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AREA STUDY: UKRAINE V. ECONOMY 1 6/24/2015 ARETE-ZOE, LLC
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AREA STUDY: UKRAINE V. ECONOMY
1
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• Currency, exchange rate • Soviet legacy • Privatization and reforms after 1991 • Business environment • Macroeconomic characteristics • Population income • Agriculture • Industry • Energy sector • Export / import, commodities and partners • Impact of seizure of Crimea • Poverty • Corruption
V. ECONOMY
CURRENCY & EXCHANGE RATE
• In 1996, Ukrainian Hryvnia replaced the coupon. 3 series were introduced in circulation since 1996 • They were all printed in 1992 in Canada and kept there until introduction. • Banknotes of Ukrainian hryvnia are the banknotes or bills (in common lexicon) of Ukraine,
denominated in Ukrainian hryvnias (UAH, ₴). • Currently, they are issued in ₴1, ₴2, ₴5, ₴10, ₴20, ₴50, ₴100, ₴500 denominations. • All current notes are issued by the National Bank of Ukraine • The current series of polymer banknotes were introduced into circulation between 2004 and 2006.
100 kopiyok = 1 hryvnia Banknotes
In response, in 1996 the Ukrainian central bank replaced the old currency, the karbovanets, with the hryvnia and pledged to keep it stable in relation to the dollar. The currency continued to wobble through the late 1990s, however, and particularly amid the Russian rouble crisis of 1998.
Corruption and poor governance are other major problems. The Ukrainian shadow economy is one of the biggest in the world—at around 50% of GDP, according to IMF research.
CURRENCY & EXCHANGE RATE
Exchange rates: National Bank of Ukraine
In the immediate post-Soviet era Ukraine was a massively unproductive economy. Like most former Soviet republics it suffered huge output declines and soaring inflation.
HYPERINFLATION in the early 1990s resulted from • lack of access to financial markets • massive monetary expansion to finance government spending • sharply declining output
SOVIET LEGACY After Russia, the Ukrainian republic was the most important economic component of the USSR • 25% of Soviet agricultural output: meat, milk, grain, and vegetables • diversified heavy industry supplied the unique equipment (large diameter pipes, defense industry) and raw
materials to industrial and mining sites (vertical drilling apparatus) in other regions of the former USSR • The major industries are power generation, fuels, ferrous and non-ferrous processing, chemicals, gas,
machine-building, machinery-building, woodworking, and food production • Most Ukrainian industrial enterprises are located in the south-eastern part of the country.
(LOC Resource Guide)
The Economist
There is no lack of reform blueprints available. Its inability to implement dramatic policy changes in social security, pension reforms, and energy sector stem from the lack of political will. (Carnegie EIP)
POST-1991 ECONOMY & PRIVATIZATION
Ukraine’s Track Record • Keeping Up with the Region: Ukraine has grown with the region
• Economic Indicators: poor rankings across the board
• Foreign Trade and Payments: account deficit growing, great capital outflow and a decrease in official reserves due to European financial regression, high public debt and total debt
• Fiscal Problems: exceptionally large pension burden with an aging population
• Gas: astronomical gas import prices and less transit revenue due to the Nord Stream pipeline.
Keeping Up With Its Peers
• Problem with Statistics: The true depth of the economic decline in the 1990s is unclear, due to high inflation, changes in price relations, structural changes, and true size of the shadow economy.
• Gross Domestic Product: steep decline in in the 1990s • Capital Stock and Infrastructure: according to 2011 Sector Transition Indicators Ukraine is not
better in infrastructure and general industry reform
The Ukrainian Curse Rampant corruption, easy access to state resources by elites. Unit values of Ukrainian exports, such as metals, metallurgy, and petrochemicals, have risen with fast global growth in the 1990s and early 2000s. At the same time, the price of energy needed to produce Ukrainian exports, in particular Russian natural gas, remained low. These conditions allowed domestic elites to create a rent system where they controlled access to state resources
(Carnegie EIP)
POST-1991 ECONOMY & PRIVATIZATION Shortly after independence in August 1991, the Ukrainian Government liberalized most prices and erected a legal framework for privatization, but widespread resistance to reform within the government and the legislature soon stalled reform efforts and led to some backtracking. Output by 1999 had fallen to less than 40% of the 1991 level. Ukraine's dependence on Russia for energy supplies and the lack of significant structural reform have made the Ukrainian economy vulnerable to external shocks.
