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TITLE:  UKRAINE ECONOMIC POLICY AND TRADE PRACTICES
DATE:  FEBRUARY 1994
AUTHOR:  U.S. DEPARTMENT OF STATE

                             UKRAINE
                                 
                     Key Economic Indicators
       (Billions of Ukraine coupons unless otherwise noted)


                                  1991 /1   1992 /2   1993
Income, Production,
 and Employment

GDP                                 262.2   4,220.0     n/a
Real NMP Growth (pct.)              -11.2     -14.0   -14.2
NMP Produced Total                  210.6   3,790.7     n/a
By Sector:
  Industry (incl. turnover taxes)    90.8   1,921.5     n/a
  Agriculture                        60.4     852.1     n/a
  Transport and Communication         9.4     177.8     n/a
  Construction                       29.1     558.7     n/a
  Other                              21.0      41.2     n/a
Net Exports of 
 Goods and Services                   9.0      44.9     n/a
Labor Force (millions)               24.4      24.0    24.0

Money and Prices

Personal Savings Rate (pct.)         95.4     28.5 /3   n/a
Retail Inflation (pct.)              84.2    2,017      n/a
Wholesale Inflation (pct.)          125.4    2,384 /4   n/a
Consumer Price Index                190.1    1,445 /4   n/a
Exchange Rate ($/coupon)   
  Official                           1.72     638.0    5,970 /5
  Parallel                           90.0    1,050.0  31,000 /5
U.S. Aid ($ millions)                 n/a      n/a      330



Notes:

1/  In billions of rubles at current prices, IMF staff
    estimates.
2/  IMF staff estimates.
3/  Ratio in percentage of disposable income, IMF staff
    estimates.
4/  Annual average, IMF staff estimates.
5/  As of October 30, 1993.
n/a = not available.


1.  General Policy Framework

    Ukraine declared independence on August 24, 1991, and the
population overwhelmingly ratified independence in a national
referendum on December 1, 1991.  Ukraine is the second-largest
nation of the former Soviet Union in terms of population and
economic power; the third-largest in terms of area.  Stretching
across 603,700 square kilometers, it has a population of 52.057
million (1993), of which three-quarters are ethnic Ukrainians
and one-fifth are ethnic Russians.  Ukraine's principal
resources include fertile "black earth" agricultural land and
significant coal reserves.  The nation's broad natural resource
endowment has led to the development of a diversified economy
with a strong agricultural and food processing industry, large
heavy industries, and a substantial capital goods sector
oriented toward military production.

    Despite its natural wealth, Ukraine has continued to spiral
into hyper-inflation in 1993.  According to unofficial
Ukrainian estimates, inflation in late 1993 had reached 100
percent per month.  In October alone, the coupon/dollar
exchange rate plummeted from 15,000 to 25,000 coupons/dollar. 
The decline of production in all sectors of industry continues,
though the rate of contraction appeared to have slowed in some
industries in 1993.  Fuel supplies continue to be uneven due to
Ukrainian indebtedness to Russia for oil and gas delivered
during 1993.  In spite of the fuel shortage, the 1993 harvest
was significantly better than in previous years.  The
privatization of small-scale enterprises has begun in several
cities including Lviv, Khmelnitskiy, Kharkiv, and Zaporizhiya;
privatization of state housing is now beginning in every oblast
of the country.  To date, however, there has been almost no
privatization of medium- or large-scale enterprises.

    Market-oriented reforms were implemented at a measured pace
in 1992 and 1993.  Ukrainian officials appeared determined to
move towards a more efficient economy without creating social
upheaval, even if this included temporary reliance on
administrative planning, the so-called "third way."  This
policy led to a decrease in industrial production in most
sectors, spiralling inflation, little privatization, and
overall gridlock in the economy.  The former Kuchma government
attempted to stabilize the economy in late 1992 and 1993. 
However, these attempts met with only initial success, and were
soon overwhelmed by the weight of collapsing production,
ruptured trade links with the former Soviet Union, and, above
all, lack of the necessary political will within the
President's administration, Parliament, and the Cabinet of
Ministers.

