Economy Has Strong Long-Term Prospects

Viktor Yanukovych, President of Ukraine
Viktor Yanukovych, President of Ukraine

As its high profile hosting of the Euro 2012 football championships this year symbolises, Ukraine is determined to carve out a niche for itself as a productive member of the European and global economy. While many challenges remain, Ukraine’s forward thinking government recently reported that 2011 saw significant economic progress being made. Ukraine’s President, Viktor Yanukovych, recently commented, “We ended 2011 with generally positive trends in the national economy, even though we understand that we did not reach the growth our citizens hoped for and we still need to step up the pace of reforms.”

In mid January, Ukraine’s Prime Minister Mykola Azarov announced that Ukraine’s GDP expanded in 2011 at its fastest pace since 2007, spurred on by a good harvest and increased exports, and that the economy grew by almost 5% overall in 2011 compared to 4.2% in 2010. In fact, a recent report by global banking group HSBC highlighted certain economies around the world that it said would move from a “low starting point” to “rapid growth and strong fundamentals” by 2050, and Ukraine was one of only four countries on the list.

When President Viktor Yanukovych presented Ukraine’s new economic strategy for 2012, which is the part of the government’s ongoing economic reform programme up to 2014, he said that Ukraine needs to increase its average GDP growth to 6% per year. He added that he will aim to reach this target by reducing the budget deficit, simplifying the tax system, attracting foreign investments, and developing financial markets, while also continuing to push forward various reform measures.

Reducing Ukraine’s energy dependence on Russia – a stumbling block for the Ukrainian economy for many years – is another key goal for the government in 2012. Ukraine’s Minister of Energy and Coal Industry, Yuriy Boyko, declared in early January that his country will import only enough gas to sustain the national economy this year – some 27 billion cubic metres, or about half Ukraine’s usual gas imports.

Building on key economic strengths

Ukraine’s key economic strengths are its strategic geographical position that makes it an ideal trade hub linking East and West; its educated and low cost labour force; and its substantial natural resources. To make the most of these advantages, Ukraine is stepping up its ties with the EU, which has become its main trading partner, and by steadily implementing EU standards in every economic sector.

Ukraine has a history of strong performance. It was the key driver of the Soviet economy, producing four times as much output as the next most productive Soviet republic. Ukraine’s fertile soil generated more than one-fourth of Soviet agricultural output, and its farms provided substantial quantities of meat, milk, grain, and vegetables to other republics. Likewise, its diversified heavy industry supplied unique equipment (such as large diameter pipes) and raw materials to industrial and mining sites (including vertical drilling equipment) in other regions of the former USSR.

Ukraine’s agriculture sector continues to underpin the national economy; Ukraine has long been a major producer of wheat as well as rye, flax, corn, barley, sugar beets, sunflowers and potatoes. Ukraine’s natural resources also include iron, manganese, coal, anthracite, aluminium, mercury, nickel, natural gas, oil, zinc, titanium and bauxite. Leading industrial products include steel, tractors, machinery, building materials, chemicals, consumer goods and fertilisers.

Ukraine has decentralised its economy; Kharkiv, Donetsk, Lugansk, Dnipropetrovsk, Zaporzhzhya, Mariupol and Makiyivka are all major industrial hubs, while Vinnytsya and Zhytomyr are important centres for agricultural activities. Ukraine has been diversifying diversifying its export markets and now exports a wide range of products to Russia, Germany, Italy, Belarus, China and Turkmenistan, among many other countries.

Strong growth for industrial sector in 2011

While independence brought a sharp decline in Ukraine’s economy, by 2006 the country reached 7% GDP growth, which it maintained the following year, fuelled by high global prices for steel – Ukraine’s top export – and by strong domestic consumption. The global crisis hit Ukraine hard but the economy began to recover in 2010, buoyed by exports. In the first half of 2011, Ukraine’s industrial sector grew by an impressive 8.9%.

Thanks to increasing state investments in infrastructure projects, a successful agricultural harvest, good performance by the construction industry, higher social spending and other factors, Ukraine’s economy managed to continue to grow in the second half of 2011, and the agriculture, energy and trade sectors are seen as having particularly strong potential in 2012 and beyond.

Attracting FDI, particularly from Europe

Ukraine’s public and private sector leaders are well aware that Ukraine needs foreign investment and closer ties to the EU to help it reach its economic potential. The government is working hard to upgrade Ukraine’s business environment and create new incentives for investors, particularly from the EU, since Ukraine sees itself as a European country that will eventually join the EU family.