“Ukraine’s Future is in the East”

There are many divides in Ukraine: a Catholic west and an Orthodox east (with a heavy sprinkle of Muslim Tatars in the Crimea). A Ukrainian-speaking west and a Russian-speaking east.

Another is economic: the west is rural and underdeveloped, the east industrial and relatively wealthier. This long post translated from the Russian-nationalist Sputnik blog makes several interesting (though debatable) observations; that the east (the region which elected the current president) economically props up the Ukrainian nationalist west. And that integration with the European economy might well deepen the underdevelopment problems of the west. Excerpts, thanks to a translation from Russophile:

If one looks at the map of the protests, it becomes obvious that the poor western half of the country is rebelling. In the past year, from all regions in the west of the country only the Lvov, Sumy and Cherkasy regions managed to do relatively well (but they managed it thanks to relatively low levels of subventions otherwise they would experience strong negative growth as well), all the others experienced a strong loss in economic activity.

The development of the regions in Ukraine over the past 15 years has been extremely uneven: the GRP (Gross Regional Product) of the Dnepropetrovsk region increased 20.3 times whilst none of the western regions managed to achieve an increase by more than 11.9 times. This means that, whilst the Eastern regions managed to do quite well, the western regions, for unknown regions, managed to lag seriously behind the East (the Eastern regions performed almost two times better). That is why the average salary in the East is 1,5 times more than in the West and the gap is only increasing.

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Ukraine’s GDP for the year 2013 is equal to about 1.475 trillion Hryvnia and more than half of it was earned by only 4 regions (Donetsk, Dnepropetrovsk, Zaporozhye and Lugansk).

The difference in gross regional product is striking. For example, when one compares the GRP of the Chernivtsi Region, a region dominated by the opposition (where protesters seized the regional administration building) with the “calm” regions in the east then: the GRP of the Dnipropetrovsk region is 3.17 times higher, in Donetsk 2.65 times, in Zaporizhia 2.6 times, in Kharkov 2.16 times and in Odessa 2 times.

In these circumstances, it would be logical to expect that the state would withdraw funds from the richest regions in order to distribute them among those who are poorer. In 2013 alone, the Donetsk region gave 1.7 billion Hryvnia, but it got back only 362 million Hryvnia. Naturally, some of that money came back to the region as donor funding to build infrastructure and industrial facilities, but most of this amount was spent to subsidize the western regions. For example, in 2010, the created/produced GRP per capita was 29.98 thousand Hryvnia in the Donetsk region, but the received income was only 21.36 thousand Hryvnia per capita. The Dnipropetrovsk region was an even bigger donor, in 2010 the total value of produced goods was 34.1 thousand Hryvnia per capita and the federal government took almost a third of this sum.

The budget of the Ternopol region (were protesters successfully captured the regional administration) got 243 million 984.6 thousand Hryvnia as taxes and other income from the region itself but the state budget provided, on top of that, 630 million and 63 thousand Hryvnia…

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If we carefully analyze the direction of China’s economic expansion in Ukraine, it turns out that the lion’s share of investments from China to the Eastern Russian regions of the country. It is generally not hard to predict what will happen after the signing the Association Agreement with the EU: the East of the country will lose a lot but in the Western regions not so much, the poverty will not disappear and West Ukraine cannot boast about any interesting products that are being made there.

Hypothetically, there is the possibility of “a united Italy” scenario: when the politically dominant north began to use the rich south as an internal colony (which led to the current contrast between the north and south of Italy). But in modern Ukraine, there is no “old money” to organize this kind of process (also, none of the Ukrainian oligarchs are able to play the role of the respectable Genoese banker). Ukrainians are accustomed to ultra right-wing violence and populism but they cannot manage to attract (or create) a middle class and businesses.

If (theoretically) investors will come to Ukraine after the signing of the association agreement, these investors will mostly go to the East of the country. Why? Because things are being produced there, there is infrastructure and there is a good track-record of export. In Russia, Renault-Nissan has gone through many hardships and continues to modernize the cumbersome “AvtoVAZ” in Togliatti instead of building its own factory in, say, Tuva.

