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Can Ukraine reinvent itself?

Glen Hodgson
Senior Fellow

Originally published in the Globe and Mail print edition on March 8, 2017.

A few weeks ago, I had an opportunity to make a second visit to Ukraine. Much has changed since my first trip four years ago. Most tellingly, my 2013 business trip included a visit to Crimea—which has been under Russian control since 2014. Following a rupture in political and economic relations with Russia and almost three years of severe political turbulence, Ukraine is attempting to reinvent itself and expand its business connections with the rest of the world.

The 2014 Maidan revolution saw massive street protests and eventually led to the election of a government that tilted away from Russia. Shortly thereafter, Russia invaded Crimea by stealth and provided support for an ongoing pro-Russian rebel insurrection in the eastern region of Ukraine. It is difficult to overstate how much the hostility between Russia and Ukraine has affected the lives of Ukrainians. Ukraine was a member of the Soviet Union until its independence in 1991. For a generation, Ukrainians were educated largely in Russian in secondary school, and many—particularly in the eastern part of the country—speak Russian as their first language.

The two countries had disputes in recent years about purchases of natural gas and other economic and political issues, but Ukraine continued to trade heavily with Russia, leaving it exposed to a rupture in political relations. The Russian aggression in 2014 was unexpected and has deeply altered the political and economic relationship.

Russia’s actions have had severe consequences for Ukraine's economy, which has suffered two years of recession. Gross Domestic Product contracted by 10 per cent in 2015. Unemployment climbed, the currency depreciated sharply and inflation soared toward 50 per cent, resulting in a collapse in purchasing power for many Ukrainians. The Ukrainian economy has now started to grow again and could expand by between 2 to 3 per cent in 2017. But deep economic reform is desperately required if the economy is to flourish.

Moreover, Ukraine faces major challenges to market-based reform. The Ukrainian economy remains heavily influenced by local oligarchs. Corruption is endemic, and due legal process and enforcement of property rights is haphazard. Moreover, Ukraine has to build and strengthen numerous government institutions that are standard in Canada and other well-functioning market economies. Enforcement of its competition policy is weak, as is oversight of financial institutions; it has no deposit insurance system.

Unlike Canada, Ukraine has no small business bank, and few programs to help small businesses access credit and develop business skills and markets; and little expertise in export market development and trade credit support. Since independence, Ukraine’s efforts to build the appropriate institutions have been hampered by poor governance and limited state resources. External assistance can help build these government institutions, and here Canada has stepped up.

Canada holds a unique position in terms of its international relationship with Ukraine. The Ukrainian diaspora in Canada numbers around 2 million people, including this author, and the community is well-organized and committed to supporting Ukraine. A bilateral free trade deal has been negotiated and is soon expected to be ratified by the Ukrainian and Canadian parliaments.

The previous and current Canadian governments have provided considerable support. Along with the European Union, United States and Germany, Canada is one of the largest foreign aid donors operating in Ukraine. A number of development projects are in place, including one being delivered by The Conference Board of Canada on building Ukrainian trade and investment linkages with Canada. Many Canadians are on the ground in Ukraine offering assistance and advice.

Ukraine needs ambitious economic reform and better institutions if it is going to attract investment and emerge as a prosperous and thriving democracy. Reinventing Ukraine on the fly won’t be easy, but it appears unavoidable if the country is to prosper.

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