Ukraine: turning challenges into opportunities


Jose Manuel Barroso, President of the European Commission (left) & Arseni Yatseniuk, Interim Prime Minister of Ukraine (right), (EC Audiovisual Services)

Last Friday Ukraine and the EU signed the political part of the Association Agreement. Although deliberately diminished in Europe, the significance of this event is unquestionable for Ukraine and its government ad interim. 

Political association is taken in Kiev as a sign of European acknowledgment and recognition at a time of continuing threats from Russia.

The economic part of the EU – Ukrainian Association remains under negotiation, but it is expected to be signed by the end of this year. The Parties are discussing the terms and conditions as well as the accompanying economic reforms package, necessary for a smooth integration. In the meanwhile Ukraine is expected to benefit from financial aid coming from major world powers, all wanting to see the country’s economy reformed and reloaded.

Economic Aid for Sustainable Development

In the West democracy and economic development walk hand in hand. Emergency financial assistance has been proposed by the US, the EU and Japan, who have offered to boost Ukraine’s economy with USD 1 billion, EUR 1.6 billion and USD 1.6 billion respectively.

The EU is also open to negotiate a EUR 15 billion financial aid package with the Ukrainian Government. In this respect the European Investment Bank and the European Bank of Reconstruction and Development shall commit to EUR 8 billion. A further EUR 3 billion shall be placed in the form of macro-financial assistance loans and grants from the EU budget. And another EUR 3 billion shall be raised through the Neighborhood Investment Facility.

Open Ukraine

In response to Russia’s blockade of Ukrainian export, the EU has unilaterally lifted tariffs and duties for Ukrainian agricultural and industrial produce. This change in trade restriction may result in an additional EUR 500 million for the Ukrainian economy.

In a similar gesture towards Ukraine and with the aim to end Russia’s energy monopoly in the region, the US are deliberately lifting the embargo on Iranian oil earlier than expected. Availability of cheaper oil shall buy independence from the Russian energy diktat for both Ukraine and Europe.

Responsibility to Reform

The unprecedented immediate financial assistance and long-term pledges come at a price. The newly appointed government undertakes to implement radical economic reforms in the shortest possible terms. A step seen by many as political suicide. 

On the other hand austerity and anti-corruption mechanisms are the only cure for a country, which has been the victim of non-systemic unprofessional rulers for such a long time.

 As a first step, the IMF demands the establishment of a flexible rate of the Ukrainian hryvnia. This shall allow to save what is left from the gold reserves and keep a relative currency balance in Ukraine.

The second priority takes the form of energy reform. A crucial increase of the efficiency of the energy sector is needed to ensure its modernization. One way of doing this is through the increase of the retail price of energy resourses. 

Furthermore, the issue of energy security is bound to take center stage not only in Ukraine, but also in EU countries exporting Russian gas and oil.

The solution lies in the development of renewable energy. So far Ukraine’s alternative energy potential has been slowed down by the preferential local content requirement, which meant low feasibility for any foreign investor. Under the current circumstances the international energy community is hoping to see this rule waived.

 The third point in the reforms list concerns tax, customs and business administration. It is likely that we see a simplified and transparent tax system alongside a user-friendly business registration procedure.

The Youth of Tomorrow Working with the Government of Today

Once in power, many of the ministers have made ambitious claims that Ukraine will soon become an economic miracle like Georgia, Poland and even Singapore. And for once more this can easily become more than wishful thinking.

 For the first time in history the government is not afraid of neither new ideas nor new people, encouraging the participation of young professionals in legislative initiatives and reforms. So far more than 1.500 Ukrainians, holding degrees from the 100 top ranked universities in the world offered to act as government consultants, form think tanks and work pro-bono to shape a new Ukraine. Such local input in combination with international experts’ opinions and strategies is bound to get the country on the track of success.

What Does It All Mean to Russia?

Russian military intervention in the Crimea has been qualified by the international community as aggression. Most experts agree that Russia has breached the basic principles of international law and should now face sanctions. Consequently, the US and the EU have published lists of Russian officials who are not eligible for entry visas and whose assets are placed under arrest. With the Russian economy going down along with global oil prices and with nowhere to run, there is hope that these sanctions may actually prove effective.

Yet the banking and finance sector is suffering the hardest blow in this situation. Visa and MasterCard, both US-based companies, are prohibited from dealing with anyone targeted by the sanctions. As a result, fifteen Russian banks have been downgraded in their credit ratings, while banks, which are supposedly close to the Russian government, are to be “frozen away” from the dollar.

The military intervention itself brings indirect losses to the Russian economy. Since the beginning of 2014 the Rouble has declined by almost 10%, the Moscow Interbank Currency Exchange, or MICEX index, fell more than 14%, with the investment inflow consolidating at USD 6 billion according to S&P data. Subsequently the country’s credit rating has been downgraded to negative and unfavourable growth forecasts are given for the rest of the year. This bring the lending price significantly up for Russian banks, which means that investors are unlikely to participate in any ventures in Russia. 

With a spoiled reputation as an unreliable partner and aggressor, it may take Russia a while to recover its reputation, causing its economy to fall into a systematic, long-lasting recession.

And of course it will be the simple people who will pay the heaviest price. A decrease in an already low standard of living and additional burdens on the lay taxpayer in the form of Crimea are just some of the difficulties in store.

Carpe Diem Ukraine

In contrast to its Northern neighbour, a bright future holds many opportunities for Ukraine. 

The internal threats and injustice have taught the people to stand up for European values. The external threats have consolidated the society and given the government an incentive to act fast in implementing the oh-so-necessary economic reforms. 

At present Ukraine has a unique chance of becoming a role model country, where the state is controlled by civil society and change is brought from the bottom up. However, turning challenges into opportunities is an art Ukraine will have to master very fast if it wants to survive and grow, and not let the sacrifices made at the EuroMaidan Revolution go to waste.