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Why the economic success of Ukraine above Russia?

Почему экономические успехи Украины выше российских?

While the Russian propaganda says about the failed state, the economy of the Western neighbour through the relationship with the EU is growing rapidly

To compare

Russian economic news of the last years can hardly be called good. The economy Ministry lowered its growth forecast for the coming years, and the Minister spoke about the coming recession. By the end of July gross product of construction decreased by 0.3% compared to June, industrial output fell 0.4%, while freight turnover of all modes of transport — by 0.5%. The chamber has reported a decline in real disposable income by 1.3% in the first half.

Against Russia imposed new sanctions, this time against government borrowing, and the notorious “national projects” do not give (and can give) the desired results.

Against this background, the Kremlin propaganda habitually tells Russians about Ukraine, the old-fashioned describing a neighboring country as a failed state.

However, it is time to dispassionately talk about the Ukrainian economy, which since the beginning of the Russian aggression has gone through a few stresses.

Despite the problems

A challenge for the Ukrainian economy became a serious rupture of economic ties with Russia. Turnover fell from $39.6 billion in 2013 to $15.0 billion in 2018. Ukraine stopped purchasing gas from “Gazprom” from November 2015, and faced with the loss of a significant part of its industrial potential (in the temporarily occupied territories in 2013 produced about a quarter of industrial production). And with the need to divert huge resources to confront the aggressor (the defence budget increased from 14.8 billion in 2013 to 163 billion in 2018). Despite all this, the results of the second quarter, in Ukraine this year was recorded the highest in the last three years GDP growth of 4.6% from the same period last year; while wages increased by 10%, investments into fixed capital — by 17.8%, and the amount of work performed in construction — by 21.2%.

What caused this significant increase? From a formal point of view that the voices of the officials in Kiev, the main drivers of the acceleration were an increase in output of agriculture (by 6.3% in the second quarter compared to the same period last year) and the increase (10.3%) retail trade turnover in the first half. But these trends have their reasons to try to understand.

Due to low base

Part of the rise is a consequence of events 2014-2017 gg when the real incomes of Ukrainians falling (decreasing from 2013 to 2016, more than 30%), and the hryvnia weakened. In recent years, however, the trend has changed: competition in the labor market is growing because of personnel shortage, caused by large-scale labor migration to Europe, and the exchange rate of the dollar against the national currency is reduced. The result is the purchasing power of citizens is increasing even faster than UAH GDP, and consumer confidence is growing that is pushing the demand.

If you translate the Ukrainian nominal GDP in dollars, it turns out that he grew up with in 2015 with a $90,6 to $131 billion, increasing at the fastest pace in Eastern Europe. Recently if it was possible to speak about Ukraine as the poorest country in the region (average nominal wage at the beginning of 2016 was $180/mo.), now in the post-Soviet space, the country only behind Russia, Kazakhstan and Belarus with a par value of $435/month. This recovery will not last forever, but it should not be underestimated.

More fundamental are a few other circumstances.

What benefit

First of all, we should recognize that cooperation with the EU has become Ukraine’s greater good. Over the past four years with the participation of European capital in the country has opened more than 200 industrial enterprises. Exports to the EU rose from 2015, more than 30%, reaching $20.2 billion, Even the liberalization of the visa regime, causing additional pressure on the labor market in Ukraine, while most works on the development of its economy (requiring technological upgrading), and not against him. Modernisation becomes more achievable, given the strengthening of the hryvnia, which makes the purchase of equipment abroad and selling products in the domestic market economically justifiable.

Significant positive impact and what is preserved in Ukraine even oligarchic, but the competition that prevents the nationalization of the economy, which we see in Russia and which in many ways kills the investment climate. Ukraine has established itself as the country in which the majority of groups represented in the government, there is a fairly efficient judicial system respects the rights of investors (especially foreign) and entrepreneurship is not — unlike Russia — a criminal offence. Even today, state-owned companies to a much greater extent operate as commercial entities and not as agents of the government. All this creates a Foundation to preserve positive macroeconomic trends.

It is worth noting that although the tax burden remains high (now it reaches almost 38% of GDP), it is unevenly distributed, and many small and medium-sized businesses feel very confident. State and police raids during the years of the presidency of Petro Poroshenko was significantly weakened. The coming to power of the new team definitely has generated more hope for a de-bureaucratization (let’s not forget that the successful second quarter is a period of transit that fuelled expectations). This new government has a powerful lever to accelerate growth in the form of tax cuts, the extension of the rights of entrepreneurs and, of course, land reform — all of it is able to maintain high growth in the coming years.

Grey area

Finally, it is impossible not to take into account another factor. The Ukrainian economy in its significant part operates in the “gray” area. The share of the informal economy estimated one-third of official GDP, informal and export-import operations — approximately 30%.

If the new authorities will be able to modernize the tax system to introduce, for example, the tax on the capital; to cancel the moratorium on the sale of land; to further simplify the procedure of obtaining patents and licenses, it can be assumed that the formal GDP will grow by 2-4% a year just because of the transition of the entrepreneurs in the official sector. Although in strict sense it will not be growth, but the reflection of this process in the statistics will lead to improvement in the debt / GDP ratio, will increase the country’s attractiveness in the eyes of investors, intensifying the work with credit & prepaid organizations.

Of course, Ukraine remains in many ways a very problematic country: it still depends on Russia to supply a number of types of energy; the political and military situation may be destabilized by Moscow is easy enough; financial support of the West and international financial institutions remains highly significant. However, the direction of development of the Ukrainian economy towards liberalisation, openness to the outside world and encourage competition leaves no doubt — because just like in 2004 you can say: “Ukraine is not Russia”. Neither in political nor in economic terms.

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