Ukrainian Economy

Making Do without Russia

Donetsk Reuters
Separatist guarding a coal mine in eastern Ukraine.
  • Why it matters

    Why it matters

    Ukraine faces serious problems as a result of the war in the eastern part of the country and a deep economic crisis.

  • Facts

    Facts

    • The Ukrainian cabinet appointed Mr. Pyatnitsky as acting economy minister in October.
    • The International Monetary Fund predicts that the Ukrainian economy will shrink by 7 to 8 percent in 2014.
    • Ukraine signed an association agreement with the European Union in September.
  • Audio

    Audio

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Valery Pyatnitsky, an economist by training, was heavily involved in the negotiations that led to the historic association agreement between the Ukraine and the European Union.

Although the political part of the agreement was ratified in September, a compromise was reached to delay the free-trade section until 2016 due to Russian pressure. Moscow had threatened to impose harsher trade restrictions on Kiev if the deal had been implemented, as initially planned, on November 1.

Mr. Pyatnitsky said Ukraine, regardless of the ongoing talks with Russia, plans to become less dependent economically on its neighbor to the east.

Handelsblatt: There is a war in eastern Ukraine. Is the economy completely on its knees now?

Mr. Pyatnitsky: Yes, we have a war and, at the same time, are reviewing all government officials. Following the parliamentary election in late October, we will also have a new government that aims to implement new reforms. Former President Viktor Yanukovych, who fled the country, looted it before that. We don’t even have enough money to house the refugees from the Donets Basin. Our economy will shrink by 7 to 8 percent in 2014.

Isn’t there a risk of an even deeper recession?

These are numbers from the International Monetary Fund, which I consider to be real. At least we won’t go hungry this winter.

But will Ukrainians be without heat in the winter?

We are buying as much natural gas as possible in Europe and the rest from Russia. We haven’t bought any natural gas from Gazprom since we reached a compromise with Russia. Luckily, half of our electricity currently comes from nuclear power plants. And we even shut off the hot water supply in Kiev this summer to save gas. But we have a valid agreement until the spring, at which point the game with Russia will start all over again.

In an interview, Russian president Vladimir Putin says Moscow will not allow itself to become isolated. Source: Reuters.

The economic section of the European Union association agreement with Ukraine is now being renegotiated with Moscow. Are you in agreement with that?

The implementation of that part was postponed until January 1, 2016, but we are already implementing everything the agreement calls for. We have a clear reform agenda; our people want E.U. integration. We cannot destroy their hopes. And if Russia wants to increase duties on our products, as well as for E.U. products, then so be it.

Can Ukraine survive economically without Russia?

There won’t be a total loss of the Russian market. We have already reduced the Commonwealth of Independent States ( the group of Russia and former Soviet states. Eds) share of our trade to 32 percent, and in a year the Russian share will be down to 19 percent. It’s not what we want, but in the end we just might have to make do without Russia. It’s much more important for the European Union to help Ukrainian companies in the missile and defense sector. These companies are losing market share in Russia and could also lose employees to North Korea or Iran.

So you can make do without Russia, but not without the Donets Basin, the industrial heartland of Ukraine?

We don’t want to lose the Donets Basin. But the region not only requires massive rebuilding efforts but is also in urgent need of structural reform. The Donets Basin’s dependence on coal and steel is far too one-sided. Many companies there are completely outdated and controlled by oligarchs. The uprising on Maidan Square in Kiev was also a protest against the oligarchs. We will not permit a return to the oligarch system. In the end, Ukraine could do without the Donets Basin, but then we would have to reform our industrial sector even more.

Is that why the government in Kiev stopped paying for retirement pensions and operating hospitals there?

No. We can’t pay pensions because the banks there were looted and cash couriers were robbed. That’s one of the reasons we had to close the branch of the central bank in Donetsk. The money is being deposited in people’s pension accounts, and they can pick it up in areas not controlled by the separatists. And we have already reopened everything we were able to move away from the Donets Basin, such as Donetsk University. We hope that the war will end soon and rebuilding can begin.

Mathias Brüggmann has worked as a foreign correspondent in Moscow, Brussels and Warsaw and is now head of the foreign affairs desk. To contact the author: brueggmann@handelsblatt.com

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