How did independent Ukraine become an inefficient economy and a paragon of crony capitalism?
From its Soviet predecessor Ukraine inherited an economy dominated by heavy industry, much of it simply incapable of being reformed. Large, inefficient factories produced military hardware for the Soviet army and in turn depended on dirt-cheap fuel from elsewhere in the Soviet Union.
Huge, obsolete mines were kept running, in part to keep alive the Stalinist myth of model Soviet proletarians, the Donbas miners. In the 1990s the economic ties among the former Soviet republics loosened, leaving much of the Ukrainian-made machinery idle. The reorientation toward the production of consumer goods proved slow and painful.The Kravchuk administration demonstrated little interest in economic reform, mostly because of its anticipated social and political costs. Instead, the government preferred to subsidize unprofitable state enterprises in order to prevent mass unemployment. In 1993 the government's free printing of currency led to annual hyperinflation of over 10,000 percent. Their savings wiped out and their salaries not keeping up with prices, three-quarters of Ukrainians lived below the poverty level. For many urban residents, having relatives in a village or owning a small garden plot in the countryside, where they could grow their own food, became the key to survival. At the same time, well-connected traders made instant fortunes by importing cheap indispensable goods.
During his first presidential term (1994-1999), Leonid Kuchma managed to introduce strict monetary controls and, eventually, a relatively stable new currency, the hryvnia (1996). His larger project, however, was the privatization of state enterprises, which originally succeeded only in relation to smaller, consumer-oriented businesses. Influential managers of large factories and mines, most of them former Soviet “Red directors” like Kuchma, initially resisted privatization because they thrived by exploiting state subsidies. It took some years for them and for more dynamic younger entrepreneurs to discover the benefits of embracing capitalism. Privatization took off in Ukraine in the late 1990s, concurrently with an industrial revival led by the export-oriented metallurgical industry. But this privatization was anything but transparent.
What emerged in Ukraine in the 2000s was crony capitalism at its worst. The new rich usually owed their instant wealth to their government connections, if not their own political appointments, but some of them also came from gangster backgrounds. Organized crime merged with big business and the political class to create an impenetrable ruling elite concerned only with its own enrichment. Its ostentatious display of wealth brought to Kyiv and other big cities brand-name boutiques and luxury cars, but social tensions were simmering in residential neighborhoods. The gap between rich and poor grew rapidly, exacerbating popular resentment against rampant corruption and political manipulation.