The Ukrainian Week
POST-1991 ECONOMY & PRIVATIZATION
The Ukrainian Week
The vacuum of power was lethal in terms of the miss-distribution of property rights. The lack of fair, efficient and transparent bureaucracy was one of the major problems. It failed to ensure a fair privatization process, but allowed it to slip into chaos and, given the lack of anti-trust organizations, to result in the concentration of power in the hands of few officials inherited from the Soviet regime. Private sector accounts for around 60% of GDP in Ukraine today (compared to the average of 75% in EU member-states and 70% in NMSs). According to the EBRD, Ukraine received just a small fraction of the worth of assets actually privatized in revenues from privatization. In Poland, this share accounted for about 30-50% of GDP in the 1990s.
Defense industry after 1991
Borysfen Intel
Before 1991: • 720 thousand military servicemen, 6500 tanks, 7150 armored personnel carriers and infantry
fighting vehicles, 3400 artillery systems, 1430 combat aircrafts, 285 combat helicopters. • Until 1996, Ukraine had had 130 ICBMs UR-100N (NATO code — SS-19) and 46 RT-23 ICBM (SS-24)
with 1652 nuclear warheads. Ukraine also had 3000 items of tactical nuclear weapons. • 23 strategic bombers TU-95, mainly modification MS (missile carriers), and 19 bombers TU-160,
armed with 460 nuclear warheads. More than 18 % of the USSR military-industrial complex. • As of 1991, Ukraine had been producing 17 % of all defense outputs of the Soviet Union. In 1991: • 3594 defense and double-purpose enterprises, employing at least 3 million people. • Purely military production: almost 700 companies, including 205 industrial associations, and 139
research and manufacturing associations, employing 1,45 million people. • Today, more than 65 % of weapons and military equipment are obsolete • About 65 % of aircraft and 77 % of warships, boats and support vessels have been operating for
more than 15-20 years, missile weapons have expired or are expiring within the next 2-3 years. In the 1990s: Ukraine confidently was among the top ten countries in the world for the sale of arms and military equipment, as it was mainly selling weapons and equipment remaining since Soviet times. After 2000 the Ukrainian defense industry began to increase production of new equipment, but not for the Armed Forces of Ukraine, but mainly for the foreign market. Until recently, at least 97 % of new military production had been exported.
Banks & Insurers
The insurance market in Ukraine is developing rapidly. It consists of around 50 companies which are partly or completely owned by foreign investment. Other financial intermediaries are credit unions, pension funds, and investment companies.
Source: LOC resource guide Finance Maps of World
The first level is represented by the National Bank of Ukraine (NBU) which is an independent central bank conducting monetary policy and having a monopolized right to issue Ukrainian national currency – hryvna. According to the Ukrainian Constitution, the main goal of NBU is to maintain the stability of the national currency. The second (lower) level is represented by commercial banks conducting their activities on financial markets. Ukrainian banks offer classical banking (depositing, lending) and investment (buying and selling securities) services.
