistical Handbook: States of the Former USSR; EIU estimates based on data from offical sources.

16 Ukraine


Sectoral origin of net material product(current prices)

1990 1994 Rb bn % of total Krb bn % of total

Agriculture 35.8 30.3 157,813 16.3

Forestry 0.1 0.1 1,965 0.2

Industry 48.7 41.3 411,579 42.6

Construction 11.5 9.7 157,687 16.3

Transport & communications 7.1 6.1 121,294 12.5

Trade & catering 6.5 5.5 68,621 7.1

Other 8.3 7.1 48,087 5.0

NMP 118.0 100.0 967,046 100.0Source: World Bank, Statistical Handbook: States of the Former USSR.

Growth in net material product by sector(% annual real change)

1989 1990 1991 1992 1993 1994

Agriculture 6.9 –7.0 –18.8 –10.2 –6.8 –22.8

Industry 3.4 –0.6 –8.2 –20.6 –19.6 –28.5

Construction –0.7 0.5 –7.0 –45.7 –19.5 –37.4

Others 5.4 –6.2 –18.9 –38.4 –19.0 –13.6

NMP 4.1 –3.4 –13.4 –20.2 –14.3 –24.5Sources: World Bank, Statistical Handbook: States of the Former USSR; IMF, Economic Review: Ukraine.

Growth in net material product by expenditure(% annual real change)

1989 1990 1991 1992 1993 1994

Private consumption 4.9 2.2 –8.0 –9.0 –30.1 –17.1

Government consumption 7.4 3.0 10.7 –9.1 –27.3 –11.3

Net investment 10.0 –22.7 –7.6 –28.8 –17.2 –32.4

NMP 4.1 –3.4 –13.4 –20.2 –14.3 –24.5Source: IMF, Economic Review: Ukraine.

Expenditure on net material product(current prices)

1990 1994 Rb bn % of total Krb bn % of total

Private consumption 85.9 72.8 529,651 54.8

Government consumption 11.4 9.7 102,646 10.6

Net fixed investment 9.7 8.2 84,243 8.7

Changes in stocks & others 11.4 9.7 230,419 23.8

Net exports & losses –0.4 –0.3 20,087 2.1

NMP 118.0 100.0 967,046 100.0Source: World Bank, Statistical Handbook: States of the Former USSR.

Ukraine 17


Employment

Under the Soviet regime there was officially no unemployment. However,unemployment is likely to become a growing problem because of the way thatUkraine has avoided reform for so long, which has led to significant over-manning. Between 1989 and 1990 the number of those employed in industrydeclined by 416,000 as the disruptions in inter-republican trade took hold. Thegovernment responded by creating a network of employment exchanges inevery city and even in some villages. There were some 700 such centres as ofSeptember 1991, and an unemployment benefit system came into operation inJuly of the same year. In 1993-94 the unemployment rate remained at about0.3% of the eligible workforce, rising to just 0.6% by the end of 1995. Womenhave apparently been severely affected and it is estimated that nine out of tenof the unemployed are women. The UN has estimated that around 40% of theworkforce is unofficially unemployed as a result of factors such as unpaid leave.The International Labour Organisation has made a more modest assumption of12%. The problem of estimating unemployment in Ukraine is made all themore difficult by the common tendency for workers to have more than oneplace of work. Thus frequently workers are registered with an official employerfor tax purposes but do little or no work for this employer, preferring instead towork unofficially in the black economy. Official unemployment can beexpected to rise sharply when, or if, loss-making enterprises are finally allowedto go bankrupt.

Trend in employment(’000; annual averages)

1989 1990 1991 1992 1993 1994

25,420 25,401 24,977 24,985 23,427 22,200Source: World Bank, Statistical Handbook: States of the Former USSR;, OECD, Short Term Economic Indicators: Transition Economies.

There has been little change in the sectoral distribution of employment sincethe mid-1980s. Agriculture employs around 20% of the population, industry30% and construction 8%. The services sector remains comparatively under-developed, employing only around 25% of the workforce.

Employment by sector, 1994% of

’000 total

Agriculture 4,750 21.4

Industry 6,249 28.2

Construction 1,640 7.4

Communications 557 2.5

Trade & material services 1,629 7.3

Health & social services 1,508 6.8

Education & culture 2,277 10.3

General administration & defence 681 3.1

Public utilities & personal services 820 3.7

Others 2,068 9.3

Total 22,179 100.0Source: IMF, Economic Review: Ukraine.

18 Ukraine


Wages and prices

Like other former Soviet republics, Ukraine experienced a surge in prices andwages in 1991-92, after decades of almost zero inflation. The pace acceleratedafter January 1992, when the prices of goods and services, accounting for60-70% of consumer expenditure, were liberalised and those prices which re-mained subject to regulation were raised substantially. Electricity charges wentup 12 times for rural consumers and six times for urban customers. To holddown the acceleration of price rises, the government set limits on the profitmargins on all goods whose prices had been liberalised. Nevertheless, the paceof inflation picked up very strongly, to far above the 100-200% forecast by thegovernment. Successive rounds of price increases and continued monetary andfiscal indiscipline raised monthly inflation to above the hyperinflation barrierof 50% per month by mid-1993. In November 1994 the Kuchma adminis-tration undertook a further bout of price liberalisation, which boosted month-on-month inflation in that month to over 70%. However, after this date fiscaland monetary policies were tightened and as a result inflation was back tosingle-digit month-on-month rates by mid-1995. The annual average rate wasreduced to 891% in 1994 and to 375% in 1995; the month-on-month end-yearrate was less than 5% in 1995.

Trend in wages and prices(% average annual change)

1990 1991 1992 1993 1994 1995

Consumer prices n/a 91.2 1,445.3 5,500.0 891.0 375.0

Wholesale industrial prices 4.5 126.4 2,489.6 4,767.3 900.0 450.0

Average monthly wage 13.3 91.9 1,302.9 155,142 1,375,450 n/aSources: IMF, IFS Supplement No 16, Countries of the Former Soviet Union, 1993; World Bank, Statistical Handbook: States of the Former

USSR; Ministry of Economy, Ukrainian Economic Trends.

The minimum wage has been revised repeatedly since the beginning of 1992.While wages have been indexed (on a scale reflecting the relationship betweenincome and the minimum wage), their increase has been highest in sectorswhere price rises were very high. Wage rises lagged behind those of pricesthroughout 1994 but over the course of 1995 real wages again began to rise.Under the current government’s economic programme, approved by the IMF,minimum wages will remain indexed to inflation and social security benefitswill remain linked to wages.

Agriculture

Since 1945, when the reconstruction of industry was a priority, Ukrainianagriculture has suffered from consistent under-investment. Thus during the1950s, under Nikita Khrushchev’s “virgin-lands” programme, both human andmaterial resources were transferred from Ukraine to the east, particularly toKazakstan.

