Economic Reforms in Ukraine:
Possibilities, Problems, Security Implications

Victor Petrov

Ukraine had great potential, even within the USSR, but it was held back by its dependence on the former central planning system. Those days are gone forever, says Minister Petrov. The kind of economic reforms that will realise Ukraine's new potential are now past the point of no return. Tough monetary policy has reduced inflation to nearly a quarter of its 1994 level. Price controls have been cut and government subsidies slashed. Unemployment has inevitably grown, and the government has tried to create a strong safety net to protect the most vulnerable. Ukraine needs international help, especially with decommissioning the Chernobyl nuclear power station and converting its arms industry, but it can offer a large market to trading partners, and promises to be an enthusiastic member of the 'New Europe'.

Victor Petrov, Minister of Engineering, Military Industrial Complex and Conversion of Ukraine.

In accordance with the will of its people, Ukraine made a historic choice in favour of independence. It is nearly four years since the proclamation of independence on 24 August, 1991, and the all-Ukrainian referendum. Our country has been constructing a sovereign, democratic and law-abiding state. Its efforts to integrate itself into the world and European communities, in our view, proved to be quite fruitful.

At the same time, as any other newly-born state, Ukraine is living nowadays through a complicated period of building up its statehood. This process turns out to be not completely painless and is sometimes controversial, but there is a general aspiration toward achieving real independence, in the economic sphere in particular, in parallel with profound social reforms.

Though the process of creation of our own state institutions is still underway, Ukraine already has all the basic attributes of statehood, including armed forces.

The emergence of Ukraine in the very centre of Europe as a new state with a population of 52 million and a territory of 603.7 thousand square kilometres is, without any doubt, a great geopolitical event.

Following the democratic changes, Ukraine seems to be moving closer into the focus of the world's attention. Taking into account its geopolitical position, recognition on the international political arena and potential economic opportunities, Ukraine is becoming increasingly attractive for foreign partners.

The Economic Potential of Ukraine

As a component part of the former USSR, Ukraine stood out for its economic, scientific and technological potential.

Production of iron, manganese and uranium ores, sulphur, coal, construction materials as well as metallurgy, were the most developed industries in Ukraine. Chemical (including oil processing and production of mineral fertilisers) and construction complexes, the production of many categories of machines and equipment were also at a significant level of development. Ukraine produces aircraft, marine and fluvial vessels, armament systems (including modern missiles of various classes and purposes), computers, radio electronic equipment, optic devices and other high-tech products.

Nevertheless, Ukraine inherited from the former USSR a disproportionately distorted economy. It is overloaded by highly material and energy consuming industries like coal, iron ore and metal production. Technological cycles of high-tech competitive production were - as a rule - tightly linked with industrial enterprises of Russia.

The dependence on energy supplies (natural gas and oil) which Ukraine used to import at low prices is extremely sensitive. But a centralised planning system of management of the national economy, as well as total state ownership, turned out to be perhaps the most negative factors.

This was the cause of the economic inertness of private individuals and collectives and of the development of such negative trends as monopolism, absence of initiative, imbalanced prices, a large number of state-supported enterprises burdened with losses and, as a result, of the significant decrease in competitivity of the production of Ukrainian enterprises. The need for radical economic reform was evident and well understood. However, until recently there was a lack of strong political will for introducing reforms. It is only with the election of President L. Kuchma that this process has become irreversible.

Economic Situation in Ukraine. Progress of Democratic and Economic Reforms

Today it is an undeniable fact that real implementation of radical economic reforms, the construction of a qualitatively new economic system and the comprehensive democratisation of social life have started in Ukraine. The Memorandum of Understanding signed between the Government of Ukraine and the International Monetary Fund is aimed at economic reform. The economic programme developed on its basis provides for achieving macroeconomic stability and implementation of economic reform. The liberalisation of the economy, its restructuring and changing of property forms serve as mechanisms to solve these issues.

Political prerequisites are being created for it. Recently the Verkhovna Rada (Parliament) of Ukraine approved the Law on state power and local government. Leonid Kuchma, the President of Ukraine, and Oleksandr Moroz, the Chairman of the Parliament, signed the Constitutional Accord.