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Ukrainian real GDP in 2013, was just 84% of the level of 1992, this means that the people do not “live better and better” but are living worse. In our review of the Global Wealth Report 2013, we did not touch on this, but it will be helpful to readers to know that Ukraine was called one of the poorest countries in the world, on par with Africa. There are many explanations as to why, but I personally prefer the “cultural anthropology” version.

Western Ukraine is the citadel of Ukrainian nationalism and at the same time, the most immature of the two halves of the country. It all boils down to the fact that local nationalism came from the towns (as was the case in all countries – from France to Norway) and from the villages. How many political figures of the Ukrainian national movement came out of the urban environment? Why did the people, before the revolution and the Bolshevik “Ukrainianization”, who lived in cities in Ukraine spoke Russian and why was Ukrainian mostly spoken in the countryside? The entire “Ukrainian” movement bears the heavy imprint of provincialism and narrow-mindedness, characteristic of people from the village, which, as such already has negative consequences for it.

Suffice it to say that of the five largest cities (Kharkov, Odessa, Kiev, Donetsk, Dnepropetrovsk) four belong to the Russian-speaking south-east of the country. Speaking of Kiev, on paper it is responsible for about 40% of the budget revenues (excluding customs) because many businesses are registered there and also pay taxes there. But subsidies to perform the functions of the capital, the huge costs for infrastructure and other payments from the budget to fund organizations actually mean, no yoke, that Kiev is one of the most subsidized regions across the country. Some may see the parallels with Moscow in Russia (which earns a quarter of the country’s GDP), but these parallels are not really there, the capital of Russia had until recently a budget deficit of 146 billion rubles, largely because of Putin’s election promises.

However, let’s not get distracted here. If you look at the competitiveness of individual regions of Ukraine, it is dominated by the eastern provinces: of the top 5, only Kiev is “Ukrainian”, Donetsk leads on the effectiveness of corporate governance (higher than Switzerland), the railway structure of the Kharkov region corresponds to the Netherlands, on efficiency of the goods market Odessa is nr 1, Donetsk takes the lead on the availability of new technologies (in the Chernigov region, it is the lowest of all the regions in the world), Donetsk also takes the lead on business development and Kharkov leads in innovation. Naturally , the people from the West of Ukraine gratefully give their Eastern brothers, who are the engine for their prosperity, nicknames like “Muscovites” and “Donetsk rednecks”

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In the coming year, Yanukovich intends to give 55% of the national budget to the regions and it is highly likely that most of it will go to purchase the loyalty of the Ukrainian Nationalists. Therefore, Ukraine’s state budget for 2014 includes an increase in loans to the general fund, which amount to 157.31 billion Hryvnia (0.2% more than a year ago). The protege of criminal clans is really not a “pro-Russian candidate”, in fact, under his leadership Ukraine approached European integration more decisive than under Yushchenko.

In addition, the preservation of the unity of the country is in the interest of the oligarchs who supported Yanukovich coming to power in the first place: they can only preserve and increase their wealth in a single economic space. But whether that is in the interest of the eastern regions?

The problem is that the domestic market of Ukraine is quite poorly developed. Steel exports this year fell by only 2.1% (and that was only because of serious trouble in the global steel industry), but domestic consumption fell by 15%. Domestic consumption of Ukrainian metal (an important source of income for the budget)is only 18% of the total production. In terms of per capita domestic consumption of steel products, Ukraine only has 140 kg per capita. In South Korea the figure stands at 1150 kg, Japan 507 kg, in the Czech Republic 596 kg, in Germany 480 kg and in China 460 kg. These figures suggest that the eastern steelworkers can easily do without the western regions.

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In the year 2013, only the economic sectors of agriculture and retail trade grew, but these could not compensate for the decline in domestic demand in other sectors of the economy. The perspectives of the continuation of a united Ukrainian state are perfectly illustrated by the following data: in 2012 the ratio shadow economy – official GDP was 45%. According to the results of 2012, Ukraine is one of the thirty largest importers in the world (25th), this says enough about the state of the country.

According to research by the World Trade report 2013, Ukraine is on the 10th place in the list of most attractive countries to purchase land, with a potential of 1.2 million ha (that means it is almost one third of arable land in Europe). Most of this land is located in the southeast.

