The Deane Group (Ukraine): Oil and Gas Consultancy Services
About Ukraine
Economic and Political Background
Ukraine is a country of around 48 million people in close proximity to the markets of Central and
Western Europe and the Middle East. After Russia, the Ukrainian Republic was far and away the
most important economic component of the Former Soviet Union, producing about four times
the output of the next-ranking republic. The country's vast agricultural potential, its highly
educated population, its transportation networks and the technological infrastructure it inherited
from the Soviet Union provide Ukraine with excellent preconditions for strong economic growth.
However, upon gaining independence in 1991 Ukraine was faced with three concurrent
transitional phases:
• Political – from a highly controlled centralized political system to a more decentralized and
democratic form of government
• Institutional – from the institutional framework of central state planning towards the more
diverse institutions of a market economy
• Economic – the disintegration of the highly integrated economic space of the Soviet Union
causing massive disruptions in trade, financial and market connections
In managing these three concurrent phases, Ukraine focused most attention on the
consolidation of its nascent independent state and did not implement the types of deep
structural reforms that laid the basis for rapid economic growth in some parts of Eastern
Europe. Instead, it adopted a ‘go slow’ approach to reforms. Unfortunately this led to nine years
of successive decline as a consequence of the disintegration and destruction of existing
political, institutional and economic relationships internally and externally.
Shortly after independence in late 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. Loose monetary policies pushed inflation
to hyperinflationary levels in late 1993. Ukraine's dependence on Russia for energy supplies
and the lack of significant structural reform made the Ukrainian economy vulnerable to external
shocks.
Eventually the establishment and development of the necessary alternative political, institutional
and economic organisations finally halted the decline of the 1990s and started to produce a
recovery that has accelerated since early 2000. What was not envisaged back in 2001 was the
very rapid growth in Ukraine’s economy since 2001/2002. Derzhkomstat, the Ukrainian State
Statistics Committee, indicated that in 2003 real GDP grew by 9.4% and industrial output
increased by almost 16%.
According to the International Centre for Policy Studies in Kyiv (ref: Political Commentary, May,
2004, ICPS) the growth in world prices for metals, Ukraine’s main export item, has ensured a
rapid expansion in industry and the continuing growth of the export portion of GDP. The
domestic market has also experienced rapid expansion, indicated by high levels of investment,
in particular: booming construction; growing turnover in goods; increased buying of long term
goods; and rising demand for bank loans.
In 2004, Ukraine’s economy continued to grow even faster. Preliminary estimates suggest that
real GDP increased at the rate of around 12 - 13% with industrial output increasing at a similar
rate. As previously, the acceleration in 2004 has been spurred by industrial expansion,
construction, trade and transport. Industry has been expanding thanks to the export oriented
sectors: metals, chemicals and machinery. High world prices for metals continued to stimulate
quick growth in those sectors related to the metals industry: transport, coal and iron ore
extraction, and coking. The boom in domestic construction is related to more intense business
activity and to high demand for housing. According to ICPS, if Ukraine’s economy were to
continue to grow at 10% per year, the 1990 GDP level would be reached in 2010 (Private
Communication: ICPS).
Ukraine’s unique geographic position, linking East and West whilst also holding critical warm
water ports on the Black Sea, has made Ukraine a trade link of growing importance between the
Former Soviet Union and Europe. Ukraine has undertaken efforts to synchronize its trade
policies with its neighbours and trade partners in both directions. The country has been
engaged in a partnership agreement with the European Union (EU) since 1998, and the two
sides are currently considering a draft action plan which Ukraine hopes will pave the way for
eventual integration into the EU. Meanwhile, in September 2003, Ukraine agreed to join Russia,
Belarus and Kazakhstan in creating a "single economic space" designed to coordinate the
countries' trade regulations and reduce tariffs. While some observers have criticized this dual-
track economic strategy as contradictory, Ukraine insists that the newly formed post-Soviet
economic bloc will compliment its EU integration strategy and thereby serve the national
interest. Independent observers are not so confident and there is a real risk that the new Soviet-
style alignment may interfere significantly with Ukraine’s aspirations to join the WTO and later
the European Union itself.
