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Here are some key excerpts from US government reports on the recent
economic history and current conditions in the Ukraine. The text
below is taken verbatim from the various reports shown.
U.S. Department of State
Bureau of European and Eurasian Affairs
Background Note: Ukraine
Ukraine has many of the components of a major European economy -- rich
farmlands, a well-developed industrial base, highly trained labor, and
a good education system. After eight straight years of sharp economic
decline from the early to late 1990s, the standard of living for most
citizens declined more than 50%, leading to widespread poverty.
Beginning in 2000 economic growth has averaged almost 9% per year,
reaching 9.4% in 2003 and 12.5% in 2004. Personal incomes are rising.
The macro economy is stable, with the hyperinflation of the early
post-Soviet period having been tamed. Ukraine's currency, the hryvnia,
was introduced in September 1996 and has remained stable until quite
recently. While economic growth continues, Ukraine's long-term
economic prospects depend on acceleration of market reforms. The
economy remains burdened by excessive government regulation,
corruption, and lack of law enforcement, and while the Yushchenko
government has taken steps against corruption and small and medium
enterprises have been largely privatized, much remains to be done to
restructure and privatize key sectors such as energy and
Ukraine is rich in natural resources. It has a major ferrous metal
industry, producing cast iron, steel, and steel pipe, and its chemical
industry produces coke, mineral fertilizers, and sulfuric acid.
Manufactured goods include airplanes, turbines, metallurgical
equipment, diesel locomotives, and tractors. It also is a major
producer of grain, sunflower seeds, and sugar and has a broad
industrial base, including much of the former USSR's space and rocket
industry. Although oil and natural gas reserves are small, it has
important energy sources, such as coal, and large mineral deposits,
and is one of the worlds leading energy transit countries, providing
transportation of Russian and Caspian oil and gas across its
Ukraine encourages foreign trade and investment. The foreign
investment law allows Westerners to purchase businesses and property,
to repatriate revenue and profits, and to receive compensation in the
event that property were to be nationalized by a future government.
However, complex laws and regulations, poor corporate governance, weak
enforcement of contract law by courts and corruption stymie
large-scale foreign direct investment in Ukraine. While there is a
functioning stock market, the lack of protection for minority
shareholder rights severely restricts portfolio investment activities.
Total foreign direct investment in Ukraine was approximately $7.72
billion as of October 1, 2004, which, at $162 per capita, was still
one of the lowest figures in the region.
While countries of the former Soviet Union remain important trading
partners, especially Russia and Turkmenistan for energy imports,
Ukraine?s trade is becoming more diversified. Europe is now the
destination of over one third of Ukraine's exports, while around one
quarter of Ukraine's exports go to Russia and the CIS. Exports of
machinery and machine tools are on the rise relative to steel, which
constitutes over 30% of exports. Ukraine imports 90% of its oil and
most of its natural gas. Russia ranks as Ukraine's principal supplier
of oil and Russian firms now own and/or operate the majority of
Ukraine's refining capacity. Natural gas imports come from Russia,
which delivers natural gas as a barter payment for Ukraine's role in
transporting Russian gas to Western Europe.
The Government of Ukraine signed a 12-month $605 million precautionary
standby agreement with the International Monetary Fund (IMF) in March
2004. The IMF, however, failed to complete its review of the agreement
in July-August 2004, raising concerns about inflationary aspects of an
increasing budget deficit at a time when revenues were growing (i.e.,
a pre-election spending surge), the accumulation of arrears of VAT
refunds to exporters, and ongoing structural problems, especially in
the financial sector. Ukraine received just $75 million of the $250
million Programmatic Adjustment Loan, second tranche, in 2003. The
World Bank may grant the remaining $175 million to the Government of
Ukraine this year, subject to energy sector financial reforms.
European Bank for Reconstruction and Development (EBRD) project
outlays, which often are tied to nuclear safety, totaled $120 million
in 2003 and $206 million in 2002.
In 1992, Ukraine became a member of the International Monetary Fund
and the World Bank. It is a member of the EBRD but not a member of the
World Trade Organization (WTO). Ukraine applied for membership in the
WTO in 1995. Progress on its application has been slow, but picked up
momentum in 2003 and early 2004. The new government has made accession
to the WTO by the end of 2005 a priority.
Department of Commerce's U.S. Commercial Service
A Brief Update on Ukraine's Business Climate
Although it is too early to tell whether the new Ukrainian government
that rose from the Orange Revolution will succeed in improving the
country's business climate, some steps in this direction are being
made. Progress has been slow since President Yushchenko took power in
late January 2005, and some recent actions - the abrupt removal of
special economic zones (SEZs) and the renationalization of
Kryvorizhstal, are leading to negative perceptions of its friendliness
to investors. However, viewed in the context of an overall effort to
reduce corruption and bring tax and other legislation in line with WTO
entry requirements, the new Ukrainian government does seem to be
trying to improve the environment for business.