The programme of economic transformation which had been proposed by the President and approved by the Parliament of Ukraine is now under implementation and bringing its first results. The implementation of a rigid monetary policy resulted in a decrease of the monthly inflation rate to 5.8 percent, that is almost 3.7 times less than it was in January of this year. The Ukrainian karbovanets exchange rate has been unified. It has been stabilised and is determined now in an open interbank foreign exchange market.

Thanks to these drastic measures it has become possible to stop the most destructive process - the bankruptcy of the state finance system. All this has created the necessary prerequisites for introducing a full-fledged national monetary unit.

The state has stopped subsidising unprofitable enterprises in all sectors of the economy. Now the profitability of enterprises will be determined solely by the qualifications and persistence of managers and the desire of workers.

The state's foreign economic activity is fully liberalised. We hope that the abolition of quotas and the licensing of export operations, except for goods subject to special purpose export and other limitations stipulated by international agreements, will stimulate foreign trade. The import regime has also been simplified.

A detailed plan of mass privatisation has been drawn up. It stipulates a substantial decrease in the proportion of state enterprises. About eight thousand medium and large-size enterprises are to be privatised during this year. The government intends to reform the state monopoly for ownership of land. In collective farms the division of land into shares is near completion.

Further changes in the Land Code are being prepared to enable farmers to get land within a shortest time possible. Changes in legislation will also facilitate privatisation of buildings and land in cities and towns. The market transformation of its economy and accelerated implementation of this process constitutes the basis of the economic policy of Ukraine. Measures to reduce government interference in the economy are being undertaken.

Owing to the introduction of the economic reform programme, administrative interference in the price formation process and the limitation of income level have been considerably reduced. The purpose of these measures is to stimulate a more effective usage of scarce resources, including imported energy resources, and to reduce the burden of excessive state budget subsidies.

At the producers' level, price regulation will be limited mainly to natural monopolies. The full cost of energy supply must be distributed among industrial and agricultural consumers. However, all these reforms proceed in a rather difficult way.

The main deterrent is a deep recession in the production sector. There are objective reasons for this, in particular the halt in the production of goods not needed by consumers. But we should also not disregard the psychological factors of the situation - as many managers were not prepared to work in the new market environment. Under these conditions unemployment is inevitable - an occurrence which was considered impossible in the former Soviet Union.

The transition to purchasing energy resources at world prices is another serious factor. The prices increased thousands of times as compared to the former symbolic prices - to reach the world market price levels. This is why serious steps were undertaken to create an effective social security system for the most vulnerable population strata (children, pensioners, disabled individuals, students, etc.).

Everyone in Ukraine is aware of the fact that reforming the economy and political structures should be performed first and foremost by our own efforts. But, nevertheless, Ukraine requires fast and substantial international support, technical and financial assistance. In the long run such assistance paves the way for our partners to a large Ukrainian market and, what is of utmost importance, will contribute to ensuring international security.

Integration of Ukraine into International Structures

The integration of Ukraine into the international community is one of the priorities of our policy. The acceleration of this process undoubtedly depends on overcoming the crisis in the national economy, a successful implementation of economic reforms and the creation of market mechanisms based on a corresponding legal foundation.

The development of relations between Ukraine and the European Union has been recently intensified. A significant impulse in changing the EU stand towards Ukraine was given by the decision of the Verkhovna Rada (Parliament) of Ukraine to ratify START and its accession to NPT.

The signing on 14 June, 1994 of the Partnership and Cooperation Agreement between Ukraine and the EU, and its ratification by the Verkhovna Rada last November, were made possible by the changes in the political climate. According to the provisions of this Agreement, each party grants to the other a Most Favoured Nation status on the conditions envisaged by GATT.

We regard as a positive development the consent of the EU to abolish quantitative restrictions on some Ukrainian goods. Finally, the Interim Agreement on trade and trade-related issues was signed during President Kuchma's visit to Brussels on 1 June 1995.

Having declared its independence, Ukraine stated that it regards no country as its enemy. At the time of the proclamation of its independence Ukraine had armed forces of roughly 700,000 servicemen in three military districts. They were armed with 6,500 tanks, 11,000 military personnel vehicles, 2,000 guns, and 1,100 combat aircraft.