Ukraine 19


Eastern Europe in 1995

0 20 40 60 80 100 120 140 160 180

RussiaPoland

UkraineCzech Republic

RomaniaHungary

UzbekistanKazakstan

BelarusSlovakiaBulgaria

Serbia-MontenegroCroatia

SloveniaAzerbaijan

MoldovaLithuania

TurkmenistanLatvia

EstoniaKyrgyz Republic

ArmeniaAlbania

TajikistanGeorgia

Macedonia

Gross domestic product (a)$ bn

(a) At purchasing power parities.Sources: EIU estimates; national sources.

677.7677.7677.7677.7677.7677.7677.7677.7677.7677.7677.7214.1214.1214.1214.1

0 2,000 4,000 6,000 8,000 10,000

SloveniaCzech Republic

EstoniaSlovakiaHungary

PolandCroatiaBelarus

LatviaRussia

BulgariaLithuaniaMoldova

KazakstanTurkmenistan

RomaniaUkraine

Serbia-MontenegroUzbekistanMacedonia

ArmeniaKyrgyz Republic

AzerbaijanAlbania

TajikistanGeorgia

Gross domestic product perhead (a)$

(a) At purchasing power parities.Sources: EIU estimates; national sources.

0 200 400 600 800 1,000

GeorgiaArmeniaUkraine

TurkmenistanTajikistan

KazakstanBelarusCroatia

AzerbaijanUzbekistanMacedonia

RussiaKyrgyz Republic

MoldovaLithuania

EstoniaRomania

LatviaSloveniaBulgariaPolandAlbania

HungarySlovakia

Czech RepublicSerbia-Montenegro (a)

Consumer prices% annual average, 1990-94

(a) Hyperinflation in 1993 means that the 1990-94 average isseveral trillion per cent.Sources: EIU estimates; national sources.

-35 -30 -25 -20 -15 -10 -5 0

PolandSlovenia

Czech RepublicHungary

TurkmenistanUzbekistan

SlovakiaRomaniaBulgariaAlbaniaCroatiaEstoniaBelarus

MacedoniaMoldova

RussiaLatvia

KazakstanKyrgyz Republic

UkraineLithuania

AzerbaijanSerbia-Montenegro

TajikistanArmeniaGeorgia

Gross domestic productannual average % change, 1990-94

Sources: EIU estimates; national sources.

20


Demographic factors have also undermined the sector. Agricultural wageslagged behind those of industry, encouraging young people to move to towns.Between 1979 and 1990 the rural population declined by 2.4 million and,reflecting the age structure of the emigrants, the proportion of pensioners inthe rural population rose from 24% to 29%. A decline in agricultural prod-uction in practically every branch was noticeable in the early 1980s.

Agricultural reform was a key component of the perestroika programme of theformer Soviet president, Mikhail Gorbachev, but it brought little improvementin Ukrainian agricultural performance. There was some experimentation withland leasing and a reorganisation of the agricultural bureaucracy but little realchange: agriculture remained centrally planned. With the collapse of the SovietUnion, Ukrainian agriculture was subject to the rigours of hyperinflation andthe loss of traditional markets. The decline in real living standards brought acollapse in demand for food and agricultural products. Demand for livestockproducts is estimated to have fallen by more than half between 1989 and 1995.As a result agriculture was thrown into recession. Unable to sell output, farmslacked sufficient cash to purchase inputs, which led to declining yields and adownturn in production. Farms cut livestock numbers, with the stock of cattledeclining by 20%, pigs by 29% and poultry by 35% between 1990 and 1995.Overall output declined substantially with meat production declining by41.3% between 1989 and 1994, milk production declining by 52.6% and eggproduction by 36.5%.

Agricultural production(Rb bn; constant 1983 prices)

1989 1990 1991 1992 1993

Crop production 23.5 22.0 18.2 18.5 20.7 of which: grain 6.0 5.9 4.6 4.5 5.3 potatoes 3.7 3.2 2.8 3.9 4.0 vegetables 2.1 1.9 1.9 1.7 2.2 fruit 2.0 2.1 1.4 1.7 2.1

Animal husbandry 27.3 27.0 24.3 20.5 18.9 of which: livestock for slaughter 12.7 12.5 10.9 9.2 8.4 milk 6.7 9.7 8.9 7.6 7.3 eggs 1.7 1.6 1.5 1.3 1.1

Total production 50.8 49.0 42.5 39.0 39.6Source: IMF, Economic Review: Ukraine.

Agricultural production

1990 1991 1992 1993 1994 1995

Crop production (’000 tons)Grain 51,009 38,674 38537 45,623 35,543 33,900Sunflowers 2,725 2,448 2,277 2,075 1,556 2,900Potatoes 16,732 14,550 20,277 21,009 16,050 14,600Sugar beet 43,283 34,253 28,783 33,717 27,604 29,400Vegetables 6,666 5,932 5,301 5,800 4,992 5,900

continued

22 Ukraine


1990 1991 1992 1993 1994 1995

Sown area (’000 ha)Grain 14,585 14,671 13,903 14,894 14,594 13,890Sunflowers 1,636 1,601 1,641 1,644 1,808 n/aSugar beet 1,607 1,558 1,498 1,514 1,460 n/aPotatoes 1,429 1,533 1,702 1,553 1,533 n/aVegetables 456 477 500 481 458 n/a

Livestock production (’000 tons)Meat (carcass weight) 4,358 4,029 3,401 2,920 2,600 2,300Milk 24,508 22,409 19,114 18,148 18,100 17,200Eggs (million) 16,287 15,188 13,496 11,794 10,145 9,400

Livestock inventoriesa (’000 head)Cattle 25,195 24,623 23,728 22,457 21,607 20,084 of which: cows 8,528 8,378 8,263 8,057 8,078 7,829Pigs 19,947 19,427 17,839 16,175 15,298 14,128Sheep & goats 9,003 8,419 7,829 7,237 6,863 6,030Horses 754 738 710 700 719 n/aPoultry (million) 255 246 243 215 180 164

a On January 1.

Source: OECD, Agricultural Policies, Markets and Trade in the Central and Eastern European Countries, Selected New Independent States, Mongolia and China, Monitoring and Outlook, 1995.

