Ukraine Economic Report : Tremendous Potential Despite The Oligarchy and Corruption

Ukraine’s GDP is growing only 2–3% in recent years. Considering Ukraine’s economic level, it is too slow growth. The GDP per capita map does not look good for Ukraine. Ukraine is about two times poorer than Belarus and Bulgaria(GDP (PPP) per capita). Ukraine, is a sprawling country of perhaps forty million people, with multiple regional metropolises comparable to Kyiv; the Donbas, Kharkiv, Lviv, and Odesa are each regional centers. As well as notable divides in language use between the more Ukrainian-using west and the Russian-using east. Many of Ukraine’s governance issues were caused precisely because of these regional divides. The 2014 revolution was caused because enough Ukrainians, particularly in the west and center of the country, were sufficiently hostile to a proposed Russia-dominated economic union to overthrow their government. The growth of Ukraine’s gross domestic product (GDP) in July-September 2019 amounted to 4.2 percent compared to the same period in 2018, while in the second quarter, the growth rate was higher and amounted to 4.6 percent, in the first quarter it amounted to 2.5 percent. And it is expected to continue at this rate in the foreseeable future. This is in light of a festering war, severe reduction of trade with Russia, traditionally the largest trading partner, seized natural resources by Russia, and an active chokehold on the shipping industry of the Azov Seaports. Despite the political and economic issues, the Ukrainian I.T. sector thrives and matures, promoting tech professionals and digital specialists. For global companies, the main benefits of the Ukranian digital market are low business costs and high-skilled, multifunctional human resources. During the last ten years, Ukraine has turned into a global tech hub and one of the leading European centers for discovering and developing IT talent. Besides developers, there are digital marketing specialists, mobile analytics, product managers, and designers. Along with tech start-ups and companies, Ukraine has a strong IT infrastructure, including IT schools and internships in tech hubs around the world. DNA325, an HR solutions company, has recently performed an analysis of the biggest software, electronics, gaming, and e-commerce companies that have offices in Ukraine. The list is quite impressive: Samsung Electronics, Siemens, ABBYY, Huawei, Gameloft, Playtika, Ubisoft, Wargaming, SimCorp, Booking, Magento, NetCracker - just to name the biggest. Many of these companies haven’t publicized the fact they have offices and R&D centers in Ukraine - for quite a long time. However, the treasure is no longer hidden, each year, more and more Ukranian IT professionals are sought-after and hired by global companies, which made the country a well-recognized and respected tech center for international IT business. Opportunities abound for tech companies to get involved in the software boom that is currently occurring in Ukraine. Today, there are: 1000+ IT companies 100+ R&D centers 2,000+ startups Ukraine in international rankings: TOP ranked Outsourcing Market in Eastern Europe (by Outsourcing Journal) TOP 50 Most Innovative Countries (by The Bloomberg Innovation Index) TOP 13 in Science and Technology (by The Good Country Index) TOP 30 World Outsourcing Destinations (by Gartner) One of the main advantages of Ukrainian IT professionals is comparatively low salaries. The average monthly gross salary of I.T. professionals is $2100. Welcome to The Atlantis Report. Ukraine is eaten away with corruption, lawfulness, disorder, and profound incompetence on all levels. Before putting the blame for the pitiful state of Ukraine on the conflict with Russia, have a look here: Twenty-two years after the fall of the USSR, the Ukrainian economy still struggled to reach 70% of its Soviet level. In 2014–2016, it crashed again, much worse than ever before. The situation is aggravated by the contrast loss of population. In 1991, the country had its population peaked at 52.1 Million. The official count today is 42 Million, but it’s an obvious overstatement. There are at least four million people in the rebellious Donetsk and Lugansk Republics, which show no inclination to be reintegrated into Ukraine. Add to that up to 2.5 Million Ukrainian refugees in Russia and over one Million of Ukrainians in Poland, who would be rather skeptical about ever coming back to their native country. All in all, Ukraine currently might have as low as 35 Million citizens. Under such circumstances, how many decades it might take to return at least to the level of 1991 — let’s imagine that corruption and incompetence have just vanished instantly as an act of God — is anybody’s guess. The most important thing that Ukraine must do develop its economy is to hang onto its dwindling industrial base. Unfortunately, Ukraine’s corrupt leaders are having a field day selling off anything that can be unbolted and loaded onto trucks. Ukraine’s mighty industrial centers are now just empty shells. The finer features of an advanced economy, such as a rich IT sector only come as a benefit of a mature manufacturing economy. With each passing year, Ukraine’s population loses more of its skill and intelligence as its leading industries shutter their doors. It won’t be long until Ukraine is a poor nation of uneducated tenant farmers. In 1989, the average income per capita in Ukraine was $8,629. By 1998, that had collapsed to $3,430. In 2012, GDP per