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Ukraine strategy

Strategy (248KB - PDF)

Public comments (58KB - PDF)

Local language translation (898KB - PDF)

The post-crisis recovery is expected to be protracted due to weak domestic demand, ongoing adjustment to the terms of trade shock, lingering problems in the financial sector, the limited capacity of government to provide further fiscal stimulus to attract inward investment. The announced structural reforms, if implemented fairly, should contribute towards increasing the country’s long-term growth potential and help mitigate the post-crisis macroeconomic vulnerabilities.

Challenges

The key immediate challenge for the authorities is to put the public sector debt onto a sustainable path and complete post-crisis stabilisation of the financial sector. Measures in this area are being implemented with the support of the IMF and other international institutions. In addition, it will be necessary to significantly improve the business environment and reduce the perceptions of endemic corruption in order to attract large scale quality investments that would, over time, help to reduce Ukraine’s dependence on several low value added and energy intensive export sectors.

Ukraine continues to face important transition challenges in all key sectors, which include:

Strengthening energy efficiency and energy security

Ukraine is a major net importer of oil and gas, and an important transit country. At the same time, its economy remains one of the most energy-intensive and inefficient in the region. The energy sector has suffered from years of serving primarily quasi-fiscal or political, rather than commercial, objectives. Ukraine’s accession to the Energy Community with the EU and the decision to raise domestic gas prices to import parity over time is expected to strengthen the gas and electricity sectors, create conditions for greater energy efficiency and conservation and support Ukraine’s ambition to remain an energy transit country.

Improving governance and transparency in the sector, as well as commercialisation and unbundling of NAK Naftogaz, will be needed to strengthen its ability to raise additional finance to modernise the gas transit system and develop its natural resource base.

Unlocking Ukraine’s agricultural and industrial potential

Ukraine carries great potential in the agricultural sector and is capable to help address global food security challenges over time. However, its potential has been only partly realised as sector productivity remains low, access to finance limited, and the future of land ownership and user rights uncertain. 

The industrial sector is expected to benefit from Ukraine’s recent accession to the WTO and the deep and comprehensive free trade area under negotiations with the EU. 

The sector has, however, suffered during the crisis from reliance on short-term finance, terms-of-trade shocks, and reduced international demand. Close links between business and politics, weak governance and transparency, and poor enforcement of competition policies hamper industrial development and inward investment. Recent government intervention and the imposition of grain export restrictions have had a negative effect on grain producers.

Providing good quality and reliable infrastructure

Recent years witnessed some improvement of the transport and municipal infrastructure, which suffered during Ukraine’s prolonged transition recession. 

As the state’s ability to allocate significant investment resources to this sector will be limited after the crisis, it will be important to engage the private sector in the rehabilitation and maintenance of roads and seaports, and encourage competition in the rail and aviation sectors. Although the municipal utilities are decentralised, they have suffered from the politicisation of tariff setting, governance problems and from restrictions in their ability to finance commercially viable projects.

Dealing with the legacy of the crisis in the financial sector

Ukraine’s highly dollarised financial sector continues to suffer from post-crisis de-leveraging, reliance on short-term funding as well as the long-standing governance problems. 

The role of the state in the sector has increased during the crisis as state owned institutions received significant capital injections and several banks were nationalised. State ownership may reduce the sector’s long-term efficiency and, ultimately, hamper economic growth potential. 

The international banks supported their Ukrainian subsidiaries during the crisis, however, their future in Ukraine will depend to a large extent on whether the authorities adopt supervisory methods in line with international best practices, establish effective coordination with home supervisors and fair competition. 

The non-banking sector is in the nascent stages of development and local currency capital markets remain largely underdeveloped.

The Bank’s strategic directions

During the post-crisis economic recovery the Bank will focus on addressing the key transition challenges in line with the government’s reform programme, in close coordination with other International Financial Institutions (IFIs) and bilateral donors:

Energy

The Bank will support safety upgrades in the nuclear sector, electricity transmission networks, operations that would integrate Ukraine into the European energy market and operations that will increase the overall energy efficiency and decrease the carbon intensity of the sector. The Bank will also support the modernisation of Ukraine’s gas transportation and distribution system, provided the authorities pursue a comprehensive and credible reform agenda, including restructuring of NAK Naftogaz.

Enterprises

The Bank will support FDI and local enterprises to help diversify the economy and restructure old energy-intensive industries with a focus on improving their governance, transparency and energy efficiency. 

In recognition of Ukraine’s great potential as an agricultural producer, the Bank will support investments along the whole value chain and especially the instruments that support primary producers, including seasonal working capital. 

The Bank will assist Ukraine in the development of knowledge intensive industries and effective use of its human and scientific potential, as well as support the government’s privatisation programme of remaining state enterprises, promoting the transparency of the process in order to maximise value for the public sector.

Infrastructure

In the road sector, the Bank will support the completion of the modernisation of the main transport corridor connecting the country to the European Union. The railway sector, which suffered from the emergence of major bottlenecks before the crisis-related recession, can be supported only after the authorities make credible steps to corporatise the national rail operator and permit entry of private operators. 

The Bank will also support commercialisation of municipal utilities through projects with large demonstration effects or energy efficiency gains.

Financial Sector and Capital Markets

Main priorities will include providing the banking sector with targeted long-term loan and equity funding together with technical assistance to help support activities that will help to limit the sector’s future instability, including strengthening governance, diversifying long-term funding sources and supporting local currency lending to the extent possible. 

The lending instruments would focus on MSMEs, financing energy efficiency improvements and trade facilitation, with the use of appropriate technical assistance. In cooperation with other IFIs, the Bank will help the authorities strengthen the role of private capital in the banking sector. The Bank will work with other IFIs and the NBU to address remaining issues preventing the Bank from structuring loans in local currency.

The success of the Bank’s ambitious operational strategy in Ukraine will to a large extent depend on implementation of reforms in all main sectors. Slow reform progress will inevitably lead to reduced investment by the Bank, particularly in the public sector. In the coming years, the Bank will be actively involved in policy dialogue with the authorities together with other IFIs. 

The recent experience of coordinating discussions in the gas and financial sectors sets a good precedent which the Bank will seek to emulate in other sectors.


Last updated 23 June 2011

Publications

  • Ukraine factsheet

    This document provides an overview of the EBRD's work in Ukraine.