Ukraine and the Global Economic Crisis

Report by: Maia Otarashvili

June 15, 2013

Economic Performance

Between 2001 and 2008 the Ukrainian economy picked up significantly. High export revenues from traditional industries of metals, metallurgy, engineering, chemicals and food (often oligarch-owned) was a major factor in the economic growth. For years Russia provided Ukraine with underpriced gas while Ukraine’s export prices increased rapidly. As a result, Ukraine had been enjoying fast but unsteady economic growth, which significantly dropped in 2008 and went into a deep recession in 2009. Thanks to two IMF loans in 2008 and in 2010, in exchange for a commitment to lowering the growing budget deficit, the Ukrainian economy was able to recover from the recession. Despite the growth resumption in 2010, the growth rates remain slow with 2012 estimates at approximately 3% of GDP. The economy experienced multiple external shocks as a result of the global economic crisis as the foreign demand fell. Foreign direct investment has also fallen, partly due to the global economic crisis, and partly due to poor investor climate in Ukraine.  Public finances still face severe challenges which are expected to force the government to reach out for further financial assistance from the international community. The government has already requested that IMF postpone loan repayment dates, resulting in a downgrade from “positive” to “negative” in Standard and Poor’s credit rating of Ukraine.

The official unemployment rate increased to 9.5% at the beginning of 2009 and stands at 8.7% (2012) according to World Bank reports. Most Ukrainians continue to live in severe poverty, the social welfare system is highly dysfunctional and the country is in dire need for poverty-reduction efforts.

Ukraine’s agricultural potential is vast but uncultivated and lacks modernization. No legal framework (for secure land ownership and free and transparent land markets) has been established to facilitate agricultural development in Ukraine. This and other sectors such as Ukraine’s highly unsafe road network and the most inefficient energy system in the region require immediate restructuring and upgrading, thus they represent key development challenges for the government. Just as severe is the condition of the healthcare, education, municipal and service sectors in Ukraine.

In order to combat the crisis President Yanukovych has gradually increased prices on utilities, resulting in much public and international dissatisfaction. With Ukraine’s government gross debt at almost 40% of GDP international financial institutions are concerned. The Euro crisis and its ripple effect on Ukraine combined with internal failures such as lack of effective reform in virtually all sectors has given the international financial institutions a very grim outlook for Ukraine’s near economic future.

Democracy

After the Orange Revolution Ukraine’s new government made some promising progress towards Ukraine’s democratic consolidation. As a part of this reform program amendments were made to the constitution in 2004, creating a mixed parliamentary-presidential system. Despite this progress President Yanukovych and Prime Minister Tymoshenko (pformer one time allies and currently angry rivals) were unable to put their personal differences aside, and political infighting took a serious toll on the ongoing crucial reforms. After 2010 presidential elections, which were considered free and fair by international observers, Viktor Yanukovych came to power. His government annulled the 2004 amendments, effectively restoring the 1996 version of the constitution and reestablishing a strong presidency. Yanukovych’s government is also responsible for imprisoning the former Prime Minister Yulia Tymoshenko – a matter which has become highly controversial to the international community and has cost Ukraine many steps backwards on its path to European integration.  

Since Yanukovych came to power significant regression towards an authoritarian rule has taken place in Ukraine. Misuse of the judiciary became the main indication of a deteriorating political landscape from 2011 on, preventing free and fair political competition. Criminal cases against the leaders of opposition and imprisonment of Yuliya Tymoshenko removed the most vocal opponents of the government from active politics. The opposition has become weakened, leaving voters with no viable alternative to the ruling party.

Yanukovych seriously diminished the power of the parliament, political parties and the Cabinet of Ministers. Civil society has not yet been weakened and continues to play an important role in Ukraine. The media have remained strong and independent, however there are clear signs of the media becoming more sensitive to the authorities’ wishes. Despite growing social turbulence Yanukovych has continued to centralize and personalize power while avoiding responsibility for the failed social and economic policies.

This dramatic change in democratic performance since 2010 is reflected in declining Freedom House democracy ratings for Ukraine. Most affected is Ukraine’s Judicial Framework and Independence score which has worsened by an entire point since 2010, changing Ukraine’s status of a semi-consolidated authoritarian regime to consolidated authoritarian regime (6-7) for this category. Ukraine’s corruption rating is very similar to its rating of the judicial framework and independence, and has declined to the rating of that of an authoritarian regime. These scores contrast with highly promising civil society scores which are currently at 2.75 (consolidated democracy level) and 3.75 (semi-consolidated democracy level) respectively.

October 2012 parliamentary elections served as additional proof of the alarming regression that has been taking place in Ukraine under President Yanukovych’s rule. Yanukovich’s Party of Regions won the widely criticized elections (30% of the seats). On November 5, over one thousand opposition supporters demonstrated outside of the Election commission office. The protesters and critics called for a recount of votes in thirteen electoral districts. Election authorities, however, agreed to a recall in only five districts. Yanukovych has mostly ignored these protests and allegations despite some strong statements made by international leaders (such as Secretary of State Hilary Clinton and the EU High Representative Catherine Ashton).

Jailed ex-Prime Minister Tymoshenko’s Fatherland Party came in second place with about 25% of the vote, a close second to the Party of Regions. However, the Communist Party is in fourth place with 13.2% of the votes, and has been known to align itself with the Party of Regions in the past and expected to continue this trend forming a coalition gathering enough votes to pass necessary amendments and continue strengthening Yanukovych’s rule in Ukraine.