Independence Day 2011: twenty years, and what was actually built
Two decades is long enough to judge. On the anniversary, an inventory of what Ukraine constructed since 1991 — and of the one thing it did not.
Twenty years is the point at which excuses about transition stop working. A country that became independent in 1991 has now had as long to build institutions as post-war West Germany had before the Wirtschaftswunder was obvious to everyone. So the anniversary deserves an inventory rather than a speech.
Start with what exists. Ukraine has a private sector that accounts for the large majority of employment and output, built almost entirely since 1992. It has a functioning consumer market of forty-five million people, with retail chains, shopping centres, mobile penetration above saturation, and a banking system that — despite everything in 2009 — still processes payments reliably. It has an agricultural sector that has gone from being a subsidy sink to one of the world's significant grain exporters. It has a software services industry approaching a billion dollars in exports that essentially did not exist in 2000.
The trade transformation nobody planned
The most under-noticed change of the twenty years is the composition of trade. In 1991 Ukraine's external commerce was almost entirely with other Soviet republics, at administered prices, in a currency that did not convert. Today roughly a quarter goes to the EU, a similar share to russia, and the rest is genuinely diversified — Turkey, China, Egypt, India, the Gulf.
That diversification was not a policy achievement. It happened because Ukrainian steel and grain are commodities that clear at world prices and because exporters found buyers wherever they could. But it created something valuable: an economy with several markets rather than one, and therefore some capacity to absorb the loss of any single one. That capacity will be tested within three years, and it will matter enormously.
What was not built
The missing institution is the one that decides disputes. Twenty years in, Ukraine has a court system that most participants in the economy do not use for anything that matters. Commercial contracts of any size are written under English law with arbitration in London, Stockholm or Vienna. Property is held through holding structures in Cyprus and the Netherlands, not because of tax alone but because Dutch and Cypriot corporate law is enforceable and Ukrainian corporate law is negotiable.
The cost of this is not abstract. It is the reason a Ukrainian company pays several hundred basis points more for capital than an equivalent Polish one. It is the reason mid-sized businesses cannot be sold at a normal multiple. It is the reason foreign direct investment has arrived overwhelmingly in sectors where the asset is physically immovable and politically visible — steel, telecoms, banking, retail — and almost nowhere else.
This year's prosecution of the former prime minister on charges arising from a gas contract has made the point internationally in a way that a thousand rule-of-law reports did not. Whatever the merits of the case, its effect on how Ukrainian legal risk is priced abroad is measurable and negative.
The economy in 2011
Growth is around five per cent, recovering with steel and a good harvest. The IMF programme is off track over gas tariffs, again. The new Tax Code came into force in January and the simplified-regime provisions were softened after last winter's protests, which is a useful demonstration that organised business constituencies can now change policy — something that was not true in 2004.
The current account is deteriorating and reserves are being used to hold the exchange rate near eight. This is the 2008 structure reassembling itself, more slowly and with a smaller banking-sector component. It will not end differently.
Twenty years in
The honest summary is that Ukraine built an economy and a society but not a state. The private sector, the consumer market and the export base all work. The tax administration, the courts, the prosecution service and the regulatory agencies work in a different sense: they function, but as instruments rather than as institutions.
Everything that happens in this country over the next decade — and a great deal is about to — turns on whether that gap closes. Nothing in the first twenty years suggests it closes on its own.
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