Ukrainian economy slumps

Despite making the reform of corrupt business and attracting foreign investment central to his public policy pronouncements, Ukrainian President Viktor Yushchenko must be more than a little worried by the economy’s latest growth figures:

Growth in the first six months of this year was 4%, compared with almost 13% in the same period a year earlier.

The government has warned it may trim its 2005 growth forecast to 8%, down from the stellar 19.1% the year before.

Although 4% is still a pretty respectable growth rate compared with much of Europe, it’s horrifically low when compared to the previous year’s.  The BBC puts the slow growth down to lower metal prices (a key Ukrainian export) and investor uncertainty since the Orange Revolution.  I guess uncertainty over the investment climate was only to be expected, following Yushchenko’s prominent anti-corruption drive and the threats of mass renationalisations eminating from Prime Minister Yulia Timoshenko’s office, but the Ukrainian government must be really looking at it’s policy right now and wondering if the short term pain of economic reform may be too harsh, and whether it would be worth slowing its pace somewhat.

Another factor not mentioned in the BBC report was Russian investment.  Russia has been keen to invest in Former Soviet Republics and, because of high oil revenues, it has plenty of cash to throw about these days.  I wonder how much of previous years’ growth was due in large part to Russian investment which has dried up since the Orange Revolution?

The BBC report goes on to mention that:

The government, meanwhile, is not spending its budget to drive the economy but is using it to finance state pensions and wages ahead of elections scheduled for later this year.

If the impact of slow economic growth is felt more strongly among the general public than the impact of the extra money being spent on pensions and state sector wages, the implications for the upcoming elections could be massive.  If the current government is not seen to deliver results in areas that really matter to people’s day to day lives, we could well see a swing in public support back towards parties linked with former President Leonid Kuchma, and his defeated Presidential protege, Viktor Yanukovich.