COMMENT: What if Ukraine’s reforms don’t work?

By bne IntelliNews September 17, 2015

Mark Adomanis in Philadelphia -


September 10-12 saw the Yalta European Strategy (YES) conference, an annual gathering put on by Ukraianian tycoon Viktor Pinchuk. In the past this conference was held in the Livadia palace in Crimea, site of the infamous Yalta conference, but in the aftermath of Russia’s annexation of that territory it has been “temporarily” moved to Kyiv.

The theme of this year’s conference, “How New Ukraine’s Fate Affects Europe and the World”, was characteristic of the optimism and ideology on display. Note how the conference’s very title takes not one but two very controversial propositions for granted. First, that there is a fundamental break between Ukraine in 2015 and Ukraine in years past, and second, that the development of Ukraine, a lower-middle income country with a rapidly shrinking population of 44.9mn, substantially impacts “the world”.

The conference’s title was a faithful reflection of its content: all of the discussions over the course of the weekend were based on the dual assumptions that Ukraine had been fundamentally transformed and that the fight over Ukraine’s future was of first-order importance for the rest of the world. Dissenting from either proposition in even the most oblique and polite terms was considered about as intellectually reputable as creationism.

Another even more important operating assumption of the conference was that Ukraine’s current round of economic reforms would stoke rapid, self-sustaining economic growth. The efficacy of “reform” was taken as so obvious and self-evident that no discussion of content was deemed necessary. Reform would happen, it would succeed, it would strengthen the economy, and this success would have a transformative impact on both Ukraine and its large, angry, authoritarian neighbour to the east.

What no one seemed to consider was the following scenario: Ukraine passes “reform” but, due to a combination of political risk, poor demography and bad luck, nothing happens. Consider the rather uninspired economic performance of Croatia since it first signed its association agreement with the EU in 2001. From 2001-2014, Croatia grew at a paltry 1.3% compound annual growth rate.

Croatia actually joined the EU during that stretch, and so it was forced to reform its political, economic and legal institutions far more comprehensively than Ukraine is likely to. Maybe someone else can look at that graph and see the transformative impact of “reform”, but I certainly can’t.

This isn’t to adopt a Sergey Glazyev-like view that would have Ukraine devolve to a Zaire-like level of poverty and dysfunction by virtue of its embrace of Europe. Ukraine’s disastrous economic situation can’t get much worse, and if it did get worse, it would almost certainly be due to some kind of direct Russian military intervention, not due to any attempt to integrate more closely with the EU. All things being equal, free trade with a market as huge as Europe’s is a clear benefit for Ukraine and its citizens.

But the Yalta conference saw a belief in “reform” that often bordered on the religious. Again and again “reform” was invoked by both Europeans and Ukrainians in much the same way that believers invoke a higher power, sometimes with the exact same language (“we can only fail if we lose faith”).

Inflating expectations to this degree strikes me as extremely dangerous. It would be almost impossible for any country to meet the lofty goals set out at the YES conference, let alone one facing challenges as extreme as Ukraine’s. But the Ukrainian elite, which was extremely well represented at YES, appears to have decided that the risks from stoking popular expectations are negligible. The president, prime minister, minister of finance: all of them spoke about the rapid growth that “reform” would soon bring.

Whether hyping reform to such an extreme degree is the right decision remains to be seen. But the lesson from Kyiv could not have been more clear: damn the torpedoes, full speed ahead.

Mark Adomanis is a Wharton MBA by day, Russia analyst by night. Follow him on @MarkAdomanis.

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