Economy
Change from the isolation of Soviet times to the unpredictable, dynamic global market was most evident in the economy. In the 1990s the economy of Ukraine was disintegrating: its innumerable ties with former republics were sundered, its factories stood still, its workers were unpaid, and much of the population was sinking into poverty.
The country’s GDP dropped by more than 60%. But in the 2000s the economy began to adjust to the demands of the market. In the process, signs of improvement began to appear. True, they occurred on such a depressed base that any positive development attracted attention; nonetheless, the indications that market-oriented activity was increasing were undeniable.In the first years of the new millennium, Ukraine’s annual GDP rose by an impressive 7–10% a year. In 2007 it even grew 12%. Moreover, the country’s basic economic assets were still formidable: it had great expanses of some of the richest soil in the world, its industrial base was extensive, and its supply of natural resources was bountiful. It also had a large, well-trained labour force that was much cheaper than any in Western Europe. Analysts who looked more closely at the economy of Ukraine began to use the phrase “great potential” with growing frequency.
The first significant signs of revival appeared in the huge steel plants -some with a workforce of 60,000 – of the southeast. In Soviet times, Ukraine was one of four top steel producers in the world. Therefore, it is not surprising that its five major steel mills, privatized for most part, were the first to find their way to both old and new markets. Steel products became Ukraine’s primary export, constituting about 40% of its total exports. International contacts meant access to modern expertise, which Ukrainian plants, with their antiquated production facilities, desperately needed. Gradually, foreign investments began to flow into the steel sector.
Most important was the purchase in 2005 of the Kryvorizhstal plant by the world leader in steel production, Mittal Steel, for $4.8 billion. This reversed the controversial sale of the plant a year earlier to two Ukrainian billionaires, Viktor Pinchuk (Kuchma’s son-in-law) and Renat Akhmetov, for the relatively paltry sum of $800 million. But although steel products led the way, conditions in Ukrainian plants were far from satisfactory. In addition to the antiquated production facilities, the huge workforces were relatively unproductive. A Ukrainian steelworker produced only 76% as much as a Polish steelworker, 14% as much as a European, and 11% as much as an American. Thus, Ukraine’s strongest performing economic sector continued to suffer from major weaknesses.Coal mining was another pillar of the Ukrainian economy. Ukraine possessed 3.5% of the world coal reserves and was one of the world’s top ten producers of coal. But signs of decline, primarily due to the lack of modernization, were already evident in Soviet times. In the 1990s and early 2000s matters grew worse. A telling indicator was the rapid decline of the workforce: in 1991 it consisted of 511,000 miners but in 2002 it shrank to 252,000. Although it was crucial to steel production and provided much of Ukraine’s fuel and electricity, the coal mining sector, based mainly in the Donbas, remained stagnant. Extraction equipment was obsolete, the working conditions were extremely dangerous – mining disasters were a regular occurrence -and there was little new investment. Many mines were deeply indebted. For the owners, investing in improvements seemed unfeasible. Consequently, the prospect of closing the numerous unprofitable mines was frequently considered. But since the coal mines remained a crucial part of the economy and neither government nor owners could offer other employment options to the hundreds of thousands of miners and their families who depended on their abysmally low salaries, substandard conditions continued to exist.
A much more encouraging aspect of the economy was the growth of small businesses. Traditionally, this was a realm of economic activity where non-Ukrainians, especially Jews, had been most active. But the poor prospects and low salaries that traditional employment offered forced many to consider “biznes” as a more promising option. Momentum gathered slowly. Initially, it consisted of former teachers, engineers, or doctors travelling to Turkey or China to buy cheap goods and then selling them in hometown bazaars at a small profit. But with time, some accumulated enough capital to open food stores, restaurants, beauty parlours, tourist agencies, home repairs stores, dentist offices, and other businesses geared to the needs of growing numbers of consumers.
