Columbia International Affairs Online: Working Papers

CIAO DATE: 04/2012

The Underachiever: Ukraine's Economy Since 1991

Pekka Sutela

March 2012

Carnegie Endowment for International Peace


When Ukraine became independent in 1991, there were expectations that it would in the near future become a wealthy free market democracy and a full member of the European and Euro-Atlantic communities. The largest country geographically wholly European, and the fifth-biggest European nation by size of population, it was hoped, would become a member of the European Union (EU), the North Atlantic Treaty Organization (NATO), and the Organization for Economic Cooperation and Development (OECD). Ukraine never fulfilled those expectations. Instead, it is seen as an underachiever, sometimes as a sick man of Europe, and perhaps even as a potentially failed state thanks to its geopolitical situation, historical burdens, and the mistakes made in institutional development and policy. Economically, Ukraine has grown along with the region. As such, growth rates have not been low, but they come after the economically devastating 1990s and are not built on a sustainable foundation. For years Russia provided Ukraine with underpriced gas while Ukraine’s export prices increased rapidly. Over the decades Ukraine, however, grew dependent on oil and gas coming from Russia, at almost no cost. Today, 70 percent of gas consumed in the country is imported. But the terms of trade improvements this provided, like other economic windfall gains, are fortunate only if well handled. Unfortunately, Ukrainian economic policy was unable to make proper use of the windfalls of the 2000s. Going forward, Ukraine must abandon its reliance on a disappearing foreign trade windfall. Prices must be set at a more realistic level, and Ukraine should rid itself of its dependence on outside funding. Rampant corruption is standing in the way of Ukraine’s transition to a true free market. If it truly wants to progress, the government must encourage competition and crack down on corrupt practices. Only then can Ukraine begin to expose its economy to more foreign competition and investment and truly live up to its potential.