Land privatisation Agricultural reform since independence has proved disappointing. Under theformer president, Leonid Kravchuk, there was little attempt made to imple-ment land reform or to privatise agricultural input supply or processing enter-prises. By contrast, Leonid Kuchma identified land reform as a crucialcomponent of his overall economic reform programme. Mr Kuchma’s landreform was modelled on that of Russia: the state and collective farm structurewas to be reorganised with farms first commercialised prior to their privatis-ation. Workers (and former workers) were given shares in their farms in propor-tion to their estimated labour contribution. They were then able to decide onthe future organisation of the farm. They had the option of taking their shareof the land and capital and creating an independent private farm, either indi-vidually or with other workers, or maintaining the existing farm unit andcontinuing to work it as either a joint-stock company or a farm collective orassociation. In the event the great majority of farms opted to retain their largefarm status, with only a small minority opting to break away and create privatefamily farms. This has been reflected in the very slow growth in private familyfarms. Thus, by the end of 1995 there were just under 35,000 of these farms,and they accounted for less than 10% of agricultural output and less than 5%of the land area.

That the rural population has spurned the land reform programme is hardlysurprising. Legislation concerning private land ownership remains incompleteand the state bureaucracy, particularly at the local level, is often openly hostileto new private farmers. Private farmers face difficulties in obtaining credit andare as yet unable to use their land as collateral to secure loans. They alsocontinue to face monopolies in both the supply of inputs and in the marketingof their products, a factor which is hindering the development of Ukraine’slarge farm sector. On this latter point, while the government has promotedprivatisation in the food industries, in an effort to improve performance, andmany food-processing enterprises have in fact been privatised, in December

Ukraine 23


1995 the whole food industry privatisation programme was thrown into con-fusion when parliament approved a bill on food industry privatisation. The billwould have forced enterprises in this sector, many of which had already beenprivatised, to allocate shares to farms supplying them with produce. The pres-ident eventually vetoed the bill in February 1996 after international agencieshad threatened to halt aid programmes, but the affair served to aggravatefurther the problem of agro-food sector reform.

Mining and energy

Ukraine’s main energy resources are coal and natural gas. The deposits arelocated mainly in the central and eastern regions.

Coal is mined principally in the Donetsk coal basin (Donbass), which contains60% of the bituminous coal reserves of the former Soviet Union, and inVolhynia, in western Ukraine. Production reached a peak of 218.2m tons in1976, but fell to only 83.6m tons in 1995. It still accounts for 48% of thecountry’s total energy production, and coking coal has been a leading export.Reserves are estimated at 47bn tons, but extraction technology is antiquatedand many mines are close to exhaustion. The industry has been particularlybadly hit by the inability of many of Ukraine’s large industrial enterprises topay for energy deliveries. In turn this has starved the industry of the financialresources needed for investment and it has meant that miners, once the best-paid workers in the former Soviet Union, have faced long delays in obtainingwage payments. Delays of 3-6 months in paying wages are now commonplace.The reaction of miners has been to take strike action. The industry was hit by awave of strikes in the winter of 1995-96. By February 800,000 miners from 123of Ukraine’s 257 coal mines were on indefinite strike demanding the paymentof Krb56trn ($290m) in back-pay. The government has tried to placate theminers by releasing increased credits to allow the payment of salaries. In thelonger term it is acknowledged that many of Ukraine’s mines are inefficientand in need of closure. In 1995 only 31 of the total number of mines in Ukrainewere able to operate without government subsidies. In this respect the govern-ment has announced plans to privatise mines and to close at least 38 mineswhich have no long-term future. The miners have signalled their willingness tofight the closure programme.

Production of natural gas has been in decline since the 1970s and Ukrainehas had to import large quantities from Russia and Turkmenistan; 80% of gasneeds are imported. In 1995 Ukraine produced 18.1bn cu metres of natural gas.

Exploited deposits of oil are small and output has been falling in recent years,although there are untapped resources in the Donbass and the Carpathianmountains. In 1995 Ukraine produced 4m tons of oil (80,000 barrels/day). Rus-sia has traditionally been the republic’s main supplier but Ukraine has beenattempting to reduce its dependence. Ukraine signed an agreement with Iran in1992 for the supply of up to 70m tons of oil and 75bn cu metres of gas over fouryears, but a new terminal at Odessa to accommodate the flow has yet to be built.In December 1994 parliament finally consented to the terminal’s construction.Imported crude is processed in the country’s large (62m-ton capacity) oil

24 Ukraine


refining industry. Shortages of crude have meant that the industry has operatedbelow capacity. In 1994 Kreminchug, the largest of Ukraine’s six refineries,operated at 60-70% capacity and was the only one that remained operationalthroughout the year. The second largest, at Lisichansk, was idle throughout1995 until the end of April. Ukraine remains heavily dependent on Russian oiland gas, importing 66% of its oil needs in 1995.

Primary energy balance, 1995(m tons oil equivalent)

Elec- Oil Gas Coal tricity Other Total

Primary production 4 14 42 20a 7 87

Imports 15 48 2 3a 0 68

Exports 2 0 0 4a 0 6

Primary supply 17 62 44 19a 7 149

Net transformation 4 20 8 8 1 41

Final consumption 13 42 36 11b 6 108

a Input basis. b Output basis.

Source: Energy Data Associates.

Energy generation is poorly diversified. Thermal power stations provide morethan 60% of energy capacity, nuclear stations 37% and hydroelectric plants 3%.The share of energy generated from nuclear energy has risen over recent years asthe government sees this as a means to reduce the dependency on Russian fuelimports. However, while the republic has deposits of uranium, it does not havethe means of producing nuclear fuel and relies on Russia for supplies. By 2010Ukraine plans to have built two uranium-processing plants, at Zhyolte Vody andDneprodzerzhinsk, which would produce 40-45% of its nuclear fuel require-ments and cost 30% less than Russian imports. Ukraine has long blamed “sub-standard” Russian fuel and its late delivery for many of the problems besettingits nuclear power industry. The first nuclear reactor was built at Chernobyl in1977, with three others added subsequently. Since then other nuclear powerstations have been built at Rovno (1,800 mw, three reactors), Zaporizhye(6,000 mw, six reactors), Khmelnytsky (1,000 mw, one reactor) and at SouthUkraine close to Mykolayev (3,000 mw, three reactors). Similar projects in theCrimea and at Chigirin had to be abandoned after public protest. Five additionalreactors with a total generating capacity of 5,000 mw at Rovno, South Ukraineand Khmelnytsky have not been completed because of lack of funds. Anotherproblem besetting Ukraine’s nuclear industry is the haemorrhage of qualifiedRussian personnel; more than 8,500 have left since independence.

The Chernobyl reactor The explosion of reactor number four at Chernobyl on April 26, 1986, was theworld’s worst nuclear accident. The number of deaths in Ukraine alone hasbeen estimated by the Ministry of Health at 125,000, while the clean-up billcosts the country around $300m a year. The Chernobyl plant is an RBMKgraphite moderated design unique to the former Soviet Union that is consid-ered inherently unsafe in the West. For example, RBMKs have no containmentto prevent an explosion. Chernobyl’s reactor number two was closed down bya fire in 1991, and there has been mounting pressure for Ukraine to shut the

Ukraine 25


entire facility down. Parliament did vote in 1991 to have the plant shut downby 1993, but the decision was overturned after a major energy crisis.

