Ukrainian economy

The Economy of Ukraine

The economy of Ukraine is an emerging free market, with a gross domestic product that fell sharply for the first 10 years of its independence from the Soviet Union and then experienced rapid growth from 2000 until 2008. Formerly a major component of the economy of the Soviet Union, the country's economy experienced a deep recession during the 1990s, including hyperinflation and a drastic fall in economic output. In 1999, at the lowest point of the economic crisis, Ukraine's per capita GDP was about half of the per capita GDP it achieved before independence. GDP growth was first registered in 2000, and continued for eight years. In 2007 the economy continued to grow and posted real GDP growth of 7%.[8] In 2008, Ukraine's economy was ranked 45th in the world according to 2008 GDP (nominal) with the total nominal GDP of 188 billion USD, and nominal per capita GDP of 3,900 USD.

However Ukraine was greatly affected by the economic crisis of 2008 and as a result a 15.1% decrease in Ukraine's GDP took place over 2008 and 2009.[9] Inflation slowed in July 2009 and stayed at about 8% since.[10] The Ukrainian currency, which had been pegged at a rate of 5:1 to the U.S. dollar, was devalued to 8:1, and was stabilized at that ratio.

There was 3% unemployment at the end of 2008; over the first 9 months of 2009, unemployment averaged 9.4%.[11] The final official unemployment rates over 2009 and 2010 where 8.8% and 8,4%.[9] Although according to the CIA World Factbook in Ukraine there are "large number of unregistered or underemployed workers".[9]

The Ukrainian economy recovered in the first quarter of 2010.[12] Ukraine's real GDP growth in 2010 was 4.3%, leading to per capita PPP GDP of 6,700 USD.[9] The resumed growth has been helped by growth in neighbouring Russia, which is by far the country's largest trading partner and export market.

Ukraine is subdivided into nine (9) economical regions: Carpathian, Northwestern, Podillya, Capital, Central-Ukrainian, Northeastern, Black-Sea-Coastal, Trans-Dnieper, and Donetsk. Those regions were redrawn from the three (3) Soviet economical regions of the Ukrainian SSR: Donetsk-TransDnieper, Southwestern, and Southern.

Ukraine's GDP real annual growth rate 1990 - 2010 

In 1910, Ukraine's GDP was estimated at 7 per cent of USA[citation needed] (about the same size as the Netherlands). By 2010, Ukraine's GDP had shrunk to 1 per cent of USA. The nation has many of the components of a major European economy - rich farmlands, a well-developed industrial base, highly trained labour, and a good education system. At present, however, the economy remains in poor condition.

While Ukraine registered positive economic growth beginning in 2000, this came on the heels of eight straight years of sharp economic decline. As a result, the standard of living for most citizens has declined more than 50% since the early 1990s, leading to a relatively high poverty rate. The macroeconomy is stable, and the hyperinflation of the 1990s has subsided[citation needed]. Ukraine's currency, the hryvnia, was introduced in September 1996.[14] The economy has continued to grow thanks to exports since 2000, although at uneven speed and being highly affected (circa -15% GDP growth) by the late-2000s recession and the 2008–2009 Ukrainian financial crisis. In general, growth has been undergirded by strong domestic demand, low inflation, and solid consumer and investor confidence.

Natural resources

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

Sectors

Light industries (Primary sectors)

Agriculture

Ukraine is the world's largest producer of sunflower oil[16], a major global producer of grain and sugar, and future global player on meat and dairy markets. It is also one of the largest producers of nuts. Ukraine also produces more natural honey than any other European country. Because Ukraine possesses 30% of the world's richest black soil, its agricultural industry has a huge potential. However, farmland remains the only major asset in Ukraine that is not privatized, hampering access to international investments and best farming technology.[17] The agricultural industry in Ukraine is already highly profitable, with 40-60% profits,[17] but according to analysts its outputs could still rise up to fourfold.[18]

Mining

Forestry, Fishing and others

Heavy industries

Metal production

Ukraine has a major ferrous metal industry, producing cast iron, steel and pipes. Among its economy leading comapnies in that field are Metinvest, Kryvorizhstal, AzovStal, Ilyich Steel & Iron Works, and others. As of 2010, Ukraine was the world's eighth largest steel producer (according to World Steel Association). Another important branch is the country's chemical industry which includes the production of coke, mineral fertilizers and sulfuric acid. Manufactured goods include metallurgical equipment, diesel locomotives, tractors, and automobiles. The country possesses a massive high-tech industrial base, including much of the former USSR's electronics, arms industry and space program. However, these fields are state-owned and economically underdeveloped.

