Ukraine: Opportunity to Reform?
by Cecilia He, MBA ‘14 (3/18/14)
Taking a closer look into the Ukrainian economic situation
Cecilia He, EMI Fellow candidate, has taken an interest in the situation that business owners / foreign investors are facing right now in Ukraine. By contacting a Johnson alumnus in the financial service sector with CEO responsibility for Ukrainian operations, Cecilia got a closer look at the economic situation in Ukraine and how important political stability is for doing business in emerging markets.
However, due to the strict internal compliance policies and rules for all external communications at the firm where our alumnus works, we cannot reveal the name and detail background of our alumnus. Even if that is the case, on behalf of EMI and Johnson community, we would like to leverage this platform to express our sincere thanks to this alumnus and wish everything goes well with his business future in Ukraine.
Here is the summary of her interview with him:
How do you personally feel about what is happening in Ukraine?
Honestly, I see this event more like an opportunity for Ukraine to reform and move to the next stage of development. Although I feel sad for all these sufferings that people are going through, I truly hope everything will work out eventually, with a better government leadership and more favorable economic policies, so that Ukraine will have a bright future. Especially right now, the whole world is watching carefully, and such attention can also help people better understand this country. Perhaps this focus can push the country to thoroughly reform, which will eventually put country back in the right direction, hopefully.
How is the capital market in Ukraine right now?
Apparently, the capital market is closed; it is hard for business to have access to capital. For local residents, the banks are closed, which brings a lot of inconvenience to their daily lives. Meanwhile, people are very concerned about the safety of the financial system, so they are counting on the coming re-election on May 25, which they hope will bring them more safety and stability.
What is the most critical economic challenge that the new government team will be facing in Ukraine?
Talking about economic challenges, nothing is new here. Challenges that concerned the last government are still concerning the current one. Ukraine’s economy has been shattered by months of civil unrest, the treasury is empty and there are fears some regions may separate. The country right now needs $35 billion over the next two years to stay afloat. The IMF and EU are unlikely to offer that much, but whatever they provide will come with strings such as sweeping reforms to institutions, an end to generous subsidies and a more open economy. None of them will be easy.So the budget deficit challenge that the Ukraine government is facing should be addressed, no matter who is in charge of the country right now.
Heavy energy dependence on Russia is another economic challenge. Ukraine gets most of its gas from Russia and when Mr. Yanukovych turned away from an EU trade deal last November, Russia stepped in with a $15-billion loan package and steep discounts on gas. Those discounts are up for renewal on April 1, and few expect them to remain.
Meanwhile, Ukraine is urging for monetary policy reform. Reforms that may stem from ongoing discussions with the EU/IMF and Russia will be crucial factors in determining the shape of growth going forward.
Now, Ukraine new government has appointed a new ministry of finance, and the whole financial system is still working under the same framework it has before. Although U.S recognize the legitimacy of Ukraine's new government, Russia is the opposite.
Do you see any possibility for foreign investors to flee the country?
Political stability is the most important foundation for economic development, so there is no doubt that the political unrest in Ukraine brings lots of uncertainty to the business world. For some business owners, how to navigate those risks becomes their first and foremost priority. Ukraine is not only an attractive market with rich natural resources, but also strategically important for many Fortune 500 companies. At least within the CIS region, Ukraine was always considered to be the regional headquarters. For example, big companies like P&G, Citi, GE are very committed to this market and have been with the country for more than a decade. However, they are very upset and struggling right now. Therefore, business owners, specifically foreign investors, are truly looking forward to seeing an elimination of the unrest and new commitments for economic reform.
Is there any possibility for the Ukraine to split into two separate countries?
I don’t think so. The most fundamental point here is that people in Ukraine love this country with their heart and soul, and it is by no means possible that people want to split their homeland. Right now, the situation is the previous government was very corrupt and not helping the people in Ukraine. Thus, the population is significantly dissatisfied with the previous regime and urges reform to reshape the whole country.