The issue of Chernobyl’s closure rapidly degenerated into a squabble overfunding. Ukraine argued that it could not afford to close the plant withoutexternal financial support to provide not only alternative energy sources butemployment for the large numbers on the plant’s payroll and in associatedindustries. Its estimates of the cost of closure escalated throughout 1993 and1994, reaching $14bn at one point. Western institutions such as the EuropeanUnion (EU) used the plant’s continued operation as a reason for withholdingeconomic support. Meanwhile, examinations of the plant revealed that thesarcophagus covering the exploded reactor was itself crumbling. In April 1995the president, Leonid Kuchma, promised that the plant would be closed by2000, once a thermal plant had been built at Slavutych, near Kiev. Ukrainescaled down the costs to $4.4bn, but this was still considered excessive byinternational observers.

Western donors rejected the proposal to build a thermal plant, arguing thatthis would serve only to increase Ukraine’s energy dependency on Russia forcoal and oil. Instead they proposed a programme of support aimed at improv-ing the efficiency of Ukraine’s existing thermal, nuclear and hydro-electricpower plant, which they estimated would make up the energy shortfall for theclosure of the plant. After months of negotiation Ukraine, the G7 and the EUreached an agreement on a programme to finance the closure of the Chernobylreactor. On November 30 in Vienna the three signed a Memorandum of Under-standing which aims to ensure the plant’s closure by 2000. According to theUkrainian Ministry of Environment and Nuclear Safety, the West will provide$2.31bn for the plant’s closure. Of this sum $498m will be provided in the formof grants and $1.81bn in credits. From the grant allocation $349m will financedecommissioning, $102m will be used to improve power engineering, $43m tomodernise the energy sector, and $4m to improve the welfare of the plant’semployees.

Energy production

1990 1991 1992 1993 1994 1995

Crude oil (m tons) 5.3 4.9 4.5 4.2 4.2 4.0

Natural gas (bn cu metres) 28.1 24.4 20.9 19.2 18.3 18.1

Coal (m tons) 164.8 135.6 134.0 115.8 94.0 83.6

Electricity (bn kw) 298.5 279.0 251.0 229.9 201.2 192.0Sources: IMF, Economic Review: Ukraine; Vienna Institute for Comparative Economic Studies.

Manufacturing

Ukraine has a large defence industry, employing one-fifth of the labour force.Many of the former Soviet Union’s advanced missiles were manufactured inUkraine, and in Kharkiv there is a large tank production facility. Part of theformer Soviet Union’s space programme was developed by Ukrainian scientistsand the government today is considering ways to exploit this legacy. Theaerospace industry, particularly the Antonov company, produces some of the

26 Ukraine


largest transport planes in the world. The country also has a highly developedchemical and machinery industry which traditionally produced 20% of Sovietoutput. However, the technology used is poor by Western standards. Theplants are energy inefficient and productivity is low. Reliability and follow-upmaintenance also tends to be erratic.

The lack of orders for the military sector since the dissolution of the SovietUnion has forced many enterprises to switch production to civilian goods.Thus light tractors and buses are being produced at some military plants butthe country has not yet implemented a comprehensive conversion pro-gramme. Rather, individual plants are taking to producing consumer goods onan ad hoc basis. Although cheap, due to low labour costs and the favourableexchange rate, many of the consumer goods are all but unsaleable because oftheir poor quality. Ukraine is eligible for $175m of US aid from the Nunn-Lugarprogramme for defence conversion, and just under $50m of this had beendispersed by the end of 1995.

Industrial production by sector(% real change)

1990 1991 1992 1993 1994

Fuels & energy –0.5 –8.8 –11.6 –16.2 –15.2

Ferrous metallurgy –3.6 –11.7 –9.7 –23.8 –28.8

Non-ferrous metallurgy –3.6 –9.1 –16.3 –12.2 –24.7

Chemicals & petrochemicals –1.3 –6.8 –12.7 –25.2 –25.5

Machine building 1.3 4.2 –3.6 6.1 –38.3

Wood & paper 2.3 2.3 1.3 –2.8 –32.8

Construction materials –1.7 1.5 –3.7 –15.0 –37.0

Light industry 0.4 –2.6 5.4 –13.3 –47.2

Food industry 0.7 –12.8 –14.5 –12.3 –18.9Sources: IMF, Economic Review: Ukraine; World Bank, Statistical Handbook: States of the Former USSR; official sources.

Production in virtually all industrial sectors declined in Ukraine throughoutthe 1990s. As a result, by the end of the third quarter of 1995 seasonallyadjusted industrial output had declined to just 43.8% of the 1990 level, withmanufacturing output down to 81.5% of the 1990 level, mining down to89.6% and electricity generation down to 91.1% of the 1990 level. This latterfigure suggests that official data fail to capture a large portion of economicactivity and that the rate of actual decline in industrial production may be farlower than officially reported. The rate of economic decline appeared to slowover the course of 1995. Thus, whereas real industrial output fell by 30% in1994, this slowed to 11.5% in 1995, according to official sources.

Industrial production(% change on year-earlier period)

1994 19951 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

–35.9 –32.1 –20.6 –22.6 –11.5 –17.7 –12.6Source: EIU estimates based on data from official sources.

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Output of key products(m tons unless otherwise indicated)

% change1995 on previous year

Coal 83.6 –11.0

Oil 4.0 –4.0

Natural gas (cu metres) 18.1 –1.0

Electricity (kw bn) 192.0 –5.0

Iron ore 50.4 –1.0

Cast iron 18.0 –11.0

Steel 22.3 –7.0

Finished rolled metal 16.5 –2.0

Lumber 2.7 –15.0

Cement 7.6 –33.0

Mineral fertilizers 2.2 –5.0

Meat, carcass weight (’000 tons) 846.0 –35.0

Whole milk products 1.1 –46.0

Eggs (bn) 9.4 –7.4

Freight hauled 795.0 –15.0 of which: Rail transport 360.0 –12.0 Road transport 165.0 –32.0 Sea transport 21.0 –20.0 River transport 13.0 –35.0

Food industry n/a –22.0

Retail trade n/a –13.3Source: Ministry of Statistics.

Transport and communications

Rail and roads Ukraine has 22,631 km of railway track, much of it outdated and in need ofmodernisation. Rail accounts for 14% of all traffic. There is also a total of247,300 km of roads. Although only half the road network is paved, it is themain transport route, accounting for 80% of all traffic.

