Greetings everyone. I'm sorry I haven't updated more often. Casualty of school business. Viktor Yanukovich was inaugurated as the fourth president of independent Ukraine today, I don't have time to write a full article about this but generally, it's a disappointment and we can only hope that he surprises us by showing some commitment to reform and democracy and having the right priorities. It's happened before with checkered politicians. Ukraine bears watching the next several months because the political shake-up isn't over yet, Prime Minister Yulia Tymoshenko is not accepting Yanukovich's victory and a new parliamentary election is to be expected, the economic situation is still very bad, there is actually some risk of default although I'm not sure how serious of one, and people have been turned fairly indifferent to politics, which is usually a bad sign.I gave a speech about the Ukrainian economy at a panel at SAIS last Tuesday, the 16th, with famous economist and Ukraine expert Anders Aslund, my classmate Greg Fuller and our professor Mitchell Orenstein, I talked about what we learned in our visit to Kyiv from January 10 to January 13. Here's the text of my speech:
"We spent two and a half days in Kyiv doing interviews last month, from January 11 to January 13, just before the first round of the presidential election. We spoke to former finance minister Viktor Pynzenyk, the EU, US and Polish missions in Kyiv, the World Bank, journalists, businesspeople in banking and other sectors, and academics in think tanks and universities. Some were deeply pessimistic about the short-term future for Ukraine and its economy, as the country deals with continued political and economic instability and structural challenges, while others were optimistic about Ukraine’s potential as an emerging growth market.
A quick overview of the economy. Ukraine is a late-reforming post-communist economy which joined the World Trade Organization in May 2008 after years of strong growth of about 7 to 8%. This is, along with continued free and fair elections, the landmark success of the Orange Revolution and the presidency of Viktor Yushchenko. Since then, the economic news has been largely bad. Ukraine is still one of the poorest countries in Europe and the global financial crisis hit the export-dependent economy hard. Ukraine was one of the first countries to ask for and receive help from the International Monetary Fund as the global economic downturn came into full force in October and November 2008.
The IMF granted a $16.4 billion loan which helped mitigate the downturn. With help from the IMF, the Ukrainian government had three key goals: help the economy adjust to the new realities by floating the exchange rate and other measures, restore confidence and financial stability by recapitalizing viable banks, and protect vulnerable groups in society through targeted social spending. The Ukrainian currency, the hryvnia, had been pegged to the dollar which resulted in one of the highest inflation rates in the world, up to about 30% in early 2008, now it was floated and lost 40 percent of its value quickly. But only $11 billion of the IMF package has been paid out, with the fourth tranche suspended due to disagreements over the 2010 budget and a generous social spending law passed in the run-up to the election.
One key conclusion from the interviews on our trip is that Ukraine’s political polarization and electoral competition have impeded the economic recovery. Ukraine’s divisions had prevented good governance and reforms before the crisis, and they have also been a challenge in the response to the recession. President Yushchenko, the government of Prime Minister Yulia Tymoshenko, and the opposition led by Viktor Yanukovich have not worked together well in the crisis, while populism and electioneering have led to an international record for spending on pensions as a percentage of GDP (almost 20%). In Ukraine, many people said that having a clear-cut winner in the presidential runoff was more important than who won, because the continued instability caused by a protracted fight could only hurt the country and its economy.
The prevailing opinion among our contacts was that although the IMF rescue had helped, the IMF had actually been too lenient with Ukraine. Businesspeople said it was correct for the IMF to not deliver further tranches of aid because conditions were not fulfilled. Viktor Pynzenyk, who resigned as finance minister in February 2009, said the IMF did not play a beneficial role for Ukraine because it covered up problems and did not force Ukraine to cut spending further when the 2009 budget was based on an unrealistically optimistic growth forecast.
Some people we talked to expected the economy would get worse in 2010, with private loans coming due and a risk of government default. Pynzenyk argued that the government and IMF have prevented people from feeling the crisis so the necessary support for tough reforms isn’t there. He said that Ukraine could still avoid default if they make the right decisions but said it was difficult to predict what President-elect Yanukovich would do. Yanukovich’s Party of Regions drove the passage of the budget-busting social standards law which if fully implemented will cause default. However, others dismissed the possibility of default.
