PEST Analysis of Ukraine PEST Analysis of Ukraine Table of Contents PDF

Preview

Summary

PEST Analysis of Ukraine August, 2008 PEST Analysis of Ukraine Page 1 of 13 August, 2008 Table of Contents PEST Analysis .............................................................................................................................................. 3 Political Factors ...................

Description

PEST Analysis of Ukraine

August, 2008

PEST Analysis of Ukraine August, 2008

Page 1 of 13

Table of Contents PEST Analysis .............................................................................................................................................. 3 Political Factors ......................................................................................................................................... 3 Historical preview .................................................................................................................................. 3 Ruling Party ........................................................................................................................................... 3 Foreign Relations .................................................................................................................................. 4 VISAs ..................................................................................................................................................... 4 Financial Incentives – Regulations ...................................................................................................... 4 Trade Partners and Agreements .......................................................................................................... 5 Economics Factors ................................................................................................................................... 5 Economic Growth .................................................................................................................................. 5 Inflation................................................................................................................................................... 6 Current Account Balance ...................................................................................................................... 7 Interest Rates ........................................................................................................................................ 7 FDI .......................................................................................................................................................... 7 Employment Growth, Income and Wages ........................................................................................... 8 Economic Ratings ................................................................................................................................. 8 Privatization of Property and Land ....................................................................................................... 9 Banking system and Lease Financing ................................................................................................. 9 International Trade and Capital ............................................................................................................ 9 Social Factors..........................................................................................................................................10 Demographics .....................................................................................................................................10 Households ..........................................................................................................................................11 Environmental Issues..........................................................................................................................11 Technological Factors.............................................................................................................................12 IT Sector...............................................................................................................................................12 R&D ......................................................................................................................................................13 Government Participation ...................................................................................................................13

PEST Analysis of Ukraine August, 2008

Page 2 of 13

PEST Analysis Political Factors Ukraine is a republic ruled in accordance with the constitution originally adopted in 1996. All fundamental governmental organisations are situated in the capital city of Kyiv. The country is under a semi-Presidential system where the President is the chief of state and shares power with the parliament. The Prime Minister is appointed by the President on the recommendation of the party or parties holding a parliamentary majority. The Parliament approves the Prime Minister and appoints and dismisses cabinet ministers as proposed by the Prime Minister. However, the President holds the constitutional right to appoint the defense and foreign ministers, as well as the head of the security service. The President also holds the right to veto legislation, with the exception of constitutional laws, as well as to stop cabinet decrees.

Historical preview Ukraine declared itself independent from the Soviet Union in 1991, which was followed by the election of President Leonid Kravchuk, a former Communist leader. His term was characterized by severe economic decline and runaway inflation, while the privatization processes of the economy hardly progressed. Furthermore, Leonid Kuchma, a Soviet-era industrial manager and Ukraine’s President from 1994 to 2004, advocated close ties with Russia. The 2004 Presidential election was characterized by widespread violations of democratic norms, including government intimidation of the opposition and of independent media, abuse of state administrative resources, highly skewed media coverage, and numerous provocations. The runoff between Viktor Yanukovych and Viktor Yushchenko included illegal expulsion of opposition representatives from election commissions, multiple voting by busloads of people, abuse of absentee ballots, reports of coercion of votes in schools and prisons, and an abnormally high number of mobile ballot box votes. Hundreds of thousands of people took to the streets of Kyiv and other cities to protest electoral fraud and express support for Yushchenko, and conducted ongoing peaceful demonstrations during what came to be known as the "Orange Revolution." In the following three years no stable President/Prime Minister cooperation was formed; the elections were held in line with 1 international standards for democratic elections.

Ruling Party The current President, Viktor Yushchenko, was elected in late 2004, which marked the end of the Orange Revolution. The head of government, Prime Minister Yulia Tymoshenko, began her official duties in December 2007. Her First Deputy Prime Minister is Oleksandr Turchynov, and the vicePrime Ministers are Ivan Vasyunyk and Hryhoriy Nemyrya. The current political structure of the Parliament is the following: Party of Regions has 175 seats; Yulia Tymoshenko Bloc – 156; Our Ukraine People’s Self Defense Bloc – 72; Communist Party (CPU) – 27; Lytvyn Bloc – 20. The President and the Prime Minister cooperate constructively and undertake reforms towards the EuroAtlantic integration. 2 However, in a recent report, Emerging Europe Monitor defined the relations between the President and the Prime Minister as volatile due to some disagreements regarding the government’s policies.3

1

http://www.state.gov/r/pa/ei/bgn/3211.htm

2

http://ukraine.suite101.com/article.cfm/ukraine_government_profile

3

http://www.emergingeuropemonitor.com/file/65962/political-risk---fractious-relations.html

