Ukraine introduced a new currency in September 1996 five years after gaining independence from the former Soviet Union in 1991. Ukraine has experienced economic decline during the 1990’s since the break up of the Soviet Union resulting in a lower standard of living with its painful restructuring of the Ukrainian economy. At present, 70 percent of Ukraine’s 48.4 million population believe their standard of living is worse than it was in 1991. Over the last decade, Ukraine’s population has declined by 3 million as many young people have emigrated to seek opportunities in Russia or in the West. Ukraine, one of Europe’s largest and poorer countries is notorious for it corruption as it one of Europe’s worst offenders.
POLITICS: President Kuchma of the ‘For United Ukraine’ was elected in 1994 and re-elected in 1999. Kuchma supports closer economic ties to Russia than with the West. He is responsible for appointing a government although powerful businessmen, communists and oligarchs have great influence on the Ukrainian government. Former pro-Western Prime Minister Yushchenko claimed victory in April 2002 elections but was denied the power. These elections were criticized by the West as unfair. Political instability is noticed recently in November 2002 when the cabinet was fired by Kuchma. In the Ukrainian political structure, the Presidency holds far too much power. It has also been suggested that much of the media is controlled by pro-Kuchma oligarchs.
ECONOMY: Why did a hyperinflationary depression in the Ukraine take place in the mid 1990’s resulting in 1999 economic output only at 40 percent of its 1991 level? Many former Soviet communists are entrenched in Ukraine’s political structure and the Russian style oligarchs yield too much political power thus ignoring the law and slowing reforms. Consequently, Ukraine still for the most part embraces a Soviet flavour in its economy and political institutions making change to free democracy and open market economy a difficult and slow transition. For example, political insiders control much of the Ukrainian economy including Mr. Kuchma’s son-in-law who controls a large business conglomerate. In addition to Ukraine’s domestic difficulties, its largest trading partner Russia itself was in a period of mass wealth transfer from corrupt privatizations. As GDP collapsed in the early 1990’s, inflation in Ukraine by 1993 reached hyperinflation levels of 10,000 percent and fell to 377 percent by 1995.
Since 1994, Ukraine has received $2 billion USD in financial aid from the United States government. By year 2000, the Ukrainian economy has finally rebounded as an increase in domestic demand & investor confidence surged ahead with solid exports in metal products and agricultural taking place. At Present, Ukraine’s economy is highly dependent on Russia as it is its largest export market, trade partner and Russia is also a major supplier of energy to the Ukraine. The country is rich in natural resources and vast fertile agricultural farm land mixed in with heavy diversified industry. The slow implementation of economic reforms and privatization has had a positive affect as it has helped to increase hard currency holdings from limited foreign direct investment ‘FDI’.
Economic Statistics
GDP as measured using purchasing power parity is $205 billion USD (2001) or GDP/capita at $4,200 USD (2001). If measuring by market prices, GDP came in at 202 billion UAH (2001) or approximately $40 billion USD. GDP growth estimated to have come in at a healthy 5 percent for 2002, year 2001 came in a robust 9.1 percent. Inflation has successfully turned into disinflation with year 2002 figure at 7.5 percent, inflation for 2001 came in at 15 percent, year 2000 at 26 percent, 1999 at 25 percent. Current account is now in surplus in partly thanks due to privatization as it also helped to put the capital account in surpluses each of 2001 and 2000 at 3.5 percent of GDP and 4.8 percent respectively. Fiscal deficit fell to 1.8 percent of GDP for 2002. External debt at $11.8 billion USD (2001). Heavy industry is at 40 percent of GDP. Domestic energy needs are sufficed as follows with nuclear at 45 percent, coal at 50 percent and hydropower at 5 percent.
POSITIVES: large military with advanced hardware & nuclear defense strike capability, fairly large merchant marine at 140 ships, well educated nation. CONCERN: nuclear waste and military hardware sales to uncertain stable states, tax evasion, net energy importer, AIDS/HIV & tuberculosis ‘TB’ is a serious threat as 1 percent of the population are infected.
BANKING SYSTEM: 1998 Russian financial crisis, capital flight was a serious problem in Russian and it spilled over into the Ukraine with many Ukrainian deposits leaving for offshore destinations. Presently, capital flight within the Ukraine is not a serious issue anymore as there 184 commercial banks operating in the Ukraine today. During the hyperinflation in the 1990’s, barter became popular as a vehicle to facilitate transactions. Since year 2000, economic growth has returned along with reforms being implemented, the banking system is advancing with a formal monetary exchange now in place thus reducing the demand for barter. The National Bank of Ukraine is the country’s central bank holding gross foreign reserves at $3 billion USD (2001) equivalent to 2 months imports which is considered moderate to low albeit a huge improvement when compared to 1998 when only $750 million USD were held in reserves. The discount interest rate is at 7 percent, well below its peak in 1994 of 300 percent.
