Tag Archives: ukraine

Ukraine Needs to Privatize its State-Owned Companies — But Rushing It Would Repeat the Mistakes of the Past

Storied aviation company Antonov, makers of the world's largest cargo plane, is in no position to be privatized.

Storied aviation company Antonov, makers of the world’s largest cargo plane, is in no position to be privatized.

 

The stakes for reforming Ukraine’s state-owned companies are high: these companies are the lifeblood of a corrupt, sclerotic crony capitalist system that scares away potential investors, drives off international donors, and robs the Ukrainian government of legitimacy. But  privatizing them as quickly as possible is not the solution.

Even after mass privatization in Ukraine in the 1990s, the government still owns a large portfolio of companies in a variety of sectors – from heavy industry to banking — that employ over 900,000 employees, far more than any private firm.  Reforming these state-owned enterprises (SOEs) has been a slow process and remains incomplete due to weak corporate governance, unmotivated management, and a near-total lack of transparency. None of these problems will be solved by simply speeding up the process.

The demand for rapid privatization is a familiar tune. Western “expert” advice in the early 1990s led to a huge transfer of wealth from the former Soviet Union to a handful of connected insiders, particularly in Russia: first through voucher privatization and later through the disastrously corrupt loans-for-shares schemes in the run-up to Russia’s 1996 election.

To get an idea of the scale involved, a 1993 paper by several Western economists who worked directly on the voucher privatization program estimated that most of the Russian Federation’s civilian industrial base – nearly every plant, factory, and mine in the country – was effectively sold off to insiders for between $5 and $10 billion, less than it would have cost to buy a single mid-sized Fortune 500 company (and roughly equal to the market capitalization of Whole Foods today). Still, at the time they regarded this program as a great success.

Unfortunately, the corrupt and predatory “oligarch” elite, created practically overnight, proved to be more interested in asset-stripping than in transforming their new firms into firms that could compete on world markets. What followed was the largest peacetime economic collapse of any country in recorded history. The sheer volume of banditry surrounding state assets during the 1990s led many average citizens in post-Soviet countries to believe that lower standards of living and a complete lack of justice were a natural part of living under democracy.

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Building Sustainable Feedback into Ukraine’s Economic Reform Efforts

Expert Discussion of SURE Draft_April, 2015

(Photo: CIPE)

This past year has been filled with both positive and negative news regarding ongoing reforms in the Ukrainian economy. Ukraine entered into a historic free trade agreement with the European Union that went into effect on January 1, 2016, which was met with the predictable implementation of retaliatory tariffs on Ukrainian goods by Russia.

Additionally, and in spite of raucous parliamentary sessions and infighting among the parties, the Rada (Ukraine’s legislature) has adopted various pieces of pro-reform legislation, some of which were proposed by CIPE’s partners under a recently completed USAID-funded program Supporting Urgent Reforms to Better Ukraine’s Business Environment (SURE).

The support of USAID allowed CIPE and partners to build a sustainable institutional framework for business associations representing SMEs to have direct input into legislation that effects SME operations specifically, and to improve the environment for doing business in Ukraine more broadly.

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Key Minister Resigns in Ukraine, Casting Doubt on Economic Reform Progress

Photo credit: Lithuania Ministry of Foreign Affairs, Flickr https://www.flickr.com/photos/mfa_lithuania/20063595149

Photo credit: Lithuania Ministry of Foreign Affairs, Flickr

By Eric Hontz and Marc Schleifer

In a stunning announcement in Kyiv on February 3, Ukraine’s Minister of Economic Development and Trade Aivaras Abromavicius submitted his resignation to President Poroshenko. The Lithuanian-born Abromavicius cited several factors contributing to his resignation, including pressure to appoint questionable individuals to his team or to key positions in state-owned enterprises. In particular, he named Igor Kononenko, considered a Poroshenko ally in parliament. President Poroshenko has reportedly urged Minister Abromavicius to stay on, and has promised that the National Anti-Corruption Bureau would investigate his claims against Kononeko.

A public statement signed by 10 ambassadors to Ukraine, including from the United States, the United Kingdom, Germany, and France, released hours after the resignation, emphasized deep disappointment and noted the importance of Ukraine’s leaders setting aside parochial differences and the necessity of putting the vested interests that have hindered progress for decades in the past.

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Will There Ever Be a Resolution in Eastern Ukraine?

frozen-conflicts-donbas

CIPE’s Frozen Conflicts blog series looks at the current situation in seven breakaway regions of the former Soviet Union, with a particular focus on the economic dimension. To learn more about frozen conflicts and what can be done about them read CIPE’s Economic Reform Feature Service article on the subject.

In May 2014, not long after the EuroMadian demonstrations toppled Ukraine’s former President Yanukovych, pro-Russian separatists in two Eastern Ukrainian regions, Donetsk and Luhansk, held referenda – unrecognized by Kyiv and the West – and declared their independence as “people’s republics.”

