Between the two rounds of the presidential election, a strange calm has grasped Kyiv. The election billboards are gone, and so are the many local protests. The only drama takes place on the Internet, where the two remaining candidates duel with videos. This is a propitious moment to take the temperature of the Ukrainian economy.
Financial markets are happy. The hryvnia strengthened by 3 percent in relation to the US dollar in the week after the first round of the presidential election. The yield on sovereign Eurobonds has fallen to 7-8 percent, while it was 9-10 percent a couple of months ago. The financial market is thin, but it is intelligent and well informed. Why shouldn’t the market respond positively?
The March 31 presidential election was the freest and fairest election in Ukraine’s history. The outcome was clear and undisputed with 30 percent for Volodymyr Zelenskiy, 16 percent for incumbent President Petro Poroshenko, and 13.4 percent for Yulia Tymoshenko.
The voters were offered two clear programs. Poroshenko stood for the nationalist slogan “Army, Faith, Language,” while the other candidates emphasized corruption and economy, which were clearly the dominant concerns. Zelenskiy, Tymoshenko, and former Defense Minister Anatoly Hrytsenko all ran against corruption, and together their platforms gained 50 percent of the vote.
The vote against corruption was also a vote against the old establishment. The young and the poor united against the old elite. Therefore, Kyiv was one of Poroshenko’s best regions, where he reached 25 percent, but even so Zelenskiy won since the dreary suburbs supported him.
Never before has Ukraine been so united. The old division between Ukrainian-speaking west and Russian-speaking east has been largely overcome. Zelenskiy won 19 out of 24 regions. Only the westernmost regions of Lviv and Ternopol preferred Poroshenko and Ivano-Frankivsk went to Tymoshenko, while the single pro-Russian candidate Yuriy Boyko won in eastern Luhansk and Donetsk.
The election result put corruption and judicial reform at the top of the agenda, followed by the economy. The war with Russia has actually made Ukrainians more confident about their nation and their own identity, so they are ready to take the two extra steps to the rule of law and a more dynamic economy.
The fundamental problem with the Ukrainian economy is that no real property rights exist. Therefore, Ukraine suffers a steady capital outflow of 4-5 percent of GDP each year, as wealthy Ukrainians realize their money is not safe in Ukraine. Some law enforcement agency or banker may seize their funds in Ukraine. Since the judicial system remains pervasively corrupt, no recourse to law exists inside the country, only through bilateral investment treaties with other countries. Informed foreigners see that and keep real foreign direct investment at bay to only one percent of GDP each year, while it should be 4-5 percent of GDP.
As a consequence, Ukraine’s investment ratio is meager at about 20 percent of GDP, which caps its growth rate at 3 percent a year, although Ukraine now has open access to the immense European market. As Europe’s poorest country, Ukraine should grow by 7-8 percent a year, as it did during the golden years from 2000 to 2007, but then the investment ratio needs to rise to 28-30 percent of GDP, which it should if Ukraine succeeded in establishing property rights.
The three most important reforms that are needed to establish property rights are to redo the failed reforms of the procuracy and courts and to remove all economic functions from the purview of the SBU, which are the central demands of Oleksandr Danyliuk, who is one of Zelenskiy’s leading advisors.
Ukrainian banks have non-performing loans of more than 50 percent because in Ukraine the privileged do not pay, as was the case with the higher aristocracy in Europe in the 18th century. If the judicial system is fixed, they will be forced to pay or go bankrupt. The jungle of permits and bureaucracy needs to be cleaned up, which is also the best cure for the oligarchy. Much has already been done.
But what will happen during this election year? Probably not much. Ukraine’s fourteen-month standby agreement with the International Monetary Fund should keep the macroeconomy afloat, though public and external finances are tight, not allowing any dangerous experiments.
If Zelenskiy becomes president, he can do little about the economy until he possibly gains a parliamentary group in the October 27 parliamentary elections. Only in December, a new coalition government is expected to reform. Given the current popular mood, it had better be radical and reformist.
Anders Åslund is a senior fellow at the Atlantic Council and author of the forthcoming book “Russia’s Crony Capitalism: The Path from Market Economy to Kleptocracy.” Follow him on Twitter @anders_aslund.