capita had recovered somewhat—but at $6,394, it was still 25 percent below its level of nearly a quarter-century earlier. That puts Ukraine in the middle of the pack of former Soviet states if you exclude the three Baltic economies of Latvia, Lithuania, and Estonia, which are already members of the European Union. But compare Ukraine with four of its former Communist neighbors to the west: Poland, Slovakia, Hungary, and Romania. The average GDP per person in those nations is around $17,000—and they, in turn, are poorer than West European countries. If Ukraine builds trade and financial ties with Russia and Central Asia, it will be a midranking country in a middle-income club. If it builds these ties with the EU, it will be a relatively poor country in a rich club. To be sure, being poor relative to everyone else isn’t a great recipe for rapid growth, despite the apparent advantages of being able to borrow technologies, techniques, ideas, and money from richer countries. Indeed, the last 200 years have been a period of incredible global income divergence—poor countries have grown more slowly than rich countries. In 1870 the world’s richest country was about nine times richer than the world’s poorest country. By 1990, that gap had grown to a 145-fold difference. The past ten years have seen poor countries growing faster than rich ones on average–income convergence—but they are the historical exception. Nonetheless, regions within countries often do converge. In the U.S., the gap between rich and poor states has traditionally fallen by about 2 percent a year (although that process has slowed in the past couple of decades). Within the regional groupings of countries, there is stronger evidence that poorer countries benefit. From 1937 to 1988, poorer parts of Eastern Europe (Yugoslavia, Romania, Bulgaria) grew faster (pdf) than richer countries (Poland, Czechoslovakia, and Hungary). The story is similar in Latin America (Brazil, Mexico, and Columbia grow faster than Peru, Venezuela, Chile, and Argentina). The Economic Community of West African States is following a similar pattern. Perhaps of most relevance to politicians and protestors in Ukraine, there’s some evidence of convergence within the European Union—although perhaps unsurprisingly, newer members are converging toward a common income with each other faster than they are converging to the EU average. There’s nothing automatic about convergence within regions. Take Greece, which had an average income worth 82 percent of France’s income in 1981 when it joined the European Community and had an income of only 74 percent of France’s 30 years later. But there’s still an opportunity for Ukraine in Europe—take Portugal, where incomes had climbed from 59 percent of France’s average when it joined the European Community in 1986 to 71 percent 26 years later. The potential for catchup is even greater for the former Soviet Republic since its current income per capita is only one-fifth that of France. When it comes to convergence within economic communities, the evidence suggests that two lessons of real estate apply: First, you’d rather be the last house on the right side of the tracks than the first house on the other side. Second, if you want your investment to appreciate, it’s best to be the cheapest house in an expensive community than the luxury condo in a lousy neighborhood. Membership was not in the cards in 2013, but a deep free-trade zone was. This alignment need not have harmed Russian interests. I would argue that Russia would have objectively gained more from trade with a prosperous and stable Ukraine also anchored in the European Union than it would from trade with a Ukraine in worse shape firmly in the Russian sphere. The problem, alas, is that the people who ran Russia preferred Ukraine to be in an exclusive Russian sphere for non-economic--I would say non-rational--reasons. This led to, among other things, the annexation of Crimea and the war in Donbas, and to the collapse of the Russia-Ukraine relationship. Any economic progress in Ukraine via the European Union will be slow. I agree with Andrey Shevchenko's suggestion that the main advantages to Ukraine will be in its exports of raw material and its access to the labor markets of the European Union. The future of Ukraine's industry remains, as it has been for the past decades, open to question. Despite all this, a European Union alignment is still better for Ukraine, simply because the European Union is not opposed to the existence of a Ukrainian nation-state within its internationally recognized frontiers. Russia, for its part, is. Meanwhile, the incentives for Ukraine to join the wealthier European Union club remain. The incentives for close ties with Russia are diminishing with the passage of time. Even ignoring the pervasive lack of trust in Russia among Ukrainians, the economic sectors and districts most closely dependent on Russia have removed themselves. Crimea has been taken directly into the Russian Federation and is facing catastrophe owing to the collapse of its many links with the Ukrainian mainland, while the strongly Russia-linked economy of the Donbas is far worse off. Ed Dolan persuasively argued last October at EconoMonitor that the industrial base of the Donbas, already antiquated, might never recover from the obvious devastation of war and the subtler of depopulation and political tyranny, with one author ("The Donbas War. Assessing the Aftermath") suggesting the economy of the republics has contracted by