Oshchad Bank (State Savings Bank)
PrivatBank Bank Aval UkrEksIm Bank
Major life insurance companies • Grawe Ukraina Insurance • Alico AIG Life Insurance • TAS Insurance • Ekko Insurance Company • Nadiya Insurance • Garant Life Insurance • Universalnaya Insurance
Major Non-Life insurance companies • Lemma Insurance • Avantyeh Insurance • Aura Insurance • Etalon Insurance • AKU Garant Insurance • Oranta Insurance • Aska Insurance • Garant-Avto Insurance
Deposits of Non-Financial Corporations
Source: NBU Bulletin No 3 (Jan 2015)
Source: NBU Bulletin No 3 (Jan 2015)
Loans to Non-Financial Corporations
MACROECONOMIC CHARACTERISTICS
Outside institutions - particularly the IMF - have encouraged Ukraine to quicken the pace and scope of reforms to foster economic growth. Ukrainian Government officials eliminated most tax and customs privileges in a March 2005 budget law, bringing more economic activity out of Ukraine's large shadow economy, but more improvements are needed, including fighting corruption, developing capital markets, and improving the legislative framework. Ukraine's economy was buoyant despite political turmoil between the prime minister and president until mid-2008. The economy contracted nearly 15% in 2009, among the worst economic performances in the world. (CIA World Factbook)
World Development Indicators - Ukraine
World Bank
World Development Indicators - All
Government finances
Source: NBU Bulletin No 3 (Jan 2015)
Macroeconomic characteristics
Ukraine’s real GDP
POPULATION INCOME
Source: NBU Bulletin No 3 (Jan 2015)
Household deposits
Source: NBU Bulletin No 3 (Jan 2015)
Loans to households
Source: NBU Bulletin No 3 (Jan 2015)
Prices, cost of living Cost of living in Ukraine • Urban areas: hyperinflation creating a gap
between income and unavoidable expense • Barter trade and shadow economy
condition of survival • Rural areas: subsistence farms and gardens
Average Monthly Disposable Salary (After Tax) $219.40 $142.52 to $316.06
Mortgage Interest Rate in Percentages (%), Yearly 21.52 18.00 to 25.00
Source: NBU Bulletin No 3 (Jan 2015)
Consumer and producer prices
Source: NBU Bulletin No 3 (Jan 2015)
AGRICULTURE Ukraine has a moderate climate and mostly flat territory which is very favorable for agricultural development. Agricultural land consists of cultivated land, orchards, gardens, vineyards, and pastures. The main grain crops are winter wheat, spring barley, and corn. Other important agricultural crops include sunflowers and sugar beets. (LOC Resource Guide)
Source: NBU Bulletin No 3 (Jan 2015)
Ukraine collected a record high grain harvest in 2014. Agriculture was the only sector demonstrating growth in 2014.
USUBC Report
Ukraine has tremendous agricultural potential. In 2012, agriculture contributed up to 9.3 percent to the country’s GDP and constituted 17.2 percent of employment and 26 percent of national exports. However, this potential has not been fully exploited, due to depressed farm incomes and an inadequate policy framework that have reduced private investment to below the levels required to modernize the sector.
World Bank Report
PAYUVANNAYA (land ownership reform)
Source: UKRMAP
• considerable number of the world's black soil - the most fertile soil • Up to 70% of the land fund is arable land (arable land, perennial plantations, pastures, hayfields) • These tremendous resources are used irrationally. • Over 80% of agricultural land is under cultivation, which also negatively affects the soil. • Low productivity due to manual labor and extensive management • Experienced farmers often left • Payuvannya (transfer to private ownership), introduction of new techniques, modernization All this
substantially improved situation in the industry
AGRICULTURE: National Projects
Grain of Ukraine National Project: the program of grain production development with high industrial and economic indicators. The Project aims at the technological re-equipment of the agricultural sector in accordance with the requirements of the World standards of product quality and creation of Ukraine’s sustainable competitive position among the World leaders of grain producers. In addition, Grain of Ukraine National Project solves the problem of attraction of the population to the work in agriculture sector (reduction of unemployment). Revived Cattle Breeding: Implementation of this National Project will ensure the State food security particularly in the sphere of high quality beef production, milk and dairy products; promote rural development and create new jobs. This Project will attract investments to the construction of the industrial livestock complexes for farming beef breeding livestock with the creation of all the required infrastructure and Logistics Park. Localization: The entire territory of Ukraine with the concentration of major manufacturing facilities in Polissia, Slobozhanshchyna and Carpathian regions as the ones with the best cumulative effects of resource supply factors and natural and climatic conditions. Green Markets: creation of the regional wholesale food markets network. Green Markets National Project is an implementation of the strategy for the development of agro logistics facilities, which will include cultivation of agricultural products, storage, processing and delivery to the consumers, i.e. the Project is directed on the development of full closed cycle of agricultural projects from production to consumption.
INDUSTRY & ENERGY SECTOR Ukraine depends on imports to meet about three-fourths of its annual oil and natural gas requirements and 100% of its nuclear fuel needs. After a two-week dispute that saw gas supplies cutoff to Europe, Ukraine agreed to 10-year gas supply and transit contracts with Russia in January 2009 that brought gas prices to "world" levels. The strict terms of the contracts have further hobbled Ukraine's cash-strapped state gas company, Naftohaz.
