The underachiever: Ukraine’s economy since 1991

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The underachiever: Ukraine’s economy since 1991. Pekka Sutela Carnegie Endowment 27 January 2012. Track record. Ukraine has grown with the region Was in 1990 one of the poorest of Soviet republics and has remained in a similar position: no catching up, no lagging behind - PowerPoint PPT Presentation

Text of The underachiever: Ukraine’s economy since 1991

  • The underachiever:Ukraines economy since 1991

    Pekka SutelaCarnegie Endowment27 January 2012*Pekka Sutela

    Pekka Sutela

  • Track recordUkraine has grown with the regionWas in 1990 one of the poorest of Soviet republics and has remained in a similar position: no catching up, no lagging behindGrowth in 2011 (>4%) and expectation for 2012 (
  • Issues for 2012Foreign trade and paymentsCurrent account deficit 8.75 BUSD in 2011:1-11 (2.13 BUSD in 2010)Capital outflow due to European financial regressionServicing 8.2 BUSD of public and >50 BUSD (est.) of total debtGovernment bonds (maturing 2117) yield 6.9 in 2011:7, 10.9 in 2012:1Official reserves 38.2 BUSD in 2011:8, 30.4 BUSD in 2011:12Fiscal affairsHeadline budget deficit 4.3%/GDP, more in state banks and companiesExceptionally large pension burden with declining and greying population

    Pekka Sutela*

    Pekka Sutela

  • GasImport price 400 USD in 2011:IV, according to contract 416 USD in 2012:1 (without Kharkiv discount?). Ukraine aims at 250 USD (with discount?)Less transit revenue due to Nord StreamEuropean buyers demanding and getting price discounts: puts also pressure on transit feesUkraine claims to be able to decrease gas imports from 40 Bm3 in 2011 to 27 Bm3. From gas to coal? Pekka Sutela*

    Pekka Sutela

  • World Banks Doing Business 2011:Kazakhstan, Russia and Ukraine(out of 183)Pekka Sutela*

    KazakhstanRussiaUKRAINEAltogether59123145Starting a business47108118Dealing with construction permits147182179Registering property2851164Getting credit728932Protecting investors4493109Paying taxes39105181Trading across borders181162139Enforcing contracts361843Closing a business48103150

    Pekka Sutela

  • Ukraine / IMF situation Press briefing yesterday: an active dialogue through technical teams in the period aheadNo timelinePekka Sutela*

    Pekka Sutela

  • Three questionsWhy is such a badly functioning economy able to grow as fast as others in peer group on average?Why is Ukraine such a badly functioning economy?Is the combination of bad functioning and average growth a vicious circle?Pekka Sutela*

    Pekka Sutela

  • (1) Why is such a badly functioning economy able to grow as fast as others in peer group on average?We do not really know how fast countries have been growingGeneral problems in changing statistics from Soviet ones to market basedTrue depth of decline in the 1990s unclear, due to high inflation, change in price relations and structural change Estimating the true size of shadow economy difficult , especially large in Ukraine Steep decline in GDP provides for fast recovery growthprobably Neither are the others in peer group well-functioningBut Ukraine seems to be the worst on these indicatorsPekka Sutela*

    Pekka Sutela

  • Perhaps Ukraine inherited better capital stock, infrastructure?Possible, due to post-war reconstructionBut Ukraine not better in infrastructure and general industry reform (EBRD Sector Transition Indicators 2011)Then, Russia and Kazakhstan are resource rich, Ukraine resource wealthyRussia has Resource Curse, no Dutch DiseaseHow about Ukraine?Pekka Sutela*

    Pekka Sutela

  • The Ukrainian CurseIn the 2000s Ukraines terms of trade improved by 50%Unit values of exports (metals, metallurgy, petrochemicals) rose with fast global growthPrices of energy exports from Russia (gas!) remained lowThis created a rent division game with need of access to state resources and corruptionPrivatization to domestic owners (oligarchs); little access by outsiders including Russians Logistics as another source of rentsPipelines, railways, roads, harborsPekka Sutela*

    Pekka Sutela

  • The windfall is not sustainableBy 2006 Russian leadership had concluded that the country could not develop on resourcesVery slow growth of oil and gas productionGDP expected to grow faster due to structural change, financial deepening etcMaintaining export volumes only possible with improved energy efficiency, which demands higher prices and much more (modernization)Jobs could therefore no longer be subsidized through low energy prices. Much wider competitiveness (diversification) neededThe economic reasons for gas price disputes do not exclude political ones. But why give Ukraine priority access to raw materials and logistics windfalls? Pekka Sutela*

    Pekka Sutela

  • Ukraine aiming at best of both worlds: the grey zone

    Export markets are in Europe and AsiaUkraine does export high-value goods also, but only ones produced in Soviet-time plants, and in small volumes: no real diversificationCollapse of machinery exports to FSU has made exports more one-sided and lower value-addedAgri-business an argument for free trade with EUFew incentives to adopt acquis as no membership perspective available. Motivation for free and comprehensive free tradeat best unclear Import markets are in Russia. How to combineNational independenceAccess to cheap raw materials and logistics windfall

    Pekka Sutela*

    Pekka Sutela

  • (2) Why is Ukraine such a badly functioning economy?Modern economics saysLong past institutions and culture have an impact on modern performanceLack of individualismImpact of different empires, with Russia as the dominant oneTragic 20th centuryBattle field of world and civil warsStalinism, collectivization, holocaust, forced population movementsFrom internationalism to Soviet closednessPeculiarities of the 1990sNation building over structural reformsFree room for asset-grabbingThe Ukrainian CursePekka Sutela*

    Pekka Sutela

  • (3) How can the circle be broken?Only the Ukrainians can do itThere is no lack of reform blueprintsPolitical will does not existPekka Sutela*

    Pekka Sutela