Strategic and Defense complex

Ukraine is also among the top 10 arms exporters in the world. The signing of recent large contracts may put Ukraine into 6th place among biggest arms traders, after the United States, Russian Federation, France, Germany and Israel.[19] The output of Ukrainian defense plants grew 58% in 2009, with largest growth reported by aircraft builders (77%) and ship builders (71%).[19]

Infrastructure

Energy harvesting and production

See also: Natural gas in Ukraine

Ukraine imports 90% of its oil and most of its natural gas. Russia ranks as Ukraine's principal supplier of oil, and Russian firms now own and/or operate the majority of Ukraine's refining capacity. Natural gas imports come from Russia - which delivers its own gas, as well as the gas from Turkmenistan. Instead, Ukraine is transporting Russian gas to the EU through its well-developed gas pipelines system, being Europe's vitally important connection. The country's dependence on Russian gas supplies dramatically affects its economics and foreign policy, especially after the recent major gas dispute.

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

Ukraine is a partner country of the EU INOGATE energy programme, which has four key topics: enhancing energy security, convergence of member state energy markets on the basis of EU internal energy market principles, supporting sustainable energy development, and attracting investment for energy projects of common and regional interest.[20]

Transportation

Communications

Trade

The EU is Ukraine's largest trading partner, with 27.1% of exports and 33.7% of imports in 2008; and trade with EU has seen strong double-digit growth in recent years.[21] The Russian Federation is Ukraine's second largest trading partner, with 21.1% of exports and 28% of imports in 2009.[9] An overcrowded world steel market[citation needed] threatens prospects for Ukraine's principal exports of non-agricultural goods such as ferrous metals and other steel products. Although exports of machinery and machine tools are on the rise, it is not clear if the rate of increase is large enough to make up for probable declines in steel exports, which today account for 46% of the country's overall exports.[citation needed]

Tourism in Ukraine

Shopping tourism

Ukraine's western neighbours (Poles, Slovaks, Hungarians and even Belarusians) are known to come to Ukraine to purchase products and presents, such as food or gasoline, that are cheaper in Ukraine than in their home countries.[22]

Dental tourism

In the past 20 years many modern dental clinics with high quality dentistry equipment, high quality materials and effective anesthetics were established in Ukraine. They provide patients with high quality dentistry services. But for all that, prices in Ukraine are much cheaper in comparison with Western and Russian clinics. A lot of tourists from USA, European Union and Russia provide a sort of dental tourism.[citation needed]

Recreational tourism and sightseeing

Financing, banking, investments

Investments

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

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

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

As of May 2010 Ukraine is the third largest borrower of the IMF, following Hungary ($11.6 billion) and Romania ($12.5 billion). The IMF granted Ukraine a $16.4 billion loan in October 2008,[23] of which the government has so far received $10.6 billion.[24][25] Further payments were frozen late 2009 after Ukraine raised minimum wages and pensions contrary to IMF recommendations.[26]

On July 28, 2010 the IMF approved a 29-month $ 15.15 billion loan to Ukraine.[27] Among others this led to a 50 percent increase on household natural gas utility prices in July 2010 for Ukrainian consumers (a key demand of the IMF in exchange of the loan).[28][29]

Foreign direct investment

Ukraine encourages foreign trade and investment. The Parliament of Ukraine has approved[citation needed] a foreign investment law allowing Westerners to purchase businesses and property, to repatriate revenue and profits, and to receive compensation if the property is nationalized by a future government. However, complex laws and regulations, poor corporate governance, weak enforcement of contract law by courts, and corruption all continue to stymie direct large-scale foreign investment in Ukraine. While there is a functioning stock market, the lack of protection for shareholders' rights severely restricts portfolio investment activities. As of April, 2011 total foreign direct investment stock in Ukraine stood at $44.7 billion.

State enterprise InvestUkraine was created[31] under the State Agency for Investment and National Projects (National Projects)[32] to serve as a One Stop Shop for investors and to deliver investment consulting services.

Monetary Policy and Banking

Stock Exchange

Insurance business and companies

Legal environment

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

On June 24, 2010 Ukraine's Foreign Minister Kostyantyn Hryshchenko signed an agreement on free trade with the European Free Trade Association (EFTA).[33]

According to specialists, a double taxation avoidance treaty with Cyprus (signed in 1982 by the Soviet Union) has cost Ukraine billions of US dollars of tax revenues.[34]

Foreign workers

A number of foreign guest workers come to work in Ukraine, mainly in seasonal farm work and construction industry, especially from neighboring Moldova and Belarus.[35][36] Meanwhile, large numbers of Ukrainian guest-workers work in EU countries. An influx of cheap migrant labor from Central and East Asia and Africa is also expected in Ukraine in 2011-12, due to labor shortages during the construction rush leading up to the Euro 2012 championship that will take place in Ukraine.[36]

Environmental issues

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

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

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

2008–2009 Ukrainian financial crisis

Ukraine was hit heavily by the late-2000s recession, the World Bank expects Ukraine's economy to shrink 15% in 2009[1] with inflation being 16.4%[2]. 

The deficit of Ukraine's foreign trade in goods and services January through September 2009 was estimated at $1.08 billion, which was 9.5 times down on the same period in 2008, export of goods over the period decreased by 48.7%, to $27.478 billion, while imports fell by 53.5%, to $31.570 billion; export of services dropped by 23.2%, to $6.841 billion, while imports were down by 19.9%, to $3.829 billion (the deficit of Ukraine's foreign trade over the first nine months of 2008 was estimated at $10.284 billion, which was 2.7 times up on the same period of 2007).

