Protesters in Kyiv, Summer 2013. REUTERS/Valentyn Ogirenko

The VoxUkraine Brief: Best of 2014

#VoxUkraine ultimate selection of 31 best articles on the Ukrainian economy in 2014.

The dramatic changes in Ukraine in 2014 have increased the worldwide demand for a better understanding of its economy. To help those looking for quality information on the topic, we have created a reading list of what we consider the best articles on the Ukrainian economy written this year.

by VoxUkraine Editorial Board

produced by Maxim Eristavi

On the Ukrainian economy in general

  • In early 2014, Tim Taylor’s primer on Ukraine’s economy:
With the Russian invasion of Ukraine and the prospect of a combustible great powers confrontation, the natural reaction of any economist is: “So what’s up with Ukraine’s economy, anyway?” Let other people look at maps; I look at economic statistics.
  • The Economist: It is really that bad
Ukraine’s is one of the world’s most corrupt countries. Ill-planned privatisations in the 1990s spawned an oligarchic class that sucked up most of the country’s wealth for itself. Corruption is a way of life.
Few people know that Ukraine is the world’s most unequal country, if you look at wealth (not income). The second-most unequal is Russia. Ukraine is more unequal than it was in 2013.
Things could get a lot worse quite fast.
  • And longer pieces by Anders Aslund
Ukraine’s economic situation is desperate but not hopeless. GDP is forecast to fall by 8 percent in 2014, which would leave Ukraine with a budget deficit of some 12 percent of GDP.
Roughly two-thirds of the output contraction derives from Russia’s military aggression in the east, as coal production fell by half in August and September and steel production by one third. The rest of the downturn has been caused by the predatory economic policies of President Viktor Yanukovych, who was ousted in February. The Ukrainian currency, the hryvnia, has depreciated by 80 percent, driving inflation up to 20 percent and rising. Half the banks are effectively bankrupt. The country is close to a devaluation-inflation cycle. The current International Monetary Fund program is underfinanced and
not sustainable.
  • and Marek Dabrowski:
• Apart from threats to its national security and territorial integrity, Ukraine faces serious economic challenges. These result from the slow pace of economic and institutional reform in the previous two decades, the populist policies of the Yanukovych era and the consequences of the conflict with Russia.
• The new Ukrainian authorities have made pro-reform declarations, but these do not seem to be supported sufficiently by concrete policy measures, especially in the critical areas of fiscal, balance-of-payment and structural adjustment. Also, the international financial aid package granted to Ukraine has not been accompanied by sufficiently strong policy conditionality.
• Ukraine urgently needs a complex programme of far-reaching economic and institutional reform, which will include both short-term fiscal and macroeconomic adjustment measures and medium- to long-term structural and institutional changes.
• Energy subsidies and the low retirement age are the two critical policy areas that require adjustment to avoid sovereign default and a balance-of-payments crisis.
Banknotes of the Ukrainian currency

