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Following the political blitzkrieg in Ukraine that gave President Volodymyr Zelensky’s team a single-party majority in parliament, the new authorities have set about implementing their social and economic pledges. Upon assuming office, Prime Minister Oleksiy Honcharuk promised economic growth of 5 to 8 percent a year. His optimism is not currently borne out by practice: the 2020 budget envisages a more modest 3.3 percent, and the International Monetary Fund (IMF) forecast is about the same.
In recent years, Ukraine’s economy has certainly grown: in 2018, real growth in GDP accelerated from 2.5 percent to 3.3 percent, and in the second quarter of 2019, it reached 4.6 percent year on year. Yet the Ukrainian economy is still too dependent on exports and global prices for raw materials to achieve the long-term, stable growth rates that Zelensky’s team has promised.
Because of the trade war between the United States and China, the metals and iron ore markets are seeing a downturn, and these are Ukrainian industry’s main exports. If there should also be a slump in grain prices—another key Ukrainian export—it will have a negative impact on both GDP and on the national currency. For now, the government has been able to shore up the hryvnia, which at least protects Ukrainians from price hikes on imported goods.
A major problem remains the country’s large foreign debt. This year represents a peak in repayments, and in 2020, nearly a third of budget spending will go toward debt repayment. There is for now no alternative to external borrowing, however, and the government is preparing to pass a new borrowing program from the IMF for $5 to $10 billion over a three- to four-year period. So far, negotiations are not going well with the IMF, which requires Ukraine to step up the fight against corruption and implement judicial reform, as well as launch large-scale privatizations and open up the country’s land market.
Large-scale privatization isn’t just an IMF requirement; it was also one of Zelensky’s campaign pledges. The Ukrainian state is not the most efficient owner, and state companies are a source of corruption. The first tenders—of a range of regional energy companies, as well as chemical and machine-building enterprises, among others—are due to be held in the spring of 2020. The government expects to make up to half a billion dollars from the privatization program, though previous attempts at privatization in the country show that the process will not be an easy one.
Potential foreign buyers of Ukrainian assets include China, which this year overtook Russia to become Ukraine’s main foreign trade partner. Increased Chinese interest in the Ukrainian economy may seem to offer great potential, but it could also complicate Ukraine’s relationship with the United States, which is keen to contain its main rival. The United States has already made it clear that it did not approve of plans to sell a controlling stake in Ukraine’s Motor Sich airplane engine plant to two Chinese companies earlier this year (the deal was in any case blocked by Ukraine’s security services and anti-monopoly committee as harming Ukraine’s security interests). The battle for control of the plant continues, with reported interest from the founder of the U.S. private military company Blackwater, Erik Prince, who is also an adviser to U.S. President Donald Trump.
The long-awaited opening up of the Ukrainian land market looks set to be no less complicated. Zelensky has ordered a moratorium on selling agricultural land that has been in place since 2001 to be repealed by the end of this year. Experts from the Kyiv School of Economics estimate the sale of land could bring in $22.5 billion, which would raise growth rates to the level promised by Honcharuk. But the move comes with a hefty political price tag. Nearly half (49.1 percent) of people living in Ukraine have a negative attitude to the prospect of unrestricted land sale, according to a poll carried out by the Razumkov Center. Given Ukraine’s endemic corruption, people are scared that the authorities will turn a blind eye to transnational companies and local magnates buying up land for a song, while Ukrainian farmers will lose out.
Zelensky maintains that only residents of Ukraine—both individuals and legal entities—will have the right to own land, and insists that no one will be able to own more than 15 percent of one region or 0.5 percent of Ukrainian land, while farmers will get compensation in the form of low-interest loans. But land sale is a highly sensitive issue, and any wrong move here could damage Zelensky’s popularity. Opposition parties across the spectrum are already trying to take advantage of these fears, and have spoken out again the sale of land.
Zelensky’s team also hopes to attract foreign investors, yet despite simplified procedures for doing business and protections for minority shareholders, foreign investors are not exactly rushing to Ukraine. In the first half of 2019, the volume of foreign direct investment was about $1.3 billion, and for the whole of 2018 it was $2.4 billion. That is currently far behind the contribution made to Ukraine’s economy by its biggest benefactors: nationals working abroad and sending money home. According to Economic Development Ministry calculations, this year they will have transferred home a total of $12 billion (up $1 billion from last year).
Another factor to be taken into account is the gas agreement between Ukraine and Russia, a long-running source of contention that must be renewed when it expires on December 31, 2019. Since the Nord Stream 2 pipeline that will bypass Ukraine is not yet complete, Moscow still relies on Ukraine’s gas transit system to deliver gas to Europe: an arrangement under which Ukraine makes an annual profit of $3 billion. Currently, negotiations are at a standstill over a shortfall in Russian deliveries.
Ukraine’s energy minister has said that the country currently has record volumes of gas in its storage facilities—enough to heat homes throughout the winter without Russian gas—and is ready to stop transporting Russian gas from January 1, 2020. Ukraine’s central bank is less optimistic, and estimates the cost of ending the transit at 0.6 percent of Ukraine’s GDP in 2020 and 0.9 percent in 2021.
While attempting to deregulate the economy, Zelensky’s team is also trying to fulfill its pledges to increase salaries and pensions. The government has said it expects the average monthly salary to increase by 50 percent by 2022, to about 16,000 hryvnia ($650). Whether or not this is realistic, the problem of low salaries certainly requires urgent measures to stem the steady flow of labor resources out of Ukraine. In neighboring Poland, the most popular labor market for Ukrainians, the minimum wage in 2020 is planned to be about 600 euros ($662).
As for pensions, the prospects for their growth are unclear. Next year, the basic pension is set to increase by just 8 percent, to about $70 a month—if the hryvnia exchange rate doesn’t change drastically. Zelensky’s government will also have to find the money to increase salaries and benefits payments to soldiers, both active and retired, and to police officers, whose loyalty is essential in the event of possible political instability. Police and National Guard salaries are set to rise by 10 percent.
Zelensky’s economic path has turned out to be as contradictory as his political path. Various promises ranging from libertarian reforms to classic social populism are hindering the implementation of any meaningful policy, and many pipe dreams have already had to be abandoned, such as the “Country in a Smartphone” program, a large-scale digitalization initiative.
The government is maneuvering to strike a balance and prevent various public grievances from coalescing. Zelensky has already reached a difficult choice: he can only implement his promises to “reboot” Ukraine through unpopular reforms that could cost him his sky-high approval ratings. Alternatively, he could continue to rely on improvisation and luck over meaningful policy.
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