According to a forecast by the State Employment Center unemployment in Ukraine will triple to 9% in 2009 (there was 3% unemployment at the end of 2008), which would mean about 3 million people will apply for employment services.[4] In September 2009 the official level of unemployment was 1.9%.[5] 95% of the population of Ukraine have felt influence of the financial crisis; in July 2009 21% of them stated that "The crisis has a catastrophic impact on me and my family", this figure dropped to 17% in October 2009.[6] Actual year-on-year wages in Ukraine fell in October 2009 by 10.9%, while in October 2008 it grew by 4.8% year-over-year according to the State Statistics Committee of Ukraine.[7] The real incomes for Ukrainians in 2009 fell down 8.5% while the nominal income went up 6.2%.[8] The Ukrainian economy shrank 15 percent in 2009.[9] The second Tymoshenko Government had predicted GDP growth of 0.4% in 2009 and a slowdown in inflation to 9.5% (also in 2009), although the overwhelming majority of economists considered this forecast to be excessively optimistic[2]. 

The Ukrainian economy recovered in the first quarter of  2010

Reasons for crisis

Analysts say the reasons for the crises are slumping steel prices, local banking problems and a the cutting of Russian gas supply of January 2009[11][12]. This made key industries such as metallurgy and machine building lay off workers, and real wages started to fall for the first time in a decade. 

In 2008 the hryvnia dropped 38% against the US dollar, eclipsed only by the Icelandic krona and the Seychelles rupee.[13] Since many loans and mortgages were issued in dollars and most Ukrainians are paid in hryvnyas (Ukraine's currency), they had to buy dollars with the weak hryvnya, and so they were paying back much more on the loans than they had expected.[12] From December 2008 till mid-May 2009 Ukrainian banks were not to allowed to grant requests for early withdrawals of bank deposits.[14] As of September 2009 financial analysts predict a recovery of the hryvnia.[15]

According to David Heslam of Fitch ratings "At the root of the problem is Ukraine’s inconsistent macroeconomic policy framework, as the authorities are aiming to defend the exchange rate while avoiding necessary fiscal tightening in the absence of adequate sources of non-monetary financing".[16]

In November 2009 (Ukraine's) Minister of Economics Bohdan Danylyshyn stated that in his view the "permanent conflicts" and "lack of understanding" between the National Bank of Ukraine (NBU) and the Cabinet of Ministers was one of major factors of the deep fall of the Ukrainian GDP in 2009, as in his view the conflicts affected the efficiency of the anti-crisis policies of Ukraine[17] (he also insists government should get involved in NBU's activity[18]).

Asked in August and October 2009 "Who bears the most responsibility for the difficult socioeconomic situation in Ukraine?" about a half of all Ukrainians polled (47%) answered President of Ukraine Viktor Yushchenko, and 22% blamed Prime Minister of Ukraine Yulia Tymoshenko, while 17% of the respondents thought that the Verkhovna Rada is also responsible for the lack of progress in solving economic problems.

Crises per year

2008

The share of problem loans in bank portfolios grew to 10.3 percent by December 11, 2008 and is continuing to grow. Banks have all but stopped issuing loans, and clients have hurried to withdraw deposits. In October 2008 the National Bank of Ukraine introduced a moratorium on withdrawals ahead of schedule.[12] Industrial output in November 2008 tumbled 28.6 percent, following a 19.8 decline in October 2008. Steel production slumped 48.8 percent, oil refining and chemical output fell 35.2 percent and machine building by 38.8 percent.[19] Ukraine's economy shrunk 14.4 percent year-on-year in November 2008. Statistical data showed the gross domestic product (GDP) growth slowed to 3.6 percent in January-November compared to 5.8 percent in January-October. Ukraine's Economy Ministry expects the economy to grow 3.5-4.0 percent in 2008.[20] The Hryvnia also lost value.[21]

According to a poll (held November 25 through December 5, 2008) by the Horshenin Institute of Management Problems about 79% of those polled suffered from rise in prices, about 29% from delays in payment of salaries. More than some 20% have suffered from reduction of salaries. In the families of some 14.8% somebody lost their job, and some 6% said their enterprise shut down.[22] A total of 90.8% of those polled described their financial state as "making both ends meet" and 83.1% said they are short of money for food. Only 2.4% of Ukrainians said they were not hit by the economic crisis at all.[23]

Mid-December 2008 the International Monetary Fund (IMF) has lowered the forecast for Ukraine's GDP in 2009 from a 2.5% growth rate to a 5% decline,[24] the same day the Cabinet of Ministers worsened the GDP growth forecast to 0.4% from 6% for 2009.[25]

In November 2008, the IMF approved a stand-by loan program for Ukraine to the tune of $16.5 billion.[26] A second one worth $1.87 billion might be granted in February 2009.[27]

In November 2008, the official unemployment rate increased by 0.4 percent to 2.3 (Previously 1.9% in September), the State Statistics Committee said that as of December 1 (2008), it registered 640,000 unemployed people.[28]