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

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

The Problem: 1991-94 No economic policy led to hyperinflation Rent seeking took over & small rent-seeking elite persists

Three Reform Waves 1994-5: Financial stabilization 2000: Deregulation led to economic growth 2014-16: Greatest reforms

GDP per capita, PPP, 1990 and 2013

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

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

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 2012-16 FDI eliminated: 4% of GDP/year

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

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

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?

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

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

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

Hryvnia Devalued from UHA 8 to 27/$1 Exchange Rate Stabilizing Source: http://www.investing.com/currencies/usd-uah-historical-data

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

Budget Deficit (with Naftogaz): 2.1% of GDP in 2015 (down from 10% in 2014) Source: 2000 - 2008: IMF World Economic Outlook, April 2014; 2009-14: JP Morgan's EMEA July 8, 2014. Emerging Markets Report. Note: I use JP Morgan statistics for 2009-13 because the IMF WEO statistics do not include the Naftogaz deficit. 2015-17: Dragon Capital Ukrainian Economy: 2017 Budget Draft, October 2016

Public Debt Stopped at 80% of GDP after Devaluation Source: 2000-2015: IMF Database; 2016-2017: Dragon Capital Ukrainian Economy, 2017 Budget Draft: A Modest Step Forward, October 2016

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

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

Europe: Reform Anchor Political & legal standards Market access: EU 16% of exports in 2000. DCFTA: 39% in H1 2016 But 36 quotas for main export items Financial assistance: Little Visa freedom key Ukrainian desire

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

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

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?