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Ukraineʼs Economic Transformation

After the fall of the Soviet Union creating an economically sound Ukraine

proved to be an extraordinary challenge, perhaps the biggest challenge comes from the

lack of balance and participation in both the political and economic spheres.  Currently

Ukrainian efforts at continued economic success and growth have largely been failures,

due to a fickle political environment, unsupported attempts at economic reform, and a

growing shadow economy; Ukraineʼs future greatly depends on the unification and

stability of political power and economic sensibility.

Ukraineʼs economic transformation from the USSR to an independent country

has not been easy and is no where near complete.  After the USSRʼs dissolution

Ukraine was forced to decide how the newly independent country would look, feel and

function apart from the USSR.  In order to recreate the Ukraine, a new political and

economic philosophy needed to be implemented and followed (p. 18 Zon).  Ukrainian

officials made it an objective to earn entrance into the European Union and to

participate within the World Trade Organization (pp. 5-6 Samokhvalov). Ukraine now

needed to transform their politics and their economy to meet stringent European

standards.  Preliminary reports showed Ukrainian independence would lead to greater

economic prosperity because Ukraine possesses a multitude of valuable natural and

industrial resources along with an educated workforce (pp. 53-54 Canadian Scholars &

p. 11 Shcherbak et al.).  However, after decades of Soviet control the Ukraine faced the

monumental challenge of entering a world economy after being restricted to the Soviet

economy. Ukraineʼs omission from the global market and its limited competition within

the USSR stunted economic development, technological progression and industrial

growth (pp. 8-9 Kravchuk). Ukraine was grossly underprepared to face an entire world

of booming, thriving, free market industry.  So, the question remained about how to take

Ukraineʼs Economic Transformation Elisabeth Hasbany 1


a country with severely stunted industrial growth and prepare it to enter the cut throat

world of free markets.

To begin this transformation, Ukrainian officials decided to restructure the

Soviet economic system in place into a free-market social economy (p. 58 Canadian

Scholars).  In order to minimize the negative economic consequences, Ukrainian

officials chose a system of gradualism to slowly move Ukraine into the new economy (p.

50 Zon).  During this time multiple systems arose which attempted to create a gradual

economic solution for the new country.  Of the many systems, two became key

components in restructuring Ukraineʼs future: the pro-independence movement and

pragmatist approach (p. 8 Samokhvalov). The pro-independence movement was

designed to sever Russian economic dependency, to diversify industrial trade and to

create connections within the Euro-Atlantic institutions (p. 8 Samokhvalov). By making

Ukraine more independent, Ukraineʼs economy would be more impervious to the market

extremes and the negative economic effects from political turbulence in former Soviet

states (p. 11 Kravchuk).  The pragmatist approach focuses on creating a secure and

thriving economy as the baseline for Ukrainian independence, with much of the

economy focused on creating and maintaining close industrial and trade relationships

with Russia (p. 8 Samokhvalov).  While these are two of the many options that were

available for President Kravchuk to implement, he choice not to focus on economic

reform, but instead to focus on nation-building (p. 38 Kravchuk). As a direct result of

President Kravchuk inaction, Ukraineʼs economy disintegrated, hyper inflation rose to

1000% and the real budget deficit was 25%-30% of Gross Domestic Product (pp. 50-51,

53 Zon). 

In the 1994 presidential election, Leoind Kuchma became Ukraineʼs new

president.  Unlike President Kravchuk, President Kuchma had a plan to reform

Ukraineʼs crumbling economy and to make it into a prosperous independent nation.  In

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the beginning of his presidency, President Kuchmaʼs plan reflected views similar to the

pro-independence movement, views which were approved by the International

Monetary Fund; his plans main components included generating an economically

independent Ukraine by reducing debt, creating and implementing the Ukrainian hryvnia

and easing foreign currency restrictions (p. 64 Kravchuk).  The implementation of

President Kuchmaʼs plan would raise Ukrainianʼs faith in the new economic system and,

more importantly, would demonstrate to foreign investors Ukraineʼs promising

investment potential. Unfortunately, by 1995 Kuchmaʼs plan for an independent

Ukrainian economy was all but deserted.  President Kuchma faced strong opposition

from parliament and from the politically elite (p. 65 Kravchuk).  It became evident that a

plan focusing on pro-independence goals would be too costly for the elite and too

strenuous on the economy, as a result President Kuchma returned to a weaker policy of

gradualism in transformation, focusing on pragmatist goals (p. 53 Zon & p. 9

Samokhvalov). By returning to Kravchukʼs limited reform system, Kuchma allowed

Ukraineʼs Gross Domestic Product to remain at -12.2% which contributed to the mass

migration of Ukrainians into other countries (p. 1, 4 Shcherbak et al.).