REGIONAL: Russia, Belarus
The ecoomic fallout of the August 1998 Russian financial crisis lasted for a couple of years as Russia is a large buyer of Ukrainian agricultural products while Ukraine owes Russia for it natural gas debts. Ukraine is strategically geographically located as a transshipment point for oil from the Caspian Sea region to markets in Western Europe and also a transshipment point for Russian natural gas. Ukraine is highly dependent on the health of the Russian economy of which Russia is currently growing faster than the world economy average. Moreover, there has been a large influx of Russian companies investing in the Ukraine. At present, Ukraine’s GDP/capita is about 50 percent of that of Russia’s. Further, the two nation’s have a close military relationship and many in the Ukraine wish for a reunification with Russia. Belarus immediately to the Ukraine’s northern border is a close ally of Russia as well of whom are discussing reunification with Russia.
KNOWLEDGE: former Prime Minister Yushchenko, a centrist will be Ukraine’s next President in elections scheduled in 2004 as predicted by BI.C. Yuschenko is former chairman of Ukraine’s National Bank and is a pro-Western market reformer. Yushcenko supports a market ideology and is backed by the West, he wants closer ties to the European Union. Ukraine’s current political leadership who support closer ties to old Russia of which have held back Ukraine’s economic development as many former communists and oligarchs have great influence in current government affairs and policy. Yushchenko representing the opposition best chance for victory was allegedly fraudently denied power in parliamentary election in spring 2002 although claimed to have won the majority of the vote. In September 2002, upwards of over 20,000 Ukrainian’s marched in protest against Kuchma’s government. The political movement for change is growing and Yushchenko is Ukraine’s best future for economic advancement.
CURRENCY: ISO symbol ‘UAH’, Ukrainian hryvnia. At time of review on February 16, 2003, the hryvnia had an exchange value of 5.33 UAH to 1 USD. Currency regime is a floating exchange rate.
CURRENCY HISTORY: the hryvnia was introduced in 1996 after the worst of the hyperinflation took place and as the Russian ruble was no longer used as currency for Ukraine. Historical valuations for the hryvnia include July 1997 at 1.856 UAH to 1 USD, January 1998 at 1.91, August 1998 at 2.24, September 1998 at 3.18, April 1999 at 4.05, November 1999 at 5.30, February 2000 at 5.61, January 2001 at 5.43, January 2002 at 5.33, December 2002 at 5.52. Over the last 5 years, the hryvnia has depreciated by upwards of 65 percent.
CURRENCY FORECAST: to appreciate modestly versus a weakening US-dollar over the short term. However, when studying purchasing power parity versus the USD, the Ukrainian hryvnia is 40 to 50 percent undervalued. It is suggested that these two exhange rates over a long period of time will move closer and close the gap. That would put the hryvnia at approximately 3 to 3.5 UAH to the USD. At present, confidence is increasing in the hryvnia with strong remonetization of the economy taking place. However, the greatest short to medium term threat to the hryvnia is political instability.
A booming Russian economy that is benefitting from world higher oil prices and commodity prices, particularly gold and nickel will spread its wealth and benefit the Ukraine as well. A change in Ukrainian government leadership will help to bring the pace of change quicker and open new markets in the West. Ukraine must find a way to remove old guard communist politicians, oligarchs, they must be flushed out of the bureaucracy in order for real effective change to take place. BI.C believes that this will happen and Ukraine with great economic potential will prosper in the long term particularly as Ukraine has considerable manufacturing idle capacity to be exploited. Reform is required in taxes, bankruptcy legislation, ownership of property rights, investor protection, etc. Ukraine rich in agricultural lands and mineral resources coupled along with a capable heavy industry infrastructure in place will realize a much higher standard of living if the country can achieve sound leadership.
One major surprisingy force for change in the Ukraine, is President Putin of Russia. Mr. Putin is embracing the United States and moving Russia closer to the West and European Union as he clearly sees these two markets as important buyers of Russian oil and natural gas. Ukraine over time may see itself join the World Trade Organization coupled with long term aspirations to accede to the European Union perhaps by year 2007. If EU accession is successful, the Euroland euro would replace the hryvnia as Ukraine’s new national currency. Stability index is a fair rating for Ukaine while BI.C subjectively gives Ukraine a modest to fair risk for the Ukrainian hryvnia. UPDATED: February 16, 2003