Air After the break-up of the Soviet Union, Ukraine was faced with the task ofbuilding a new air network, as most international connections were throughMoscow. A state airline has been set up, Ukraine International Airlines, whichservices 400 Ukrainian cities and connects with 150 cities abroad. Many foreignairlines now have scheduled flights to Kiev, including Austrian Airlines, KLM,Lufthansa and SAS.

Ports Ukraine has warm-water ports at Odessa, Ilyichevsk, Nikolaev, Kherson,Feodosiya, Kerc and Mariupol. Odessa is the main port, handling 30m tons ofcargo a year.

Telecommunications A programme of expansion for Ukraine’s telephone system is planned. It isexpected that 300,000 new telephone exchanges will be installed in cities and60,000 in rural areas. Over 700 km of cables will be laid and 270,000 domestic

28 Ukraine


telephones installed, thus providing every third family with a telephone. Di-rect dialling to 167 countries overseas was installed in Kiev at the end of 1992,but there is still a shortage of international lines, resulting in frequent delays inobtaining an international connection. By the beginning of 1995 there were amere 4.7 million private telephones or nine per 100 of the population.

Media The communist monopoly of newspapers was finally broken after the failedcoup in Moscow in August 1991, when the communist-run papers lost theirsource of funding. Even before this happened hundreds of low circulation,anti-communist and often crudely produced newspapers had began to appearin 1989. The first mass circulation independent newspaper was Za vilnu Ukrainu(For a Free Ukraine) produced with help from the democratic Lviv regionalcouncil after 1990. It had a readership of almost 1 million in its first year ofpublication, although this had fallen to about 150,000 by 1992. Many commu-nist newspapers have changed their titles. Thus Radyanska Ukraina (SovietUkraine), formerly the organ of the Communist Party of Ukraine, the SupremeSoviet and the Council of Ministers, was renamed Demokratychna Ukraina(Democratic Ukraine). Among the new publications, Holos Ukrainy (The Voiceof Ukraine) is the official mouthpiece of the parliament while Uryadovy Kurieris the newspaper of the Cabinet of Ministers. The opposition group, theUkrainian Popular Movement (Rukh), publishes its own weekly newspaper,Narodna hazeta (People’s Newspaper).

Russian-language newspapers continue to be the most widely read. A 1995SOCIS-Gallup poll indicated that 11.5% of respondents read an issue of aRussian-language daily, Komsomolskaya Pravda, at least once per week, 6.2%read an issue of Trud, and 5.6% an issue of Izvestiya. This compares with just9.7% indicating that they read the Ukrainian-language Kiyevsky Vedomosti, and3.9% Holos Ukrainy. While figures on sales of Komsomolskaya Pravda are un-available, Holos Ukrainy had the highest reported number of subscriptions in1995, at 506,300. Rising publishing costs and the government’s monopoly ofpaper supply squeezed many independent papers out of the market in 1992-93.

Television is the population’s main source of information, achieving a weeklyaudience share of over 95% of the population aged 11 and over, which com-pares to just 60% for radio. As with the written media, television is dominatedby Russian-language channels. The Russian state channel, Ostankino, is themost widely watched, followed by the three Ukrainian state television chan-nels UT-1, UT-2 and UT-3. A recent development has been the emergence ofnational private TV stations, with one channel, ICTV, achieving a weeklyaudience share of around 17% in 1995. There has also been a great expansionin local TV channels. These appear to be only nominally regulated, and fillairtime with advertising, local information, screening subtitled western filmsand often pirated videos. Radio is dominated by Ukrainian radio station one,followed by the Promin channel and then by the Russian station Radio Mayak.Regional radio stations are popular and achieve a 28% audience share.

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Finance

Public finance Under the Soviet regime Ukraine’s state budget was in balance, with the repub-lic transferring to Moscow a significant part of the revenue collected. In 1991its budget was separated from that of the union, and transfers to the centrewere gradually phased out in the course of the year. As a result, revenue re-tained by the government rose in real terms, from 27% of GDP in 1990 to 32%in 1991. However, expenditure rose far in excess of revenue as the governmentheld back some price increases, hence pushing up subsidies, and social outlaysrose to compensate for inflation. Moreover, withdrawal from the union, theestablishment of a Ukrainian army and the need to underpin enterprises in themilitary-industrial complex placed further burdens on the budget. As a result,spending rose from 28% of GDP in 1990 to 46% in 1991, producing a fiscaldeficit of Rb33.6bn, equivalent to 14.4% of GDP in 1991. According to IMFfigures, Ukraine’s budget deficit as a percentage of GDP ran to 30.4% in 1992,10.1% in 1993 and 8.6% in 1994. This conflicts with official Ukrainian datawhich estimated the 1992 budget deficit at 27.1% of GDP, the 1993 budgetdeficit at 14% of GDP and the 1994 budget deficit at 17% of GDP. According tothis same source, revenue retained by the government had increased to 49.1%in 1994, with government expenditure as a proportion of GDP rising in thesame year to 59.7%.

In November 1994 Ukraine agreed a stabilisation programme with the IMF inwhich it committed itself to holding the budget deficit in 1995 to under 7.3%of GDP. By limiting the growth in expenditure, the budget deficit was heldwithin this range over the first half of 1995. However, in July and August 1995the government gave way to pressure from the agro-industrial lobby and re-leased large credits to fund the procurement of the harvest, which pushed thebudget deficit in July 1995 to 16.2% of GDP. Over the latter part of the year thegovernment drastically cut back spending in an attempt to put the budget backon target. This was partially successful and the budget deficit ended the year at8.1% of GDP, or Krb331trn ($2.1bn). More than two-thirds of the deficit wasfinanced through credits issued by the National Bank of Ukraine (NBU, thecentral bank), with around 15% covered by foreign loans and the balance byTreasury bills.

The government has set itself the target of reducing the budget deficit in 1996to 6% of GDP. However, while the Ukrainian parliament approved the draftversion of the budget in December 1995, it went on to submit a number ofamendments, proposing increased public-sector salaries and welfare paymentswhich would take the deficit well over target. In order to keep the budget ontrack the government has proposed making large cuts in budget allocations toeducation, health, social welfare and scientific research to fund the increasedspending. The government has pushed ahead with reducing subsidies paid tocover domestic consumers’ utility bills. From January 1, 1996, consumers pay60% of the cost of utilities and from July 1 this will rise to 80%. On the revenueside the government has proposed increasing taxes on property, increasing thenumber of goods subject to excise tax and value-added tax (VAT) and intro-ducing a system of licensing for alcohol and tobacco. Overall the governmentaims to increase the tax take from indirect taxes in order to reduce the basic rate

30 Ukraine


of income tax, which it hopes will both improve the efficiency of tax collectionand provide more incentives for private business. To facilitate this the govern-ment is proposing to introduce a new tax code in 1996. Already from October1 the government adjusted the tax thresholds, to account for high inflation.The tax-free personal allowance has now been raised to Krb1.7m per month,from the previous rate of Krb1.4m, and the top rate of tax has been cut from50% to 40%.