    Opposition to crucial liberalization and stabilization
measures grew during 1993 allowing adoption of several
regressive measures, including a mandatory 50-percent
conversion of hard currency earnings at a fixed rate of
exchange far below the market rate.  These steps and the
inability of the different governmental structures to cooperate
led to increasing dissatisfaction among reform-minded members
of the Cabinet and culminated in the resignations of Viktor
Pynzenik, First Deputy Prime Minister for Economic Reform, and
Prime Minister Leonid Kuchma himself.  Since September 1993 the
President has directed the economic activities of the 
government.  He has set privatization and combatting inflation
as priorities.


2.  Exchange Rate Policies

    On January 10, 1992, Ukraine adopted a system of multi-use
coupons as legal tender.  The government introduced this system
in response to two problems: a complete cut-off in supplies of
rubles from the Russian Central Bank and concern over exports
of lower-priced Ukrainian goods to other newly independent
states.  The coupon, or karbovanets, became the sole legal unit
of currency on Ukrainian territory on November 12, 1992, when
the government eliminated the ruble from use in all cash and
non-cash transactions.  The Ukrainian government considers the
coupon a transitional currency, until the new Ukrainian
currency -- the hryvnia -- can be introduced in 1994.

    In August, 1993, Ukraine instituted a multiple exchange
rate regime which included a fixed exchange rate to be utilized
for some purposes (e.g. mandatory conversion of a portion of
enterprises' hard currency earnings) and a "floating" rate to
be set at a weekly inter-bank currency auction (for U.S.
dollars, German marks and Russian rubles).  The floating rate,
which reflected the value of "non-cash" coupons in the economy,
was typically even lower than the parallel rate (i.e. the rate
offered to individuals or enterprises by commercial banks or by
street traders).

    Hyper-inflation is a reality in Ukraine with prices rising
at 100 percent per month in early fall 1993.  One consequence
of this is a growing divergence between the fixed and floating
exchange rates, leading to a reduction in officially registered
exports.  In response, many industries and reform-oriented
economists have called for the elimination of the fixed
exchange rate.  In an effort to stabilize the currency, the
government issued a decree on November 2, 1993 temporarily
suspending the inter-bank currency exchange system as well as
other operations involving sales and purchases of foreign
exchange.


3.  Structural Policies

    Legislation has been passed to lay the foundation for a
privatization program which would include mass privatization
through a system of privatization accounts.  Implementation has
been slow, however, due to both lack of political will and
continued legislative barriers.  The existence of a very broad
leasing law has eliminated a significant portion of small,
medium- and large-scale enterprises from the privatization
process.  In addition, the Parliament did not adopt a
privatization program for 1993 and there are, therefore, no
targets for the process.

    In 1992 Ukraine undertook significant tax reform, including
introduction of a value-added tax, excise tax, enterprise
income tax and individual income tax.  However, budgetary
problems combined with rapid increases in wage payments in 1993
caused the Parliament to reverse the previous decision to tax
enterprises on a net income basis and return to 
the former Soviet system of enterprise taxation.  Ukrainian
enterprises face a significant tax burden and pay a number of
different taxes, including a hidden tax through mandatory
conversion of 50 percent of hard currency earnings at a
non-market fixed exchange rate.  Most foreign joint ventures
are shielded from taxation by tax benefits granted by the
Ukrainian Law on Foreign Investment, which provides for a tax
holiday for five years for qualified investments.  In response,
in late 1993, private and state industry once again spurred
efforts to introduce major tax reform.

    According to official estimates, the Ukrainian government
maintains price controls on approximately 17 percent of
production, including transportation, certain food products,
rents, electricity and heating, as well as
domestically-produced oil, gas, and coal.  In addition, limits
exist on certain industry profitability levels.  Ukrainian
officials continue to be reluctant to fully decontrol prices in
an economy dominated by large monopolies, claiming prices would
rise immediately without attendant production increases.


4.  Debt Management Policies

    Ukraine's share of the debt and assets of the former Soviet
Union is 16.37 percent, as agreed in an inter-Republic treaty
dated December 4, 1991.  In November 1992, Ukraine and Russia
signed a protocol assigning Russia management responsibility
for Ukraine's share of the debt, pending a bilateral agreement
to resolve outstanding issues.  The protocol was terminated on
December 31 and negotiations continue between Russia and
Ukraine on issues surrounding the division of the external
assets and debt.

    Since independence, Ukraine has incurred a modest foreign
debt to the west, but an increasingly large debt to Russia for
deliveries of oil and gas.  According to Ukrainian statistics,
in mid-1993 the officially acknowledged debt included $626
million to the west, 730 billion rubles to Russia (about $700
million), and 120 billion rubles to Turkmenistan ($100
million).  The government established a hard currency credit
committee to consider all governmental hard currency debt
obligations and issuance of state guarantees on credits.


