Ukraine’s Growth and Future

With Ukraine and the European Union expected to finally sign the much-anticipated Association Agreement in November, opening trade and travel between the two, it is time to take stock of Ukraine’s progress since its efforts lapsed in the late days of the Yushchenko presidency. Turmoil in government led to Yushchenko running through a series of prime ministers — ironically, beginning and ending with his once ally and now bitter foe, Yulia Tymoshenko — and the rapid economic meltdown in Europe meant that the effort essentially stalled on both sides.

Today, a decade of hard work is set to pay off, and Ukraine deserves credit for its rapid work repairing and revitalizing the drive to Europe.

Since Viktor Yanukovych assumed the presidency after the 2010 elections, Kyiv has effected a series of reforms at a pace that quite frankly few expected. A complete overhaul of the criminal code, tax law, customs regulation, land reform, and pension reform have helped bring Ukraine into line with European norms, making the Association Agreement likely where a year ago it was uncertain at best.

Little-noticed is Ukraine’s determination to reform its tax code to improve its overall economic competitiveness. The income tax structure for corporations was lowered from 25% to 23% starting in April 2011, then to a top tier of 21% in 2012, a top rate of 19% this year, and a top rate of 16% from 2014 on. Ukraine is clearly seeking to recreate Ireland’s “Gaelic Tiger” experiment of the 1990s, by undercutting the corporate rates in much of Europe (and vastly undercutting the corporate rates in the U.S.).

This aspect of Kyiv’s reforms, together with a massive overhaul of the corporate code (permits have dropped from over 1,200 to 141), have been largely overlooked by an international media more concerned with the fallout of Tymoshenko’s desire to buy her way into the presidency than substantive change. Yet the effect is potentially transformative: shedding the bureaucratic tendency to tax and regulation of the Soviet days, Ukraine is now poised for explosive economic growth, especially now that it will soon have free access to European markets.

Ukraine nevertheless faces economic challenges with which it must grapple soon. Because of the gas contract Tymoshenko signed in her bid for power, Ukraine continues to pay the highest prices for Russian natural gas in Europe, despite being the conduit point for that very resource. Russia has also demonstrated its willingness and intent to punish Ukraine should the latter continue on the “suicidal” course of signing the Association Agreement and developing closer ties to the European Union. Civil service reform, judicial reform, and other measures must still pass on the road to Europe.

Yet these challenges can and almost certainly will be overcome. To experience Ukraine today is to experience a country grimly determined to press forward despite Russian threats, and a place that with typical bluntness will admit its own failings and set about fixing them. Draft civil service reforms, a new judiciary law, and other measures are slated for the near future, and the potential loss of the Russian market promises to be offset by more trade with Europe.

For three years, Ukraine has raced to make up lost time. The momentum it has since developed will carry it into an increasingly bright, European future.

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