President Kuchma, during his second term in office, pledged to reduce the number of
government agencies, streamline the regulatory process, create a legal environment to
encourage entrepreneurs, and enact a comprehensive tax overhaul. However changes in the
politically sensitive areas of structural reform and land privatization are still lagging. Pressure on
the President particularly from the US due to a range of perceived irregularities during 2000 -
2002 abated somewhat when Ukraine expressed support for US efforts in Iraq. Ukrainian forces
are currently active in Iraq engaged in peace-keeping operations.
Ukraine's presidential election has been in progress since 31 October 2004. The principal
candidates for the first round were Prime Minister Viktor Yanukovych, former Prime Minister Viktor
Yuschenko (Leader of the de facto Opposition and a pro-West reformer), Oleksandr Moroz
(Leader of the Socialist Party) and Petr Symonenko (Leader of the Communist Party). Mr
Yuschenko won the first round of the election by a small margin of around 0.5% over Mr
Yanukovyvh although he did not receive the 50% of votes needed for outright victory.
Consequently a second round election involving only Mr Yuschenko and Mr Yanukovych took
place on 21 November 2004.
The perceived rigging of the second round of the presidential election in favor of Viktor
Yanukovych led to massive protests in western and central Ukraine. The so-called “Orange
Revolution,” born of the desire of voters no longer to suffer an undemocratic regime, proved
exceptionally effective. As a result of complaints by the Yuschenko camp, the Supreme Court of
Ukraine ruled the election of 21 November 2004 to be invalid and ordered a re-run of the second
round of the process on 26 December 2004. The unofficial result of the re-run indicated a victory
for the Opposition candidate Viktor Yuschenko by a margin of a little under 8%.
Ukraine's International Centre for Policy Studies (ref: Political Commentary, December, 2004,
ICPS), considers that after all this Ukraine will have every chance of following the path of a
democratic country with healthy political competition, a free media, and a strong civil society.
The Ukrainian uprising changed the European Union’s perception of Ukraine as a European
country. By not acknowledging the original 'official' results of the (rigged) election, for the first
time the EU went head-to-head with Russia over spheres of influence. It was supported in this
by the US, which threatened individual sanctions against those in Ukraine who had organized
the rigged vote. Russia’s bet on Mr. Yanukovych created a crisis in Ukrainian-Russian relations.
Should Mr. Yushchenko be confirmed as president, these relations will be re-oriented to be
primarily economic in nature and Moscow’s influence over politics in Kyiv is likely to be
dampened significantly.
The government of Ukraine was, for all intents and purposes, paralyzed throughout November
and December 2004. The out-going president vetoed a bill that would have raised the minimum
living standard and the government began to lend money to the Pension Fund, which no longer
had enough revenues to pay out pensions rises that had been promised just before the election.
However, the fourth quarter political crisis did not lead to a widespread economic crisis. There
were no food shortages, prices did not rise much during the month, and the hryvnia was not
officially devalued. Still, by the end of November economic activity among both the general
population and business saw a real drop, prices for consumer goods continued to rise, and
demand for hard currency, especially the dollar, grew. With the completion of the largely
satisfactory re-run of the election this crisis has been substantially resolved and economic
growth for 2004 will simply show something of a slow down relative to previous predictions.
For more detailed and specific information about business in Ukraine, current affairs, news,
history etc please follows these links:
The Business Directory of Ukraine - This is an excellent source of business
information and is a very good starting point for those new to Ukraine.
BBC News Country Timeline: Ukraine - This BBC Ukraine site is comprehensive and
up to date, and of course leads out into the world beyond.
Ukraine Gateway - Although still being developed and sometimes a little out of date, this site
should also prove to be interesting and useful. Good history and historical perspective plus an
interesting chronology section. Also numerous excellent pictures especially of Kyiv:
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