Money and credit(Krb bn unless otherwise indicated)

1992 1993 1994 1995a

Currency in circulation 491 12,790 79,104 223,527

Central bank credit to government 1,749 11,458 124,400 327,107

Money base 1,525 28,221 160,371 316,484

Total credit 4,622 60,783 377,841 896,452

Payables on enterprise balances 1,921 127,718 683,437 2,694,331

Central bank monthly refinancing rate (%) 9.5 12.1 5.0 n/a

Real interest rate (%) –20.9 6.8 –1.2 n/a

a Third quarter.

Source: Ministry of Economy, Ukrainian Economic Trends.

State budget(Krb trn unless otherwise indicated)

1992 1993 1994 1995

Total revenue 1,695 56,826 531,381 1,441,000 Tax revenue 1,525 49,679 461,953 n/a VAT 473 17,647 136,535 n/a Excises 60 2,669 18,205 n/a Enterprise tax 272 14,978 150,198 n/a Personal income tax 136 2,966 35,272 n/a Chernobyl Fund receipts 121 2,669 25,031 n/a Pension fund receipts 463 8,750 96,712 n/a Non-tax revenue 170 7,147 69,428 n/a

Total expenditure 2,325 66,100 645,348 1,772,000 of which: economy & foreign trade support 694 16,610 243,488 n/a education, health, culture & science 498 14,978 146,775 n/a repayment of foreign debt – – 13,654 n/a social transfers & pension fund 745 28,177 166,118 n/a police, justice, defence & administration 176 5,784 55,752 n/a

Balance –630 –9,275 –113,967 –331,000 % of GDP –27.1 –14.0 –17.0 –8.1Source: IMF, Economic Review: Ukraine.

Money and credit The NBU implements monetary control through reserve requirements and theinterest rates it charges banks on funds transferred from the state savings bank.Before November 1992 the NBU was able to obtain additional roubles byrunning a surplus on transactions with other republics in the rouble zone.However, with inflation accelerating since early 1991 the supply of roublesproved insufficient to meet the economy’s needs, and Ukraine consequentlyresorted to the use of coupons (see Currency). The resulting rise in inflation was

Ukraine 31


the main factor behind Ukraine’s enforced departure from the rouble zone inNovember 1992.

Attempts by the NBU to tighten monetary policy have regularly been under-mined by credit emissions voted through by parliament. Notably, every summersince independence the NBU has been forced to issue large credits to fund theprocurement of the harvest. The other tendency has been for the NBU to bepressurised to offer cheap credits to industry at negative real rates of interest. Asa result of these trends, money supply spiralled in 1992 and 1993, which pushedthe economy to the verge of hyperinflation. Under Leonid Kuchma the NBU hastightened monetary policy and there has been a conscious effort to hold interestrates positive in real terms. As a result the rate of growth of money supply easedin 1994 and 1995. In 1994 the growth rate of M2 increased by 670%, comparedwith 1,750% growth in 1993. The growth in net domestic credit was also curbed,with growth of 580% reported in 1994. By October 1995 M2 growth was downto just 95% compared with December 1994, with the growth in net domesticcredit reduced to 165%. Real interest rates, meanwhile, were held positive fornine of the 16 months between July 1994 and October 1995, whereas in almostevery month in 1992 and 1993 real interest rates were negative.

Banking The NBU was formally established in June 1991 and has since assumed thefunction of a central bank. The commercial banking sector is dominated by thefive big former state-owned banks (Prominvestbank, Ukraina, Ukrsotsbank,Eximbank, and Oshadbank), in which the state continues to hold a large stake.In addition to these there are a further 200 commercial banks, many of whichwere formed by state-owned enterprises as a means to access cheap credit.Approximately half have foreign exchange licences, and one-third are mem-bers of the Ukrainian Interbank Currency Exchange. It is generally acknow-ledged that Ukraine has too many banks and that there will be numerousmergers and failures in the coming years. The NBU appears eager to acceleraterationalisation in the banking sector. As a result it has raised the capital require-ment for commercial banks to Ecu1m ($1.3m). For banks with foreign capital,the minimum capital requirement is Ecu3m and for wholly owned foreignbanks it is Ecu5m. Only 14 of Ukraine’s 204 banks have capital of more thanEcu1m, but banks have two years to increase their capital up to this level.Already in 1995 more than 20 banks went out of business, almost 80 changedownership and only eight new banks entered the market. As yet the govern-ment has failed to introduce legislation covering deposit insurance, although aspate of banking collapses in the Baltic states in 1995 may hasten its intro-duction. Meanwhile, restrictions on banks opening subsidiaries have also beenlifted as have restrictions on banks’ participation in other enterprises, whichwas previously limited to 15%.

Financial markets The Law on Securities and the Stock Exchange came into effect in January1992. There are seven stock exchanges and seven commodities exchanges,although these are more like the auction houses that sprung up after thecollapse of the Soviet Union in 1991 as conduits for goods rather than thesecurities exchanges found in the West. Capital markets are undeveloped evenby the standards of countries such as Russia. The government’s launch ofTreasury bills to finance part of the budget deficit has initiated a debt market.

32 Ukraine


The programme started in March 1995 with the government issuing someKrb17trn in 1995 and planning to issue Krb150trn in 1996. It is conceivablethat there might be market interest in Ukraine’s recently monetised gas debt.Ukrainian vouchers are not tradeable, but there are around 200 investmentfunds which have sprung up in the wake of the privatisation programme. TheUkrainian Stock Exchange (USE), established in 1992, acts to coordinate pri-mary and secondary market trading of Ukrainian securities. The exchange has50 broker members and has drawn up listing and trading requirements.

Foreign trade and payments

Under the former Soviet system Ukraine was largely isolated from foreign trade,which was controlled by foreign trade organisations based in Moscow. Thehighly integrated Soviet regime ensured that most of Ukraine’s input suppliersand markets were located in other former Soviet republics. By the late 1980sUkraine’s import profile consisted of mainly energy and raw material inputs,while it exported machinery, ferrous and non-ferrous metals and chemicals.Obtaining precise information on the trade balance during the Soviet era isdifficult, given that prices diverged from world market levels. However, in 1989it is thought Ukraine ran a merchandise trade deficit of $9bn. During thisperiod the former Soviet Union is estimated to have accounted for over 80% ofboth imports and exports. At independence this high dependency on tradewith the former Soviet republics, and the collapse in monetary relations be-tween these states after the collapse of the Soviet Union, was a major contrib-utory factor in plunging Ukraine into recession. Between 1989 and 1992overall trade declined by 85%, with the greatest declines occurring in tradewith the former Soviet republics, while trade outside of this region declined byaround 60%. These declines should probably be treated with a large degree ofcaution as much of the downturn may be the result of under-reporting and therise of barter trade.