By 2007 small businesses had become a significant sector of the economy. They accounted for 20% of all production in Ukraine and grew at the rate of 11% a year. A growing internal market provided a base for this development. By 2007 about 2.6 million small businesses were registered in the country (although about a third proved to be unprofitable and unviable). Major retailers were often financed by European and Russian investors. These small businesses were the sector of the economy that exposed the average Ukrainian most directly to market forces. And it was here that they experienced the market’s ability to respond to their needs and wants. The growth of consumerism, aided by the introduction of credit cards, became ever more evident. Nonetheless, Ukrainians still lagged far behind the buying power of West Europeans. For example, the average Ukrainian consumer had only 9% of the buying power of his German counterpart.
In the all-important agricultural sector the situation was more ambiguous. Ukraine possessed 42 million hectares of arable land but only one-third of it was farmed, producing 14% of the country’s GDP.8 Despite widespread unemployment in the countryside (often as high as 40%), it still employed 25% of Ukraine’s population compared to 5% in the European Union and 3% in the United States.
By the early 2000s most former collective farm workers, about 6 million in number, had received title to their shares of the disbanded collective farms. This was a radical transformation in the countryside, perhaps as revolutionary as collectivization had been in the 1930s with the traumatic abolition of private land ownership. Private ownership of land was restored to the countryside (although restrictions remained on the right to sell this land). State ownership of land practically disappeared. Yet all this happened with little fanfare. There were no outbursts of joy or heightened activity among the villagers. The primary reason for this surprising reaction was the fact that the rural population was no longer able or willing to work and benefit from the lands that were returned to it.A small number attempted to become independent farmers, leasing land from others, investing in farm machinery, hiring labour, and growing crops for the market. Many of their more passive neighbours, accustomed to the less demanding ways of the collective farms (with their numerous opportunities to shirk work or to steal) did not take kindly to such hardy individualists. The more usual option was to rent one’s land at extremely low prices, since there were many willing to lease their holdings to the growing numbers of agribusinesses that began to appear, and that were often financed by foreign investors. These large-scale operations could afford major investments, were more efficient than small landowners in producing crops, and had ready access to markets. To many, they constituted the future of farming in Ukraine. Thus, although the fate of the country’s large rural population was in doubt, rising food prices throughout the entire world seemed to indicate that the farming that re-emerged in the 2000s in Ukraine was a promising economic undertaking. One way or another, Ukraine’s fertile lands were certain to remain a central element in its economy.
After 2004, the economic potential of Ukraine – its proximity to European markets, its cheap labour and numerous natural resources – was frequently recognized by international investors.
There was, moreover, the hope that the new government would institute more business-friendly policies. Consequently, foreign investment began to flow into Ukraine. In 2006, it amounted to about $4.2 billion. A year later, the figure was almost $8 billion and growing. Despite the financial crisis in 2008, foreign investment in the country grew by 54% more than in the previous year. Most of these funds went into banking, agricultural enterprises, car dealerships, retail malls and outlets, hotels, and machinery manufacturing. In 2008 Germany alone accounted for 20% of these investments. Other European Union countries such as Austria, the Netherlands, and Great Britain allocated another 38%. Surprisingly, Russian investment, which had been dominant in the Kuchma years, made up only 6% while the Americans accounted for a mere 5%. Another 20% of foreign investment funds came from an ostensibly unexpected source: Cyprus. It was, however, not difficult to decipher the real origin of these funds: they came from the offshore bank accounts of many of Ukraine’s oligarchs. Apparently even they had decided that the investment of their often illegal gains in their native land was a promising venture.Slowly, Ukraine’s modest participation in global markets began to increase. Its two major trading partners were Russia and the European Union, each taking turns in playing the leading role. Each accounted for about 20% of Ukraine’s foreign trade. Between 2002 and 2007 European purchases of Ukrainian products doubled. In addition to its largest export, steel products, Ukraine also exported machinery, chemicals, and agricultural produce. This, however, was a rather limited variety of products to offer on global markets, and it explains why Ukraine was only sixteenth in the European Union’s list of trading partners. On the one hand, it demonstrated Ukraine’s severely limited ability to rival foreign competitors. On the other hand, it was also an indication that Ukrainian manufacturers were becoming more familiar with the global marketplace and learning how to compete more successfully.