two-thirds. Without Crimea and Donbas having any political influence inside Ukraine, the benefits for Ukraine of close links with Russia decrease even more. The best chance Ukraine has at normalization is to return to a neutral political position it held before 2005. Ever since the Orange Revolution, the Ukrainian society has been in a constant state of instability, culminating in the 2014 Maidan and the loss of territory in Crimea and Donbas. Revolutions and radical swings in pro-Western or pro-Russian direction only exacerbate Ukraine’s instability and weakness. Instead, Ukraine needs a parliament that represents the diverse Ukrainian society and a president who respects the sentiments and priorities of Ukrainians living in the western and eastern regions of the country. Ukraine should learn from countries like Kazahkstan and Azerbaijan, who carefully maneuver between the various geopolitical pressures. The main reason Kazakhstan and Azerbaijan are able to do this is that they are experiencing economic growth, and society is satisfied with the leadership and the economic trajectory of their country. Ukraine should stop focusing on big slogans and political games and instead focus on their economy. This means building bridges and partnerships, not cutting the country off from available markets and investments. Perhaps the elections next year will bring some stability to Ukraine. However, Ukraine is also facing a large risk factor as Russia and Germany complete construction of the North Stream 2 natural gas pipeline across the Baltic Sea. This project threatens to make the Ukrainian natural gas transit system virtually useless, and the country stands to lose billions of dollars annually over the loss of the transit business. At this point, Ukraine is doing everything it can to alienate Russia and, as a result, to kill its greatest asset — the gas transit system. The next president will need to turn this situation around, build bridges with Russia, and try to save the Ukrainian natural gas business. If this is not achieved, the Ukrainian economy will collapse once again, and another round of instability will ensue. In Conclusion. Ukraine has tremendous potential, but it has mostly been untapped since its independence. On the plus side, civil society is vibrant, and there is (mostly) freedom of speech. Ukrainians are very smart and educated. Agriculture has huge potential. If land reform is implemented, Ukraine could be an agriculture superpower. There is already increasing investment in information technology. Decentralization is taking place. Ukraine has an active association agreement with the European Union, which has increased trade opportunities. Ukraine also has a visa feel travel to the EU for those who can afford to do so. It's remarkable that almost every European country is doing something to help Ukraine, even Greece. Some countries like Estonia look at Ukraine and empathize, remembering how difficult their own transitions were. Others like Germany owe Ukraine a historical debt given the suffering inflicted upon it during World War II; stand to increase exports given that Ukraine needs well…everything. Other countries like Georgia consider Ukraine a kinder spirit given that both countries have had remarkably similar and difficult experiences with Russia while trying to develop more open, democratic societies. On the negative side, the economy is still oligarchic and corrupt. It is one thing to invest in an information technology startup. If it doesn’t work, then you can pick up and move to another country fairly easily. However, very few investors are willing to sink tens of millions of dollars into a factory when the country doesn’t have the rule of law. The judiciary is famously corrupt here, and the political leadership has been extremely reluctant to set up independent anti-corruption courts. As things are, if an oligarch wants your resources, he can take them, bribe the judges, and there is nothing you can do about it. What mostly happens so far is that the government investigates corruption cases, but then there are no prosecutions that follow. It’s like “catch and release” for the corrupt. The holy trinity of investor confidence is Amazon, IKEA, and Ryanair. They don’t have Amazon (but there is a work-around company), IKEA has agreed to come back (it took some convincing because of all the bribes that were demanded of it the last time it tried), and Ryanair announced it would enter the market, then de-announced when they didn’t get the conditions they had expected from the government. The government wants to resume talks - we’ll see how it turns out. This isn’t an authoritarian state like Russia, where when Putin makes a decision, it is usually going to be implemented. To invest in Ukraine, it usually involves working with a wide range of political and economic stakeholders. Many investors will remain on the side-lines until they are certain that Ukraine is serious about fighting corruption and promoting the rule of law. It feels like two-step forwards and one step back around here a lot of the time. Can the economy diversify? If/when the political leadership is willing to consistently push through the difficult reforms that are going to create a better climate for investment, even though it will piss off powerful people, including many of their friends, sure it could. The jury is still out. This was The Atlantis Report. Please Like. Share. And Subscribe. Thank You.
















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