Ukraine’s Economic
Transformation: Radical
But Not Complete
Anders Åslund, Senior Fellow
Atlantic Council, Washington, D.C
January 2017
What Went Wrong
No sharp break with the
Soviet system
 As a consequence, pervasive
corruption evolved

The Problem: 1991-94
 No economic policy led
to hyperinflation
 Rent seeking took over &
small rent-seeking elite
persists
Three Reform Waves
1. 1994-5: Financial
stabilization
2. 2000: Deregulation led to
economic growth
3. 2014-16: Greatest reforms
GDP per capita, PPP, 1990 and 2013
25,000
(constant 2011 international $
20,000
15,000
10,000
5,000
0
Ukraine
Source: World Bank, World Development Indicators
Poland
1990
Russia
2013
Turkey
Democracy and Corruption, 2015
Freedom House Political Rights and Civil Liberties Rating
(1=free, 7=not free)
0
Czech
Republic
Slovakia
1
Lithuania
Bulgaria
2
Hungary
Latvia
Romania
3
Ukraine
Estonia
Poland
Moldova
Georgia
4
Kyrgyzstan
Armenia
5
Kazakhstan
R² = 0.754
Russia
6
Tajikistan
Uzbekistan
Azerbaijan
Belarus
7
8
0
10
20
30
40
50
Transparency International Corruption Perceptions Index
(from 0="highly corrupt" to 100="highly clean")
Sources: Freedom House (2016), Transparency International (2015).
60
70
80
Ukraine is an Outlier
 As corrupt as most postSoviet countries
 But free & very open
EU integration can combat
corruption
Control of Corruption, 2000-2015
70
60
50
40
30
20
10
0
2000
2001
2002
2003
2004
2005
2006
Ukraine
Source: Transparency International Corruption Perceptions Index.
2007
2008
Poland
2009
2010
Romania
2011
2012
2013
2014
2015
What Was Wrong with
Yanukovych’s Policy




Pegged overvalued exchange rate
caused current account deficit
Rising budget deficit
Big energy subsidies
Predatory corruption
Cost of Russian Aggression
 GDP
fell by 7% in 2014 & 10% in
2015
 Output fall in occupied Donbas: 7% of
GDP + losses in Ukrainian-held area
 Eliminated trade w Russia: 28% of
trade from 2012-16
 FDI eliminated: 4% of GDP/year
Reform Achievements
Political
Reform
Energy Reform
Current Account Balance
Financial Stabilization
Transparency & Deregulation
Fix Politics First!
 Presidential
elections, May 25, 2014
 Parliamentary elections, Oct 26,
2014
 New government of young, welleducated outsiders, Dec 2, 2014
 Reform program, Dec 9, 2014
Energy Reform
energy prices: Consumption -20%
 Abolished all energy subsidies: 8% of GDP
 Provided social cash compensation
 Stopped buying gas from Russia Nov 2015
 Improved corporate governance
 Legislation on markets for all gas & electricity
 Missing: Stimulation of private energy
production- coming now?
 Unified
Foreign Account
1. Floating exchange rate: Depreciation
from UHA8/$1 end 2013 to
UHA27/$1 now
2. Current account deficit from 9% of
GDP in 2013 to balance in 2015
3. International reserves: from $5bn
Feb 2015 to $15bn December 2016
Current Account Balance -9% of
GDP in 2013, but 0 in 2015
15
10
5
0
-5
-10
Source: IMF World Economic Outlook, October 2016; World Bank Database
International Reserves: From
$5bn (Feb 2015) to $15bn (Dec 2016)
45
Billions of US Dollars
40
35
30
25
20
15
10
5
0
Source: IMF, International Financial Statistics 2014; Central Bank of Ukraine
Hryvnia Devalued from UHA 8 to 27/$1
Exchange Rate Stabilizing
0
5
10
15
20
25
30
Source: http://www.investing.com/currencies/usd-uah-historical-data
Financial Stability
IMF program: March 11, 2015, $7.7bn disbursed
 Fiscal Adjustment: reduced public expenditures
from 50% of GDP 2014 to 44% of GDP 2015
 Budget deficit from 10% of GDP to 2.1% of GDP
 Public debt reduced from $73bn 2013 to $71bn
end 2016
 Debt restructuring: postponed $15bn in debt
service until 2020
 Major tax reform: cut payroll tax from 45% to 22%


Half of 180 banks closed; owners revealed
Budget Deficit (with Naftogaz):
2.1% of GDP in 2015 (down from 10% in 2014)
2.0
% of GDP
0.0
-2.0
-4.0
-6.0
-8.0
-10.0
-12.0
Source: 2000 - 2008: IMF World Economic Outlook, April 2014; 2009-14: JP Morgan's EMEA July 8, 2014. Emerging Markets Report.
Note: I use JP Morgan statistics for 2009-13 because the IMF WEO statistics do not include the Naftogaz deficit. 2015-17: Dragon Capital Ukrainian Economy: 2017 Budget Draft, October 2016
Public Debt Stopped at 80% of
GDP after Devaluation
90
% of GDP
80
70
60
50
40
30
20
10
0
Source: 2000-2015: IMF Database; 2016-2017: Dragon Capital Ukrainian Economy, 2017 Budget Draft: A Modest Step Forward, October 2016
Ukraine’s Inflation: Up with Devaluation &
Tariff Rises to 61% April ‘15; 12.4% Dec ‘16
70
% YoY monthly
60
50
40
30
20
10
0
Source: Dragon Capital Ukrainian Economy, 2017 Budget Draft: A Modest Step Forward, October 2016
Next Key Reforms
1. Judicial Reform: Prosecution & Courts
2. Privatization: 3,800 state enterprises
remain. Sell off the easy ones first!
3. Civil Service Reform: Raise salaries!
4. Land Reform: Allow private sales!
5. Pension Reform: Cost cut from 17% of
GDP to 11% of GDP, but system must
change
Europe: Reform Anchor
 Political
& legal standards
 Market access: EU 16% of exports
in 2000. DCFTA: 39% in H1 2016
 But 36 quotas for main export items
 Financial assistance: Little
 Visa freedom key Ukrainian desire
Three Growth Sectors
 Agriculture
& food processing
 Hi-tech: Computer programming 3.3%
of GDP
 Future: Integration into European
supply chain with manufacturing &
services
 Note: Polish salaries are 5-6 times
higher than Ukraine’s
Ukraine Needs
Investment Funding
 Ukraine’s
investment ratio: only 15% of
GDP in 2015
 FDI used to be $6bn/year – now 0 apart
from bank recapitalization because of
Russian aggression
 Reasonable: United West ought to provide
$5bn a year in investment credits
Big Questions
 Have
Ukraine’s reforms become
irreversible? Probably
 Will reforms proceed? Yes but probably
more slowly
 Is Ukraine getting enough financial
assistance? No
 Enough market access? Hardly
 Will growth be 2-3% a year or 6-8% a year?