5.  Significant Barriers to U.S. Trade

    Ukraine's shortage of hard currency earnings and lack of
banking, legal, shipping and other key infrastructure are the
most significant impediments restricting U.S. exports to
Ukraine.  These barriers are further fortified by Ukraine's
inexperience in trading in an open market environment and its
general unfamiliarity with U.S. suppliers and their products,
technology and business practices.

    Since gaining its independence, Ukraine has asserted its
right to establish and maintain its own system of standards and
product certification.  In fact, Ukraine is currently
developing a wide range of national standards and many of these
are being strongly influenced by EU standards.  In the interim,
Ukraine's domestic production standards and certification 
requirements are based on those of the former Soviet Union and
they apply equally to domestically-produced and imported
products.  Product testing and certification generally relate
to technical, safety and environmental standards as well as to
efficacy standards for pharmaceutical and veterinary products. 
At a minimum, imports to Ukraine are required to meet the
certification standards of the country of origin.  In cases
where Ukrainian standards are not established, country of
origin standards may prevail.

    The Ukrainian government does not impose import duties on
enterprises with foreign capital, i.e. joint ventures, or on
wholly owned foreign subsidiaries as long as the goods being
imported are for the investor's own use or the enterprise's
production needs, such as capital equipment or production
inputs.

    Imported goods are not considered legally entered until
they have been processed through the port of entry and cleared
by Ukrainian customs officials.  Duties on goods imported for
resale are subject to varying ad valorem rates and import
license requirements in certain cases.

    A broadening of trade and investment relations with Ukraine
is a high priority of the U.S. Government and a key to economic
reform and development in Ukraine.  The U.S.-Ukraine Trade
Agreement, signed in June 1992, provides for reciprocal
most-favored-nation (MFN) status and establishes a basic
framework for broadening this relationship.  The trade
agreement also provides for the establishment of a bilateral
Business Development Committee to facilitate trade and
investment.

    Going beyond MFN status, the U.S. Government is considering
Ukraine for General System of Preferences (GSP) treatment which
will enhance Ukraine's hard currency earnings capabilities on
exports to the United States.  Discussions are continuing on a
bilateral investment treaty (BIT) which will establish a legal
framework to protect and stimulate U.S. investment in Ukraine. 
Furthermore, a bilateral tax treaty now being negotiated
between the U.S. and Ukraine will provide relief from double
taxation of income which will serve to stimulate trade and
investment.

    In addition, an Overseas Private Investment Corporation
(OPIC) incentive agreement, which allows OPIC to offer
political risk insurance and other programs to U.S. investors
in Ukraine, was concluded in 1992 and is in force.


6.  Export Subsidies Policies

    Government subsidies to state-owned industry are an
integral part of Ukraine's economy.  These subsidies, however,
are not specifically designed to provide direct or indirect
support for exports, but rather to maintain full employment and
production during the transition from a centrally controlled to
a market-oriented system.

    The government does not target export subsidies
specifically to small business.  Indeed, due to short supply of
consumer goods and continued price controls, the government has
restricted export of many consumer goods.


7.  Protection of U.S. Intellectual Property Rights

    Ukraine is committed legislatively to the protection of
intellectual property, though enforcement remains inadequate. 
Ukraine is a successor state to many of the conventions and
agreements signed by the former Soviet Union.  Ukraine abides
by the Universal Copyright Convention (Geneva, 1952) and is
preparing to join the Bern Convention on Protection of Literary
and Artistic works (1971).  In addition, in August 1992, the
Ukrainian government adopted the Paris Convention for
Protection of Industrial Property (March 2, 1883; amended in
1967 and 1979); the Madrid Agreement on the International
Registration of Marks (April 14, 1891; amended in 1967 and
1979); and the Agreement on Patent Cooperation (June 1970;
amended in 1979 and 1984).  In addition, the Ukrainian
Government has committed to improvement of intellectual
property right protection in the U.S.-Ukrainian Trade Agreement
signed in May 1992.

    Two state agencies are working to ensure intellectual
property rights: the State Ukrainian Copyright Agency (literary
and artistic works) and the State Patent Office of Ukraine
(industrial property).  A Ukrainian Copyright Law has been
drafted by the Ukrainian State Copyright Agency and has been
submitted to the Parliament.


