The Dilemmas of Ukraine’s Economic Policy

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Read the Outlook on Ukraine special report


The vast majority of emerging Europe countries started their transition process into market economies at the beginning of the 1990s. Ukraine became an independent state in August 1991, yet the country’s social and economic development still lags behind its Central European peers. Emerging Europe asked some leading economists how to speed up growth and catch up with the country’s Central European neighbours.

Ivan Mikloš  chief economic advisor to the Prime Minister of Ukraine and co-chairman of the Strategic Advisory Group for Support of Ukrainian Reforms. Also a former Minister of Finance and Deputy Prime Minister of Slovakia, in 2004, named the top business reformer by the World Bank’s Doing Business report.

It is clear that high and sustainable economic growth is the only way Ukraine can achieve its goal — that is to increase the quality of life, standard of living and public service quality, but also to secure it’s independency and territorial unity. The word “sustainable” is of decisive importance in this regard because in the past Ukraine achieved a few periods of the fast growth but every time it was done in a non-sustainable manner.

The necessary preconditions for achieving this goal are deep and comprehensive reforms in macroeconomic stabilisation as well as structural and institutional reforms. A lot of was done during last three years, after Euromaidan, especially in the area of macroeconomic stabilisation. For the first time in its history, Ukraine is changing its economy towards a functioning market economy.

The economy, which is based for the most part on vested interests and rent seeking behaviour, is changing to free and fair competition and a profit seeking based system. But there is still a lot to do. What is extremely important now is to continue in the efforts in macro-stabilisation and at the same time to speed up structural reforms, especially in area of property right protection, deregulation, de-monopolisation and privatisation.

The Ukrainian economy and the Ukrainian people overcome very difficult recession period in 2014–2015. Now the economy is more or less stabilised with growth in 2016–2017 around 1.5–2.5 per cent. But the Ukrainian economy has the potential for sustainable growth of around six–seven per cent when it comes to of accelerating and intensifying the necessary reforms. One of the most important preconditions for achieving this is a significant increase in foreign direct investment (FDI). In order to attract FDI, the above mentioned reforms and changes in property rights protection, deregulation, de-monopolisation and privatisation are needed.

Sergei Guriev  chief economist, European Bank for Reconstruction and Development

Ukraine has actually made substantial progress since 2014 in terms of macroeconomic stabilisation, fiscal adjustment, cleaning up the banking system and restructuring of the gas sector. These are however only necessary but not sufficient steps to restart growth.

Economic growth comes from investment and growth in productivity and these require drastic improvement in the business and investment climate. In this respect much more is to be done. First and foremost, it is crucial to continue the work on fighting corruption and building an effective and honest judiciary system. Without the public and business community’s confidence in the government and the courts, other reforms are unlikely to succeed; moreover, political stability will be at risk. Secondly, Ukraine has to revise its regulatory system to make it friendly to business. Thirdly, Ukraine has to finally start privatisation and to raise the efficiency of the companies that will remain in state ownership. Fourthly, Ukraine has to undertake land reform. Fifthly, pension reform is crucial for improving the long-term fiscal outlook and for creating long-term financial markets thus bringing households’ financial resources.

Finally, reforming the health and education sectors is key for raising Ukraine’s competitiveness and for making sure that reforms bring benefits and opportunities to all citizens, irrespective of their place of birth or parental background.

Paul Gamble — head of Emerging Europe Sovereign Ratings at Fitch Ratings

Fitch forecasts that economic performance in Ukraine will improve in 2017 and 2018, underpinned by increased exchange rate flexibility and a tight monetary policy. Nonetheless, at around 2.5 per cent, growth will be low relative to its peers at the ‘B’ rating level.

Macroeconomic stability is gradually being entrenched with the authorities enacting fiscal reform, that includes significant tariff reform, and tackling the weakness of the banking sector. These gains are still fragile and a weak liquidity position means the economy is vulnerable to commodity and confidence shocks. Fitch has identified improved macroeconomic performance and a stronger external liquidity position as factors that could lead to a positive action on Ukraine’s ‘B-’ long term foreign currency rating.

The key challenge for the government is implementing the reforms that will strengthen the policy framework and create an environment for faster growth. In our opinion, the framework under the Extended Fund Facility with the International Monetary Fund (IMF) provides a solid grounding for strengthening growth. Progress with structural reform and privatisation will improve the business environment. Political considerations have delayed reform in the past and the political environment, weak governance and corruption are likely to continue to pose a challenge to reform. The conflict in eastern Ukraine will continue to weigh on growth, while unresolved.