With one failure under his belt, in late 1995 President Kuchma put Prime

Minister Marchuk in charge of creating and developing another economic program to fit

the Ukrainian peopleʼs needs. After the pervious failure it was decided that the country

should follow a program reflective of Ukraineʼs unique perspective and history, thus, the

“Ukrainian Model” of reform goals was written and implemented (p. 68 Kravchuk). While

the idea if implementing a model to reflect the individual needs of a country seems on

point, it cannot be overlooked that years of presidential inaction and an uncooperative

parliament may be the root cause of previous reform failure, not an inefficient model.  

None the less, Prime Minster Marchuk produced a new program which was very similar

to that of President Kuchmaʼs original 1994 program; however, it slowed down the rate

Ukraineʼs Economic Transformation Elisabeth Hasbany 3


at which some of these reforms would take place (p. 69 Kravchuk).  Marchukʼs plan was

passed through the parliament without any problems; however, just like President

Kuchmaʼs reform plan, it was completely ignored by parliament members as they

continued to compose policies and to pass laws which explicitly ignored the laws and

regulations laid out by Marchuk (pp. 68-69 Kravchuk).  By mid 1996 President Kuchma

had fired Prime Minster Marchuk and had completely abandoned Marchukʼs plan for

economic reform (p. 70 Kravchuk).  It is interesting to note that the inclusion of the

“Ukrainian Model” did little if anything to promote concrete changes in parliamentsʼ

actions.  In fact, the modelʼs failure clearly illustrates the Ukrainian parliamentsʼ

dismissive attitude toward Ukraineʼs future economic prosperity.  This attitude is

especially highlighted by looking at countryʼs Gross Domestic Product rate which was a

dismal -10% at the time (p. 1 Shcherbak et al.).  Without a supported plan of action,

Ukraineʼs economy continued to flounder.

In order to keep receiving funding from the International Monetary Fund,

President Kuchma attempted another economic reform program, this time with the help

of Deputy Prime Minister Pynzenyk (p. 71-72 Kravchuk).  Pynzenykʼs program was

even more far reaching than that of President Kuchmaʼs first attempt and it was again

passed through the parliament without issues.  However, the parliament neglected to

approve or enact any of the new tax laws and regulations that were needed to make the

reformation a reality.  After fighting and failing to get the new laws implemented

Pynzenyk resigned from his position, and the economy continued to fail (p. 72

Kravchuk).  While history does allow for 20/20 vision, it still appears strange that

members of parliament would ignore a failing economy and the serious repercussions it

has on Ukraineʼs future.  As mentioned previously, the rate if migration from 1990-1999

caused the population of Ukraine to fall by a third (p. 9 Shcherbak et al).   Losing one

third of the workforce puts an incredible strain on an economy.  Without people to

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stimulate the economy, the timeline for a sustainable Ukrainian economic system

dramatically increases.  Also, another drastic side effect of losing a third of the

workforce is the acceleration of population aging.  Accelerating population aging

dramatically lowers the birthrate of a country which inevitably affects a countryʼs ability

to sustain economic growth; without a workforce the countryʼs economy will continue fail

(p. 10 Shcherbak et al). 

With a weakened economy, low popularity ratings, outrageous national debt

and a parliament clearly against any sort of economic reform that possessed short term

pain but long term results, President Kuchma was forced to implement yet another new

program aimed at eliminating national debt and increasing real economic growth. 

However, this task did not come with ease, as additional trouble loomed with the fall of

the Asian and Russian markets (p. 7 Shcherbak et al). Kuchmaʼs new program needed

to correct not only Ukraineʼs floundering economy, but it also needed to meet

international standards to allow Ukraine to continue collecting loan money from the

International Monetary Fund.  Kuchma put into action a plan which put the government

in control of banks, restricted currency and allowed the government to print more money

(p. 77 Kravchuk).  Kuchmaʼs new program met neither the requirements of the

International Monetary Fund nor the requirements of the World Bank; therefore, funding

was immediately ceased causing inflation to climb, resulting in the hryvniaʼs value to fall

drastically (p. 78 Kravchuk).  Kuchmaʼs continued failure prompted him to pull together

a new plan of action which would provide short term and long term goals for Ukraine

called “Ukraine 2010” (pp. 80-81 Kravchuk). Naturally, these new goals emerged just in

time for elections.

