Independence Day 2016: a quarter of a century, and a new trade map
Twenty-five years. The free trade area with the EU took effect in January, russia closed its own preferential regime in response, and Ukrainian trade flows rearranged themselves faster than anyone predicted.
Twenty-five years is the anniversary that invites comparison, so here is the useful one. In 1991 Ukraine and Poland had roughly the same output per head. Today Poland's is around three times higher. Nothing about geography, resources, education or industrial inheritance explains that gap. Policy does, and mostly the policy of the first decade.
That framing is worth stating on a quarter-century anniversary precisely because this is the first year in a long time in which the direction of travel has genuinely changed.
The DCFTA's first year
The deep and comprehensive free trade area took effect on 1 January. russia responded by suspending its own free trade regime with Ukraine and imposing a transit ban on Ukrainian goods crossing its territory toward Central Asia.
The results after eight months are clearer than most forecasts allowed. Exports to the EU now account for well over a third of the total, up from around a quarter three years ago. Exports to russia have fallen to around ten per cent, from a quarter. In absolute terms Ukraine has lost a great deal — total exports are far below their 2013 level — but the composition has shifted decisively, and the EU share is growing while the russian share is not coming back.
The winners are agriculture and food processing, which had capacity and needed only market access; the IT services sector, which sells across borders without customs at all; and light manufacturing operating on contract for EU brands. The losers are heavy engineering and railway equipment, whose customer base was in the CIS and which have no equivalent buyer in Europe.
Tariff quotas are the recurring practical complaint. For sensitive agricultural products the EU grants duty-free access only up to fixed annual volumes, and several quotas — honey, poultry, sugar, some grains — are exhausted within weeks of the year opening. That is a real constraint, and it is negotiable over time; the quotas were set in 2012 based on trade volumes that are already obsolete.
ProZorro
From this month, electronic public procurement is mandatory for all state and municipal buyers. Every tender is published, every bid is visible after the auction, and the analytics are open to anyone.
It is difficult to overstate how large a change this is in a country where public purchasing was for twenty-five years the primary mechanism for converting state budgets into private wealth. The savings are being measured in the low tens of per cent on comparable purchases. More importantly, the market has become legible: a foreign supplier can now see what the state buys, at what price, from whom, and can bid without a local partner whose main asset is a relationship.
The banking endgame
The clean-up continues and the largest remaining problem is unresolved. The country's biggest bank by deposits has a related-party loan book that everyone in the market can estimate and nobody official will describe. Resolution is coming, it will be expensive, and it will be paid for through the budget.
For depositors and businesses the practical point is straightforward: the state will not allow a systemic payment failure, but shareholders and unsecured creditors of failed banks have not been protected and will not be. Choose your banking relationships on balance-sheet quality, not on branch convenience.
Where the economy is
Growth has returned at around two per cent — modest, but positive for the first time since 2013. Inflation has fallen from above forty per cent to the mid-teens. The exchange rate has been broadly stable near twenty-five for a year. Reserves have rebuilt to around fifteen billion dollars.
None of this constitutes recovery. Output is roughly a fifth below 2013. Real wages are far below their pre-crisis level, and emigration to Poland and the Czech Republic has become the largest labour market phenomenon in the country. That outflow is the single biggest medium-term risk to everything else described here, and almost nothing is being done about it.
Twenty-five years in
The first quarter century produced a functioning market economy attached to a state that could not enforce its own rules. The reforms of the past two years — banking, energy pricing, procurement, and the beginnings of an anti-corruption architecture — are the first serious attempt to fix the second half of that sentence.
They are incomplete, contested, and reversible. But for the first time since 1991 the direction is unambiguous, and the external anchor holding it in place is a legal agreement rather than a political promise.
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