The Post-Soviet countries share of total exports of a unified Ukraine is 36.8%, Asia 25.7%, Europe (mainly EU countries, but not limited to) 25.3%, Africa 8.2% and America 3.8%. The absolute majority of the export products come from the east of the country. It is in the east that the national financial flows are generated and concentrated, which has lead to the creation of large financial-industrial groups and there is nothing that would presage a significant reduction in demand for products in these regions. Western and central Ukraine are focused on the development of the domestic consumer market, which, in theory, would be very good (like in the US) but it turns out that in West Ukraine, it is actually very, very bad. The financial base of Ukrainian nationalism is not impressive. Of the 20 largest banks in Ukraine: 1 belongs to Poltava deputy Konstantin Zhevaho, 1 to the Buryak brothers from Donesk, 1 to Russian citizen Novitskiy, 2 to the husband of Julia Chebotareva (related to former president Kuchma) Nicholaj Lagun, 1 to the “best friend of the Kremlin”, Firtash, 1 to a partner of Yanukovych, Akhmetov, and only one to the sponsor of the Ukrainian Nationalists Igor Kolomoisky. Everything else belongs to European and Russian banks, which are partly owned by the people close to the Russian government (mostly immigrants from the East of Ukraine).

The 6th largest bank in the country (“Prominvestbank”) belongs to the Russian VEB bank and is embedded in important industries for Ukraine: Energy and transport engineering, nuclear energy and aircraft and engine development. Its target clientele – leaders of the national industry, export-oriented enterprises, large enterprises (infrastructure) and medium-sized businesses. In the western Ukraine, the bank participates in the construction of the fourth line of the Kiev Metro and the completion of the Khmelnitsky NPP (Nuclear Power Plant), not to mention dozens of smaller projects. So if someone screams “kick out the Muscovites”, we need to add “out of economically insolvent regions.”

So, in the case of the separation of the Ukrainian East, that region will lose very little as it can throw the western regions out off the balance sheet. The West of the country will lose a lot more: it will be one big Albania. In this situation, the unity of Ukraine can be saved by, oddly enough, the Customs Union [with Russia]. In the case of Ukraine joining the CU, it will have: a revision of energy prices, increased tariff protection market, unimpeded trade will all members of the CU, the lack of gas/dairy/meat wars, and protection against threats from external markets.

Ukrainian Nationalists renamed the “Customs Union” into the “Taiga Union” but, dear Western Ukrainians, if you look at the GRP per capita in your regions, you are not even “Taiga” and, at some points, not even on par with Africa.

The current statistics show that the CU is a very good choice for Ukraine: in 2009, the amount of export transactions between member countries was $36 billion, in 2010 it had already grown to $46 billion, in 2011 to $63 billion and in 2012 to $68.9 billion. In 2012 the trade vole between Russia en Belarus increased by 9.6%, between Russia and Kazakhstan by 6.8% and between Belarus and Kazakhstan 15.1%. Speaking of Belarus: in 2012, Russia and Belarus reached an agreement on the average price of gas: $ 165.6 per thousand cubic meters (Ukraine pays $ 268.5), the profit for Belarus, which gets oil at Russian domestic prices, is estimated at $ 700 million per year.

The removal of export duties on oil to Ukraine could give the Ukrainian budget $ 3 billion (for petroleum products about $ 500 million), a decrease in gas prices to the level of domestic could mean a $ 4.6 billion profit. The big question whether the CU is beneficial for Russia. All this without talking about GDP growth, scientific and technical cooperation and other pleasant bonuses. The association agreement with the EU will be much less favourable.

The economic gap between the two parts of the same country today deepens the national political divide: Russian eastern regions are quiet, whilst the fires of civil disobedience rage. We will not argue who is right and who is not. The main thing is that the two halves of the country have already started the latent confrontation and to preserve the unity of the country it is necessary to resort to the federalization, based on the Canadian example (or peaceful disengagement, as in Czechoslovakia).

The existing unitary state will appeal less and less profitable for the Ukrainian eastern regions and will lead to more and more questions about living together with the colourful peasants from the West to are producing mainly chants and burning tires. For now, the East of the Ukraine has been mesmerized with the Western talk about Europe and the cries of “Glory to Ukraine” but when the eastern Ukrainians start counting the money (and their OWN money), it will mean a very sad ending for the colourful tire burners from the West