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Ukraine And European Security - International Mechanisms
As Non-Military Options For National Security Of Ukraine.

Bohdan Lupiy
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GoChapter 1. National Security Of Ukraine
GoSection 2 Sectoral Analysis of Ukraine's National Security

2.3 Economic sector

The collapse of the USSR and rapidly deepening crisis of 1992-1994 negatively affected the economic basis of Ukrainian economy. Gross national product of Ukraine decreased by 37 percent in 1993 and industrial output decreased by a quarter.(69) Inflation rise increased from 2500 per cent in 1992 to 9000 in 1993. The continued inflation brought down the value of national currency to the US dollar from 1,050 units in early 1993 to 65,000 in 1994 and over 170,000 in August of 1995.(70)

The crises in industry and agricultural sector have also fatalistically affected the labour market of Ukraine. According to the UN Human Development report 1995 the actual unemployment rate was more than 40 per cent, when average Ukrainian living standards have declined by 80 per cent. One third of Ukrainian factories have discharged more than 12 per cent of their workers and half of the factories in heavy industry sector sent employees on vacations for their own expense or offered them a part-time employment.(71)

Another important and perhaps, most crucial problem for Ukrainian economy is Ukraine's dependence on Russian energy supplies and raw materials.(72) At the same time, country's industry is heavy and inefficient energy user, while domestic prices on energy remains below world's costs.(73)

Ensuing the situation, Russian leadership swiftly understood the leverage it had over Ukraine and since 1991 it has several times cut the amounts of oil and gas delivered to Ukraine.(74) Afterwards both countries have often failed to find an acceptable solution for the fuel problems - usually, Russia accused Ukraine of violation of the schedule of payments and cut energy supplies. At the end of the first half of 1995, Ukraine's total energy debt to Russia standed at RUB. 5,8 trl (US $ 1,7 bln.). The largest share of the debt or RUB. 5,5 trl. (US $ 1,5 bln.) was for natural gas. Considering the fact, that gas is the most commonly used form of energy in Ukraine,(75) such situation seriously affected, both economic and political independence of Ukraine.

The circumstances also worthened, after the second gas supplier to Ukraine, Turkmenistan cut off its deliveries in February 1994, because of Ukrainian gas non-payments on US $ 700 mln. debt. This further made the country more reliable on Russian energy sources.

Understanding of mighty instrument that Russia has had over Ukraine made Kiev look for alternative energy supplies. In 1992 Ukraine started talks with Iran and proposed to construct a new pipeline toward the Black Sea coast. However, neither Iran nor Ukraine were able to invest the amount needed to start the project (76).

The same can be said about Ukrainian intentions to guarantee energy aviability through the diversification of supplies, e.g. from Azerbaidzan or Central Asia - it would be an expensive alternative for Ukraine, because it requires new infrastructure of pipelines and terminals.

Thus far, Ukraine remains Russia's largest energy consumer of oil and gas. Although, Russian side actively used its advantage in an almost blackmailing way: through manipulation of prices and the quotas on energy supplies and demands of hard currency payments, Ukraine in fact still pays less compared to the world market price.(77)

The dependence of Ukraine upon Russian energy stock is an important factor in the relations between the countries. In 1993 Leonid Kuchma, then prime-minister, openly accused Russians in using Ukraine's oil shortages for extorting political concessions. Kuchma emphasized the fact, that the increases in prices on oil and gas supplied to Ukraine, directly coincided with aggravation of political relations between Moscow and Kiev.(78) Ukraine's gas non-payments have been accompanied with big tensions in political sphere, particularly, over the division of the Black Sea Fleet assets. Declining energetic basis had stimulated Ukraine to restrain from actions adverse to Russia and prerequisited many political concessions.

Finally, the deterioration of Ukrainian economy played a consequential role in the convalescence of separatist sentiments in Ukraine, especially in the Crimea. As one Western diplomat, who followed the Crimean events in 1995, suggested 'that feeling of being Russian, of belonging to Russia will not go away, but with a better economic situation, the Crimeans will not go to the barricades for it".(79)

There is also an evident transparency between economic, political and societal sectors of Ukraine's security on domestic level. Drastic falls in incomes have plunged many Ukrainians into poverty and led to growing public dissatisfaction through large-scale regional strikes in industrial regions.(80)


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