According to a September report from the UN, an estimated 8,000 people have been killed and almost 18,000 wounded in the ensuing war in Eastern Ukraine – the area known as the Donbas – as the new government in Kyiv has tried to regain control over its territory. The UN High Commission on Refugees (UNHCR) estimates that the conflict has created 1.5 million internally displaced persons. While the Kremlin long denied its military involvement, the Russian business magazine Delovaya Zhizn revealed the number of Russian casualties: 2,000 dead, 3,200 wounded.

Of the three million who are left in the region, about two million are children and pensioners. This leaves only one million working-age adults to support them and do the fighting. For around two months, between the beginning of September and November 2015, fighting in Donbas subsided, and some Ukrainian news outlets were speculating that the war could be coming to an end. But just as some IDPs were starting to return to the region, reports of ceasefire violations emerged. In September, UN agencies and a number of humanitarian NGOs were expelled from Luhansk by the forces in control of the area.

While the military aspect of the situation has been extensively covered, less well known is how the occupied region is managing economically. At first, the Kyiv government paid social benefits to the separatist region, despite not receiving any of its tax revenues. But since November 2014, when Kyiv cut the region off, the separatist authorities have been supporting residents with pensions paid out in rubles. They claim that these funds derive from tax collections, not support from Moscow, but this assertion seems questionable given a sharp economic decline. Interestingly, in June 2015 the authorities paid out pensions in U.S. dollars.

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The Unprofitable Business of Crimean Annexation

frozen-conflicts-crimea

CIPE’s Frozen Conflicts blog series looks at the current situation in seven breakaway regions of the former Soviet Union, with a particular focus on the economic dimension. To learn more about frozen conflicts and what can be done about them read CIPE’s Economic Reform Feature Service article on the subject.

After the early 2014 ouster of former Ukrainian President Viktor Yanukovych, Russian-backed forces seized control of Ukraine’s Crimean peninsula. In early March 2014, Crimea’s regional parliament called a referendum, asking voters to choose between joining Russia and having greater autonomy within Ukraine. The result was nearly 97 percent in favor of joining the Russian Federation, with a declared turnout of 83 percent, though an independent observation of the vote was impossible, and the results could not be verified. Soon thereafter, Russia announced that it would formally incorporate Crimea.

The international community, of course, still considers Crimea a part of Ukraine de jure. The EU and the U.S. in particular have made it clear that they will never recognize Russia’s annexation of Crimea, sparking arguably the worst crisis in relations between Russia and the West since the end of the Cold War.

There would seem to be no easy way to resolve the crisis and bring Crimea back into the Ukrainian fold. Moscow appears to be firmly dug in, and many Ukrainians loyal to Kyiv have left the region. Economic means do not seem to be having an effect: the EU and U.S. have put in place sanctions on Russia which, combined with the low price of oil, have had serious repercussions for the Russian economy. Crimea itself is under one of the world’s toughest embargo regimes. Almost all international trade and transport links to the EU and the U.S. have been cut off, and banking transactions are blocked. Personal sanctions have been put on high-ranking Russian and Crimean officials.

The impact on the Crimean economy has been profound: over 60 percent of local firms have stopped operating, and the number of individual entrepreneurs has decreased threefold. As a result, analysts predict that, at least until 2020, Moscow will be forced to continue subsidizing a region far larger than the other breakaway regions Russia supports: 40 times the size of South Ossetia, eight times the size of Abkhazia, and four times the size of Transnistria.

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Shock Therapy Isn’t Enough to Jumpstart Ukraine’s Economy

Photo: Wikimedia Commons

Photo: Wikimedia Commons

The high level of economic development in Poland today is often accredited to the rapid implementation of liberal free market policies, or “shock therapy”, in the immediate aftermath of the collapse of Communism in Poland.

The architect behind economic shock therapy was the former Minister of Finance and Deputy Premier of Poland Leszek Balcerowicz, who earlier this year was invited by Ukraine’s President Poroshenko to design a similar economic reform policy for Ukraine, implying that Ukraine could emulate the success story of Poland.

However, Poland’s positive transition does not provide a comprehensive blueprint for Ukraine, as other social and institutional factors were imperative in ensuring the economic growth of Poland.

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Progress on Pro-SME Legislative Reform in Ukraine

View_to_Kiev

Kiev is Ukraine’s political and economic capital. (Photo: Wikimedia Commons)

The Ukrainian government is in the difficult position of trying to overhaul a wide range of economic, judicial, and political institutions, all while fighting a war in the country’s east. The challenges are stark: Ukraine is in the midst of its worst recession since 2009, and the government expects the economy to shrink by 9.5 percent this year, with annual inflation likely to reach 48 percent. Thus it comes as no surprise that many Ukrainian citizens have begun to complain that the government isn’t doing enough, or that the pace of change after the EuroMaidan is too slow.

A policy paper released by the Friedrich Naumann Foundation in November 2014, not long after the current government took office, analyzed a range of Ukrainian policies that are slanted against the business community, creating particular challenges for small and medium-sized enterprises (SMEs).

While the reform effort since 2014 has been intense, many SME owners are still not satisfied with efforts to ease the regulatory burden, according to the findings of a national survey of over 1,600 SMEs, recently conducted by CIPE as part of the USAID project Supporting Urgent Reforms to Better Ukraine’s Business Environment (SURE) .

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