Independence Square, Kiev
GENERAL OVERVIEW
Ukraine is Europe’s second largest country. After the collapse of the Soviet Union in 1991, Ukraine gained independence and changed position toward closer integration with Western Europe.
While Ukraine and Russia share common historical origins, the west of the country has closer ties with its European neighbours, particularly Poland, and nationalist sentiment is stronger there.
A significant minority of the population uses Russian as its first language, particularly in the cities and the industrialized east.
Crimea, an autonomous republic on the Black Sea, was part of Russia until 1954, and now ethnic Russians make up about 60% of the population.
Russia once again seized and annexed Crimea in March 2014.
With the election of the pro-western Petro Poroshenko as president of Ukraine in May 2014 and parliamentary elections in October that consolidated the grip on power of the president’s political allies, Kiev is now firmly western-leaning.
However, tensions between Kiev and Russian-backed separatists plunged the eastern regions of Donetsk and Luhansk into war.
With the self-proclaimed “people’s republics” holding their own leadership polls in November, the likelihood that the split between the two parts of the country could harden into a “frozen conflict” with the eastern regions protected by Russian troops .
ECONOMIC OVERVIEW
After years of strong growth, in 2009 Ukraine experienced one of the worst recessions in Europe. Growth rate decreased by -15%, under the joint effect of a decline in economic activity, on the hand due to absence of foreign funds and on the other because of crisis in the global demand for steel. The country faced a collapse of its industrial production, a currency crisis, an inflation hike, and a weakening of its banking system and eventually had to be saved by the International Monetary Fund (IMF). Ukraine resumed growth in 2010 (3.7%), thanks to the recovery of international trade and a political stabilization following the March elections.
The new government elected in March has reestablished relations with the IMF (which had been suspended due to the country’s failure to pursue the necessary reforms) and is committed to put in place the planned structural reforms: strengthen the competitiveness of the Ukrainian industrial sector, reform public administration, invest in regional development and deregulation and reform the financial system, fiscal procedures and public finances.
The economic crisis had a deep social impact in Ukraine. Unemployment rose sharply, finally leveling off at just below 9% in 2010. Wage levels have also declined.
CURRENT ECONOMIC SITUATION
Recent data suggests that the economic recovery continued to stumble in the third quarter, after GDP growth decelerated notably in the first half of the year.
Industrial production dropped in September, but robust real wage growth propped up retail sales.
On the policy front, progress is also mixed. The government approved a watered-down version of the pension reform, which had gone through hundreds of amendments, at the beginning of October, and a key healthcare reform was also passed. However, these measures alone are unlikely to be enough to unlock the next tranche of IMF aid, and the government still needs to draft legislation on privatizations and create a new anti-corruption court, an unpopular proposition among lawmakers.
Overall, economic reforms have progressed at a very slow pace, and reform momentum could deteriorate further as the 2019 elections approach.
GDP
Growth slumps in the second quarter due to economic blockade.
Ukraine’s recovery remained on feeble footing in the second quarter as tensions with rebel-held areas continued to stifle economic activity. Growth has fallen notably this year compared to fourth quarter 2016’s solid 4.8% expansion, chiefly due to a blockade with the rebel-held eastern regions
The external sector drove the second quarter’s slowdown, subtracting 2.6 percentage points from growth. Exports plummeted 2.1% annually in second quarter, reflecting the loss of exporting capabilities in the east due to the blockade. In addition, Ukraine’s competitiveness has been eroded due to rising labor costs, and poor weather has hampered agricultural output. Imports, on the other hand, rose 4.6%.
Looking at the domestic economy, private consumption grew a robust 6.9% annually—the best result since 2013. Household spending is being supported by real wage growth, and retail sales boomed in second quarter. Fixed investment growth continued to suffer. Behind the result was improved business sentiment and the rebuilding of infrastructure within the country. Public spending, however, fell 7.8%—the largest contraction since Q3 2011.
