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Ukraine: Struggling Sovereign

Ukraine's GDP real annual growth rate since 1990, as of 16 July 2009

Unlike its neighbors, profiled in the Central Europe Report, Ukraine's economic scene is dimmer since the recession began. Setting the stage for its current economic downturn was a longer road to a market economy than other former Soviet states faced, and now the crisis has hit Ukraine the hardest. As the Visegrad 4 turned West and flourished, Ukraine, tied to Poland but still tethered to Russia, saw its economy slump for years after the end of communism before hitting its stride in 2000. In 2004 its GDP grew 12 percent, while in 1999 it had registered negative growth.

"Hungary, the Czech Republic and Poland caught on more quickly to market economy," says James Hitch, managing partner of Baker & McKenzie's Kyiv office. "The Ukraine is where Poland was eight to 10 years ago."

And it has started to catch up, loosening economic ties with Russia and beginning more of a Western integration. "In the last three or four years, we have seen multinational corporations switch from running the Ukraine out of their Moscow offices to the Ukraine being handled from their Western European headquarters," Hitch says. "Ukrainians want to belong to the EU--they think they belong to Europe, while Russians feel they are much bigger than that."

Then in 2005 the country's growth seemed to catch up to itself--its GDP rate fell to 2.5 percent, perhaps in response to much-needed market reforms combined with falling steel prices.

So the global economic crisis of last year struck an already vulnerable Ukraine. According to the World Bank, Ukraine's Real GDP dropped by 20.3 percent in the first quarter of 2009; its economy is expected to contract a total of 15 percent this year. Steel prices continued to fall, as did seed oil prices, while underdeveloped Ukrainian banks faltered and export demand plummeted. Currency values dropped dramatically Meanwhile, a gas supply dispute with Russia came about at the end of 2008 as well. In January 2009, as the two countries failed to agree on gas prices for the year, Russia cut its supply to Ukraine. And corruption in government and political instability--currently Ukraine's president and prime minister are not on speaking terms--have compounded those problems.

"There is so much political uncertainty in the Ukraine that there is absolutely no international investment appetite," says Michael Cuthbert, regional managing partner at Clifford Chance in Central and Eastern Europe.

Still, the country remains a base for manufacturing and assembly plants (although many have experienced layoffs in the past years), and the government is trying to attract research and development facilities. The government also recently passed a new company law to make setting up businesses more straightforward, although it is so new it hasn't yet had any large effect. However, the country faces major hurdles as it moves forward.

Its most recent drama came in early September. As currency value dropped about 5 percent around that time, Interior Minister Yuriy Lutsenko came forward with a statement accusing officials at Ukraine's National Bank of "plundering hundreds of millions of hryvna" that had been set aside to help the country's economic recovery.

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