The article was originally published on February 14 by Michael Roberts, a few days before the Russians invaded. Although some of the language may seem anachronistic, the analysis retains its full interest in understanding the state of the Ukrainian economy after the collapse of the Soviet Union.
When the drums of war are beating on Ukraine’s doorstep, how will this affect Ukraine’s economy and the standard of living of its 44 million people, will war be averted or not? I have already published several articles about Ukraine during the major economic crisis that the country experienced in 2013-2014, which ended with the collapse of the current government, the Maidan uprising and the Russian annexation of Crimea and the predominantly Russian-speaking eastern provinces. The situation then was catastrophic for the people. Since then, the situation has improved somewhat, but economic growth remains relatively weak and living standards have remained stagnant at best. The average real wage has not increased for 12 years and fell sharply after the 2014 crisis.
Average annual real wages in 2017 expressed in hryvnias (UAH). Source: EWPT 7.0 series.
Ukraine suffered the most from the collapse of the Soviet Union and the “shock therapy” imposed by capitalist restoration in Eastern Europe and Russia. It took a long time for all of the former Soviet satellites to recover to pre-bloc GDP per capita and income levels, but in the case of Ukraine, these figures never returned to 1990s levels. Ukraine’s economic performance between 1990 and 2017 was not only worse than its European neighbors. They are in the top five in the world. Indeed, between 1990 and 2017, only 18 countries showed negative cumulative growth, and even in this small group, Ukraine’s economic performance was in the weakest third, along with the Democratic Republic of the Congo, Burundi, or Yemen.
Dynamics of Ukraine’s GDP per capita from 1990 to 2017 1) Compared to the rest of the world. Thus, Ukraine is among the five countries where GDP per capita has changed the least in the world over this period. 2) Compared with neighbors in the region.
During the 2014 debt and currency crisis, Ukraine avoided total collapse for three reasons. Firstly, by default on the debt to Russia, which, despite numerous efforts, has not been able to return it so far. Second, because post-Maidan governments have negotiated a number of IMF loans; and third, because these agreements have led to a severe program of austerity in public services and social assistance. Ukraine owes Russia $3 billion (more than 10% of its foreign exchange reserves), the payment of which would double Ukraine’s external deficit.
This deficit is currently being replenished by the IMF, and Ukraine is “negotiating” with Russia on a “debt restructuring”, allegedly mediated by Germany. Having broken Russian influence since 2014, Ukraine has indeed decided or been forced to rely on the “West” and an IMF loan to support its currency and hope for some economic improvement.
Agreements with the IMF are ongoing. The latest is an agreement to extend borrowings through 2022 for $700 million from a $5 billion total standby agreement. Instead of Ukraine “should maintain a ‘sustainable’ level of its debt, protect the independence of its central bank, bring inflation back to its target range, and fight corruption.”. A commitment that requires the application of austerity measures to government spending. The central bank must act in the interests of foreign debtors, prevent excessive devaluation of the currency, and maintain high interest rates without government intervention. The pervasive government corruption fueled by the Ukrainian oligarchs must be stopped. (See November 2021 IMF report)
Austerity measures have been implemented by various governments over the past ten years. The IMF’s current package includes a tax increase equivalent to 0.5% of annual GDP, an increase in pension contributions and an increase in energy tariffs. All these measures will lead to a further fall in social spending, which at the time of the 2014 crisis was 20% of GDP compared to 13% this year.
Social spending in % of GDP in Ukraine. Blue shows the share of spending on unemployment, orange shows pensions, and gray shows social security. Source: IMF.
At the same time, the government must resist any increase in the salaries of civil servants, which would be aimed at offsetting the near-double-digit inflation rate.
Government spending on wages, as a % of GDP. Source IMF
Backed by the latest post-Maidan government, the IMF is pushing above all for a substantial privatization of banks and state-owned enterprises for the sake of “efficiency” and the fight against “corruption.” “The authorities remain committed to downsizing the state-owned enterprise sector. The adoption of a comprehensive public ownership policy would be a key step. Ultimately, corporatization and the accompanying improvement in the performance of non-strategic state-owned enterprises should lead to their successful privatization. Preparations are also underway to implement the authorities’ strategy to reduce the state’s share in the banking sector. Updated in August 2020, the strategy calls for reducing state ownership to less than 25% of the net assets of the banking sector by 2025.
The most important decision was the privatization of farms. Ukraine has a quarter of the world’s fertile “chernozem” (chernozem) soils. It is already the world’s largest producer of sunflower oil and the fourth largest producer of corn. Along with soybeans, sunflower and corn are among the main crops grown in the sunflower belt, which stretches from Kharkiv in the east to the Ternopil region in the west.
