UKRAINE

Holders of Ukrainian international bonds are offered new international bonds with seven years maturity. The principal amount of debt will be repaid over six years after a one-year grace period (when only interest is paid) on a semi-annual basis.

The IMF suspended a USD 2.2bn loan September 1999, when Ukraine missed economic targets. But the country needs the IMF loan to help repay old credits and to launch talks with the Paris Club of sovereign creditors on restructuring USD 500m in debts.

Russia was getting tough about Ukraine’s habit taking more gas than it can pay for. It has sharply reduced energy supplies to Ukraine this year in an effort to force payment of debts. Ukraine may pay energy debts to Russia by handing over state-owned enterprises for cash.

Ukraine imports some 80% of its energy from Russia. Any debt-for-equity deal may be complicated by the fact that Ukraine and Russia cannot agree on how much Ukraine owes for energy supplies. Gazprom claims Ukraine owes it USD 2.3bn, Ukraine says it is no more than USD 1.4bn.

Part of the problem is that Ukraine is one of the world’s great energy-wasters. Ukraine’s vast outdated industry is mostly to blame. Corruption and political interference in the sector have scared off foreign investment, and with them the new technology needed to reduce gas consumption.

Reform of Ukraine’s gas market stands together with changes in the structure of the electricity market. The IMF wants to see more privatisation in the electric power industry as a way to stimulate cash payments.

After Russia, the Ukrainian republic was far and away the most important economic component of the former Soviet Union, producing about four times the output of the next-ranking republic.
Its fertile black soil generated more than one-fourth of Soviet agricultural output, and its farms provided substantial quantities of meat, milk, grain, and vegetables to other republics. Likewise, its diversified heavy industry supplied the unique equipment (for example, large diameter pipes) and raw materials to industrial and mining sites (vertical drilling apparatus) in other regions of the former USSR.
Ukraine depends on imports of energy, especially natural gas, to meet some 85% of its annual energy requirements. Shortly after independence in late 1991, the Ukrainian Government liberalized most prices and erected a legal framework for privatization, but widespread resistance to reform within the government and the legislature soon stalled reform efforts and led to some backtracking. Output in 1992-99 fell to less than 40% the 1991 level. Loose monetary policies pushed inflation to hyperinflationary levels in late 1993.
Ukraine's dependence on Russia for energy supplies and the lack of significant structural reform have made the Ukrainian economy vulnerable to external shocks. Now in his second term, President KUCHMA has pledged to reduce the number of government agencies and streamline the regulation process, create a legal environment to encourage entrepreneurs and protect ownership rights, and enact a comprehensive tax overhaul. Reforms in the more politically sensitive areas of structural reform and land privatization are still lagging. Outside institutions - particularly the IMF - have encouraged Ukraine to quicken the pace and scope of reforms and have threatened to withdraw financial support.
GDP in 2000 showed strong export-based growth of 6% - the first growth since independence - and industrial production grew 12.9%. As the capacity for further export-based economic expansion diminishes, GDP growth in 2001 is likely to decline to around 3%.