The shadow economy has grown in the economic crisis to the point where it may be over a third of Ukraine’s true economy, and it has acted as a cushion. Ukraine’s economy hasn’t really shrunk as much as the statistics indicate. The Orange Revolution has been called “the revolt of the millionaires against the billionaires,” billionaires referring to the powerful oligarchs who run much of the economy. What has happened is that a good proportion of the millionaires have gone underground because the problems with bureaucracy and kickbacks haven’t been fixed. We were told there are a lot of good policy ideas floating around and also lots of good legislation already passed that goes unimplemented. One of our contacts said his college friends complained about “so many regulations, forms, taxes, extortion, officials coming to their office to demand money.” In Ukraine you have to bribe people but your bribes won’t get you results as reliably as in some other corrupt countries like Russia. Serhiy Tihipko, a successful banker who finished a strong third behind Yanukovich and Tymoshenko in the January elections after staying out of politics since the Orange Revolution, owed much of his success to rhetoric about streamlining the bureaucracy to make Ukraine more business-friendly. Tihipko has a good shot at becoming prime minister so perhaps we will see action on this front.
There are some reasons to be optimistic about the Ukrainian economy going forward. The reliance on steel exports was one of the major problems Ukraine had in the crisis, as production dropped precipitously. But the devalued currency will help exports grow this year, while some of our contacts were optimistic that the crisis would push the country to diversify its exports. The President of the American Chamber of Commerce was very optimistic about the economy’s long-term prospects, comparing Ukraine with the BRICs as a growth market with strong margins for multinational corporations while still painting a picture of a tough environment in which to do business. EU membership seems pretty far away but an Association Agreement with a deep free trade area should come into effect during the Yanukovich presidency. And the Euro 2012 soccer championship, which Ukraine is co-hosting with Poland, is welcomed because it will leave behind a legacy of improved infrastructure.
I think we did get the sense that life was going on a bit more normally in Kyiv than in Riga, that the crisis had struck Latvia harder than Ukraine. This is the result of several factors. The boom and bust in Riga was bigger, with faster growth in Latvia before the crisis, and the economy has simply shrunk more in Latvia, while Ukraine’s shadow economy means that the shrinking of the economy there is actually smaller than it looks on paper. Also, Latvia’s government has embraced tough austerity measures in hopes of gaining entry to the Eurozone, while Ukraine’s has been less cooperative with the IMF as irresponsible politicians jockey for votes. And I think that to some extent Ukrainians, having lived through a rougher last two decades than Latvians, are more used to dealing with the turbulence.
The election was of course won by Viktor Yanukovich, the villain of the Orange Revolution, with a margin of about 3.5% of voters. Yulia Tymoshenko has refused to concede defeat, which is in line with what many of our contacts predicted she would do if she lost narrowly, but she is limiting her challenge to the results to the courts and telling her supporters not to take to the streets. The OSCE said the elections were free and fair, Yanukovich has been recognized as the new president by world leaders, and the results are not going to be overturned, but the new political order could take some time to emerge with the possibility of Yanukovich calling snap parliamentary elections to help form a new government. In short, there is a great likelihood of continued political fighting, while the 2010 budget necessary for further IMF help is yet to be adopted by the Verkhovna Rada. Ukraine’s economy is not out of the water yet."
It is fitting that the crime of which Yulia Tymoshenko stands accused relates to gas. Gas made her rich in the 1990s, she was one of the oligarchs, known as the Gas Princess. It made her deputy prime minister for fuel and energy Viktor Yushchenko's cabinet back in the Kuchma years, from December 1999 to January 2001. When her reforms angered enough powerful enemies, she was pushed out of government and arrested. That was a decade ago. After the Orange Revolution, the peasant braids, two stints as prime minister, serial gas crises with Russia, a massive economic crisis, a close-run presidential election, vociferous denunciation of new President Viktor Yanukovych's swift and unconstitutional consolidation of power, and a political trial in which she has shown Ukraine's criminal justice system as much contempt as it has shown her, Tymoshenko sits in prison once more, accused of making an improper deal with Russia to restore the flow of gas in 2009. 
