Ukraine is the poorest country in Europe in terms of GDP per capita. Its GDP per capita of $4,384 is 133rd among the world’s 200 jurisdictions, and well below neighbouring countries like Moldova, Georgia, Kosovo, Albania, Bosnia and Herzegovina, Belarus and Russia.
Despite its large population of 44 million, its economy ranks only 55th in the world, well behind 11th placed Russia. According to the World Bank, some 23% of Ukraine’s population were living below the actual “Subsistence Minimum” in 2019.
Ukraine does have immense economic potential and is often called the “breadbasket of Europe”. On the eve of the Russian invasion, agriculture accounted for 10% of the country’s economy, 15% of its employment, and around 40% of Ukraine’s total exports, writes the OECD. Not surprisingly, the current war in Ukraine has seen surging commodity prices, especially for wheat and fertiliser, as both the Ukrainian and Russian economies have been hit hard.
While Ukraine has abundant energy and mineral resources, it remains heavily reliant on oil products and gas imports. At the same time, Ukraine is the main transit route for Russian natural gas sold to Europe, which earns Ukraine about $3 billion a year in transit fees.
Rich human resources, but demographic drama
Ukraine is also rich in human resources. Its literacy rate is virtually 100%, while the expected years of schooling is 15 years, according to UNESCO. Ukraine’s women score well when it comes to educational attainment in the Global Gender Gap Index. And Ukraine’s talented youth are driving a dynamic IT industry. However, the country’s poor economy and fractious politics has been driving a brain drain.
Ukraine is also in the midst of a demographic crisis. Low birth rates could drive a fall in its population from 44 million today to 24 million by the end of the century. The working age population (24-64 years old) could halve from 25 million to 12 million over the same period. While life expectancy is relatively low at 72 years, that of men is only 67 years reflecting poor health conditions (female life expectancy is 77 years). Suicide rates in Ukraine—unfortunately—are among the world’s highest.
Difficult transition to a competitive market economy
Ukraine is still in the midst of a transition from a communist, planned economic system to a competitive market economy. For example, it has struggled compared with a country like Poland which has become a European success story. Membership to the European Union (EU) has provided Poland access to markets and finance, and driven policy reform. Its membership of NATO is an important pillar of national security, while membership of the OECD encourages Poland to adopt best policy practices. Today, Poland’s GDP per capita is $17,300, four times that of Ukraine.
It is hardly surprising that Ukraine, which is not yet a member of any of these organisations, and has suffered from being in the orbit of Russia’s stagnant economy and volatile politics, should seek membership. Indeed, the European Union–Ukraine Association Agreement, signed in 2014, highlights the immense potential benefits for Ukraine in adopting a western orientation. Ukraine is committed to converge its economic policy, legislation and regulations across a broad range of areas. The agreement establishes a free trade area between the parties, and provides Ukraine access to finance from the European Investment Bank.
Ukraine has quickly reoriented its economy away from Russia, and the EU has quickly become its major trade partner, with a share of 40% of Ukraine’s foreign trade as of 2020. The EU has been the largest donor to Ukraine, and funds many technical assistance projects. In late 2020, Ukraine signed a political, free trade and strategic partnership agreement with the United Kingdom.
Ukraine’s poor governance
Despite the impressive recent steps in its partnership with Europe, Ukraine is plagued by poor governance which adversely affects its economy, society and politics. Like Russia, Ukraine has its oligarchs and businessmen who profited from the corrupt privatisations in the early years of the country’s transition to a market economy.
The oligarchs exert significant influence over politics through their financial support for various political parties, and lobby for the appointment of loyalists to key institutional positions. Then there is the Russian government which has always interfered in Ukrainian politics to influence policies to its liking. The result is that Ukraine is a difficult country in which to do business.
Ukraine is also assessed to have poor competitiveness, with particular concerns about the security environment, judicial independence, corruption, property rights, corporate governance and macroeconomic stability. It’s hardly surprising that Ukraine receives very little foreign direct investment—which can be a very important vector for knowledge and technology transfer, as well as job creation—in sharp contrast to Poland.