During the 1999 Ukrainian elections Kuchmaʼs “Ukraine 2010” program

managed to keep him afloat and helped him secure the presidency for an additional five

years (pp. 80-81 Kravchuk).  During this presidency Kuchma chose Viktor Yushchenko

Ukraineʼs Economic Transformation Elisabeth Hasbany 5


to serve as prime minister (p. 82 Kravchuk).  As Prime Minister, Yushchenko began to

transform Ukraineʼs political atmosphere into one of progress and reform.  Yushchenko

implemented a new plan called “1,000 Days of Reform in Ukraine.” This program

executed economic transformation with measurable success and attainable goals;

however, it still neglected the international approval that would allow the Ukraine to

receive international loans (pp. 83-86 Kravchuk).  Even with harsh criticism and many

set backs, Yushchenkoʼs reform program began to work, by 2000 the results were

measurable, GDP was up 6%, industrial output rose 12.9% and agriculture grew 9.2%

all the while debt began to decrease and the hryvniaʼs value began to stabilize (pp. 7-8

Shcherbak et al). Even though it took countless years to create an economic program

with results, Yushchenkoʼs results prove that Ukraine does possess the potential to

become economically independent and stable.  While Yushchenko preformed well as

Prime Minister, he and Kuchma did not see eye to eye on many issues (p. 84

Kravchuk). After the end of a long power struggle, Kuchma eventually relieved

Yushchenko of his position and made Viktor Yanukovych Prime Minister. 

After the end of Kuchma's Presidency it became clear that the election of 2004

would not be an easy battle to win. During the election year Yanukovych and

Yushchenko went head to head for the presidency. The results of the 2004 election

declared Yanukovych the winner (Arvedlund).  However, this result came with much

criticism as speculation grew over the election results (Arvedlund).  The Ukrainian

people felt the results were a forgery and they began to protest the election (Arvedlund). 

With so many people rallying for Yushchenko, Ukrainians took his campaign color of

orange and used it as the symbol of the revolution.  The Orange Revolution continued

to explode within the country until officials finally agreed on a re-vote.  Yushchenko

received 51.99% of the votes, thus making him Ukraineʼs new president (pp. 1-2

Woehrel). The Orange Revolution became a huge turning point in Ukraine; it came to

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represent the peopleʼs ability to speak out for what they wanted and to earn justice for

themselves.  Furthermore, the Orange Revolution could have caused a civil war or had

other severe costs, yet the protest remained peaceful and the country did not collapse

into turmoil.  President Yushchenkoʼs victory brought about a positive change in

Ukrainianʼs perception of the country; the people had a renewed faith in democracy.

By proving the Ukraine was a country able to stand up for democracy, Ukraine

more then ever wanted entrance into the European Union and the World Trade

Organization (pp. 9-10 Samokhvalov).  Especially with President Yushchenkoʼs new

policies supporting a pro-independence movement, many officials felt entrance or at

least validation from these organizations would help to solidify Ukraineʼs new position

(p. 11 Samokhvalov).  While the European Union and the World Trade Organization has

yet to allow Ukraine entrance, they have looked favorably at the Ukraine for their

attempt to stabilize and legitimize democratic values (pp. 9-10 Samokhvalov). However,

the lingering shadow economy still dramatically limits Ukraine's economic future and

keeps them out of the European Union and the World Trade Organization.

Ukraine's shadow economy has long caused serious economic and political

consequences; most of these consequences involve stunted economic growth, corrupt

officials, distrust of government amongst Ukrainians, rejection by international

organizations, and poor democratic development (p. iv USAID). The Ukrainian economy

is trapped in a system controlled by elite cartels (p. 4 USAID). These cartels are high

powered political and business officials using Ukraineʼs poorly structured economic

system to their advantage. The cartels possess so much economic power over Ukraine

that at times the shadow economy as accounted for more than 50% of Ukraineʼs Gross

Domestic Product (p. 4 Hughes).  The shadow economy does more than just make the

elite more powerful; it also creates a closed insider economy (p. 4 USAID). This means

that Ukraineʼs economy is unable to fully participate on a world wide level because

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competition is greatly decreased, growth is extremely limited, and foreign investment is

not allowed (p. 4 USAID).     

The causes of such an economy are varied; however there are some

contributing factors that allow Ukraine to remain so entrenched in the shadow economy.

One of contributing factors is Ukraine's taxation system. Ukraineʼs tax system is

extremely convoluted, inaccessible to many businesses and far too costly for many

corporations to use (p. 354 Canadian Scholars). Restructuring this system has been

attempted many times with little if any success, mostly due to parliamentʼs refusal to

implement new tax laws when they are created (pp. 72-73 Kravchuk). Without proper

tax laws in place, the average corporation does not possess the ability to make money

legitimately, causing these businesses to stay in the shadow economy.  Also

contributing to the shadow economyʼs continued existence is widespread cultural

acceptance of deep rooted corruption compounded with few expectations of public

officials (pp. 6-8 Neutze et al.). In order to stop the growth of the shadow economy more

opportunity must be created and Ukrainians must hold elected officials to higher

standards, or to any standards for that matter. Many people are drawn into the shadow

economy because it is a socially acceptable way to earn money in an economy with

failing industry and few legitimate work opportunities (p. 4 Hughes). Through education,

true economic growth and social reform, the shadow economy can be eliminated. Even

with social movements such as the Orange Revolution attempting to address corruption,

corruption remains a constant damaging factor to Ukraineʼs economic success that

must be corrected.