Since 1992 trade with former Soviet republics has continued to decline but at aslower pace, while trade to other countries has begun to expand. Importgrowth from outside the former Soviet republics has proved particularly buoy-ant, with strong demand for consumer goods of a higher quality than availablefrom suppliers in the former Soviet republics. Despite this, Ukraine is thoughtto have run trade surpluses with countries outside of the former Soviet repub-lics in 1992-93, a slight deficit in 1994 and a large surplus again in 1995.Meanwhile, Ukraine has continued to run a large, although declining, tradedeficit with former Soviet republics, which appears linked to increased rates ofenergy conservation in Ukraine. This has enabled a reduction in fuel imports,particularly from Russia and Turkmenistan. Ukraine is thought to run a largesurplus on invisibles, of approximately $1.5bn, which is mostly composed oftransit fees levied on Russian oil and gas exports through Ukraine to centraland western Europe. This moderates the current-account deficit, which is esti-mated to have reached $2.5bn in 1994.

Ukraine 33


Foreign tradea

($ bn)

1989 1990 1991 1992 1993 1994 1995b

Merchandise exports 77.1 74.6 50.0 11.3 12.8 11.4 12.7 To former Soviet republics 63.1 61.4 42.7 5.3 7.6 6.6 6.7 To other countries 14.0 13.2 7.3 6.0 5.2 4.9 6.0

Merchandise imports –86.1 –87.3 –53.4 –11.9 –15.3 –15.6 –15.5 To former Soviet republics –71.3 –71.5 –43.4 –6.4 –10.6 –10.4 –10.5 To other countries –14.8 –15.8 –10.0 –5.5 –4.7 –5.1 –5.0

Trade balance –9.0 –12.7 –3.4 –0.6 –2.5 –4.2 –2.8 With former Soviet republics –8.2 –10.1 –0.7 –1.1 –3.0 –3.9 –3.7 With other countries –0.8 –2.6 –2.7 0.5 0.5 –0.3 1.0

a Totals may not add due to rounding. b EIU estimates.

Sources: IMF, Economic Review: Ukraine; European Bank for Reconstruction and Development (EBRD), Transition report, 1995.

Composition of foreign trade(% of trade outside former Soviet republics)

1993 1994 1995a

Exports to:Turkey 11.3 13.4 19.8 Italy 12.0 11.9 11.4 USA 4.5 7.5 7.5 China 11.4 14.8 6.8 Germany 5.5 6.2 5.4 Czech Republic 2.4 4.1 5.3 Poland 7.2 4.1 3.2 EU 15 27.9 32.1 n/a

Imports from:Germany 24.3 29.2 23.0 Poland 9.7 7.5 8.2 USA 8.0 4.8 1.6 Italy 6.7 6.5 6.7 France 4.4 3.9 5.7 Czech Republic 2.0 4.1 5.7 UK 2.9 3.5 3.9 EU 15 47.8 56.5 58.0

a First quarter .

Source: Ministry of Economy, Ukrainian Economic Trends.

Ukraine’s exports have in the past been composed of military equipment,ferrous and non-ferrous materials, machinery, food, refined oil and consumergoods. Imports have essentially comprised material inputs for industries andagriculture—crude oil, fertilisers and pesticides. Other countries have suppliedcapital and consumer goods in return for electricity, coal and metal products.

34 Ukraine


Commodity composition of trade, Jan-Jul 1995 (% of total)

Exports Imports

Livestock products 3.8 0.5

Arable products 1.0 0.8

Processed food 7.1 0.9

Minerals 11.5 54.4

Chemicals 10.2 4.7

Plastics & rubber 2.5 2.9

Raw leather materials 0.6 0.2

Fabrics & textiles 2.8 2.9

Non-precious metals 36.8 4.5

Machinery 11.8 15.0

Transport equipment 6.9 2.1Source: Ministry of Economy, The Ukrainian Economic Monitor.

Debt Before 1993 Ukraine had wanted to assume a 16.37% share of Soviet foreignliabilities, equivalent to some $10bn-10.5bn. In return, Ukraine was assigned16.37% of foreign assets. Such a debt burden was unsustainable for Ukraine andon December 9, 1994, it agreed to the so-called zero option, under which Russiaassumed liability for all debt in return for ownership of all assets. Trade amongthe former Soviet republics in the last three years has been hampered by thebuild-up of mutual debt and by disputes about prices. Russia has pushed tomove to world prices for raw materials and energy while Ukraine has de-manded hard currency for the transit of Russian gas across Ukraine.

As of January 1, 1995, Ukraine’s foreign debt stood at $7.48bn, of which$4.19bn was owed to Russia—including $1.49bn to the monopoly gas exporterGazprom—and $700m to Turkmenistan, again for gas. In March 1995 Russiaand Turkmenistan were persuaded to reschedule Ukraine’s debt; in Russia’scase the incentive was its own ongoing negotiations for a $6.8bn stabilisationpackage from the IMF. In the case of Gazprom’s debt, Ukraine has agreed to adebt-equity swap, with the gas company taking a stake in 15 key Ukrainianindustries.

According to the finance minister, Vasyl Hureyev, as of January 1, 1996, foreigndebt amounted to $6.6bn, which included $4.59bn owed to other formerSoviet republics. Mr Hureyev estimated that debt-service costs in 1996 wouldamount to $1.27bn, although he admitted that the economic situation made itdifficult precisely to estimate the debt position. However, the prime ministerrecently estimated total debt at $8.8bn, and indicated that debt had risen by$4bn over the year. This contrasts with figures produced by the Ministry ofEconomy which put foreign debt on January 1, 1996, at $8.5bn. The reason fordiscrepancies between the various official estimates is unclear but is probably aresult of differences in recording debt owed to other former Soviet republics.The figure cited by Mr Hureyev implies non-Commonwealth of IndependentStates (CIS) debt of $2.01bn, which appears low given that Ukraine owed$1.54bn to the IMF as of November 30, 1995. In January 1996 the release of thethird and fourth tranches of the $1.5bn stand-by facility from the IMF, agreedin April 1995, was delayed until at least April 1996, due to Ukraine’s lack ofprogress with economic reform.

Ukraine 35


Foreign debt, Jan 1($ bn)

1994 1995 1996

4.6 5.4 8.5Source: Ministry of Economy.