MAIN INDUSTRY SECTORS
The agricultural sector has a major role in Ukraine’s economy. It employs around 17% of the population and contributes around 10% to the GDP. The main crops are cereals, sugar, meat and milk. Ukraine is the fifth biggest exporter of cereals in the world. Ukraine is rich in mineral resources, the main ones being iron and magnesium, and in energy resources (coal and gas).
The secondary sector employs 24% of the population and contributes more than a half of the GDP. The Ukrainian manufacturing sector is dominated by heavy industries such as iron (Ukraine is the 6th biggest producer of iron in the world), and steel. These two sectors alone, account for 30% of the industrial production. Coal mining, chemical and mechanical products (airplanes, turbines, locomotives and tractors) and ship building are also important sectors. However, it is important to keep in mind that industrial production was much affected by the global economic crisis.
The service sector employs close to 60% of the workforce and contributes up to 38% of the GDP. Ukraine is an energy transit country, providing transportation to western Europe and the Balkans, for Russian and Caspian oil and gas through its territory.
FOREIGN DIRECT INVESTMENTS (FDI)
Increasing in the recent years, the FDI flux into Ukraine have slowed down due to the global recession and the severe economic crisis affecting the country. Apart from the economic downturn, the inefficient and corrupted legal system, complexity of legislation and regulation, poor contract and enforcement and poor governance constitute serious impediments to investment. This is so despite the fact that the country has its strengths: a large domestic market, proven agricultural potential, energy and mineral resources and a strategic geographic location which makes it a transit hub and a gate to Europe.
The main investors in Ukraine are Cyprus, Germany, The Netherlands, UK, Austria, the United States and Russia. Apart from the energy sector, direct foreign investment is concentrated mainly in the banking and food processing sectors. You can refer to the Invest in Ukraine website for more information.
FDI GOVERMENT MEASURES
Following the orange revolution, investment friendly reforms have allowed for the considerable increase of FDI. In effect, the government wishes to strongly attract foreign investors. Except for certain key sectors like banking and telecommunications, most sectors are entirely open to FDI.
Country Strong Points
The country’s main strong points are:
– One of the biggest markets in Europe with 47 million consumers;
– The most dynamic GDP growth in Europe;
– A very good education system. The Ukraine is placed fourth in the world, in terms of specialists with diplomas in the high-tech sector;
– A strategic geographical positioning, the country being situated at the entry of Europe, Russia and Asia;
– The emerging middle class estimated at 20% of the population;
– The presence of investors such as Kraft Foods, Coca-Cola, Hewlett Packard, Cargill, Knauf, Raiffeisen Bank, Credit Agricole and many others; and
– The strengthening and reforms of the banking sector’s.
Country Weak Points
The country’s weak points are:
– The small amount of support given to foreign investors by the law;
– The weakness of the national oil company, Naftogaz’s, financial situation and the country’s permanent risk of being unable to pay its gas bill;
– The drop in industrial production in 2009;
– A high rate of inflation;
– Political instability;
– Endemic corruption.
FOREIGN TRADE OVERVIEW
Ukraine is a very open economy and the share of foreign trade in the country’s GDP has reached over 100%. The recession in 2009 led to a drop in exports and a reduction in domestic demand, leading to a considerable adjustment of the trade balance, since imports declined more rapidly than exports and later grew also less rapidly. Ukraine’s three main suppliers are: Russia, the Commonwealth of Independent States (CIS), Germany, Italy, China, Poland, Turkmenistan and Turkey. Russia is a major supplier of oil and gas, almost a third of Ukrainian total imports. The Ukraine mainly imports fuels and oil, machinery, vehicles, electric and electronic equipment and plastics.
Its main customers are Russia and the CIS (25%), Turkey and Europe. Main export goods are iron and steel, fuels and oil, nuclear reactors and boilers, machinery and machine tools (nearly 30% of exports), and cereals.