chapter  1
40 Pages

The Ukrainian Donbas in ‘transition’

ByADAM SWAIN, VLAD MYKHNENKO

Until the so-called ‘Orange Revolution’ in November 2004, Ukraine had been regarded by orthodox transition economists as a failed ‘transition country’. According to this view the Western prescription of stabilisation, liberalisation and privatisation had been implemented in Ukraine too late and too haltingly and had been reversed from time to time as the influence of reformers vacillated (Aslund and de Ménil 2000; Aslund 2000; Dubrovskiy and Ivaschenko 2002). It was argued that the prolonged severe economic depression that followed the disintegration of the USSR and the Soviet system was caused by a rent-seeking elite, which spanned the arenas of politics, economics and crime, that served its own interests and frustrated economic reform. Accordingly it was argued that political change was required in order to puncture the increasingly entrenched rent-seeking elite. However, following the financial crisis in Russia in August 1998, the Ukrainian economy began to grow rapidly without any notable political change taking place until the ‘Orange Revolution’. (Ironically, following the ‘Orange Revolution’ economic growth slowed precipitously, from 12.1 per cent in 2004 to 2.6 per cent in 2005.) Whilst some continued to argue that the Ukrainian economy was plagued by a vicious circle of macroeconomic stability and entrenched structural problems, others sought to account for the emergence of economic growth. It was suggested that the structural reforms implemented by Viktor Yushchenko’s government in 1999-2001, especially in the energy sector, had finally stimulated economic growth (Aslund 2001). It was also argued that artificially low prices for Russian oil and gas effectively subsidised the growth in industrial production. In addition the devaluation of the hryvnia following the Russian financial crisis also improved Ukraine’s competitiveness in international markets.1