Analysis: Ukraine's economy

Putin makes deals with Kuchma, but relations remain tense

Ukraine's president Leonid Kuchma has hit back at protestors' demands for his resignation by claiming that their action is a threat to the country's economy. BBC News Online's Jorn Madslien finds out whether he has a point.

Ukraine is climbing out of a recession that has lasted for almost a decade.

Ukraine's GDP growth projection

5.4% 2000

3.1% 2001

3.4% 2002

3.0% 2003

3.5% 2004

3.5% 2005

Source: EIU

Last year, the country experienced economic growth for the first time since independence in 1991.

In the past year, a fragile political stability has meant that some economic reforms were introduced, encouraging investors to start putting their money there.

But these same investors may decide to turn their back on the Ukrainean economy, if the allegations about corruption in President Kuchma's government continue to create political unrest which may put the breaks on the reforms.

Ukrainean growth

"Strong growth in the fourth quarter [of 2000] is estimated to have brought annual real gross domestic product (GDP) to at least 5.4%", according to the Economist Intelligence Unit.

Continued growth should be supported by the arrival of World Bank funds.

Who are investing?

$631m US

$357m Netherlands

$357m Cyprus
(offshore investors)

$294m Russia

Since 1991
Source: Ukraine economics ministry

On Monday, the Bank handed over $60m - the third tranche of a $260m credit facility aimed at modernising the country's financial sector - along with a promise that it "intends to continue to support the development of the Ukrainian financial sector".

But the Bank, as well as the International Monetary Fund, have repeatedly insisted that the reforms must speed up.

In early February, the IMF delayed the hand-over of a $190m loan due to slow economic reform - a loan which is part of an extended funds facility of $2.6bn that was released in December after having been frozen since September 1999 for similar reasons.

Kuchma allegations

Delay in reform is linked to political instability and a recent wave of allegations which centre on President Kuchma.

The allegations are that Mr Kuchma ordered the murder of the editor of a Ukrainian internet newspaper which focused on corruption, the journalist Georgio Gongadze.

"He can't control the situation. New revelations continue to come out," said the Economist Intelligence Unit's senior economist Dr Rupinder Singh.

Cautious investors

The investors who have entered Ukraine "know what kind of country they are putting their money in", an emerging markets economist with a major investment bank in London said.

Protesters demand President Kuchma's resignation

To these investors, it should have come as no surprise that Transparency International, an organisation that studies corruption, has ranked Ukraine as the third most corrupt country in the world.

But mainstream investors remain frightened of the country's reputation as lawless and corrupt, the emerging markets economist said.

Consequently, only $3.6bn investments have flowed into the country since 1991.

Investors dislike uncertainty

The investors' concern is not that many Ukrainians now believe the president is himself deeply corrupt.

Investment from abroad

$437m 1999

$583m 2000

$900m 2001
(predicted)

Source: Ukraine economics ministry

They are instead concerned about how, in the words of Dr Singh, "the risk of greater political instability has risen".

Political turbulence not only makes it difficult to predict future earnings on their investments, it also makes it more difficult for Ukraine's government to push through reforms.

"What is happening around Ukraine... makes it very hard for the government to demand effective work or to introduce effective policies," Ukraine's prime minister Viktor Yushchenko said in an interview on Ukrainian television on Monday.

Ambitious growth prediction

The investment community has, by and large, approved of what President Kuchma was doing during 2000.

Last year's improved business and investment environment - which resulted from improved political stability and great willingness to push on with economic reforms - boosted investment into Ukraine from $437m in 1999 to $583m, according to the Ukrainian economy ministry.

But the ministry's ambitious prediction that investment this year will grow to $900m is laughable given the current political tension, the emerging markets economist said.

"It is the most unstable time now since the beginning of the reforms," he said.

Investors' dilemma

So while the investors have favoured some of Mr Kuchma's policies, they are not prepared to stand up and defend him.

"One could argue that resignation [by Mr Kuchma] would bring the problem to an end, so there's an exit to the situation," the economist said.

"On the other hand, there are no guarantees that his replacement would be any better," he said.

Investment into Ukraine is growing

Many investors would be happy for Mr Kuchma to go if he was replaced by Prime Minister Yushchenko, who is widely seen as the reformist behind the President's success.

"Kuchma has ridden on the coat tails of his Prime Minister," said Dr Singh.

But the Prime Minister may be tarnished by association if voters see him as the President's ally, and power could then instead transfer to the Socialist Party leader Oleksandr Moroz - an option few investors would like, the emerging markets economist added.

A weaker president

The most likely outcome, according to the EIU, is that Mr Kuchma will weather the political storm.

But given that it is likely to rage on for several months he is expected to come out of it a weaker president.

"Although Mr Kuchma has so far rejected all calls for his resignation, his ability to pursue his policy agenda has been hampered," said Dr Singh.

But the protesters attacking Mr Kuchma only amount to a few thousand in a country with 50 million people, so investors will shrug off their worries and the investment flows into Ukraine are expected to continue to grow.

In addition, Ukraine's exports will remain strong - with the exception of steel which has been hit by weak world markets.

But industrial reform is expected to remain painfully slow, the government's tax revenues - which have been falling steadily for years - will remain low, poverty will remain widespread, and the country's GDP will not climb fast.