The Strategic Nuclear Forces stationed in Ukraine consisted of 176 intercontinental ballistic missiles with 1,280 warheads, as well as of 40 strategic bombers which had about 600 nuclear charges.

Ukraine has put forward the initiative to remove nuclear weapons from its soil and consistently fulfils its obligations despite numerous problems that arise due to the reduction of huge armed units, as well as the necessity to utilise nuclear weapons. As of today 60 missile complexes have been put off active duty. The accession of Ukraine to NPT has become an important step confirming the consistency of this policy.

The tactical nuclear weapons (about 2,600 missiles) which fell under Ukraine's jurisdiction, were transported to Russia in 1992 in line with the agreement between the two countries. The Presidents of Ukraine and Russia signed the agreement on the division of the Black Sea Fleet.

In accordance with the decision of the Parliament of Ukraine, and as a result of reforms and significant reductions, the number of personnel of the Ukrainian armed forces will be 450,000 by the end of 1995. This constitutes 0.8 percent of the Ukrainian population. But the structure, number of troops and other characteristics of the armed forces have not yet been optimised. The process of reduction of the Ukrainian armed forces is being carried out under the control of corresponding international organisations.

Ukraine and the "Partnership for Peace" Programme

Today we have another important factor - the factor which has emerged just recently - the "Partnership for Peace" programme.

Ukraine highly appreciates the active adaptation of NATO to new realities and challenges. We positively accept the measures undertaken to reorganise political and military structures within the Alliance.

Ukraine believes that NATO is capable of playing a significant role in the creation of a reliable, comprehensive system of European security based not on a bloc-to-bloc confrontation, but on mutually complementary interlocking institutions.

Ukraine appreciates the role of NATO in:

  • Promoting the climate of confidence in Europe and beyond it.
  • Organising a dialogue between West and East on various military and political issues, including the problems of international security and stability, and environmental protection.
  • Working out approaches to arms control and disarmament issues and preventing the proliferation of weapons of mass destruction.

Our conceptual vision of security risks coincides with NATO's view in that the notion of "security" includes not only the military dimension but political, economic, social and ecological aspects as well, and that it is inseparable from these and other components.

Ukraine highly appreciates the openness of NATO towards the countries of Central and Eastern Europe. We support the creation and broadening of the opportunities for dialogue and consultations with partners - the opportunities that emerged as a result of NATO's transformation.

We accept the proposals of NATO to deepen and to intensify its practical cooperation with other European countries by developing the "Partnership for Peace" programme as a promising initiative directed to strengthen security and stability in Europe.

Ukraine would like to deepen its relations with NATO in these directions:

  • Individualised cooperation in the framework of the "Partnership for Peace" and with the Atlantic Council on a bilateral basis, first of all in the military field.
  • Application of NATO's experience and standards to the armed forces of Ukraine being reformed and the provision of democratic control over the latter.
  • Participation in peacekeeping operations realised by the armed forces of the NATO countries, getting the experience of the NATO countries in operations to maintain peace.
  • Participation in military studies in the framework of the "Partnership for Peace".
  • BilateraI cooperation in the process of arms reduction and conversion of military-industrial complex.
  • Sharing experience and planning activity of the civil defence services in extraordinary situations.
  • Participation of Ukraine in discussing all the aspects of possible NATO extension.

The Chernobyl Problems

The Government of Ukraine has adopted an important and responsible decision on decommissioning the Chernobyl nuclear power plant before the year 2000. The Statement of the Government of Ukraine on this decision has been adopted. The Government of Ukraine has prepared a schedule for shutting down the Chernobyl nuclear power plant which envisages the beginning of work on closing the second reactor in 1996. Furthermore, the Programme of Measures, which are necessary to fulfil the schedule in time, has been prepared by the State Committee of Ukraine on Use of Nuclear Energy. The schedule and the Programme of Measures were handed over to the G7 Delegation during the meeting on 16-17 May 1995, in Kiev.

