Independence Day 2010: a recovery, and a quiet change of constitution
The nineteenth anniversary arrives with growth back, a new IMF programme signed, a gas discount traded for a naval base lease — and a court case pending that will restore presidential power to what it was in 2003.
Nineteen years, and the country has a new president, a stable parliamentary majority for the first time since 2004, a fresh IMF programme and growth of around four per cent after last year's collapse. On the surface this is the most orderly Independence Day in half a decade.
The recovery is real but narrow. It is driven by the same steel and chemical exports as before, helped by a rebound in world prices and by a hryvnia that is now roughly forty per cent weaker than in 2008, which has done for competitiveness what a decade of productivity investment did not. Domestic demand remains weak. Bank lending has not restarted in any meaningful way, because the banks are still working through the loans they made before 2009.
The Kharkiv accords and how to read them
In April the government agreed to extend the Black Sea Fleet's basing rights in Sevastopol to 2042 in exchange for a discount of roughly a hundred dollars per thousand cubic metres on imported gas. The arrangement was ratified in a chaotic parliamentary session and is being presented as a straightforward commercial trade.
Judged commercially, it is a bad one, and the reason is structural rather than political. The discount is applied against a contract price formula that continues to escalate; the lease is fixed for thirty-two years. Over time the value of what was received falls while the value of what was given remains. Within three years the discount will be worth substantially less in real terms than at signature, and the incentive to renegotiate again — from a weaker position — will be back.
The wider point for anyone assessing Ukrainian counterparty risk is that this deal demonstrates the state's willingness to convert long-dated strategic assets into short-dated cash relief. That is a fiscal signal as much as a geopolitical one.
The constitutional question
A case is pending before the Constitutional Court on the validity of the 2004 amendments — the ones that shifted powers from president to parliament. The expectation in Kyiv is that the amendments will be annulled on procedural grounds, restoring the 1996 constitution and with it a presidency that appoints the government without parliamentary confirmation.
Whatever one thinks of the 2004 settlement — and it produced three years of institutional deadlock, as this archive has recorded — reversing it through a court ruling rather than a parliamentary vote sets a precedent that matters. It establishes that the constitutional text can be changed by litigation. Any investor pricing legal risk in Ukraine should file that away carefully.
The tax code and the business climate
A new Tax Code is being drafted for adoption by the end of the year. The draft consolidates a chaotic body of law and reduces the number of taxes, both genuine improvements. It also tightens the simplified taxation regime used by several hundred thousand small businesses and individual entrepreneurs, which is generating the most organised protest since 2004.
The technical case for reform is strong: the simplified system is widely used to disguise employment relationships and to break up revenue for tax purposes. The political execution is another matter, and the small-business protests in the autumn will force a partial retreat.
What to actually do this year
Three things are worth acting on. First, the IMF programme signed in July restores a policy anchor, and gas tariff increases for households — long avoided — are now conditionality. Assume energy costs rise for households and industry alike over the next three years, and check what that does to any consumer-facing model.
Second, agricultural land remains under a sales moratorium extended yet again, which means the only way into Ukrainian farming is through leases. Do the title work properly or do not do the deal.
Third, the free trade negotiations with the EU are progressing quietly and are the most consequential thing happening this year. Whatever the political mood, the technical harmonisation continues, and companies that align their certification, food safety and labelling to EU norms now will not have to do it twice.
Nineteen years in
The pattern by now is legible. Ukraine alternates between periods of institutional deadlock with stable rules and periods of institutional consolidation with unstable rules. It has just moved from the first to the second. The economic consequences of that swap take about three years to appear, and they are rarely what the government expects.
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