U.S. – Ukraine Trade
• $3.3 billion in total (two way) goods trade during 2012. • Goods exports totaled $1.9 billion; • Goods imports totaled $1.3 billion. • The U.S. goods trade surplus with Ukraine was $587 million in 2012.
Investment U.S. foreign direct investment (FDI) in Ukraine (stock) was $840 million in 2012, up 21.7% from 2011. There is no information on the distribution of U.S. FDI in Ukraine. Ukraine FDI in the United States (stock) was not available in 2012.
Exports • Mineral Fuel (coal) ($490 million) • Machinery ($454 million) • Vehicles ($225 million) • Aircraft ($145 million) • Fish and Seafood ($75 million) • Poultry meat ($44 million) • planting seeds ($24 million) • eggs and egg products ($15 million)
Imports • Iron and Steel ($344 million) • Iron and Steel Products ($224 million) • Inorganic Chemicals ($213 million) • Mineral Fuel (oil) ($179 million) • Aircraft ($102 million). • sugars, sweeteners, and beverage bases ($13 million).
Source: USTR
ENERGY Gas: Ukraine faces astronomical gas import prices and less transit revenue due to the Nord Stream pipeline. European buyers are demanding and getting price discounts for natural gas from Russia, which also puts pressure on transit fees. Ukraine has potential to replace some of its cuts in natural gas consumption by coal but Ukrainian unconventional gas deposits will only be available for use in about two decades.
(Carnegie EIP)
Gas production in Ukraine
Source: Resilience
Ukraine energy sector • Restructuring and upgrading the energy sector continue to be key development challenges • Ukraine is among the world’s top-10 most energy-intensive economies. While the country’s energy
intensity declined at a rate of 5 percent per year between 1996and 2009, it still exceeds that of Germany by a factor of 3.7 and is three times higher than the EU average.
• The sector faces serious challenges in maintaining the security, reliability, and quality of supply, due to delays in energy sector reform, the poor financial condition of energy sector enterprises, a lack of investments, and deferred maintenance to aging infrastructure.
• Ukraine became a member of the Energy Community Treaty in 2010
Nuclear energy in Ukraine
Nuclear plants in Ukraine
Nuclear energy in Ukraine
National Projects The first list of the National Projects was defined during by the Committee on Economic Reform in 2011
New Energy National Priority: • LNG-Terminal – building of receiving terminal of 10 billion cubic of liquefied natural gas on the Black Sea
coast of Ukraine . The dependence on the monopoly of natural gas imports to Ukraine generates systemic economic problems as well as the political threats.
• Energy of Nature - the construction of wind and solar power stations. «clean» energy source - wind and sun with the planned amount in 2000 MW of capacity. This Project will be implemented mainly in the Crimea and Zaporizhzhya where the main problem is electricity transportation.
New Life Quality National Priority • Affordable Housing Project housing for experts in strategic priorities, cheaper than market price • Clean City Project- modern system of solid domestic waste recycling complexes • Clear Water- providing of the population of Ukraine with high quality drinking water • Open World National Project informational and communicational educational 4G network • City of Future - creation of a strategic plan and system of projects for city development • New Life, a new quality of maternity and childhood protection.
Olympic Hope 2022 National Project - Winter Olympic Games 2022 in the Carpathians.