But agricultural productivity is low. In 2014, the value added of agricultural products per hectare was $413 in Ukraine compared to $1,142 in Poland, $1,507 in Germany and $2,444 in France. Ukrainian agriculture is divided between a handful of large mechanized commodity farms and a mass of peasants working small plots. About 30% of the population still lives in rural areas, and agriculture employs more than 14% of the active population. One of the main demands of Western advisers to Ukraine in recent years is that it ” liberalize » land market to call « flourishing growth momentum The IMF estimates that such liberalization will lead to GDP growth of 0.6-1.2% per year, depending on whether this privatization is open to foreigners or only to national ownership.
If the government continues to deny foreigners the purchase of land, in 2024 Ukrainian legal entities will still be able to qualify for land deals up to 10,000 hectares. They will operate on a total agricultural area of 42.7 million hectares (103 million acres): the equivalent of the entire area of California or all of Italy! The World Bank hailed this opening up of a key Ukrainian industry for capitalist enterprise: Without exaggeration, this is a historic event, which became possible thanks to the leadership of the President of Ukraine, the will of the Parliament and the hard work of the government. “. Therefore, Ukraine plans to further open its economy to capital, including foreign, in the hope of accelerating growth and prosperity.
But this is only hope. According to optimistic forecasts, the current annual economic growth should reach 4% per year, while inflation will remain at the level of 8-10% per year. Unemployment remains very high (10%) and business investment is collapsing (-40%). This does not bode well for the capitalist boom. Capital investment is low because the return on capital is very low.
Gross rate of return on capital in Ukraine
Perhaps the wealth from the privatization of state assets and land will benefit some capitalists, probably mostly foreign investors. But most of the gains are likely to disappear as corruption remains ubiquitous. The IMF admits that if corruption is not reduced, there will be no recovery and Ukraine will not catch up with its Western neighbors.
Forecast of GDP growth in Ukraine based on the level of corruption. In black: reduction of corruption to a level equivalent to that of the EU. In blue: the decline in corruption corresponds to the highest level of corruption in the EU. In red: corruption is not decreasing.
Theoretically, the Gini coefficient in Ukraine, which measures the degree of income inequality, is the lowest in Europe. This is partly due to the fact that Ukraine is so poor that there is practically no middle class. And the very rich hide their income and wealth, paying almost no taxes. The “underground economy” is very large, so that the richest 10% have 40 times more wealth and income than the poorest Ukrainians. In the current World Happiness Report, Ukraine ranks 111th out of 150 countries, below many countries in sub-Saharan Africa.
And the conflict with Russia was costly. According to the Center for Economic and Business Research (CEDR), Ukraine lost $280 billion in GDP between 2014 and 2020, or $40 billion a year. [ndlr : auxquels s’ajoutent les conséquences économiques de la guerre actuelle, depuis le début de l’invasion russe fin février]. The annexation of Crimea by Russia has cost Ukraine $8.3 billion a year, and the ongoing conflict in Donbas is costing the Ukrainian economy $14.6 billion a year. The total losses from these two professions alone since 2014 are $102 billion. CEBR says the conflict has had a significant impact on Ukraine’s economy, including lowering investor confidence in the country. This, in turn, resulted in losses of $72–10.3 billion per year. The steady decline in exports has resulted in total losses for Ukraine of up to $162 billion between 2014 and 2020. The total loss of fixed assets for Ukraine in Crimea and Donbas due to the destruction or damage of assets is $117 billion.
After the fall of the Soviet Union and gaining formal independence in 1994, the people of Ukraine were ravaged by oligarchs who exploited the country’s assets and resources, as well as by governments thrown between Putin’s Russia and the EU. Since the Maidan uprising against the regime of the pro-Russian government, Ukrainian ultra-nationalists have dominated state politics. They demand that Ukraine join the EU and especially NATO in order to return the territories annexed by Russia.
It is a cruel irony that Germany does not intend to allow an unstable and very poor Ukraine to join the EU, which would cause too many problems and costs; while even the United States is likely to relinquish its NATO membership. For its part, Russia does not intend to return control of Russian-speaking territories to Kiev, but instead demands permanent autonomy and an agreement that Ukraine will never join NATO.
The so-called Minsk agreements of 2014-2015, signed by the great powers and the previous Ukrainian government, cannot reconcile this division. Thus, the nationalists in Kyiv, encouraged by the United States, continue to exert pressure, and the Russians continue to prepare for a possible invasion to impose an agreement to permanently partition the country. Ukraine is sandwiched between the interests of Western imperialism and Russian crony capitalism.
Translation : Kenza Adele