A Year Doomed to Change

LAST YEAR'S RESULTS

Last year can be characterized by rather obvious events in contemporary Ukraine's policy and economy.

Above all, in 1998 the only positive achievement of the present government, national monetary stability, was lost. Traditionally, this stability was maintained by a rigid monetary policy. The outbreak of financial crisis in August resulted in the devaluation of the hryvnia, and the President's subsequent statements de facto calling for abandoning restrictive monetary policy and tearing down the currency corridor could only aggravate the situation.

Also, the past year did not justify forecasts about economic stabilization and growth. On the official level many predicted GDP growth by year's end. These prognoses were constantly revised and eventually proved wrong.

The mounting economic crisis was unpredictable for the political and economic leadership of Ukraine. Previously statements were made to the effect that the Asian financial crisis and that in Russia would not affect Ukraine. Nothing was said about domestic causes.

The external factor remains painfully pressing: both the general concept of Ukraine's role and place, and its relations international financial institutions, in which big hopes were constantly placed. In fact, the Cabinet's performance is so heavily dependent on the IMF Memorandum as to verge on risking Ukraine's national security, and in some cases even crossing this line.

Social tensions remain and gain momentum, primarily due to reductions in budget social spending and growing arrears on pensions and other social payments. Using official statements, the key to solving social problems is a monetary emission and the privatization of Ukrtelekom, although in both cases the outcome is anyone's guess.

Ukraine's political and economic leadership's ideas for overcoming the crisis remain vague in keeping with local tradition. The President's messages to Verkhovna Rada in May and November contradict one another and offer no constructive approach. His latest public appearances boil down to constant demands for more and can by no means be considered a lever that will get the country out of the crisis, and the same is true of his almost paranoiac statements about a bad Parliament. Most likely there are no mechanisms on high to lead the country out of crisis. Moreover, the latest cadre "achievements" of the Presidential Administration's economists are simply terrifying.

There was perhaps one positive aspect to the past year. Basic macroeconomic parameters did not avalanche, especially compared to what the crisis did to Russia. At the same time, it is necessary to take into account the fact that Russia had farther to fall. With all the general similarity of the transformations in the former Soviet republics, owing to objective as well as subjective conditions, Russia remained in the lead. In addition, the almost spiteful official tone of commentaries on the Russian financial crisis does not testify to the high intellectual level of their authors.

UKRAINE ASSESSED FROM WITHOUT

The ratings of Ukraine by the foreign analysts do not offer anything new. Traditionally, its image is smeared by corruption out of control, the predominance of organized crime in all social spheres, absence of real economic reform, instability of the legal framework, political situation, and a multitude of other factors. Thus, in mid-1998 the Swiss World Economic Forum published a report on worldwide competitiveness. Among other things, the document refers to Ukraine as a country where: (a) bribe-giving and taking are a daily standard procedure, (b) citizens evade taxes, (c) organized crime stands in the way of business, and (d) the police cannot guarantee personal safety.

According to the EBRD Transition Report, Ukraine was placed 15th in 1998, in aggregate transformation parameters among the 17 Central and Eastern European countries under study. Below Ukraine were only those of Bosnia and Belarus.

Ukraine's place in international economic relations can be judged proceeding from the world economic integration ratings carried by the New Year issue of the Central European Economic Review. Of 27 postsocialist and post-Soviet countries of Europe Ukraine takes 23rd place, superior only of Uzbekistan, Turkmenistan, Belarus, and Tadjikistan.

In terms of statistics for 1999, the Austrian Erste Bank Research predicts Ukraine's GDP decline of 4.0% and an unpredictable inflation rate. This decline will be second worst after Russia (-6.0%), with -2.0% in Romania and none in the other postsocialist countries. The Central European Economic Review predicts 3.2% GDP decline and 34.8% inflation in Ukraine in 1999. Among the 27 countries under study regress is expected only from Russia (-4.6%), Belarus (-2.1%), and Moldova (-0.4%).

These statistics originate from the said organizations and have nothing to do with the quasi-propaganda forecasts of official Ukrainian structures. Incidentally, in 1997 the Deutscher Bank Research, annual supplement to The Economist, and the prestigious economic prognosticator, Consensus Forecasts, predicted for next year 1.0-1.5% growth in Ukraine, largely under the influence of official Ukrainian sources.

As for of economic and social development forecasts, this year cannot be analyzed using the traditional tools. Apart from Ukraine's economic specificities ruling out worldwide schemes and criteria, one has to reckon with the specific impact of the presidential campaign.

Two facts are apparent: first, the current political leadership has no vehicles to stabilize the situation and keep the economy in a relatively normal condition before the elections; secondly, there is no money to finance social programs. Thus, the alleged "natural manner" of canvassing, saying that "life will get better through the dedicated effort of the beloved leader of the nation," sounds very dubious.

Speaking of possible political scenarios and their impact on the economic situation in general, it seems worthwhile to single out three:

First, a "soft" cancellation of presidential elections. In this case the economic sphere could continue as it is for a time, although mounting social tensions, budget troubles, consequences of the debt pyramid, and a great many other national peculiarities would loosen the foundations of the current administration. Other countries will hasten to fold up economic and political relations with Ukraine and its international isolation will become an established fact. Considering the present government's inability to carry out any reforms, it will be doomed.

Second, it is also possible that the authorities will be strengthened after canceling the elections and establishing a semi-military regime. Likewise, it is theoretically possible to return to a rigid command system under the slogans of "preserving the gains of independence" or of fighting something else. In this case the economy will have to adopt something akin to rationing, extinguishing the first weak glimmering light of a market economy. But this scenario is hardly likely to be played out as it will be immediately and overwhelmingly condemned by the international community; in addition, those wielding power in the advanced shadow sector will never allow the current administration to tighten the screws that much.

Third is yet another scenario which seems most likely, whereby the present political and economic leadership will do its utmost to suck this country dry before the elections. Of course, the money-printing machines will be working at full steam and all debts will be paid off, wages and salaries raised, and other steps taken, acting on the principle apres mois le deluge. Several months before the elections Ukraine will live contrary not only to the fundamentals of the economic theory, but also common sense. No one will pay any attention to what international financial institutions say, or to domestic and foreign opinion. All this will be followed by soaring inflation and recession. A sad scenario that will not bring the results expected by today's wielders of power. Instead, it will have devastating consequences for Ukraine's future. Considering that this country has no reserves left for such experimentation, the new President will receive a miserable economic legacy which will best illustrate his predecessor's performance.

The existing socioeconomic situation makes it clear that in ten months Ukraine will have a new Chief Executive. This year is simply doomed to change, as the electorate at large - from pensioners to housewives to political figures to businessmen. Such changes are sure to be positively received within and without Ukraine.