Ukraine: Economy

With rich farmlands, a well-developed industrial base, highly trained labor force of 20 million, and good education system, Ukraine has the potential to become a major European economy. After a robust 8-year expansion beginning in 2000 that saw real GDP expand 75%, Ukraine’s economy experienced a sharp slowdown in late 2008, which continued through 2009. After contracting 15.1% in 2009, GDP is estimated to have bounced back only 4.2% in 2010 and is forecast to grow between 4.0% and 4.6% in 2011.

Ukraine’s 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 to create a market system for agricultural land. President Yanukovych chairs a Committee on Economic Reform, and in 2010 Ukraine developed an economic reform plan for 2010-2014. In December 2010 a comprehensive new tax code was passed by parliament and signed into law, provoking major street protests in Kyiv.

Ukraine ostensibly encourages foreign trade and investment. Foreigners have the right to purchase businesses and property, to repatriate revenue and profits, and to receive compensation in the event property were to be nationalized by a future government. However, the country's 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 from abroad.

Ukraine abounds in natural resources and industrial production capacity. Although proven onshore and offshore oil and natural gas reserves are limited, there is now interest in oil exploration in the Ukrainian portion of the Black Sea as well as prospecting for shale gas. The country has other 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 gas across its territory. Ukraine imports almost 80% of its oil and 77% 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 currently come from Russia, Turkmenistan, Kazakhstan, and Uzbekistan, which deliver the gas to Ukraine's border through a pipeline system owned and controlled by Gazprom, Russia's state-owned gas monopoly. Ukraine owns and operates the gas pipelines on its territory, which are also used to transit Russian gas to Western Europe. Ukraine's laws forbid the sale of the gas pipeline network. The complex relationship between supplier, transporter, and consumer has led to intermittent bilateral tensions, resulting in severe gas supply disruptions for downstream consumers in 2006 and January 2009. In April 2010, the Rada ratified the Kharkiv gas-for-basing agreement in which Ukraine agreed to extend the Russian Black Sea Fleet’s basing rights in Sevastopol for an additional 25 years (until 2042) in exchange for concessional pricing of Ukraine’s imports of Russian gas.

Ukraine’s economy is heavily dependent on its exports, which make up about 40% of its gross domestic product. While countries of the former Soviet Union remain important trading partners, especially Russia for energy imports, Ukraine's trade is becoming more diversified. The European Union (EU) accounts for about 30% of Ukraine's trade, while CIS countries account for about 40%. Ukraine has a broad industrial base, including much of the former U.S.S.R.'s space and rocket industry. The country 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. World demand for steel and chemicals began to recover in 2009 after dropping sharply in the second half of 2008, and Ukraine's suppliers experienced nearly 50% year-on-year export growth at the start of 2011. Steel constitutes nearly 40% of exports. Ukraine is also a major producer of grain, sunflower seeds, and beet sugar. In October 2010, Ukraine introduced grain export quotas. The distribution of these quotas in November 2010 and January 2011 was highly non-transparent and discriminatory to foreign grain trading companies, which did not receive allocations.

In July 2010, following extended negotiations, the International Monetary Fund (IMF) approved a second loan package to Ukraine, after an earlier package negotiated in 2008 went off-track. The new 29-month $15.2 billion Stand-By Arrangement (SBA) is primarily conditioned on adjustments in fiscal and monetary policy, consumer gas price increases, and pension reform. Disbursement of SBA funds was postponed as of March 2011 until the Ukrainian Government meets its commitments on enacting reforms. The World Bank has committed more than $5 billion to Ukraine since the country joined the Bank in 1992.

Ukraine is a member of the European Bank for Reconstruction and Development (EBRD) and joined the World Trade Organization (WTO) in May 2008. In 2008 Ukraine and the European Union launched negotiations on a free trade agreement. As an interim step to an EU association agreement, Ukraine hopes to conclude with the EU a deep and comprehensive free trade agreement (DCFTA) as well as an agreement on visa liberalization. Some chapters, including trade, remain under negotiation.

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 last operating reactor at the Chornobyl site on December 15, 2000. All urgent and required stabilization measures of the "sarcophagus"--the concrete shelter hastily built around the damaged reactor by the Soviet Union in the months following the disaster--including radiation and worker safety are complete. The contract for construction of a new shelter to be built around the sarcophagus was awarded in September 2007. Construction for the new shelter has begun, with the ultimate goal of its commissioning in 2014. The successful commissioning of the new shelter will provide a long-term, environmentally sound solution for the destroyed reactor. It should be noted that none of the 15 operating reactors in Ukraine, which generate about half of the country's electricity, are of the Chornobyl design. The United States Government has provided significant assistance to enhance the operational and nuclear safety of these reactors. Ukraine has 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, and associated with the Copenhagen Accord on Climate Change in April 2010.

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.

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