You're reading: Ukraine’s economy still with promise, pitfalls

With $175-billion worth of goods and services, Ukraine’s economy isn’t a member of the 50 biggest economies club, although it is one of the 30 most populated countries in the world with 45 million people.

Given that it is endowed with natural resources, fertile land and an educated workforce, the nation’s gross domestic product could be 10 times bigger – closer to Australia’s or Canada’s – if the government would eliminate the underground economy and modernize, said Oleg Ivanets, an analyst for Art Capital, an investment house.

This year the economy is expected to shrink by 6.5 percent, forecasted the International Monetary Fund, a Washington D.C.-based lender and reform-pusher.

Prime Minister Arseniy Yatsenyuk, called a technocrat by Western media, plans to have a huge selloff of state-owned assets to bring more investments and better management to the industrial sector. Reducing the number of taxes, and simplifying revenue reporting and duty collection are also part of the plan.

Russia’s ongoing war against Ukraine in Donetsk and Luhansk oblasts, which came after the Kremlin’s annexation of Crimea in March, is the nation’s biggest political challenge since gaining independence in 1991. It is severely pressuring the economy, with the hryvnia currency losing 40 percent of its value since the beginning of the year.

“Ukraine has to become a much bigger player on the (global) market,” says Michael Jager, managing director at European Economic Senate, a Brussels-based group that lobbies business interests with European Union authorities.

A big lover of Ukrainian agriculture products, especially tomatoes which by his own words are way less watery than German ones, Jager thinks tourism and technology could contribute much to the country’s economic well-being.

“Wood is another key product that Ukraine can export – whether plain timber or high-quality furniture,” added the lobbyist.

He thinks low production costs will eventually bring more European money into the country, whose previous privatization projects haven’t attracted much global interest due to its corrupt image and restrictive prerequisites to bid on state assets. Those seeking high-return gains should look into Ukraine’s privatization program, especially where the energy and chemical sectors are involved, Jager says.

Arturo Bris, who holds a Ph.D. degree in management from Insead business school and taught investment banking at Yale University, says Yatsenyuk shouldn’t think twice about privatization. He sees allowing “market forces to determine the efficient allocation of assets” as a key to boost economic growth.

A believer in the hryvnia devaluation’s positive impact on helping the economy make a pivot towards growth, Bris doesn’t think Ukraine should be in a rush to produce high added-value goods. “Not all countries need to focus on high value-added products. To fix the basics, it is probably better to start by what is unique for the Ukrainian economy, and this is intermediate and low value-added products that contribute to employment the most,” he said.

What credit-worthiness agency Standard & Poor’s sees through its Moscow office’s eyes is a lower than investment-grade environment. It may be better than it looks, given that unemployment decreased by 10.3 percent in the first half of the year from a year earlier.

Meanwhile, Igor Mityukov, who leads the Ukrainian unit of Morgan Stanley, an American investment bank, expects the economy to start growing in three months after the Ukrainian army defeats the enemy in the east.

Ukraine’s finance minister in 1997-2001, Mityukov is not overly pessimistic about the expected budget deficit, which by the IMF’s calculations will reach 5.8 percent of GDP in 2014. As long as the economy is growing, government may successfully borrow money and cover the deficit, Morgan Stanley’s Kyiv representative said.

Local businesses, however, say the economic reality they face is monstrous-looking. Oleksiy Oshkalo, 31, a car repair shop owner, laments that business can’t develop when people stop consuming. “As of now, the consumer has clearly taken a wait-and-see position and saves as much as he can,” he said. “We are looking forward to at least some signs of stabilization in the country.”

Kyiv Post associate business editor Ivan Verstyuk can be reached at [email protected].