Fall/Winter 2014
Number 27

Dispatches - Ukraine’s New Promise

George Logush

KYIV—As paradoxical as it may sound, the situation in Ukraine is better than it has been for some time. Better not only since the turmoil began in November of 2013, and the subsequent start of the Russo-Ukrainian war with the occupation of Crimea at the end of February in 2014, but also better since the ascendancy of the pro-Kremlin regime of Viktor Yanukovych. Perhaps also, one may risk saying, better than at any time since the country gained independence in 1991.

With the combined impact of Western sanctions and the collapse of petroleum prices, the Russian Federation has blinked in its confrontation with Ukraine and the West, and Ukraine is inching toward quiet on the eastern front. The latest cease-fire is holding better than the previous one, and the Kremlin has not dared to launch its offensive to secure the overland route to the beleaguered and isolated Crimean peninsula, where the population’s unrest appears to be mounting. Nor is there any movement, or even feint, to capture the Ukrainian Black Sea coast between Transdniester and the land bridge to Crimea, in part perhaps because of the disappointing outcome (for Russia) of the Moldovan election.

Russia has apparently seriously miscalculated in its Ukraine strategy. It forgot that an entirely new generation of Ukrainians has emerged during the period of independence, progressively more assertive and self-assured as a result of three Maidans (1990, 2004, and 2014). This is not the Ukraine of the Soviet era, or even that of the end of the czarist period. The carefully executed destruction of the country’s military capability during the Yanukovych presidency was unexpectedly offset by the same civil society activism that produced the most recent uprising. Ordinary citizens displayed extraordinary tenacity and courage on the streets of Kyiv, took up arms, rushed to the Donbas, and stopped the Russian advance—actions somewhat reminiscent of the Kozak self-defense phenomenon of the 16th and 17th centuries. This allowed the armed forces to regroup and, together with civilian battalions, to push back the amalgam of separatists, Russian “volunteers,” and regular army units. As a result, Ukraine may now be closer to peace than at any time since the warfare began. And Western support has been bolstered by the results of the mid-term elections in the U.S., and a growing sentiment in favor of supporting Ukraine on Capitol Hill.

Of course, challenges remain. The Ukrainian economy is in difficulty, but the magnitude of the downturn is within the bounds of three previous post-Soviet economic crises in Ukraine—crises that Kyiv weathered successfully. Ukrainians are inured to hardships; in the first post-independence depression, GDP had dropped by approximately 70 percent by 1997 and 15 percent in the post 2008 recession. The current GDP decline of 7 percent for 2014 is smaller and largely localized to the Donbas region. In glaring surrealism, Kyiv suffers from traffic jams and packed restaurants and entertainment venues. Soldiers and volunteers returning from the front are stunned by the contrast with the violence, death and destruction of the front lines and in occupied Donbas.

Devaluation is repeating the pattern of the post-1998 and post-2008 periods, running at about 100 percent, and nowhere near the 100,000-fold devaluation of 1992-1995. While there is concern about potential default, international support of Ukraine is stronger than at any time in the past, and the international community appears to be intent on preventing a catastrophic scenario. True, inflation is running at about 20 percent and banks are underwater, serious obstacles to stabilizing the decline and ultimate recovery. But, on the positive side of the ledger, we have witnessed the end to the plutocracy that has been in the ascendancy since the early 1990s, and a fresh start for the economy.

The key to economic recovery is the completion of the transition and transformation of the centrally planned economy to a reformed market economy. Early transformational reforms of the 1990s, with a few fits and starts, had stalled and then regressed between 2010 and 2013. The pro-European revolution of last year had a strong reformist vector, much more powerful than that of 2004. The new Rada now has a constitutional majority coalition of reform-minded forces of the Maidan. To avoid conflict, the parties hammered out a coalition agreement and approved a new government of young new faces with an admixture of quickly naturalized foreign nationals for the Finance, Economics, and Health portfolios. The first-stage reform agenda of the government has been approved by the Rada, the 2015 budget is being prepared, and new reform legislation is to follow. The reform plan is to include horizontal economy-wide and vertical sectorial reforms. Planned reforms will cut across all sectors and industries, and are intended to liberate long-constrained drivers of the economy.

On the diplomatic and political fronts, Prime Minister Arseniy Yatsenyuk and President Petro Porshenko have been very skillful in building Western support. This has been effective in marshaling sanctions against Russia, mobilizing Western financial support, and nurturing Western expectations of radical economic and political reforms. If political unity is preserved, the combined forces of a hyperactive civil society and determined business community will drive the Ukrainian government and parliament along the road to reform.

In short, if all goes as hoped, Ukraine may soon be open to the world for business and moving more assertively into world markets. Ukraine, and conservative inward- and eastward-looking Ukrainian business, need to quickly adapt to the enormous opportunities offered by the Deep and Comprehensive Free Trade Agreement (and Association Agreement) with the European Union, and by other world markets beyond the restrictive Russian one to which Ukraine has been tethered for so long.

If they do, a new, reformed Ukraine could become the best investment opportunity in Europe. The world is supportive. It is now all up to the Ukrainians.

Dr. Logush is President of the Kyiv School of Economics, the Graduate School of Economics and Management in Kyiv, Ukraine, and of the international Economics Education and Research Consortium.