Presentation for the Federation of Paasikivi Societies International Centre for Policy Studies Kyiv, 22 April 2005

What is the International Centre for Policy Studies? ICPS is an independent research organization, founded by the Soros-funded Open Society Institute in 1994 Our goal is to promote public policy concepts and procedures in Ukraine ICPS works with different interest groups — government, business, NGOs, mass media Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) Web:

Research areas Economic policy Policy analysis Public administration reform European integration Regional policy and local government Development of non-government organizations Education policy Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) Web:

Regular publications Quarterly Predictions — a quarterly overview of Ukraine’s economy and 3-year development forecasts (the only product of its kind in Ukraine) Political Commentary — an analytical monthly that evaluates Ukraine’s government policy and the various processes affecting it Consumer Confidence — a unique quarterly survey of household expectations in Ukraine, generating five standard indices Economic Statistics — a monthly table of statistical data that are important for doing business in Ukraine Regional Trends — analysis and forecast of regional development and regional policy; special publication published in 2003 Policy Studies — an occasional series providing the results of ICPS research on key issues of government policy, including an annual analysis of the impact of legislative changes on the business climate in Ukraine Information about ICPS services is posted at Internet shop launched in May 2003 Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) Web:

Analysis of public policy alternatives and formulation of recommendations Analysis and development forecasts for specific markets Medium-term forecasts for macroeconomic and regional development indicators Impact analysis of company activities, particularly investment projects Analytical support for strategic planning Research into consumer behavior Business services Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) Web:

Impact Analysis of the Enactment of the Mixed Excise Taxation System for Tobacco Products (JTI) Survey of Bank Lending in Ukraine (Club of Officers’ Enterprises) Analysis of the Telecommunications Market in Ukraine (Kyivstar) Building a static financial model for Ukrtelecom (designing the methodology for Ukrtelecom’s cost distribution in accordance with provided services and calculated real and normative cost of Ukrtelecom’s services) (Ukrtelecom) Impact of WNISEF Portfolio Companies on Ukrainian and Moldovan Economies (Western NIS Fund) Business services: examples Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) Web:

Political situation

The Orange Revolution The results of presidential elections of October– November 2004 were falsified Protests were widely supported (especially by young people and SMEs) On 26 December 2004 most Ukrainians voted for Viktor Yushchenko Constitutional reform was approved by the legislature Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) Web:

Political competition today Three pillars of the new opposition: the Communists, Yanukovych’s Party of the Regions and Medvedchuk’s SDPU (o) Other forces look scattered, but they’ll try to merge in order to take part in the next election At the moment, the opposition conditionally supports initiatives of the Government The 2006 elections are the next big prize to be contested Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) Web:

Three myths about Ukrainian political life The East-West division The rivalry between President Victor Yushchenko and Premier Yulia Tymoshenko The witch-hunt in Ukraine, in terms of both expropriation and incarceration of political opponents Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) Web:

The Government’s priorities Ensuring transparency of public policy Fighting corruption Fulfilling election promises regarding social security and pensions Curbing inflation Abolishing privileges for select businesses Reforming the military Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) Web:

Policy shortcomings The Government still relies only on itself: its decisions are not often informed by external expertise The lack of a process of stakeholder discussion The political cycle with the target of winning in 2006 often results in myopic policy: strategic goals are overridden by short-term tasks and promises to voters Top-managers of the reforms face the need to develop capacities of state institutions Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) Web:

Geopolitical situation Although Ukraine has declared almost 20 countries its strategic partners, we consider Russia, the EU, and the US the main foci of Ukrainian foreign policy Ukraine is becoming a distinct centre of democratic and market reforms in the Eastern Europe Relations with the EU and the US are improving Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) Web:

Foreign policy priorities ‘Inherited’ joint projects with Russia: (1) Common Economic Area, (2) Gas Transport Consortium Improving relations with the US and the European Union is motivating Ukraine to carry out domestic economic and democratic reforms The EU still considers Ukraine a ‘new neighbor’, but its stance on potential membership is more optimistic Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) Web:

Economic situation and forecast

Rapid economic growth continues GDP, real % change Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) Web:

What’s behind Ukraine’s economic revival? A population that is “getting” what business and market conditions mean High prices for export goods on foreign markets Active privatization Growing consumer incomes and a developing domestic market Macroeconomic stability Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) Web:

Current economic trends Economic growth is slowing down: we expect real GDP to grow 8% in 2005 The government is sharply raising social spending Inflation is on the rise, mainly due to increased consumer spending World prices for key exports are still high Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) Web:

Economic policy limitations The new Government is concerned mainly with short-term priorities: e.g. fighting inflation, reviewing shady privatization deals The Government still lacks a clear strategic agenda that would facilitate sustainable economic development Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) Web:

Forecast for 2005 A slowdown in GDP growth to 8%–chiefly due to a high baseline in 2004, a slowdown in investments, and a gradual flattening of world commodity prices A Budget deficit of up to 4% of GDP Inflation driven by high consumer demand and reaching 16% at year-end Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) Web:

The Consolidated Budget deficit should reach 4% of GDP in 2005 after not exceeding 2% of GDP since 1999 This deficit is being covered by privatization revenues and borrowings Borrowing will be divided evenly between foreign and domestic markets The deficit will not be investment-oriented and will speed up inflation Budget deficit Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) Web:

Steep growth in social payouts will push deficit to 4% of GDP Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) Web:

Assumptions of external situation Annual growth of key trade partners will outpace global growth in 2005–2007 World oil prices will remain above US $40 for at least H1’05 and fall to US $30–40 in 2006 World metal prices will decline slightly in 2005 WTO accession will take place in the end of 2005 or early 2006 Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel Web:

GDP of Ukraine’s trade partners, Exports and Imports, % annual change Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel. (380-44) Web:

Current account balance, % of GDP Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel Web:

Structure of Ukrainian exports, % Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel Web:

Major risks Steep hryvnia appreciation Government failure to deliver on campaign promises Lower-than-expected Budget revenues Sharp price fluctuations for Ukrainian exports on external markets Failure to accede to the WTO in late 2005 or early 2006 Міжнародний центр перспективних досліджень International Centre for Policy Studies Tel Web:

Thank you for your attention The International Centre for Policy Studies