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Ukraine. Going West despite everything

In 2014 Ukraine found itself at a turning point when the government signed the political and (later) economic parts of the Association Agreement with the European Union. Six years later it has become evident that too little time has passed to fully evaluate this period, but one thing is certain: Ukraine is determined to stay on the path to the West.

In the spring of 2014, shortly after the EuroMaidan victory, I attended regular meetings of bank executives from the National Bank of Ukraine to discuss system stabilisation and reform. The smell of burned tyres lingered in the air as a constant reminder. A feeling of hope and expectation was growing within Ukrainian society. However the annexation of Crimea and the war in Donbas were in their active phases and the Ukrainian economy was in chaos.

April 6, 2020 - Volodymyr Kuzyo - 20 years of the Lane Kirkland Scholarship ProgramIssue 3 2020Magazine

The main railway stration in Lviv. Photo (CC) https://www.wallpaperflare.com/lions-lviv-lvov-ukraine-railway-station-transport-train-wallpaper-gmbog

As a result of the annexation and war, Ukraine’s economy fell by 6.5 per cent in 2014 and by 9.7 per cent the following year, which was accompanied by a significant depreciation of the national currency (the hryvnia) and high inflation. This has become the third deep recession in the last 30 years. The first one took place from 1993 to 1996 and the second occurred during the global crisis in 2009. The Economist estimates that Ukraine is one of the poorest countries in Europe with 3,800 US dollars GDP per capita by the beginning of 2020. Together with the thousands killed in the war, this is the price that Ukrainians have paid for choosing a European path after their independence and the unreformed economy in the 1990s.

Ukrainian time-pendulum

I am inclined to think that the answer to today’s challenges for Ukraine should be sought in the transformation of its economic and foreign policy that took place in recent decades. In the early 1990s the transition from a socialist to market economy was much slower than from communism to democracy. And this distinguishes the former Soviet republics from other countries of the socialist camp. The priority of building national institutions in Ukraine was important. At the same time, the communist elite, which stayed in power, slowed the economic transformation to its own advantage. It was beneficial for the existing authorities at the time to avoid “shock” reforms.

The first window of reform opportunity emerged in the mid-1990s, when the introduction of the “Washington consensus” measures was discussed with the IMF in terms of Ukraine: the deregulation of markets, trade, prices, minimisation of budget deficit, the introduction of the hryvnia and preparation of the first major privatisation plans in 1996. As a result, the recession of the economy stopped, but the reformers’ forces were rather weak and limited in the struggle against the interests of the heads of large state-owned enterprises and entire branches of the post-socialist economy.

In the second half of the 1990s, the emergence of new Ukrainian capitalists and oligarchs as a class finally occurred on the back of the search for economic growth. Hundreds of industrial enterprises were transferred into “private hands” during the large-scale insider privatisation during the 1990s. The economic development models of Ukraine and the countries of Eastern Europe were finally divided at this stage, and foreign policy meant balancing between the West and Russia.

The Orange Revolution in 2004 opened a second window of opportunity and hope for Ukrainian society. Economic growth of that time was the result of increased trade and consumption due to the financial sector. But the pro-European political coalition had shown its instability, while the structure of the Ukrainian economy, transparency of public sector and the complexity of doing business had not changed. Therefore, as a result of the 2009 global crisis, the decline of the domestic economy was rapid and accounted for more than 15 per cent of GDP.

In 2010 the pro-European coalition lost badly and the authorities were changed. Another balancing act of the new kleptocratic Ukrainian regime between the European Union and the new Russian Customs Union project ended with a sharp refusal to sign the Association Agreement between Ukraine and the EU in November 2013. This refusal, along with the desire for democratic institutions, was the start of EuroMaidan, which ended with the dramatic events of 2014: first on Instytutska Street in Kyiv, and later in Crimea and Donbas.

Transformation continues

In the 1990s, Ukraine was delicately choosing its geopolitical vector. The Ukrainian authorities were looking more towards Moscow at that time and the European Union was less interested in Ukraine’s movement towards the West. It is interesting to consider, however, what it would have been like if Ukraine had signed the Association Agreement with the EU back in 1994-1995? Could we have followed the same path 20 years ago as the Baltic states, Poland, Romania, and many other post-communist countries of Europe? Unfortunately we will never know, but Ukraine found itself at this turning point 20 years later, ready to sign the political and (later) economic part of the Association Agreement with the European Union in March 2014.

Six years later it has become evident that too little time has passed to fully evaluate this period, but certain things can already be observed. First, Ukraine, in co-operation with the IMF and other international organisations, has succeeded in securing macro-stabilisation, reducing inflation and budget deficits, successfully reforming the banking system, and reorienting business entities to alternative markets during these years. Second, Ukraine is continuing its economic transformation after the elections in 2019. The Ukrainian government declares the continuation of the implementation of the Association Agreement with the EU. Dozens of economic and financial bills have been voted on in parliament within a relatively short time period. The anti-money laundering law and the OECD Action Plan on Base Erosion and Profit Shifting, for instance, passed in late 2019. The reform of key markets such as energy, infrastructure, and land were announced. The deregulation and privatisation of hundreds of inefficient state-owned enterprises remains a priority.

Third, the lack of good governance that has affected Ukraine for so long still plays a critical role. This in turn negatively impacts the pace of reforms. It is appropriate to mention the words of American political scientist Francis Fukuyama who has said that effective governments must first ensure the rule of law and public services to its citizens. Only then will the private sector be able to create wealth based on human capital and potential.

It is increasingly difficult for us to retain human capital until the transformation is complete. Competition in the workforce is increasing around the world, and only an increase of direct investments in the domestic economy can keep active Ukrainians in the country. The rules and legislation common to EU members can ensure this. Other transformations, which are equally important, are the social and mental ones. Young Ukrainians born after the independence of Ukraine, having no burden of the Soviet past, are becoming an active part of our new society.

Window of opportunity

It took our western neighbours nine years to become full members of the European Union in 2004 (Romania and Bulgaria became members in 2007). As a result, these countries have experienced economic growth, and have economically and politically integrated into a united Europe. Ukraine is in a different context today. Despite the Donbas factor, we continue to do our homework and implement the EU directives. Most of the requirements of the Association Agreement with the EU shall be fulfilled by the end of 2023. Due to Poland’s initiative and Sweden’s support, Ukraine became one of the countries of the Eastern Partnership of the European Union in 2008. However this does not mean an automatic prospect of membership.

What is more, it looks as though there is no consensus on Ukraine’s EU membership in the EU. But we do not have much time before the Ukrainian pendulum could swing in the other direction. Therefore, at the same time as Ukraine will meet most of the Association Agreement requirements, the EU Member States should revitalise  their intellectual discourse and debate on Ukraine’s future membership. Moreover, countries like Poland and Lithuania may help open the window of opportunity for Ukraine in five years’ time. We will be watching closely as Poland will hold the presidency of the Council of the European Union in 2025, and Lithuania in 2027. Make no mistake, despite everything, Ukrainians still seek to be a part of the West.

Volodymyr Kuzyo is an economist who manages assistance programmes for Ukraine’s financial sector in the framework of the USAID Financial Sector Transformation Project in Ukraine. He previously served as the investment director for Ukrainian Railways as well as a member of the management board of Idea Bank Ukraine. He participated in the Lane Kirkland Scholarship Program in 2010–2011.

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