Ukraine’s economy has gone from Soviet chaos to oligarch domination to a vital global trader of wheat and neon – and now Russian devastation

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(THE CONVERSATION) Many factories and businesses are still functioning. Other industries like information technology have barely missed a beat as workers continue to work in areas out of the direct line of fire.

But Ukraine has largely turned into a war economy. For example, a women’s shoe manufacturer uses Italian leather to make military boots, a construction company’s dump trucks have been converted into anti-aircraft launchers, and a steel and mining group manufactures anti-tank weapons and shelters. in concrete. And many computer scientists have joined Ukraine’s army of hackers aimed at defending infrastructure against cyberattacks or going on the offensive against Russia.

Yet the economic damage is considerable. At the start of the war, the Ukrainian central bank estimated that total production had fallen by half. The government estimates that Russia has already destroyed more than US$500 billion in economic assets. Extensive damage to airports, seaports and bridges crippled the country’s infrastructure and its ability to trade with other countries.

Beyond its importance in feeding, feeding and supporting its own citizens, Ukraine is also a vital part of the global economy with its exports of wheat, corn and neon. As a native of Ukraine and professor of economics, I would like to introduce you to the Ukrainian economy, how much it has changed since it was a Soviet republic and the consequences of the Russian war.

Ukraine’s command economy is collapsing


Ukraine inherited a “command economy” when it became an independent state after the dissolution of the Soviet Union in 1991. In a command economy, all decisions regarding production, investment, prices and revenues are centrally determined by a government.

Moreover, much of it was tied to a Soviet obsession with heavy industry and a huge military-industrial complex. In other words, the Ukrainian economy was great at mining ore and building intercontinental ballistic missiles, but less so at making the kinds of consumer goods vital to a modern economy.

And so, the economy collapsed soon after independence. Gross domestic product plunged over 60% in the early 1990s and inflation soared to over 10,000%. For ordinary Ukrainians, this collapse meant massive poverty and hardship: around 50% of households lived on less than $5.50 a day, and life expectancy fell by five years.

This has led to the massive privatization of state-owned enterprises as small as a grocery store to as large as giant steel mills – just like in Russia. It also created the class known as the oligarchs, made up of former communist elites and others with connections in government, who took control of large factories and other key productive assets little by little. or no charge. Some estimates suggest that more than 50% of GDP was controlled by oligarchs.

Although the oligarchs initially helped Ukraine’s biggest companies restore production capacity and revive the economy, they soon began to use their connections to stifle competition. Corruption was rampant, and the economy struggled to expand or diversify beyond the production of commodities and equipment like steel, iron ore, and mining equipment. In 2006, for example, base metals accounted for 43% of exports, followed by mineral products at 10% and chemicals at 8.8%.

And Russia was Ukraine’s biggest trading partner, buying 56% of all its exports. The UK was far behind with just 3.4%.

Ukraine’s import sources were only slightly more diversified. Goods from Russia accounted for 16% of Ukraine’s imports, just behind 23% of US imports.

Ukraine turns to the West

Ukraine’s economy began to change drastically around 2014, when Russia annexed Crimea and fomented insurgencies in the east of the country.

The events leading up to annexation were largely inspired by Ukrainians’ desire to forge closer economic and political ties with Europe and to end corruption. A deal forged in 2013 to integrate Ukraine more closely into the European Union was abruptly scrapped days before it was signed, and the government has signaled it plans to align itself more closely with Russia. Massive street protests followed, which eventually ousted the pro-Moscow president from power in what became known as the Maidan Revolution.

Russia responded by taking Crimea and supporting separatists in the Donbass region.

Since then, trade with Russia has plunged as Ukraine has strengthened its ties with other countries, especially those in Europe. The government almost immediately resumed negotiations with the EU on the trade agreement and signed it, which lowered or removed tariffs on most goods and made the EU its biggest trading partner.

In addition, the economic crisis caused by the conflict in the east led the International Monetary Fund to offer a $17.5 billion bailout in return for economic reforms that included a crackdown on corruption, an independent central bank, and processes improved democratic countries, many including Ukraine. subsequently implemented.

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As a result, Ukraine started sending a wider range of goods to the world, especially agricultural products such as wheat and sunflower oil, which were its top exports ahead of base metals in 2019. ukraine has one of the most fertile soils in the world. .

Another key growth industry in Ukraine was information technology, which accounted for 26% of export revenue in 2020. In fact, computer services were its top export to the United States in 2021.

Economic gains at risk

Ukraine’s increased integration into the global economy means that many of its products play a vital role in certain markets.

Ukraine was expected to account for 12% of global wheat exports in 2022. Egypt, Tunisia and Algeria, for example, are heavily dependent on Ukraine for their wheat, and there are fears of famine due to the Russian blockade on ships leaving Ukraine. The situation will only get worse as the conflict drags on and if farmers are unable to plant their seeds as the war rages on.

Ukraine also plays a vital role in the production of neon, an inert gas that is a key component of lasers used in chip manufacturing. Ukraine produces 90% of the semiconductor-grade neon used in the United States

It’s still unclear how many civilians Russia’s war in Ukraine has killed, and it’s unclear when the destruction will end. But another casualty of the invasion is likely to be Ukraine’s economy and the progress it has made in moving from an unbalanced Soviet economy to a diversified modern economy.

This article is republished from The Conversation under a Creative Commons license. Read the original article here: https://theconversation.com/ukraines-economy-went-from-soviet-chaos-to-oligarch-domination-to-vital-global-trader-of-wheat-and-neon-and-now-russian-devastation- 178971.

Christi C. Elwood