Staunton, September 11 – The spate of bad economic news in Russia has led Moscow to try again what it has done so often in the past: tell Russians that no matter how bad things are in their country, the situation in the “non-existent state” of Ukraine is worse. But now, Moscow has a problem: the situation in Ukraine isn’t worse but better, Vladislav Inozemtsev says.
Despite all the problems economic and otherwise Ukraine faces, the Moscow economist says, in the second quarter of this year, Ukraine had the highest rate of GDP growth in the last three years (4.6 percent), salaries rose 10 percent, capital investment 17.8 percent, and construction 21.2 percent (echo.msk.ru/blog/v_inozemcev/2499311-echo/).
The Ukrainian government argues that the main drivers of this acceleration were expanded agricultural production and retail trade growth in the first half of the year, Inozemtsev says. But those developments “have their own causes,” and they are far from the only things going on that are boosting the Ukrainian economy.
In part, he continues, the large percentage increases reflect the low base from which Ukraine started given the fall in real incomes over the last four years and the weakening of the national currency. But in the last year, he says, “the trend has changed.” Openness to Europe has allowed Ukrainians to work abroad, increasing competition at home, and boosting confidence.
Obviously, the growth in Ukraine’s GDP from 2015 to 2019, from 90.6 billion US dollars to 131 billion, is in large measure a recovery and won’t be “eternal, but it must not be underrated” as Russian commentators often do. And there are several other circumstances that lay the foundation for optimism about the future.
“Cooperation with the US has become a major boon for Ukraine,” he continues. Over the last four years, EU investment has helped open “more than 200 industrial enterprises;” exports to the EU have risen more than 30 percent since 2015; and even the liberalization of the visa regime has helped promote economic growth.
Also helping Ukraine to grow economically is that its system is still oligarchic but it is competitive. That is, various oligarchic groups are represented in the government, but they have to compete with each other, unlike in Russia where competition is usually suppressed, something that “kills the investment climate.”
Moreover, and in contrast to Russia, Ukraine has “a quite effective judicial system, the rights of investors (especially foreign ones) are respected, and entrepreneurialism is not, unlike in Russia, a criminally punishable phenomenon. Even state companies there to a much greater degree than in Russia act like commercial organizations and not like government agencies.”
“All this lays the foundation for the maintenance of positive macro-economic trends,” Inozemtsev says.
Moreover, not only have government and police raiding of businesses fallen, but there is hope that with the coming to power of a new regime taxes will be reduced and bureaucracy will be cut back. And the new regime may gain statistical growth if it is able to shift more of the Ukrainian economy out of the gray zone.
At present, approximately 30 percent of GDP is in the gray zone. If the government can reduce that by several percent, it will see reported GDP go up by a similar amount. While that reflects bookkeeping rather than production, it will by itself give more people confidence in the economy and thus contribute to real growth.
“Undoubtedly,” Inozemtsev concludes, “Ukraine remains in many ways a country with many problems … but the direction of the development of the Ukrainian economy toward liberalization, openness to the outside work and the encouragement of competition leaves no doubt and therefore, as in 2004, one can say ‘Ukraine isn’t Russia.’”
“Neither in a political nor in an economic sense.”