Thus, the Ukrainian side has completely fulfilled its obligations concerning the solution of the Chernobyl nuclear power plant problem. The Governmental Delegation in charge of carrying on the negotiations on all the issues which are connected with this problem has been organised and it has received appropriate powers.

But it's necessary to note that under conditions of an unbalanced economy and an energy crisis Ukraine cannot solve the Chernobyl problem without assistance. Ukraine is waiting for an adequate reaction of the Western countries supporting the decision to put out of operation the Chernobyl nuclear power plant. The expenses for closing down the Chernobyl nuclear power plant will total up to 4 billion US dollars. This estimation has been made by the Ukrainian and American experts who have carried out a joint study. That is why we hope to get appropriate financial and technical assistance to realise the measures which will ensure putting out of operation the Chernobyl nuclear power plant. These measures envisage:

  • Making storehouses for the exhausted nuclear fuel and radioactive waste products.
  • Building the compensating capacities in Slavutich region to solve the employment problem of the region's population.
  • Transposition of the "Cover" object - the so-called "Sarcophagus" - over the damaged block to create an ecologically safe system.

Ukraine will cover a considerable part of the expenses for realising this wide-ranging programme with its own economic resources.

Military and Industrial Complex Conversion

The scientific, technical and industrial potential of the Ukrainian defence factories constituted about one-third of the whole Soviet military and industrial complex. It was concentrated mainly in the missile/space sector, ship-building, aviation, tank construction, radio electronics and communications.

The transition from military confrontation to cooperation between the USA, Western European countries and former USSR countries - and the sharp reduction of military manufacturing which resulted - left independent Ukraine with complicated conversion problems. Just after the creation of our state we started tackling this problem.

The priorities of military factory restructuring were defined on the basis of diversification. Today this programme consists of 52 complex and targeted scientific and technical programmes, grouped in 21 priority areas. The most important, as defined by the state, was the creation of up-to-date energy, ecology and agriculture equipment, as well as medical systems. A lot should be done in aviation, ship-building and automotive sectors and in other science-related areas.

No country in the world has experienced in technical production sectors, such a shocking rate of decline which was counted in tens of percent per year (our expression - "landslide conversion"). This is why state assistance for this process was foreseen and realised. At the same time this assistance appeared to be drastically lower than that which was really needed. This is why we feel our conversion which is now going on to be the most complex problem that we face.

The conversion's most negative consequence for separate factories, as well as for the sector of economy and the country as a whole, is the liquidation of many thousands of jobs. It is clear that it creates extreme social tensions in the society. But even in these extremely hard conditions some positive results were reached. Thus, the world famous missile factory "Juzhny" started manufacturing trolleybuses. Shipyards in Nikolaev which formerly built aircraft carriers and other military vessels converted to the production of oil tanks and refrigerators. Kyiv enterprises - which used to build land-to-air and air-to-air missiles - turned to the construction of medical equipment, gas calculators, and many other kinds of civil products.

There are many similar examples that illustrate how the measures which have been taken in time helped save and reorient the most valuable part of the scientific and industrial potential in the military complex, towards a solution of the tasks facing the Ukrainian economy.

The work of creating and realising such programmes gave us the opportunity to elaborate workable enterprise conversion projects within the military complex into joint ventures to establish credit and investment.

Ukraine is now modernising its legislature with the aim of creating the most favourable conditions to attract foreign investments. The investment priorities of Ukraine include:

  • Energy complex development, introducing energy and resources saving technologies.
  • Agro-industrial complex development.
  • Speeding up medical and microbiological industry development.
  • Overcoming the Chernobyl disaster consequences.

Partnership Perspectives

Important changes in relations between Ukraine and the West are underway. Very favourable relationships exist between Ukraine and the USA, some countries of Western Europe, Canada and Japan.

The necessary external conditions have been created in the Western direction for the economic reconstruction follow-up and activation of the efforts to get Ukraine out of the economic crisis.

The recognition of the status of Ukraine as a state with a transition economy is very important, and the coming year will be an important one for further extending our cooperation with the European structures - the EU, NATO, the European Council and the OSCE.

Our participation in the NATO Economics Colloquium "Status of economic reforms in cooperation partner countries in the mid-1990s: opportunities, constraints, security implications" confirms it.

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