PEST Analysis of Ukraine August, 2008

Page 3 of 13

Foreign Relations Ukraine maintains peaceful and constructive relations with all its neighbors; the country has especially close ties with Poland and Russia. Relations with Russia are complicated as a result of conflicting foreign policy priorities in the region concerning energy dependence, payment arrears, etc. The government has declared Euro-Atlantic integration as its primary foreign policy objective. Ukraine has signed The European Union's Partnership and Cooperation Agreement (PCA) and is included in the European Neighborhood Policy. The EU and Ukraine are negotiating a "new enhanced agreement," which could also incorporate a free trade agreement. Ukraine is part of the Organization for Security and Cooperation in Europe—OSCE and of the North Atlantic Cooperation Council. In January 2008 Ukraine requested a NATO Membership Action Plan. Ukraine is a founding member of the Commonwealth of Independent States (CIS) and of GUAM (Georgia-Ukraine-AzerbaijanMoldova). Ukraine is a member of the EBRD (European Bank for Reconstruction and Development), International Monetary Fund, World Bank and since 2008 of the World Trade Organization (WTO). Currently, it does not receive IMF financing. The World Bank and EBRD provide loans and grants to support the development of the country and the implementation of reforms for improvement of the investment climate, public administration, financial management, and social inclusion.

VISAs Ukraine has a visa-free regime with the countries from the CIS, including Russia and Belarus. Furthermore, visa facilitation agreement with most EU countries was successfully completed. Its completion has eased the procedures for issuing short stay visas for Ukrainian citizens. Such visa free regime has been established for citizens of the following countries: United States of America, Austria, Belgium, Canada, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Malta, Poland, Portugal, Principality of Andorra, Principality of Liechtenstein, Principality of Monaco, Republic of Iceland, Slovakia, Slovenia, Spain, Sweden, The Holy See (State of the Vatican City), The Netherlands, The Swiss Confederation, United Kingdom. Citizens of the above-mentioned countries do not need visas to enter Ukraine or transit through its territory for the period of time of up to 90 days with a valid travel passport. However, visas are required for citizens who enter Ukraine with the purpose of employment, permanent residency, study and work at the diplomatic missions in Ukraine or with any 4 other purpose if they are going to stay in Ukraine for more than 90 days.

Financial Incentives – Regulations Ukraine encourages foreign trade and investment and has established Ukrainian Center for Foreign Investment Promotion (Invest Ukraine). Foreigners have the right to purchase businesses and property, to freely repatriate revenue and profits, and to receive compensation in the event that property is to be nationalized by a future government. Ukraine has low tax rates. The top income tax rate changed from a flat 13 percent to 15 percent in January 2007, and the top corporate tax rate is 25 percent. Other taxes include a value-added tax (VAT), a land tax, and a vehicle tax. In the most recent year, overall tax revenue as a percentage of GDP was 35.4 percent. rd

The Heritage Foundation Index of Economic Freedom 2008 places Ukraine on 133 place in the world with a score much lower than the regional average. The report of the foundation says: ‘Ukraine is very weak in business freedom, government size, monetary freedom, investment freedom, property rights, and freedom from corruption. Inflation is high, and government expenditures equal nearly twofifths of GDP. While foreign investment is officially welcomed, corruption and regulations are deterrents to capital. The judiciary does not always enforce contracts and is tarnished with corruption.

4

http://www.mfa.gov.ua/mfa/en/509.htm

PEST Analysis of Ukraine August, 2008

Page 4 of 13

Corruption is a major problem throughout the civil service, and bureaucratic inefficiency makes many 5 commercial operations difficult.’

Trade Partners and Agreements Ukraine is a Generalized System of Preferences (GSP) beneficiary with a number of industrialized countries, a member of the Commonwealth of Independent States (CIS) and of a customs union agreement, with Russia, Belarus, and Kazakhstan although the latter has not been fully implemented. While the trade relationship with EU is currently defined by the Partnership and Cooperation Agreement (PCA), however the planned EU–Ukraine Free Trade Agreement (FTA) is expected to change the situation. Ukraine also started negotiating an FTA with Israel in November 2007. Ukraine’s accession to the WTO was ratified in July 2008.6 The EU stated that ‘WTO membership will bring significant benefits for Ukraine. It will provide it with guaranteed access to the markets of all other WTO members, including the EU. It creates a degree of certainty and stability in openness of the Ukrainian market that will help attract new trade and 7 investment. It will be a highly significant step in Ukraine's integration in the global economy.’ As of July 2008, Ukraine’s major export partners are EU – 28% and Russia – 26%. Major import partners are EU – 37% and Russia – 28%.8 The trade between EU and Ukraine trade has been growing steadily in recent years. According to EU press releases, Ukraine is the 25th largest export 9 market of the EU and the EU is Ukraine's first trading partner, followed by Russia.

