Russia’s recent aggression against Ukraine in the Black Sea has made it clear that the Kremlin still has strong leverage over Ukraine’s economy.
While Ukraine has been switching its trade routes more towards the European Union, Russia is still Ukraine’s top trade partner. In fact, Ukraine’s trade with Russia increased by 9 percent in terms of exports, reaching $4 billion, and by 40 percent in terms of imports in 2017 reaching $7.2 billion.
Moreover, a large chunk of Ukraine’s financial transactions still come from Russia, so it’s safe to say that Ukraine is still heavily reliant on Russia.
But the vulnerabilities lie not only in trade dominance.
All it takes for Russia is to take a surprise step – something it hasn’t done before – and alarms start to ring all over Ukraine, alarms that then resonate across the world. When the world sees tanks, ships, and military personnel in Ukraine on its TV screens, the international community gets spooked – especially investors.
For Russia, it’s quite easy to ratchet up the tension. When it sees Ukraine’s gross domestic product going up, the hryvnia currency getting stronger and more stable, and reports of more foreign investment deals – all it has to do is take some minor offensive action to throw Ukraine and the world back into suspense, creating unpredictability and instability for business.
Russia did this several times during the 2013-2014 EuroMaidan Revolution, and it took about two years for Ukraine’s economy to stabilize and for foreign investors to regain confidence. The incident in the Kerch Strait, while demonstrating the weakness of Ukraine’s navy, also showed that its economy remains fragile too: Right after the Coast Guard of the Russian Federal Security Service attacked and seized the three Ukrainian navy boats on Nov. 25, Ukraine’s hryvnia devalued, Ukrainian companies’ stock prices fell, and Westerners again started to have fears for Ukraine’s economic health.
If the Kremlin continues to meddle, the resulting internal economic turmoil could make more Ukrainians doubt the wisdom of their economic and political switch to the West. After all, Ukraine’s economy was twice as big under the Russian puppet President Viktor Yanukovych, and the hryvnia was at a fixed stable currency rate (despite its value being inflated). “Why not go back to the good old days?” they might ask.
Indeed, Hanna Hopko, an independent member of Ukraine’s parliament who chairs the Verkhovna Rada’s Committee on Foreign Affairs, told me recently that this is creating a “serious pro-Russian mood” in the southern regions, with people already starting to become nostalgic for the certainties of life under the Kremlin’s thumb.
Ukrainian factor
Meanwhile, Ukraine’s leadership has been doing a poor job of fulfilling the promises of the EuroMaidan, as still many think that they can keep to their corrupt practices, doing businesses as usual while also somehow reforming the country and making it more independent.
Five years into Russia’s war against Ukraine, I keep on hearing foreign business saying that it’s not so much the war that affects their decision on whether to invest in Ukraine or not, but the ongoing corruption, which creates a hostile environment for foreign investment.
They have a very good point: If Ukraine’s economy is strong, the war (which is still mainly restricted to Ukraine’s easternmost regions), becomes less and less of an issue. As the country becomes stronger, its borders better protected, and more foreigners see better prospects for doing business in the country, there is a ripple effect on everything else – plugging the brain drain, strengthening Ukraine’s infrastructure, and creating both economic and military resilience to the threat from Russia.
The weak points are obvious – take Ukraine’s state railway monopoly Ukrzaliznytsia, for example. The massive outdated cash cow for corruption still cannot meet the needs of agricultural firms that want to export grain abroad – it simply doesn’t have enough wagons to transport grain, which is a completely nonsensical situation for a country that is trying to attract more FDI. Reforming this monopoly into a transparent corporation will strengthen the country’s infrastructure and make Ukraine less vulnerable to Russia’s attempts to damage the economy.
And that’s just one example of many.
The fact that Ukraine’s southern Azov Sea coast, the water area closest to the aggressor Russia, has been neglected militarily (and thus economically) over the past four years, is also scandalous. This other obvious weak spot should have been given much more attention by Ukraine’s leadership. Instead, we see a non-transparent UkrOboronProm, Ukraine’s giant state-owned defense conglomerate, delaying the acceptance of coast guard ships from the U.S., and top Ukrainian oligarchs involved in shady ownership deals concerning the country’s only builder of modern patrol boats – two of which were captured by Russia on Nov. 25.
This neglect has had enormous consequences.
Before Russia began its occupation of Ukraine’s Crimea, Ukraine had 18 state-owned ports. After Russia’s military intervention, Ukraine was left with 13, forcing commercial trade routes to be switched towards Odesa. If Ukraine loses access to the Kerch Strait, then two more ports, important for the export of commodities such as steal and grain, will be lost.
Will Ukraine be able to survive such a hit? Probably, but at a high cost: Roughly 80 percent of Ukraine’s freight turnover now goes through the country’s ports in the southwest in the Odesa Oblast, and the Dnipro River – which also transports freight – flows into the Black Sea on the country’s western side, allowing ships to avoid the Russian-controlled Azov Sea.
Prevention measures
Meanwhile, Ukraine’s leadership needs to implement strong reforms – radical reforms – that will truly revolutionize the country’s economy. Too many vital changes have been delayed for the sake of corrupt interests of a few big businesspeople, and not for the sake of the majority of Ukraine’s citizens, most of whom want to live normal lives where corruption and bribe giving are a thing of the past.
All of the required changes are well known and have been repeatedly stated by top economic experts – land reform, a truly independent court and judicial system, and transparency in the state budget. These recipes are well tried elsewhere, and there is no need to spend time inventing new ones. Outside support for reform is still there, and good draft legislation for it has been submitted by international donors, think tanks and non-profits.
As former U.S. Ambassador to Ukraine John Herbst said recently, Ukraine’s leaders can turn Russia’s aggression to their own benefit through tactical diplomacy. But Ukraine can also use it as a driver to finally take difficult decisions that will quickly overhaul the Ukraine economy, and further reduce Russia’s ability to damage Ukraine’s economy.
Yet Ukrainian leaders still think that they can have it both ways – keep stealing money from their own people and living lavish lifestyles, while still receiving Western support, and still somehow achieving victory over an aggressor that remains much stronger than Ukraine.
The incident in the Kerch Strait should again remind Ukraine’s leadership that such thinking is delusional: Unless they change their ways, reform the country, cut corruption and strengthen Ukraine’s economy, their fortunes, and the overall fortunes of the entire contry, could take another hit in the next serious attack on Ukraine by the Kremlin.