On the Hryvnia Devaluation

  • Hromadske International explaining Ukraine’s currency crisis
What You Need to Know:
✓ The hryvnia continues to hit new historic lows on a monthly basis and it is the worst performing currency in the world this year;
✓ The government is trying to stabilize the currency, but has had mixed success;
✓ The currency’s devaluation is the result of balancing reforms with maintaining stability;
✓ The Ukrainian hyrvnia is not in real danger unless it fails to secure further loans from international donors;
  • Bloomberg on the black market for Dollars
“The black market is quite organized,” said Alexander Valchyshen, the head of research at Investment Capital Ukraine. “And talk about a balanced hryvnia rate will be less and less trusted by the public when inflation soars, which is the risk now. I don’t see the government dealing with it, no.”
Some, like Oleksandr Yaroshevskyi, who are fortunate enough to have dollar incomes, have become quasi-private bankers, settling informal deals in offices, lunchrooms, coffee bars and kitchens to friends, family and acquaintances.
“When I need to sell dollars, I go to my colleagues who I know are interested in buying foreign currency as they are paid salaries in hryvnia,” said Yaroshevskyi, an accountant in Kiev. “A couple of months ago they were not interested when I offered, and now I am quite popular. It’s good for them, it’s good for me.”
  • VoxUkraine’s Yegor Grygorenko on why a floating exchange rate is needed
Many, even most, of the people who run the National Bank today are professionals. No news would be revealed to them in this piece, and yet they maintain the administrative restrictions that disrupt the market. Why? It is hard to be sure of course, but the pressure from their peers in the government could explain quite a lot. Concerns of the ministers are valid indeed — rapid devaluation may trigger default on the government debt, a sort of thing that countries at war normally try to avoid. However, as reasoned above, manipulating the foreign exchange market can only postpone the problem, not remedy it. Now, with the election campaign over and the reasonably pro-reformist majority secured in the parliament, the government pressure might be relaxed somewhat — and hopefully the grip of the NBU on the FX market and the banking system in general could be relaxed as well.
  • Anders Aslund on how the currency troubles can lead to a financial meltdown and how this meltdown would look like
First, Ukraine should close the truly insolvent banks rather than recapitalize them. The new government must not allow its reserves to just run out. It should call on its creditors to agree to a standstill on its foreign payments. In particular, it must not pay the remaining $1.65 billion to Gazprom for disputed arrears. For Ukraine, money is in far more short supply than natural gas. The government needs to cut public expenditures by 10 percent of GDP — as the Baltic governments did in 2009 — to save the country and convince foreign creditors that it can manage the nation’s finances. The main expenditure cut should come from a unification of Ukraine’s domestic energy prices, which would cut energy subsidies as well as the rampant corruption in the energy sector. After having proven its reform acumen, the government should call for sufficient international financing through a renewed IMF program, expanded EU financing, and a Marshall Plan for Ukraine.
The 2013 Transparency International’s Corruption Index

On Corruption

  • The Economist on the extent of corruption and the difficulty fighting it
Corruption in Ukraine did not begin with Mr Yanukovych — nor will it end with him. Weak institutions, low morale, and an underdeveloped sense of public service have made everyone from judges to traffic police liable to corruption over Ukraine’s entire post-Soviet history.
  • VoxUkraine’s Timofiy Mylovanov on anti-corruption reforms
The corrupt political elite will resist the changes that take away opportunities for corruption but will welcome new legislation that allows for (selective) prosecution of corrupt officials in order to extract favor, revenues, and strengthen their power in other ways. Thus, there is the danger that the anti-corruption effort will fail to be systemic and will be hijacked by reactionaries. Possible countermeasures include (a) consistent PR effort to increase public awareness of attempts to subvert the anti-corruption initiatives, (b) strong emphasis on anti-corruption measures different from strengthening prosecution, and (c) coordination and engagement with the new wave of activists and leaders who can mobilize popular support.
  • VoxUkraine’s Maria Popova on the entrenchment of the judicial elite and the risk for continued corruption
On the one hand, the dogged survival of Yanukovych-era judicial elites bodes well for the emergence of a judiciary that is independent from political incumbents. On the other hand, the retention and retrenchment of compromised judicial elites does not bode well for the Ukrainian judiciary’s popular legitimacy. It is also unlikely that greater independence from politicians would translate in any gains in the fight against corruption. Rather, the entrenchment of judicial elites behind a fortress of institutional independence may sustain current levels of judicial corruption. In any case, it is too early to tell whether the Yanukovych-era judicial elites will indeed manage to retain and consolidate their grip on the judiciary. It is also plausible that the new parliamentary majority will successfully purge the judiciary. What is much clearer is that Ukraine is at a critical juncture in its rule of law development.
Rivne Nuclear Plant

