1. Ukraine’s Economic Transformation: Radical But Not Complete
Anders Åslund, Senior Fellow
Atlantic Council, Washington, D.C
January 2017

2. What Went Wrong No sharp break with the Soviet system
As a consequence, pervasive corruption evolved

3. The Problem:
No economic policy led to hyperinflation
Rent seeking took over & small rent-seeking elite persists

4. Three Reform Waves 1994-5: Financial stabilization
2000: Deregulation led to economic growth
: Greatest reforms

5. GDP per capita, PPP, 1990 and 2013

7. Ukraine is an Outlier
As corrupt as most post-Soviet countries
But free & very open
EU integration can combat corruption

9. What Was Wrong with Yanukovych’s Policy
Pegged overvalued exchange rate caused current account deficit
Rising budget deficit
Big energy subsidies
Predatory corruption

10. Cost of Russian Aggression
GDP fell by 7% in 2014 & 10% in 2015
Output fall in occupied Donbas: 7% of GDP + losses in Ukrainian-held area
Eliminated trade w Russia: 28% of trade from
FDI eliminated: 4% of GDP/year

11. Reform Achievements Political Reform Energy Reform
Current Account Balance
Financial Stabilization
Transparency & Deregulation

12. Fix Politics First! Presidential elections, May 25, 2014
Parliamentary elections, Oct 26, 2014
New government of young, well-educated outsiders, Dec 2, 2014
Reform program, Dec 9, 2014

13. Energy Reform Unified energy prices: Consumption -20%
Abolished all energy subsidies: 8% of GDP
Provided social cash compensation
Stopped buying gas from Russia Nov 2015
Improved corporate governance
Legislation on markets for all gas & electricity
Missing: Stimulation of private energy production- coming now?

14. Foreign Account
Floating exchange rate: Depreciation from UHA8/$1 end 2013 to UHA27/$1 now
Current account deficit from 9% of GDP in 2013 to balance in 2015
International reserves: from $5bn Feb 2015 to $15bn December 2016

15. Current Account Balance -9% of GDP in 2013, but 0 in 2015
Source: IMF World Economic Outlook, October 2016; World Bank Database

16. International Reserves: From $5bn (Feb 2015) to $15bn (Dec 2016)
Billions of US Dollars
Source: IMF, International Financial Statistics 2014; Central Bank of Ukraine

17. Hryvnia Devalued from UHA 8 to 27/$1 Exchange Rate Stabilizing
Source:

18. Financial Stability IMF program: March 11, 2015, $7.7bn disbursed
Fiscal Adjustment: reduced public expenditures from 50% of GDP 2014 to 44% of GDP 2015
Budget deficit from 10% of GDP to 2.1% of GDP
Public debt reduced from $73bn 2013 to $71bn end 2016
Debt restructuring: postponed $15bn in debt service until 2020
Major tax reform: cut payroll tax from 45% to 22%
Half of 180 banks closed; owners revealed

19. Budget Deficit (with Naftogaz):
2.1% of GDP in 2015 (down from 10% in 2014)
Source: : IMF World Economic Outlook, April 2014; : JP Morgan's EMEA July 8, Emerging Markets Report.
Note: I use JP Morgan statistics for because the IMF WEO statistics do not include the Naftogaz deficit : Dragon Capital Ukrainian Economy: 2017 Budget Draft, October 2016

20. Public Debt Stopped at 80% of GDP after Devaluation
Source: : IMF Database; : Dragon Capital Ukrainian Economy, 2017 Budget Draft: A Modest Step Forward, October 2016

21. Ukraine’s Inflation: Up with Devaluation & Tariff Rises to 61% April ‘15; 12.4% Dec ‘16
Source: Dragon Capital Ukrainian Economy, 2017 Budget Draft: A Modest Step Forward, October 2016

22. Next Key Reforms Judicial Reform: Prosecution & Courts
Privatization: 3,800 state enterprises remain. Sell off the easy ones first!
Civil Service Reform: Raise salaries!
Land Reform: Allow private sales!
Pension Reform: Cost cut from 17% of GDP to 11% of GDP, but system must change

23. Europe: Reform Anchor Political & legal standards
Market access: EU 16% of exports in DCFTA: 39% in H1 2016
But 36 quotas for main export items
Financial assistance: Little
Visa freedom key Ukrainian desire

24. Three Growth Sectors Agriculture & food processing
Hi-tech: Computer programming 3.3% of GDP
Future: Integration into European supply chain with manufacturing & services
Note: Polish salaries are 5-6 times higher than Ukraine’s

25. Ukraine Needs Investment Funding
Ukraine’s investment ratio: only 15% of GDP in 2015
FDI used to be $6bn/year – now 0 apart from bank recapitalization because of Russian aggression
Reasonable: United West ought to provide $5bn a year in investment credits

26. Big Questions Have Ukraine’s reforms become irreversible? Probably
Will reforms proceed? Yes but probably more slowly
Is Ukraine getting enough financial assistance? No
Enough market access? Hardly
Will growth be 2-3% a year or 6-8% a year?