Beyond the shadow economy, there are many other threats to Ukraine's

economic future; the most dangerous of these being disease.  Currently disease is out

of control in the Ukraine. Among those diseases HIV/AIDS is the most serious, by 2016

AIDS could claim as many as 2.1 million Ukrainians; besides the lives lost, by 2010 HIV/

AIDS could consume one half of the Ministry of Health's budget (Meier). Adding to the

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serious threat of HIV/AIDS, tuberculosis and alcoholism are also causing huge losses in

the Ukraine. Due to the stress, the already weak economy could decrease by an

additional 1% per year (Meier).  Along with the health issues facing Ukraine immigration

is still depleting workforces and weakening the economy further.  The continued loss of

human capitol to both disease and immigration will have a dramatic impact on the

Ukraine within the next few years.  Along with disease and immigration the current

economic climate has caused another set back for Ukraine. Ukraine's Gross Domestic

Product is projected to shrink by 9% and the hryvniaʼs value to drop by 38% (BBC

News). Ukraine's economic problems are further complicated by President Yushchenko.

Once the figure for Ukrainian democracy and progress, opinions about Yushchenko

have begun to change. Yushchenko lost validity and trust by making radical changes in

the government, such as dissolving the parliament and the cabinet (Kramer). He has

also failed miserably to take on the ever present shadow economy and has even been

fighting allegations of corruption within his own officials (Meier & p. iv USAID). 

President Yushchenko is well on his way to becoming Dictator Yushchenko by

continuing to erode Ukraineʼs democratic values.  As of now Yushchenko has taken a

liberal democracy which fought to see him as president, and turned it into an illiberal

democracy.  Only time will tell if the Ukraineʼs democracy and economy will be able to

withstand yet another far reaching leader, grasping for more power.

From the collapse of the USSR up to the current president, it is clear that the

Ukraine continues to struggle to create a thriving democracy and a prosperous

economy.  The extreme ups and downs, paired with a failing parliament and poor

international connections continues to trouble Ukraine.  While many solutions are

available to the country it still remains to be seen how the Ukraine can balance the new

turbulence they have hit.  Hopefully though, the same people who protested during the

Orange Revolution will continue to fight for a democratic, independent Ukraine.

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Works Cited

Andrew, Kramer E. "Political Turmoil Jeopardizes Financial Relief for Ukraine."

New York Times 18 Oct. 2008, A9 sec.

Arvedlund, Erin E. "Ukraine's Rifts Extend to the Economy." New York Times

29 Nov. 2004, C5 sec.

Corruption Assessment: Ukraine. Rep. Washington D.C.: United State Agencty

International Development, 2006.

Hughes, Donna M. "The "Natasha" Trade: The Transnational Shadow Market

of Trafficking Women." Journal of International Affairs Spring 2000 53 (2000):

625-51.

Kravchuk, Robert S. Ukrainian Political Economy The First Ten Years. New

York: Palgrave Macmillan, 2002.

Meier, Andrew. "Endangered Revolution." National Geographic Magazine Mar.

2006. 22 Apr. 2009 <http://ngm.nationalgeographic.com/print/2006/03/Ukraine-

revolution>.

Neutze, Jan, and Adrian Karatnycky. Corruption, Democracy, and Investment

in Ukraine. Rep. Washington D.C.: The Atlantic Council of the United States,

2007.

Samokhvalov, Vsevolod. Relations in the Russian-Ukraine-EU triangle: 'zero-

sum fame' or not? Publication. Vol. N68. Paris: The European Union Institute

for Security Studies, 2007.

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Shcherbak, O. I., V. Tomashenko, M. Berizko, L. Golik, L. Yanevich, N.

Nichkalo, A. Simak, and O. Zaytseva. National Observatory report on

vocational education and training in Ukraine. Publication. Kiev: European

Training Foundation, 2001.

Society in transition social change in Ukraine in western perspectives. Toronto:

Canadian Scholars' P, 2003.

Steven Woehrel. Ukraine's Orange Revolution and U.S. Policy. Rep.

Washington D.C.: Congressional Research Service, 2005.

"Ukraine develops strategy for reducting shadow economy." ICPS newsletter

79 (25 Sept. 2000): 1-2.

"Ukraine's economy 'to shrink 9%'" BBC News 7 Apr. 2009. 22 Apr. 2009

<http//news.bbc.co.uk/go/pr/fr/-/2/hi/business/7988196.stm>.

Zon, Hans Van. The Political Economy of Independent Ukraine (Studies in

Economic Transition). New York: Palgrave Macmillan, 2000.

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