On Energy

  • Basil Kalymon on why cheap gas for the Ukrainian population is not cheap at all
The need to move immediately to the market pricing of gas is both critical economically and a patriotic necessity for the defense of Ukraine. For too many years, this step has been delayed due to the false argument that domestic prices controlled at low levels were for the protection of the citizens. It is apparent, that this approach was supported by corrupt oligarchs and the Kremlin, both of whom used these policies for their advantage and for the subjection of the country. The policy has led to the dependence of Ukraine on Russian gas and the persistence of Russian influence over its politics and destiny. An immediate adoption of market prices is essential at this turning point in history.
  • Andrei Kirilenko on what to do with Naftogaz
  • VoxUkraine editorial board on the importance of energy independence both for the EU and Ukraine
Energy is at the core of the Russia-EU and Russia-Ukraine relationships. Since the 2009 gas dispute, which led to a 13-day interruption of the natural gas exports from Russia to the EU, European politicians have started publicly talking about reducing Europe’s dependence on Russian energy supplies. A lot more has been said than done on that front, admittedly. Yet, the issue has resurfaced recently, as Russia’s blatant disregard for international law and its aggression against Ukraine brought about fresh fears that the country will once again be leveraging the energy as a “diplomacy tool”.
Ukrainian Finance Minister Natalia Jaresko presents a draft of the state budget for 2015 during a parliament session in Kyiv. AFP

On Ukraine’s budget

  • Daron Acemogly on the oversized budget and what to cut
  • VoxUkraine’s Dmytro Boyarchuk with more details on what to cut
A simple analysis of the State Budget for 2014 allows to find opportunities for savings of up to 3% of GDP. Proposed structural reforms will lead to even more efficient use of the budget funds over the 1–3 year horizon.
  • VoxUkraine’s Yuriy Gorodnichenko on why reshuffling the budget is better than just cutting
This program of fiscal austerity is comparable to what Greece implemented in 2009–2013. Greece had a large fiscal deficit in 2009 (about 12% of GDP) and it reduced it close to about 2% in 2013. But Greece received a huge aid package (110 billion euro loan in 2010 and 130 billion euros bailout in 2011) from the IMF, European Central Bank, and European Commission. This package is roughly equal to 100% of Greece’s pre-crisis GDP. For comparison, Ukraine’s aid from the IMF amounts to about 10% of GDP. In contrast to Ukraine, Greece did not have a war and disruptions in energy supplies. Yet, even in these relatively favorable conditions, the cumulative decline of output in Greece between 2007 and 2013 was 25%. The economic cost of austerity in Greece is simply tragic. This is as bad as the Great Depression was in the U.S.

An enigmatic cat GIF while you are catching a breath from all this awesome read:

On Ukraine’s Trade Agreement with the European Union

  • Leonid Bershidsky on the benefits and the costs of signing the trade agreement with the EU

On the IMF and Ukraine

  • Susan Schadler on the IMF’s difficult job of both helping Ukraine and remaining credible
  • The IMF’s First Review under the stand-by agreement

On Regulation of the Airline Sector

  • VoxUkraine’s Volodymyr Bilotkach on how and how not Ukraine should regulate its airline sector

On the Need for New Politicians and Civil Servants

  • Paul Gregory, Europe and New Leaders Are Ukraine’s Only Salvation
  • VoxUkraine’s Boyarchuk on the challenges on getting professionals to work for government
  • “The war should not be an excuse not to conduct reforms” — VoxUkraine’s Mylovanov
Current unrest in Ukraine is, in part, a symptom of corruption. Outside powers [Russia] seized upon preexisting weaknesses to further corrode Ukraine’s already fragile political systems, said Tymofiy Mylovanov, assistant professor of economics, University of Pittsburgh during an interview on Hromadske International’s Sunday Show. Reforms will help protect Ukraine’s national sovereignty. Without wide-sweeping and lasting reforms, the country could crumble.

On the Health Situation

On the Longer Run Impact of the Ukraine Crisis on the World Economy


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