8.  Worker Rights

    a.   Right of Association

    A successor to the former Soviet official trade unions, the
Ukrainian official trade union, "the Federation of Trade
Unions", has began to work independently of the government and
has been vocal in opposing draft legislation that would
restrict the right to strike.  Many independent Ukrainian
unions have emerged and now provide an alternative to the
official unions in most sectors of the economy.  Some, such as
the Independent Miners' Union of Ukraine (NPGU), emerged out of
the former U.S.S.R. independent unions.  Independent unions
were established in the Black Sea fleet, among the military
officers of Ukraine, and among the scientific workers of the
Academy of Sciences.  In early 1992, the NPGU, the pilots,
civil air dispatchers, locomotive engineers and aviation ground
crews unions formed the Consultative Council of Free Trade
Unions.  This entity acts independently of the Federation of
Trade Unions.  In negotiating wage deals, the government has
invited all unions, not just the Federation of Trade Unions, to
participate.

    Soviet law, or pertinent parts of the 1978 Ukrainian
constitution, continue to regulate the activities of trade
unions.  A new constitution and new law on trade unions are
being debated, which will affect the future status and
activities of trade unions.  In principle, all workers and 
civil servants (including members of the armed forces) are free
to form unions.  In practice, the government discourages
certain categories of workers (e.g., nuclear power plant
employees) from doing so.

    The law on labor conflict resolution guarantees the right
to strike to all but members of the armed forces, civil and
security services, and employees of "continuing process plants"
(e.g., metallurgical factories).  The law prohibits strikes
that "may infringe on the basic needs of the population" (e.g.,
rail and air transportation).  Strikes based on political
demands are illegal.  However, this did not stop miners and
transportation workers from making political as well as
economic demands during their September 1993 strike.  The law
forbids penalizing union members who participate in strikes. 
The government has relied on the courts to deal with strikes
that it feels have violated the law.  The courts, however, have
not always ruled in favor of government positions.

    Ukraine is a member of the international labor organization
(ILO).  There are no official restrictions on the right of
unions to affiliate with international trade union bodies; the
NPGU is a member of the International Miners' Union.  The
AFL-CIO has a permanent representative in Kiev who interacts
freely with the Consultative Council of Independent Trade
Unions.

    b.   Right to Organize and Bargain Collectively

    In accordance with the law on enterprises, joint
worker-management commissions should resolve issues concerning
wages, working conditions, and the rights and duties of
management at the enterprise level, a system that is not
clearly defined.  Overlapping spheres of responsibility
frequently impede the collective bargaining process.  The law
on labor conflict resolution introduced another bureaucracy,
the National Mediation and Reconciliation Service, to mitigate
labor-management disputes that cannot be resolved at the
enterprise level.  The president appoints the head of this
service.  Collective bargaining law prejudices the bargaining
process against the independent free trade unions in favor of
the official unions.

    There are no export processing zones in Ukraine.

    c.   Prohibition of Forced or Compulsory Labor

    The Ukrainian constitution forbids compulsory labor, and it
is not known to exist.

    d.   Minimum Age for Employment of Children

    The minimum employment age is 17.  However, in certain
nonhazardous industries, enterprises can negotiate with the
government to hire employees between 15 and 17 years of age. 
Education is compulsory up to age 15.  The Ministry of
Education rigorously enforces the law on education.

    e.   Acceptable Conditions of Work

    In 1992 the government established a country-wide minimum
wage, which at the end of the year was significantly below the
estimated cost of living.  Wages in each industrial sector are
established by government agreements with trade unions.  All
unions are invited to participate in these negotiations.  The
current law on wages, pensions, and social security provides
for mechanisms to index the minimum wage to inflation.

    The labor code provides for a maximum of 41-hour work week
and at least 15 work days of paid vacation per year.  Economic
stagnation in some industries (e.g., defense) have
significantly reduced the work week for some categories of
workers.  Gross under compensation for overtime work in some
sectors (e.g., railroad workers) has resulted in strikes.

    The Ukrainian constitution and other laws contain
occupational safety and health standards, but these are
frequently ignored in practice.  Lax safety conditions were the
principal causes of two serious mine accidents that occurred in
the summer of 1992, resulting in dozens of casualties.  The
Labor Ministry is currently rewriting the mine safety law.  The
NPGU is demanding that the government improve worker safety in
the mines.

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