New Infrastructure National Priority • Air Express Project –- passenger railway from Kyiv to Boryspil International Airport (funding from China) • The Danube corridor • Kiyv Ring City Road • Industrial Parks industrial production infrastructure. • Technopolis National Project–innovative development and high technology infrastructure. • Agro Perspective: Grain of Ukraine, Revived Cattle Breeding, Green Markets
National Projects
EXPORT & IMPORT
Source: NBU Bulletin No 3 (Jan 2015)
Exports
World goods prices
Source: NBU Bulletin No 3 (Jan 2015)
Trade balance
Export / import: EU and Russia
• Ukraine’s export markets are in Europe and Asia, yet its import markets are in Russia. • Challenge to maintain national independence and access to cheap raw materials
The Ukrainian week
Russian economy • Difficult situation in the economy of Russia continued, causing a decline in investment activity and trade. • Real estate sector: worsening • Industry remained almost the only sector backing the country's economy; reduction in manufacturing
production, growth slowing down. • Domestic market: decline in population's consumer demand. Real disposable incomes continued to
diminish (-0.8%); real wage did not grow (-8.0%); rapid ascending inflation • Retail trade turnover went down by 4.4% YOY • In January 2015, the unemployment rate continued to augment, totaling 5.5%. • Inflationary processes continued to accelerate 15.0% chiefly in prices of foodstuffs due to devaluation of
the ruble, which exerted pressure upon an increase in prices for imported goods.
Source: NBU Bulletin No 3 (Jan 2015)
Source: The Telegraph
IMPACT OF SEIZURE OF CRIMEA In April 2010, Ukraine negotiated a price discount on Russian gas imports in exchange for extending Russia's lease on its naval base in Crimea.
Source: Quartz
Source: The Washington Post
Source: The Washington Post
ASSOCIATION AGREEMENT WITH THE EU Movement toward an Association Agreement with the European Union, which would commit Ukraine to economic and financial reforms in exchange for preferential access to EU markets, was curtailed by the November 2013 decision of President YANUKOVYCH against signing this treaty. In response, on 17 December 2013 President YANUKOVYCH and President PUTIN concluded a financial assistance package containing $15 billion in loans and lower gas prices. However, the end of the YANUKOVYCH government in February 2014 caused Russia to halt further funding. With the formation of an interim government in late February 2014, the international community began efforts to stabilize the Ukrainian economy, including a 27 March 2014 IMF assistance package of $14-18 billion. Russia’s seizure of the Crimean Peninsula has created uncertainty as to the annual rate of growth of the Ukrainian economy in 2014.
After signing the political chapters of the EU-Ukraine Association Agreement at the EU Summit of 21 March 2014, both parties signed the remaining sections of the Association Agreement on 27 June 2014. The Association Agreement will enter into force once all EU Member States, in addition to Ukraine, have ratified it.
Source: EEAS Europe
The World Bank Projects in Ukraine
Source: The World Bank
Aid Data – international development
Source: Aid Data GIS
• Corruption is THE driver behind the protests in 2004 and 2014 • EU membership was supposed to remediate the internal chaos
CORRUPTION
CORRUPTION: Wealth distribution
The Ukrainian Week
=> Don’t worry about average, look at median
CORRUPTION: Oligarch system
The Ukrainian Week
• The lack of an efficient legal and institutional framework that could prevent this distorted informal behavior, resulted in corruption that emerged furiously in the 1990s and accompanied Ukraine in the past two decades. It is a necessary component of the oligarch system.
• This level of corruption also underscores a very low level of civicness and social capital (Robert Putnam), i.e. low participation of civil society in the political and economic system.
U.S. to help Ukraine tackle corruption
U.S. Ambassador to Ukraine Geoffrey Pyatt says that the agreement the Ukrainian and U.S. governments signed on Friday to provide $26.358 million in aid in the sphere of law enforcement and criminal justice foresees the effective fight against corruption.
Both countries will cooperate in creating a government in Ukraine that would be free from corruption, respect human rights and realize the Ukrainian people's expectations. Ukraine is presently fighting on two fronts: on the one hand, this is an inner front where it is rooting out corruption and building a new society, on the other hand, this is war with Russia in Donbas. The signed agreement is designed to help Ukraine succeed in reforms. The agreement will serve as the formal ground for joint work in the fight against corruption. Particular attention will be paid to interaction with the Ukrainian Prosecutor General's Office. The U.S. Department of Justice and the FBI are ready to work with the new team of the Prosecutor General's Office, the ambassador said. The U.S. is also looking forward to the beginning of the Anti-Corruption Bureau's work in Ukraine. The signed agreement is also designed to bolster cooperation with Ukrainian border guards. The allocated funding will be funneled into improving their mobility and technical capabilities, including war on terrorism, and will help Ukraine reinforce its borders.
Source: UNIAN | EurActiv
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