Trade and exchange regulations

Until October 1994 trade was controlled through a system of state contractsand barter arrangements. In January 1993 export tariffs were imposed on 103commodity groups and a special export regime was imposed in December 1993on strategic items such as coal, minerals and grain. Meanwhile, imports fromoutside the republics of the former Soviet Union remained comparatively freeof import tariffs. In general import tariffs range up to 10% while there are noquantitative restrictions on imports. A limited number of goods, for examplecars and textiles, face tariffs of up to 50%. In December 1994, in line with itsbid to gain membership of the World Trade Organization (WTO), Ukraineabolished all export quotas and licensing arrangements, with the exception ofthose on grain. The government phased out restrictions on grain exports byJuly 1, 1995, but was then forced to reimpose these on August 17, 1995. Exportquotas remain for goods subject to voluntary export restraints and foreigndumping regulations.

In June 1995 Ukraine signed an Interim Trade Agreement with the EuropeanUnion (EU), as part of the Partnership and Cooperation Agreement reachedwith the EU in June 1994. As yet the latter agreement is still awaiting ratific-ation by the parliaments of the EU member states (by February 1996 Denmark,Spain and the UK had already ratified the agreement) but the Interim TradeAgreement came into effect on February 1, 1996. The trade agreement givesUkraine Most Favoured Nation (MFN) status and abolishes quantitative restric-tions on trade (with the exception of trade in textiles and steel, where Ukraineis given a 20% higher export quota for textiles and a 15% higher export quotafor steel). The agreement adopts the anti-dumping rules as agreed by theUruguay Round of the GATT.

Ukraine has consistently opposed the creation of a Commonwealth of Inde-pendent States (CIS) customs union on the grounds that such an organisationwould inevitably be dominated by Russia. Instead Ukraine has sought to nego-tiate bilateral free-trade agreements with individual states of the CIS. Thus, in1993 Ukraine concluded a free-trade agreement with Russia and has also con-cluded similar agreements with most other CIS states. However, these treatieshave yet to be implemented and trade between Ukraine and individual CISstates continues to be subject to much disruption. Despite the free-trade agree-ment, in late 1995 under domestic political pressure both Ukraine and Russiaimposed punitive tariffs on imports of each others’ products.

The foreign exchange tax introduced in February 1992 required the surrenderof 20-75% of export proceeds (the share varying with the type of product), withno compensation. Enterprises with foreign capital participation of 30% orabove were exempt. As of mid-1993 Ukrainian enterprises were obliged to

36 Ukraine


surrender 50% of all hard-currency earnings at the official exchange rate,which was united to the rate of the Ukrainian Interbank Currency Exchange(UICE). In November 1993 a decree issued by the then president, LeonidKravchuk, ordered the closure of the UICE and declared that only official bankscould henceforth undertake foreign currency operations. The exchange wasreopened and the exchange rate unified in August 1994. As is the case withnon-convertible currencies, there is an official and unofficial street rate. Theofficial rate is established by the National Bank of Ukraine (NBU, the centralbank) from the exchange’s currency auctions, and applies to local accounting,payment of taxes and obligatory conversion of hard-currency receipts. Thestreet rate is offered by licensed kiosks. The NBU has attempted to narrow themargin between the official and retail market exchange rates. To facilitate this,in mid-1995 the NBU introduced a new regulation whereby banks buyingforeign currency through the UICE are limited to reselling this currencythrough retail outlets at no more than 10% above the rate at which the cur-rency was bought. By late 1995 the margin between the official rate and theretail rate was less than 5%. The 50% surrender rate still prevails but is due tobe abolished.

Foreign investment andregulations

By the end of 1995 foreign direct investment in Ukraine amounted to $750.1m;of this total, $281.5m was invested in 1995. The largest single investor was theUSA which accounted for 22.8% of the total, followed by Germany with 17.3%,the UK with 6.2%, Cyprus with 5.1%, Russia with 5%, and Switzerlandwith 4.7%.

Foreign investors with a minimum 10% holding are subject to the March 1992Law on Foreign Investment. There is no restriction on the size of investment—foreigners can own up to 100% of a Ukrainian company—but licences arerequired for certain business activities such as insurance, foreign trade, bank-ing, mining and use of other resources. Foreign companies can hold local-currency accounts, and can convert local-currency earnings into dollars at theprevailing market rate. Repatriated profits are subject to a 15% withholdingtax. The law protects foreign investors from nationalisation (except in the caseof a natural disaster) for up to ten years from the date of registration in the caseof any adverse change in the law. As of January 1, 1995, tax holidays are nolonger granted. Foreigners can participate in the privatisation programme sub-ject to the approval of the Ukrainian State Property Fund or the local authority.They can own buildings, but land can only be acquired on a maximum 50-yearlease. The tax laws are in a constant state of flux; in addition to some 12 majorstate taxes, there are 15 types of local taxes applied at the discretion of the localauthority. The most significant tax reforms in 1995 switched the application ofcorporate tax from gross income to adjusted profits. The prevailing rate is 30%;in the case of gambling it rises to 60%.

In turn Ukrainian investments abroad were officially estimated to have risen to$29.5m by the end of 1995. Of this $8m was invested in Switzerland, $7.3m inHungary, $3.8m in Russia, $2.4m in Cyprus and $2m in Panama. Unofficialcapital outflows, “capital flight”, is estimated to be running at an annual totalof around $1bn.

Ukraine 37


Select bibliography

Centre for Economic Development, The Ukrainian Economic Monitor

Europa Publications, Eastern Europe and the Commonwealth of Dependent States,1992

European Bank for Reconstruction and Development, Transition Report:Investment and Enterprise Development, 1995

European Institute for the Media, The Ukrainian Media Bulletin, Quarterly Digest

IMF, Economic Review: Ukraine, 1992 and 1993

I S Koropeckyj, The Ukrainian Economy, Harvard Ukraine Research Institute,Cambridge, Massachusetts, 1992

Ministry of Economy of Ukraine, Centre for European Policy Studies,Ukrainian Economic Trends, April-December, 1995

Ministry of Economy of Ukraine, Ukraine in Numbers, No 15, 1995

A Motyl, The Dilemmas of Independence: Ukraine after Totalitarianism, Councilon Foreign Relations Press, 1992

RFE/RL Research Institute, Research Bulletin (weekly)

Orest Subtelny, Ukraine: a history, University of Toronto Press in associationwith the Canadian Institute of Ukrainian Studies, 1994

Unicef, Poverty, Children and Policy: Responses for a Brighter Future, Economiesin Transition Studies, Regional Monitoring Report, No 3, 1995

World Bank, Statistical Handbook: States of the Former USSR, 1995

Edited by:All queries:

Fiona Mullen; Timothy AshTel: (44.171) 830 1007 Fax: (44.171) 830 1023

38 Select bibliography



Documents

Ukraine - iuj.ac.jp · Donetsk 1,121 Odessa 1,087 Lviv 810 Climate Situated in the central part of the northern temperate zone, Ukraine has a moderate continental climate with four