Commercial relations with the much-heralded EEC, based on the weak or unbalanced economics of the former Soviet countries, remained moribund. However, in 2008 Ukraine took a major step toward improving its position in global commerce. After many years of negotiation, it was finally accepted into the World Trade Organization (WTO). By forcing Ukrainian manufacturers to make the adjustments required by international commerce, the entry into the WTO drew them even more into the global marketplace.The economic upsurge that characterized the early 2000s could not hide the fact that Ukraine’s economy was still saddled with major problems. Because the country failed to introduce reforms into its political and economic system, the result was one political crisis after another. Such instability, coupled with bureaucratic red tape, pointless restrictions, and corruption frightened off many potential investors. Moreover, there was the problem of energy. Ukraine imported about 90% of its energy from Russia. Exacerbating the situation was the fact that Ukrainian enterprises were shockingly inefficient in their use of energy. Indeed, Ukraine had the dubious distinction of being a world leader in this regard. Consequently, it was extremely vulnerable to price increases in energy and, as tensions with Russia rose, the low energy prices that Ukraine once enjoyed also increased.
A dramatic reflection of this dilemma came in late 2005 to early 2006 when Russia reacted to protests about price rises by shutting off gas deliveries to Ukraine. The result was momentary panic not only in Ukraine but in all of Europe, because much of the latter’s energy supplies flowed through the gas lines in Ukraine. Eventually, the issue was settled, at least temporarily. But henceforth, Ukraine’s industries and growing numbers of car owners had to learn to live with oil and gas prices that were ever closer to world market levels. There were other problems: the country’s domestic market was still relatively weak, despite the presence of numerous scientific institutes, innovation in the high-tech sector was practically non-existent, and its economic infrastructure, especially in the area of transportation, was woefully inadequate. On top of all this, in the early 2000s inflation hovered at about 10–15% a year, reaching as high as 20% in 2008. Thus, despite encouraging improvements in some sectors of its economy, Ukraine still faced major obstacles in its efforts to modernize the economy.
When the global financial crisis struck in the fall of 2008, its impact on the highly vulnerable economy of Ukraine was great. Indeed, Ukraine, together with Iceland and Hungary, headed the IMF list of countries in urgent need of support. The sudden evaporation of credit was evident in troubles encountered by the country’s banks. To prevent runs on their holdings, the banks greatly limited withdrawals. This meant that businesses could not obtain funds to pay salaries. Unemployment quickly rose, especially in the crucial and hard-hit steel sector, where exports declined by more than 20% and steel prices dropped by 50%. About one-third of the workers in the large plants in Mariupol were laid off; thousands of steelworkers and miners lost their jobs or went on unpaid leave in Donetsk. Layoffs spread to all sectors of the economy. Some of the country’s oligarchs lost a large part of their wealth.
By October 2008 the country’s industrial output sank by 20% and an even greater decline was expected. Meanwhile, the currency, which had been relatively stable, went into a tailspin, losing 20–30% of its value against the US dollar. The situation was even worse on Ukraine’s tiny stock market, which sustained losses of about 75%. Suddenly, Ukraine’s rosy economy descended into crisis. Conservative estimates called for a 5% decline in its GDP in the coming year. Widespread panic was avoided, however, by a timely loan from the us-backed International Monetary Fund (IMF) of $16.4 billion. The loan had another encouraging aspect: it indicated that the state of Ukraine’s economy was of concern to an important international financial organization. For better or worse, the country’s economy was well on the way to becoming a part of the global economic system.