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3 June, 2013

Yanukovych’s presidency is essentially finished in terms of reforms. It is now a matter of muddling through and survival

Swedish economist and a senior fellow at the Washington-based Peterson Institute for International Economics, Andres Aslund believes that the time of financial crisis is the best time for Ukraine to implement economic reforms.

Scandinavian states did this in the early 1990s. Eventually, they grew into some of the most developed and socially-oriented countries in the world. However, the Yankovych regime has exhausted its potential for reforms, Mr. Aslund suggests. At his lecture at the Shevchenko University in Kyiv arranged by the Embassies of Sweden and Switzerland* and The Ukrainian Week, Mr. Aslund shared his solutions to the problems of Ukrainian economy.

UW: Ukrainian economy is growing less and less competitive, and Ukraine is losing financial stability. Meanwhile, the government prefers Soviet command tools to control the situation. What are the biggest challenges for Ukraine’s economy today?

If you take the general challenges, corruption is the biggest one. The current system is working for the enrichment of the narrow elite rather than the country. More specifically, we now see economic stagnation and any growth is unlikely. In this situation, Ukraine risks facing a new economic crisis. The fundamental problem is that Ukraine has high current account deficit. It was 8% of GDP last year, and will probably be the same this year; limited reserves at barely USD 25bn, and that is falling, and pegged exchange rate. So, Ukraine can experience steep domestic devaluation because its currency market is totally illiquid. The government’s response to this has been through very high interest rates which, on the one hand, keep money in the country and inflation down, while minimizing investment on the other hand. Another tool is increasing currency regulation. This results in the currency market drying up. There are two weaknesses in this situation. One is that Ukraine may be hit by an external shock. The price of steel, an important element of Ukraine’s exports, can fall sharply. This is quite likely to happen. The other is that bond yields, now 7.5%, can soar because Ukraine has no confidence in the market. Then, Ukraine will lose its reserves more quickly and can eventually end up in a financial crisis. This looks pretty bad and nobody expects any reforms now. Yanukovych’s presidency is essentially finished in terms of reforms. It is now a matter of muddling through and survival. And the government’s only goal is to stay in power – it has no higher goals.

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UW: How could the signing of the Association Agreement and FTA in November change this?

This is a very important agreement. It is also a big one, comprised of one thousand pages, and it took four years to negotiate. If signed, it would give Ukraine four big things. One is the access to a vast European market for Ukraine, and that is what got Eastern European countries that joined the EU lately going. Secondly, it entails many legislative changes to adopt the good parts of the common European legislation. This would really transform Ukrainian state institutions. The third aspect of the package is substantial assistance, particularly in terms of the state reform. The fourth element is extensive education exchange allowing tens of thousands of Ukrainians to study at the EU universities. This could really become the pivot that could change Ukraine. The only reason to say no to this is that President Yanukovych prefers to keep Yulia Tymoshenko in prison. As long as he insists on that, the EU will hardly sign the Association Agreement.

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UW: How has Ukraine’s oligarch system transformed after the Family rose? How competitive is this model in the current economic environment?

The oligarchy is a consequence of late liberalization of foreign trade that offered extraordinary privileges in the foreign trade with gas and steel to just a few people. Ideally, an oligarchy should include more and more big businessmen until it becomes a normal market economy and democracy. However, an opposite trend was first seen in Russia, and is now seen in Ukraine. More and more power and assets are consolidated in the hands of the ruling families who do not want to share them.

If we compare the situation in Ukraine and Russia under President Putin today, we can see that the concentration of power and property in the hands of the ruling family is moving much faster in Ukraine compared to Russia. It appears that Ukraine’s President is ousting disloyal oligarchs one after another, and we see them leaving the country. The former oligarchic model is going. Yankovych's capitalism in one family is reminiscent of what Karl Marx called oriental despotism, only that his power is too limited for that as yet. It is outright retrograde, with a severe destruction of rule of law and property rights. Institutionally Ukraine seems to have reversed to 1993.

We see that national wealth is concentrated in one hands, and those who are on friendlier terms with the government pay less taxes. Privatization was very selective with most economically attractive objects privatized at peanuts. Corruption has flooded many sectors of the national economy.

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UW: Are the oligarchs close to the government interested in the signing of the Association Agreement and FTA? Don’t these documents contradict their “rules” in doing business?

This has two sides to it. In the short-term prospect, they are interested in getting more assets. However, they are also interested in obtaining market access. These two goals contradict each other.

UW: What could Ukraine borrow from the Nordic economic model?

This first thing to learn is the experience of state institutions. Nordic countries do not have the problem of corruption, their state institutions function effectively. But if you go down to details, Ukraine could learn much from their deregulation, privatization, pension reform, public service reform, and more. The EU would also have a very positive impact on reforms in Ukraine.

BIO

Andres Aslund is a senior fellow at the Washington-based Peterson Institute for International Economics focusing on market reforms and post-communist transformations in Ukraine, Russia and other Eastern European countries. He was the founding director of the Stockholm Institute of East European Economic. In the 1990s, Mr. Aslund served as economic advisor for the governments of Russia, Ukraine and Kyrgyzstan, and as Swedish diplomat in Kuwait, Poland, Switzerland and Russia. He wrote a number of books, including The Last Shall Be the First: The East European Financial Crisis in 2010, How Ukraine Became a Market Economy and Democracy in 2009, Russia's Capitalist Revolution: Why Market Reform Succeeded and Democracy Failed in 2007, Building Capitalism: The Transformation of the Former Soviet Bloc in 2001 and more.

*Correction: Mr. Aslund's interview published in the print edition does not mention the Embassy of Switzerland as one of the organizers of his lecture at the Shevchenko University. In fact, it was jointly arranged by the Embassies of Sweden and Switzerland, and The Ukrainian Week.


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