Gunter Deuber  head of Economic, Fixed Income and FX Research at Raiffeisen Bank International (RBI) AG

The recent Privatbank nationalisation offers great potential to flag a turnaround in Ukrainian economic prospects and how the Ukrainian economy is managed. That said, a decent handling of the restructuring and a partial wind-down of Privatbank is needed. In order to be successful on this front, close cooperation with independent and internationally experienced accounting/restructuring managers will be key. Finally, the Ukrainian authorities have to work on a mid-term re-privatisation strategy with 50 per cent of the banking sector now being under state control.

Such a scenario will require consistent policy action and returning investor confidence. Any signal that taxpayer money will be used for the Privatbank restructuring, supporting vested interests of either old or new oligarchs, is a no-go.

Also, an overall restructuring of the banking sector should be also used to foster the development of broader capital markets. This could help to improve the governance, while the overall degree of debt capital financing seems to be still at fairly high levels. In total, more outsider equity capital investment (e.g. via debt to equity swaps) is needed rather insider and (offshore) debt financing. In order to secure a decent mid-term planning for foreign investors the commitment to a more flexible exchange rate regime should remain in place.

Firstly, FX markets are definitely a useful “weighing machine” of the economic potential in a given country. Secondly, they are an important discipline device. This especially holds true in a highly dollarised economy such as Ukraine. Thirdly, a flexible exchange rate can help to implement tough adjustments rather quickly, while markets could be blamed for that. This seems especially important in Ukraine, where there are still many vested interests.

Vladimir Vano  chief economist and head of CEE Research, Sberbank Europe AG

Ukraine is undeniably a country of an enormous potential, not in regard to the economic opportunities offered by the size of its unsaturated market but also its geographic location. In the contemporary economy of the 21st century, Ukraine is rather well-positioned internationally, also in terms of the quality of its human capital, i.e. the qualifications and motivation of its workforce.

However, analysis of the current economic situation and the necessary reforms should be more in-depth than is currently popular among the majority of observers. Such an analysis should be retrospective enough to contrast the trajectory of the Ukrainian economy, after the fall of the Iron Curtain, in particular, with their corresponding East European peers (e.g. Poland and others). These countries shared a similar starting position in terms of economic situation as well as institutional capabilities of the post-socialist era. At the same time, an analysis of the past two decades should fully take into account the non-negligible role, which the special conditions for the oil and gas purchases had for long played in sustaining the Ukrainian economy before the global recession.

Former Slovak Prime Minister Mikulas Dzurinda used to say, that once you button the first button on the shirt wrong, it follows that all the subsequent buttons would not fall into their right place. When addressing the inevitable but gargantuan task of economic reforms in Ukraine, it is important to re-emphasise the crucial importance of the effective and conductive institutional framework.

The foremost important and necessary  condition for successful economic reforms of Ukraine (though not sufficient on its own) is the thorough reform of the governance institutions. Well-functioning and effective governance institutions can subsequently create the necessary preconditions for planting of the further informal institutions, such as confidence of investors, entrepreneurs and citizens, which are altogether a backbone for sustainable and well-functioning market economy.

Igor Burakovsky  head of the Board and Professor of Economics at the National University “Kyiv-Mohyla Academy”

Strategically Ukraine needs deep and comprehensive structural reforms to get on track for long-term and sustainable economic growth. In the meanwhile I would just like to highlight some areas for priority actions.

Firstly, the military conflict in Eastern Ukraine has been causing obvious socio-economic losses but, in general, economic agents have already adapted to the new political and economic realities. Now the government has to elaborate and introduce clear regulatory regime of economic relations with occupied territories immediately. In order to do this Ukraine has to take the difficult political decision of how to treat these territories, politically.

Secondly, Ukraine needs to improve the condition of public finance further, paying special attention to tax and tax administration reform, as well as proper state debt management. Thirdly, labour market reform became a pressing priority a long time ago. This reform is closely connected with the reform of the social security system and pension reform in particular.

Fourthly, a radical improvement of the regulatory environment must become a real long-term strategy for the government. In Ukraine this reform has two clear cut dimensions. The most “popular” one is deregulation, i.e. the abolition of the red-tape barriers that are hampering economic activities. At the same time Ukraine faces a challenge to introduce new regulations that are determined by the current level of economic and technological development.

Fifthly, energy sector reform, as in Ukraine’s case this reform is a prerequisite for energy independence and a stable economic development.