In short, the Ukrainian economy and society are beleaguered by troublesome domestic and international politics. Indeed, according to the Economist Intelligence Unit’s democracy index, it would have a “hybrid” political regime, meaning a blend of democracy and authoritarianism. But it does get a high score for its electoral process. In other words, relatively clean elections take place in Ukraine, and change of leaders and governments is possible, such as in 2019 when Volodymyr Zelenskyy defeated incumbent president Petro Poroshenko.
Corruption has long been a chronic problem in Ukraine, something which has been facilitated by Western financial systems which collaborate in money laundering by elites. Transparency International—an anti-corruption activist group—ranks Ukraine a lowly 122nd out of 180 countries surveyed in its Corruption Perceptions Index. However, President Zelenskyy has been fighting valiantly against elite resistance with modest progress.
Conflict with Russia
The last thing that the long-suffering Ukrainian people needed was a war with Russia. Already, more than 14,000 people have been killed or wounded by Russian military intervention in the Donbas region of eastern Ukraine and 5% of GDP is being spent to defend the country against Russia.
Russia is Europe’s last remaining imperial power, and would like to keep Ukraine in its empire. It thought that by invading Ukraine it could make it into a client state, and a buffer from its supposed adversary, the West. However, the Ukrainian people don’t want this. Today, they are literally dying to hold onto their freedom and independence.
Vladimir Putin argues that there is no such thing as a distinct Ukrainian people, and believed that his troops would be welcomed as liberators. This proved horribly wrong and should have been obvious. Indeed, a distinct Ukrainian national identity started to emerge in the second half of the 19th century, as other national identities were emerging in much of Europe.
The Ukrainian national identity was however far more developed in western Ukraine, then part of the Austro-Hungarian empire, than in the east which was in the Russian empire. Russians saw Ukrainian nationalism as an Austro-Hungarian invention, which aimed to divide and weaken the Russian empire, so it repressed Ukrainian nationalism and banned the Ukrainian language.
When the Russian empire collapsed in 1917, Ukraine declared independence. This fledgling new state did not survive due to its takeover following the Bolshevik Revolution. But Ukraine did become one of the republics of the Union of Soviet Socialist Republics, and when the USSR collapsed in 1991, Ukraine became an independent country.
Ukraine’s “Maidan Revolution” in 2013/14 was a pivotal event in Ukraine’s modern history. The people rose up against President Viktor Yanukovych when he turned his back on pro-EU policies and the signing of the EU Association Agreement. Ultimately Yanukovych fled the country under the cover of night. Russia then responded by annexing Crimea, and launching a war in the Donbas region.
Following the Maidan Revolution, Ukrainian national identity, which was initially understood in ethnic terms, has been evolving. More and more people of other ethnicities (like Russian speakers and Muslims) living on Ukrainian soil identify themselves as Ukrainian. Ethnic nationalism is evolving into civic nationalism, with a strong attachment to the Ukrainian state by all ethnic groups and regions. Prior to the current war, neither Russia nor the West appreciated the rise of Ukrainian civic nationalism, nor did they understand the intensity of anti-Russian sentiment.
It is imperative that Ukraine wins this war. Russia’s outrageous invasion, in defiance of both international law and decency, must not be allowed to succeed. Moreover, the distinctive Ukrainian people deserve the right to determine their own destiny, rather than being a geopolitical pawn for Russia. Indeed, this war is a nation-defining event for Ukraine, and joining the EU and the West, as Poland has done and the Ukrainian people wish, is a surer way for them to realise their great potential, instead of being a client of the mafioso Russian state.
John West is author of the recent book, “Asian Century … on a Knife-edge,” and executive director of the Asian Century Institute. He is also adjunct professor at Tokyo’s Sophia University and contributing editor at FDI-Intelligence, a Financial Times magazine. These positions follow a long career in international economics and relations, with major stints at the Australian Treasury where he was director of balance of payments, OECD (head of public affairs and director OECD Forum) and Asian Development Bank Institute (senior consultant for capacity building and training).