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World > Europe > Ukraine > Economy (Notes)

Ukraine - Economy (Notes)


ECONOMY
With rich farmlands, a well-developed industrial base, highly trained labor, and a good education system, Ukraine has the potential to become a major European economy. After eight straight years of sharp economic decline from the early to late 1990s, the standard of living for most citizens declined more than 50%, leading to widespread poverty. Beginning in 2000 economic growth has averaged 7.4% per year, reaching 12.1% in 2004 and 7.0% in 2006. Personal incomes are rising. The macro economy is stable, with the hyperinflation of the early post-Soviet period now reduced to just over 11.6% (2006). Ukraine's currency, the hryvnia, was introduced in September 1996 and has remained stable despite a small nominal appreciation in April 2005. While economic growth continues, Ukraine's long-term economic prospects depend on acceleration of market reforms. The economy remains burdened by excessive government regulation, corruption, and lack of law enforcement, and while the government has taken steps against corruption and small and medium enterprises have been largely privatized, much remains to be done to restructure and privatize key sectors such as energy and telecommunications and to allow the free sale of farmland.

Ukraine is rich in natural resources. It has a major ferrous metal industry, producing cast iron, steel, and steel pipe, and its chemical industry produces coke, mineral fertilizers, and sulfuric acid. Manufactured goods include airplanes, turbines, metallurgical equipment, diesel locomotives, and tractors. It also is a major producer of grain, sunflower seeds, and sugar and has a broad industrial base, including much of the former U.S.S.R.'s space and rocket industry. Although proven onshore and offshore oil and natural gas reserves are small, it has important energy sources, such as coal, and large mineral deposits, and is one of the world's leading energy transit countries, providing transportation of Russian and Caspian oil and gas across its territory.

Ukraine encourages foreign trade and investment. The foreign investment law allows Westerners to purchase businesses and property, to repatriate revenue and profits, and to receive compensation in the event that property were to be nationalized by a future government. However, complex laws and regulations, poor corporate governance, weak enforcement of contract law by courts and particularly corruption have discouraged broad foreign direct investment in Ukraine. While there is a functioning stock market, the lack of protection for minority shareholder rights severely restricts portfolio investment activities. Total foreign direct investment in Ukraine was approximately $21.2 billion as of January 1, 2007. At $447 per capita, this was one of the lowest figures in the region.

While countries of the former Soviet Union remain important trading partners, especially Russia and Turkmenistan for energy imports, Ukraine?s trade is becoming more diversified. Europe is now the destination of over one third of Ukraine's exports, while around one quarter of Ukraine's exports go to Russia and the CIS. Exports of machinery and machine tools are on the rise relative to steel, which constitutes over 30% of exports. Ukraine imports over 80% of its oil and 73% of its natural gas. Russia ranks as Ukraine's principal supplier of oil and Russian firms now own and/or operate the majority of Ukraine's refining capacity. Natural gas imports come from Russia and Turkmenistan, which deliver the gas through a pipeline system owned and controlled by Gazprom, Russia's state-owned gas monopoly. In 2005 and 2006, Ukraine switched from barter to cash payments for gas imports. Ukraine controls the gas pipelines on its territory that are also used to transit Russian gas to Western Europe. The complex relationship between supplier, transporter, and consumer has led to some tensions, including Russia's decision to cut off gas supplies for three days in January 2006.

The Government of Ukraine's 12-month $605 million precautionary standby agreement with the International Monetary Fund (IMF) expired in March 2005, and Ukraine currently does not receive IMF financing. In Article IV Consultations, the IMF recommends fiscal discipline and structural reforms, particularly of Ukraine's pension system. In July 2005, the World Bank approved a $250 million Development Policy Loan (formerly a Programmatic Adjustment Loan) to support reforms to improve the investment climate, public administration and financial management, and social inclusion. European Bank for Reconstruction and Development (EBRD) project outlays more than doubled in 2005 to 530 million Euros, bringing its portfolio to 2.2 billion Euros.

In 1992, Ukraine became a member of the International Monetary Fund and the World Bank. It is a member of the EBRD but not a member of the World Trade Organization (WTO). Ukraine applied for membership in the WTO in 1995. Progress on its application had been slow but picked up momentum in 2006. The government has made accession to the WTO a priority in 2007.

Environmental Issues
Ukraine is interested in cooperating on regional environmental issues. Conservation of natural resources is a stated high priority, although implementation suffers from a lack of financial resources. Ukraine established its first nature preserve, Askania-Nova, in 1921 and has a program to breed endangered species.

Ukraine has significant environmental problems, especially those resulting from the Chornobyl nuclear power plant disaster in 1986 and from industrial pollution. In accordance with its agreement with the G7 and European Commission in 1995, Ukraine permanently closed the Chornobyl Nuclear Power Plant in December of 2000. Urgent measures for radiation and worker safety as well as structural improvements to the 'sarcophagus' erected by the Soviet Union are largely complete, and the contract for construction of the new shelter to be built around the sarcophagus is expected to be awarded in 2007.

Ukraine also has established a Ministry of Environment and has introduced a pollution fee system, which levies taxes on air and water emissions and solid waste disposal. The resulting revenues are channeled to environmental protection activities, but enforcement of this pollution fee system is lax. Ukraine ratified the Kyoto Protocol in April 2004.

Construction of a shipping canal through a UN-protected core biosphere reserve in the Danube Delta, which began in May 2004, is an environmental issue of international interest.


Facts at a Glance: Geography - People - Government - Economy - Communications - Transportation - Military - Climate - Current Time - Ranking Positions - Ukraine Hryvnia Exchange Rates
Notes and Commentary: People - Economy - Government and Political Conditions - Historical Highlights - Foreign Relations - Relations with U.S.



Facts at a Glance
Geography
People
Government
Economy
Communications
Transportation
Military
Climate
Current Time
Ranking Positions
Ukraine Hryvnia Exchange Rates


Notes and Commentary
People
Economy
Government and Political Conditions
Historical Highlights
Foreign Relations
Relations with U.S.





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