Ukraine created special economic zones (SEZs) in the mid-1990s to
encourage development in certain regions. The SEZs were aimed at
providing incentives, such as tax breaks, to foreign businesses
investing in Ukraine. In March 2005, Ukraine withdrew all privileges
associated with SEZs through a revision of the 2005 budget. Removal of
SEZs was a condition to inclusion in WTO and eventually also in the
European Union (EU) free trade area. Moreover, some expert observers
point out that while SEZs benefited specific regions of Ukraine, the
problems associated with their existence, especially tax evasion by
large Ukrainian businesses, provided legitimate reasons for their
removal. However, negative perceptions of this action arose because,
while the elimination of SEZs was not completely unexpected, there was
apparently no discussion with established businesses before their
removal. Also, revocation of SEZs reportedly adversely affected many
existing businesses and led to some foreign businesses deciding not to
invest in Ukraine.
Another governmental measure drawing criticism from the private sector
was the expropriation of Kryvorizhstal, Ukraine's largest steel mill,
which was sold in June 2004 for far less than fair market value and to
the son-in-law of outgoing President Leonid Kuchma. The international
business community was reportedly unnerved by Ukraine's decision to
overturn the privatization of Kryvorizhstal, and became even more
concerned when President Yushchenko signaled that other privatizations
would be reexamined as well. Overall, fears of a return to excessive
government interference in private industry fueled apprehension toward
investing in Ukraine. However, the government of Ukraine has indicated
that it considers recent measures to be necessary steps toward rule of
law, the fight against corruption, and conformity with WTO and EU
In order to achieve Ukraine's goal of accession to the WTO, and
ultimately EU membership, a number of reforms need to be implemented.
Many of those reforms require Ukraine to bring existing economic
legislation (tax laws, customs laws, intellectual property laws) into
conformity with WTO and EU standards. Some progress in this direction
was made in July 2005 with the passage of legislation addressing
piracy and other legal obstacles to accession. Of the six laws passed
in July, the most significant was one that strengthens intellectual
property rights. Other key laws pushed through parliament ease
restrictions on used car imports, stiffen environmental standards,
lift requirements that half of components used by Ukrainian car
manufacturers be domestically sourced, and pave the way for foreign
auditors and life-insurers to operate in Ukraine. Three other new
laws, including one that will permit foreign banks to operate in
Ukraine, are due to be voted on in September.
The passage of new legislation addressing piracy and other issues,
removal of SEZs, and re-privatization of Kryvorizhstal indicate that
President Yushchenko is making progress toward WTO and EU compliance,
as well as cracking down on corruption. The slow pace of approval of
economic reform legislation has largely stemmed from the reluctance of
the Parliament's socialist faction, whose members reportedly oppose
joining WTO and other supranational organizations. Most expect that
Ukraine will become a member of the WTO within the next year.
Although Ukraine does seem to be making progress, many issues
concerning lack of effective law enforcement, transparency, and
excessive registration and compliance requirements remain unresolved.
The foreign business community in Ukraine has reportedly been
disenchanted by the failure to significantly strengthen the rule of
law and eliminate some government regulatory procedures. A survey
conducted in July 2005 by Ukrainian National Committee at the
International Chamber of Commerce reveals the sentiment among
investors with experience in Ukraine and Eastern Europe - almost
universal disappointment with the Government's efforts to improve the
business environment. At the same time, however, these respondents
said they would maintain or increase their investments in Ukraine.
During the World Economic Forum in June 2005, President Yushchenko
adamantly stated Ukraine's intention to provide a receptive
environment for foreign investment.
CIA World Factbook -- Ukraine
Economy - overview:
After Russia, the Ukrainian republic was far and away the most
important economic component of the former Soviet Union, producing
about four times the output of the next-ranking republic. Its fertile
black soil generated more than one-fourth of Soviet agricultural
output, and its farms provided substantial quantities of meat, milk,
grain, and vegetables to other republics. Likewise, its diversified
heavy industry supplied the unique equipment (for example, large
diameter pipes) and raw materials to industrial and mining sites
(vertical drilling apparatus) in other regions of the former USSR.
Ukraine depends on imports of energy, especially natural gas, to meet
some 85% of its annual energy requirements.
Shortly after independence in December 1991, the Ukrainian Government
liberalized most prices and erected a legal framework for
privatization, but widespread resistance to reform within the
government and the legislature soon stalled reform efforts and led to
some backtracking. Output by 1999 had fallen to less than 40% of the
1991 level. Loose monetary policies pushed inflation to
hyperinflationary levels in late 1993. Ukraine's dependence on Russia
for energy supplies and the lack of significant structural reform have
made the Ukrainian economy vulnerable to external shocks.
Ukrainian government officials have taken some steps to reform the
country's Byzantine tax code, such as the implementation of lower tax
rates aimed at bringing more economic activity out of Ukraine's large
shadow economy, but more improvements are needed, including closing
tax loopholes and eliminating tax privileges and exemptions. Reforms
in the more politically sensitive areas of structural reform and land
privatization are still lagging. Outside institutions - particularly
the IMF - have encouraged Ukraine to quicken the pace and scope of
GDP in 2000 showed strong export-based growth of 6% - the first growth
since independence - and industrial production grew 12.9%. The economy
continued to expand in 2001 as real GDP rose 9% and industrial output
grew by over 14%. Growth of 4.6% in 2002 was more moderate, in part a
reflection of faltering growth in the developed world. In general,
growth has been undergirded by strong domestic demand, low inflation,
and solid consumer and investor confidence. Growth was a sturdy 9.3%
in 2003 and a remarkable 12% in 2004, despite a loss of momentum in
needed economic reforms.
I trust these excerpts provide you all the information you need on the
recent economic history of the Ukraine.
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