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Opinion
February 2, 2018 www.intellinews.com I Page 23
Russia and Ukraine: More similar than either wants to admit
Anders Åslund in Washington
Today Russians and Ukrainians emphasise how different their nations are. Russians see them- selves as economically superior while Ukrainians cherish their freedom. Yet, having dealt intensely with both countries for the last three decades,
my observation is that economically the similari- ties are greater than the differences. Their cur- rent fundamental problem is their absence of real property rights.
The greatest difference in their post-Soviet eco- nomic history is that Russia experienced an at- tempt at serious market economic reform from 1991-94, spearheaded by the late Yegor Gaidar. Thanks to him and his reform team’s heroic ef- forts, Russia avoided Ukraine’s abyss of 10,200% hyperinflation in 1993. While Russia’s situation was bad, Ukraine’s was far worse. This policy difference laid the groundwork for Russia’s GDP per capita at current exchange rates being three times higher than Ukraine’s today.
Subsequently, economic policy has largely run in parallel. For the rest of the 1990s, mediocre poli- cies led to decline and the financial crash of 1998 in both countries. That crisis compelled Russia
to carry out substantial reforms from 1999-2002, establishing a sound macroeconomic system. Ukraine also reformed, but less. Both countries enjoyed a wonderful commodity boom from 2000- 07, with an annual growth rate of 7% in Russia and 7.5% in Ukraine. The whole region seemed to have found their road to higher economic development.
The global financial crisis showed that was not the case. In Russia, GDP plummeted by 8%, more
Russia and Ukraine are more alike than they are different
than in any other G20 country in spite of the big- gest fiscal surplus of any G20 country. In Ukraine, where the overheating was far worse, GDP plum- meted by 15%. Since then, the two economies have been similarly stagnant, though Ukraine’s GDP fell by 17% in 2014-15 because of Russian military aggression.
From 2015-17, Ukraine carried out impressive economic reforms, which may be able to secure macroeconomic stability for the future, but these reforms largely correspond to what Russia ac- complished in 1999-2002.
The fundamental problem of both countries –
and the rest of the former Soviet Union – is that they do not have real property rights. All wealthy people — whether for or against the government — realise that their cash is not safe in any form in their country. Therefore, they transfer their money abroad, where the real banks of the former Soviet Union are located.
Roughly 5% of the GDP of each country has been exported as capital flight every year since 1990. Russian and Ukrainian individuals have accumu- lated enormous fortunes of probably $1 trillion and $140bn, respectively. For Russia, that corre- sponds to three quarters of GDP and for Ukraine 140% of GDP.
Potential foreign investors are no fools. They see that the locals do not invest but take their money out, so why should they be so foolish as to invest in such countries. Therefore, Russia and Ukraine have had foreign direct investment of about 1% of