Russia's Younger Brother

Ukraine's long-predicted economic revival is at hand. After a long hiatus, both the International Monetary Fund and the World Bank are expected to make new commitments in their forthcoming visits in June or July. Finance Minister Mykola Azarov is hoping for $600 to 800 million in fresh funds. Debt repayments amount to $1.6 billion this year and the next. Ukraine is even considering a bond issue.

Concurrently, NATO will be holding in the country a massive one week long military exercise under the aegis of the "Partnership for Peace" - its collaborative program with the countries of East and Southeast Europe. It will involve army units from Armenia, Austria, Azerbaijan, Bulgaria, Germany, Georgia, Italy, Canada, Kyrgyzstan, Lithuania, Moldova, Norway, Poland, Romania, France, Ukraine, Uzbekistan and the United States.

The USA just cancelled financial sanctions it had earlier imposed on Ukraine on the recommendation of the Financial Action Task Force. Ukraine is no longer a center of money laundering, said the international watchdog. It may be removed from the agency's blacklist by yearend and is planning to join the EGMONT group of the financial intelligence units of 69 countries.

There are other signs of thawing. A 16-month ban on $11 million in U.S. poultry imports was terminated last week with the signing of a revised veterinary certificate protocol. Ukrainian officials are holding talks with their European Union counterparts to integrate the two space programs. Ukraine has expertise in launch vehicles, satellites and payloads. And Volkswagen inked a letter of intent regarding the assembly of its Passat, Golf, Bora and Polo models in Ukraine.

According to Radio Free Europe/Radio Liberty, last month, the EU offered Russia, Ukraine, and Moldova - its future neighbors following enlargement - "preferential trade terms, expanded transport, energy, and telecommunication links, and the possibility of visa-free travel to the EU." The door to future accession was left ajar, though the inclusion of North African nations in the "New Neighborhood Policy" bodes ill for Ukraine's future membership.

Long-stalled negotiations between Ukraine and the European Bank for Reconstruction and Development over the $215 million financing of two much-disputed nuclear power plants to replace the smoldering Chernobyl reactor have mysteriously restarted last week. The Bank's President, Jean Lemierre, promised positive results by summer - despite environmental concerns and studies, financed by the EBRD itself, which cast in doubt the project's feasibility.

Quoted by Interfax-Ukraine, Foreign Ministry spokesman Markijan Lubkivskyy, announced last Tuesday, that "the U.S. may subcontract Ukrainian companies (for postwar reconstruction in Iraq), particularly those that have experience in working with firms in the Persian Gulf."

There are good news from the East as well.

Turkmenistan and Russia proposed to Ukraine - a major gas importer - a tripartite 25 year agreement to exploit and export Turkmen natural gas with prices frozen throughout at current levels, well below the market. In return, Ukraine is supposed to co-finance the construction of a $1 billion, 1070 kilometer long, 30 to 40 billion cubic meters a year, pipeline, mostly on Kazakh territory, along the shores of the energy-rich Caspian Sea.

Inevitably, not all is rosy.

In contravention of all prior measures of liberalization, President Leonid Kuchma intends to administratively halve grain exports to 1 million tons a month, due to a weak harvest in the first quarter of this year and rising domestic grain prices. The Crimean agricultural ministry announced that one is seven hectares of winter crops - mostly barley - are lost due to the harsh weather.

This is half the average ratio in other parts of Ukraine. According to AgWeb.com, "the country's milling wheat crop (this year) may be only 10 million metric tons to 12 MMT, down sharply from 22 MMT in 2002 and 26 MMT in 2001." Domestic consumption, at 7 million tons, now equals inventories.

The country - formerly Europe's breadbasket - lacks modern infrastructure and grain storage facilities. Its extempore export policy is muddled. Agricultural imports are surging. Ukraine bought 70,000 tons of - mainly Brazilian - sugar in February alone.

In the worst of Stalinist traditions, the former Deputy Prime Minister for Agriculture Leonid Kozachenko, a reformer, was promptly arrested for "bribery and tax evasion". Grain merchants, foreign investors and multinationals included, are under official scrutiny.

In an unusually strongly worded letter to Ukraine's Ambassador to the United States Kostyantyn Hryshchenko, President of Ukraine-US Business Council, Kempton B. Jenkins wrote:

"We hope that this effort to turn back the clock to Soviet-style management of Ukraine's critical sector will soon disappear and allow Ukraine's dramatic march to productivity and prosperity to resume."

Nor has Ukraine forsaken its erstwhile clients, frowned upon by an increasingly assertive United States. According to IRNA, the Iranian news agency, a Ukrainian delegation is in Iran to discuss the construction of Antonov An-140 aircraft. This week, Pakistan and Ukraine are slated to negotiate a free trade agreement.

Standard and Poor's, the international rating agency, concluded, in a report it released earlier this month, that "despite some early successes, the political environment in Ukraine remains difficult and financing uncertainties continue."

The Sovietologist John Armstrong dubbed the Ukrainians the Russians' "smaller brothers". This is no longer true. Unlike Russia, Ukraine aspires to NATO membership and is far less pro-American. It seeks Russian investments but is wary of the imperial intentions of its neighbor. Despite Russian coaxing, Ukraine hasn't even joined the Eurasian Economic Community, a pet project of the Russia-dominated Commonwealth of Independent States.

In the meantime, Ukraine is bleeding both its least-skilled, menial workers - and its most highly educated brains. Ukrainians are welcome nowhere and abused everywhere. Israel has just deported 300 illegal Ukrainian aliens. Others - notably Turkey, Hungary, Poland, Slovakia, and Italy - are likely to follow suit.

Ukrainian ombudswoman Nina Karpachova pegs the number of economic exiles at between 2 and 7 million. At least 5 million - one fifth of the workforce - seek seasonal employment abroad. Remittances amount to between $2 and $3 billion a year.

One quarter of all Ukrainians barely survive under the wretched poverty line. Official unemployment - at 11 percent - underestimates the problem by half. A low birth rate conspires with elevated mortality to produce a self-induced demographic genocide.

Capital flight is on the rise and equals half the foreign direct investment in the economy. The Governor of the National Bank, Sergiy Tyhypko, estimated this February that as much as $ 2.27 billion fled Ukraine in 2002 - compared to $898 million in 2001 and $385 million in 2000. This is the reflection of a thriving informal economy, half the size of its formal counterpart, by some measures.

Appearances aside, ubiquitous corruption, tottering banks, clannish institutions, compromised leadership, illicit deals and barely contained xenophobia are entrenched in Ukraine's criminalized economy. As the 2004 presidential elections near, the oligarchs are augmenting their war chests abroad. Kuchma may try to postpone the elections to 2006 or 2007. The opposition vows to aggressively oppose such chicanery. Ukraine may be in for a bumpy ride ahead.

Economies in Transition
Issues in microeconomics and macroeconomics of economies in transition.