Independence Day 2012: after the tournament, before the reckoning

The twenty-first anniversary follows the most successful piece of international presentation in Ukraine's history. Four cities hosted the European Championship in June. The airports at Kyiv, Lviv, Donetsk and Kharkiv were rebuilt, the stadiums were finished, the roads between them were mostly finished, and several hundred thousand foreign visitors arrived and left with a substantially better impression than they came with.

The infrastructure is the durable part and deserves an honest accounting. Lviv now has an airport that can handle low-cost carriers, and the effect on tourism and on the software industry's ability to recruit is already visible. The Kyiv–Kharkiv and Kyiv–Lviv road corridors are transformed. Rail rolling stock was renewed on the main intercity routes. None of this would have happened on a normal capital investment cycle, and all of it will still be in use in 2030.

The cost side

The bill was very large, the procurement was mostly non-competitive, and the difference between what comparable infrastructure costs in Poland and what it cost here is the clearest single measure of the procurement problem this country has. Poland hosted the same tournament and built more for less.

That comparison is worth holding on to, because it separates two things that get confused. Ukraine can build. What it cannot yet do is buy — that is, run a procurement process where the price paid resembles the price a competitive market would produce. This is the specific gap that ProZorro will attack four years from now, and the reason that reform matters more than its dull name suggests.

The economy has stopped

Growth for the year will be somewhere near zero. Steel demand from Europe has weakened with the eurozone crisis, Chinese capacity has come online, and Ukrainian mills are selling at or below cash cost on some product lines. The harvest is weaker than last year's record.

Meanwhile the exchange rate is being held at roughly eight to the dollar by direct intervention. Reserves have fallen substantially over the year. Every element of the 2008 setup is present again: an overvalued fixed rate, a widening current account deficit, and short-term external debt that has to be rolled. The difference is that there is no IMF programme in place, because the gas tariff conditionality remains unacceptable to the government in an election year.

The October election and the language law

Parliamentary elections are due in October under a restored mixed system — half the seats by party list, half in single-member districts. The mixed system favours candidates with local resources and independent access to finance, which in practice means the outcome will be shaped by district-level negotiation more than by national campaigning.

The language law adopted in July, which allows regional languages official status where speakers exceed ten per cent, was passed in a session that ended in physical confrontation. Its practical administrative effect is limited. Its political effect is to make identity the organising axis of the campaign, which suits both major parties and serves no one else.

What businesses should be doing

Plan for a devaluation. Not because it is certain in any particular month, but because holding a fixed rate against a deteriorating external position with no policy anchor has one historical outcome and Ukraine has already demonstrated it once. Price the scenario, match your currencies, and do not sign a long dollar-denominated obligation against hryvnia revenue.

Beyond that, the DCFTA text with the EU was initialled in March. It is not signed and the political conditions attached — principally the treatment of imprisoned opposition figures — are not being met. But the text exists, and the technical requirements in it are the specification for what Ukrainian regulation will eventually look like. Reading it now is free; complying with it later will not be.

Twenty-one years in

The tournament demonstrated what this country can do when there is a deadline, external scrutiny and political consensus on an objective. The economy in the second half of this year demonstrates what happens without those three conditions. Both facts are true simultaneously, and any assessment that keeps only one of them is not describing Ukraine.

Related in this archive

• Independence Day 2013: a trade war already under way
• Independence Day 2011: twenty years, and what was actually built
• Holodomor: the famine of 1932–33 and why grain carries weight here
• Ukraine Annual Review 2012: stagnation with one door opened