Needless to say that the success and speed of these, and other reforms, critically depend upon the institutional capacity of the government to elaborate and implement proper economic policies.

Prince Michael of Liechtenstein  founder and chairman of Geopolitical Intelligence Services, providing independent political intelligence, strategic analysis and future scenarios to companies, governments and organisations

Ukraine is being ground between the millstones of geopolitics. An assertive Russia and a weak response from the West is partly to blame. The other reason, however, is a lack of drive for self-determination, which has allowed foreign powers to have too much influence in Ukraine. Another unfortunate legacy of the Soviet system is an oversized, complicated and, as a result, corrupt administration. This has prevented Ukraine from developing as quickly as other Central European countries.

In order to overcome this situation, Ukraine must address its governance shortcomings. This is a difficult task, especially while it is also suffering a war. However, the country has no choice but to streamline its bureaucratic and judicial functions. Only the Ukrainians themselves can carry out such reforms, and they should do so with self-confidence. Foreign interventions should be avoided.

Ukraine could be in a similar position to Austria during the Cold War. Austria had to be neutral, and was not allowed to join NATO or the European Economic Community (which later became the European Union). However, it had economic self-determination. Though it traded predominantly with the West, it was also a leader in trade with the Comecon countries in the east. Austria became one of Europe’s most prosperous countries.

Geopolitically, Ukraine will have to strive for neutrality. This means, as the Swiss example shows, a strong will to preserve territorial integrity, diplomatic networks, political pragmatism and a commitment to military deterrence.

Anders Åslund — a senior fellow at the Atlantic Council

Ukraine has achieved macroeconomic stabilisation. Today, the issue is to attain a substantial economic growth of six-eight per cent per year. Economic growth always starts with exports. Ukraine needs to boost its exports of agricultural products to the whole world, and it needs to become integrated into the European supply chain, as Central Europe has done so successfully.

The next step is to attract more investment. Ukraine’s investment ratio should rise from 16 per cent of GDP to 25-30 per cent in the medium-term. A fundamental problem is Russia’s military aggression in Ukraine. Few big foreign companies are ready to invest in a country they perceive as at war. It is vital to achieve a real armistice, at least, which the Minsk agreements are aimed at but have never delivered. After the West has provided some financing for financial stability, it should offer some $five billion a year for the next five years through its multiple sources.

The most important measure the Ukrainian government can carry out is probably to legalise the private sale of agricultural land, which could open Ukraine’s agricultural bonanza up to fast development. The government should also sell off all the useless state enterprises that do not really work or that cause losses. A vital long-term project is to build up a new judicial system in Ukraine. The European Union should take the lead and follow the successful examples of East Germany, Estonia and Georgia, where the whole judicial system was built up anew.

Marek Dąbrowski — a non-resident scholar at Bruegel, professor at the Higher School of Economics in Moscow and member of the Scientific Council of the E T Gaidar Institute for Economic Policy in Moscow

Ukraine has long way to go to catch up with its neighbours in the EU. Its economic prospects will depend partly on the opportunities to end the war in Eastern Ukraine, and to the reintegrate country’s territory. However, even more important will be speed and comprehensiveness of domestic economic and institutional reforms.

For the first 25 years of its independence Ukraine was not a star reformer. The dramatic events of 2014-2015 pushed the country’s political elite to take the task of reform more seriously. As result, considerable progress has been accomplished in several policy areas. With support of the IMF and other donors authorities Ukraine managed to avoid a macroeconomic catastrophe in 2014 and early 2015, i.e., the uncontrolled devaluation of the hryvnia and the high inflation spiral. This required substantial fiscal adjustment which was achieved by eliminating large natural gas subsidies. Bringing domestic gas prices to an international level also helped to reduce an important source of corruption, and decreased dependence on gas imports from Russia while creating an opportunity to restructure the gas and energy sectors on a competitive basis.

Other important measures which can support future growth, were the cleaning up of the largely insolvent and corrupted banking sector and a partial tax reform. Creating the National Anti-Corruption Bureau, the National Agency for Preventing Corruption and publishing the asset declarations of public officials may help in fighting this deeply-rooted social disease.

However, the list of reforms, which should be completed in near future remains long. It includes privatisation, ending the moratorium on selling agricultural land, increasing the retirement age and the elimination of privileged pensions for various sectors and professional groups, building a genuine local and regional self-government, judicial reform, and many others. Ukraine also must sustain its fiscal consolidation effort to be able to return to private markets after the expiration of the IMF programme in 2018.


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