Economics Factors Ukraine is granted a market economy status by the EU and USA. The sharp economic decline in the 90s resulted in deteriorating living standards for most citizens and widespread poverty. During the st 21 century, some positive economic growth has been realized. The macroeconomic characteristics of the country are stable, with the hyperinflation of the early post-Soviet period gone. Ukraine's currency, the hryvnia, was introduced in September 1996 and has remained relatively stable. The country has a well-developed scientific and productive basis with good industrial potential. It produces heavy machinery and special vehicles such as light and cargo vehicles, agrarian techniques, diesel locomotives, lathes, equipment for Electric Power Plants, turbines, aviation and oil refinery equipment. Ukraine is a powerful energy producer. Ukraine's long-term economic development depends on the implementation of market reforms. The government undertakes measures against corruption and towards the acceleration of the privatization process. Still, much remains to be done to restructure and privatize key sectors such as energy and telecommunications, to allow the free sale of farmland, and to improve the law enforcement.

Economic Growth The unstable political situation in Ukraine hardly influences its economic development. GDP has been growing steadily since 2005 at an average growth rate of 7% and industrial production has been expanding by 12%.10 The per capita GDP, at Purchasing Power Parity, in 2007 amounted EUR 5800 which is an 11% increase compared to 2006.11 Ukraine`s GDP growth continued in 2008 - 6.4% until May. The GDP is divided in the following composition by sectors – Industry 32.3%, Agriculture 9.1%, 5

http://www.heritage.org/Index/country.cfm?id=Ukraine

6

http://info.worldbank.org/etools/wti2008/docs/brief197.pdf

7

http://ec.europa.eu/trade/issues/bilateral/countries/ukraine/pr160108_en.htm

8

http://ierpc.org/ierpc/memu/memu_93_jul_08_en.pdf

9

http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/249&format=HTML&aged=1&language=EN&guiLanguage=en

10

http://www.investukraine.net/about/

11

http://www.wiiw.ac.at/e/ukraine.html

PEST Analysis of Ukraine August, 2008

Page 5 of 13

and Services 58.7%.12 According to the Institute for Economic Research and Policy Consulting the real GDP growth is expected to decrease in 2009 to 6.3% due to significant slowdown in final consumption of households as a result of the higher inflation and low credit growth. Investment activity is forecasted to speed up in 2009 due to large infrastructure projects aimed at preparing Ukraine for the European Football Championship in 2012. 14

12.1

12 10

9.2

9.6

7.3

8

7.6 6

5.2

5.9 4

2.7

2 0

-0.2

1999

2000

2001

2002

2003

2004

2005

2006

2007

-2

Figure 1. Ukraine GDP Growth (1999 – 2007)13

Inflation Inflation is a major threat for the development of the Ukrainian economy. In May, consumer price inflation reached 31%. Although it is somewhat driven by foods, the major blame should be put on loose fiscal and monetary policies over the last few years. Growing budget spending (30% per year in real terms since 2004) notably contributed to the build up of inflationary pressures, giving strong impetus to disposable income growth. Implementation of generous social promises made during early 2007 parliamentary elections caused further substantial fiscal loosening in 2008, though rallying inflation as well as the widening current account deficit have called for fiscal tightening.

60 50 40 30

30.2

20

31.1

13.5

22.7

16.6

10 12

0.8

5.2

9

9.1

0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2008 2008 2008 Q1 April May June

CPI Monetary Base

Figure 2. Ukraine CPI/Monetary Base Trend (1999 – 2007)14

12

https://www.cia.gov/library/publications/the-world-factbook/geos/up.html

13

http://ierpc.org/ierpc/memu/memu_93_jul_08_en.pdf

14

http://ierpc.org/ierpc/memu/memu_93_jul_08_en.pdf

PEST Analysis of Ukraine August, 2008

29.3

26.2

28.2

Page 6 of 13

In addition to the loose fiscal policy, the monetary policy framework of anchoring nominal exchange rate stability along with large foreign capital inflows into the country has resulted in the rapid growth of money supply. To defend the peg, the National Bank of Ukraine had to purchase large amounts of foreign exchange, thus injecting large sums of Hryvnias into the economy. As a result, the monetary base has been growing steadily and contributing towards inflation.

Current Account Balance The current account deficit has been widening significantly during the last two years. The expansion is attributed to the increased commodity trade deficit in the face of increasing imports. High foreign capital inflows covered the most of the current account deficit. 15.00%

10.60%

According to Emerging Europe Monitor, the deficit as a percentage of GDP will narrow beyond 2009. The analysts believe that the shortfall does not pose a significant risk to macroeconomic stability, and will continue to be covered by the financial account surplus going forward.15

10.00% 2.90%

5.00% 0.00% 2004 -5.00% -10.00%

2005

2006

2007

-1.50%

-4.20%

2008 Q1

-9.60%

-15.00%

Figure 3. Ukraine CA Balance as % of GDP Trend (2004 – 2008)16

Interest Rates In the face of rising inflation and credit growth, the National Bank of Ukraine raised its discount rate by 200 basis points from 10% to 12% at the end of April. Since the end of 2007, the National Bank of Ukraine has been making efforts to contain rapid money supply and credit growth. It tightened reserve requirements and performed sizable sterilization operations. However, rising interest rates while keeping the exchange rate pegged will likely encourage higher inflows of foreign capita...