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Before the annexation of Crimea, the war in Donbas, and even amidst the full-scale invasion, the discussion in Ukraine has been consistently focused on the need for a strong economy, a “national producer,” “well-paid jobs,” “business rights guarantees,” and “ending law enforcement abuse.” Every year, we seem to revisit these topics anew. However, instead of discussing strategy, we consistently focus on local problems and economic tactics. While one might think that war is not the best time for such discussions, considering that the war has exposed the inadequacy of the old Ukrainian model, now is precisely the time to talk about a new model.
Economic policy, or rather its almost complete absence over the past 33 years, has been beneficial only for simple business models, mostly of the resource-based type. This resulted in low taxes for large businesses, significant interest from tax authorities and law enforcement towards small and medium-sized businesses, a lack of motivation to pay employees decent wages, and no defined state priorities for development.
The lack of any long-term planning has led to Ukraine not investing in professional education, quality higher education, and applied sciences, which could have served as a basis for a new industrialization and the creation of a technological economy. Consequently, a social-political model has gradually formed that corresponds to economic uncertainty – populism as the basis of politics and constant struggles for “flows” as the content of Ukrainian politics. If almost the only model of economic success is rent, then the struggle is for rent. This, by the way, is one of the fundamental reasons why Ukraine was unprepared for Russian aggression.
Ironically, this unbalanced resource model hindered the development of resource sectors as well. The gas market, which is almost native to me, was effectively closed to adequate private investment for many years, the energy market is still highly monopolized, and the Ukrainian metallurgy has gradually degraded from primarily steel production to exporting ore. The Russian invasion only further highlighted these obvious shortcomings – we have virtually no complex industry that could be quickly converted to military rails. And we are critically dependent on the help of Europe and America not only for weapons supplies but also for setting up production lines for ammunition and equipment. Moreover, China, which is quite an unpredictable partner, remains the main supplier of components for almost all drones produced in Ukraine.
What to do about it? Right now, amidst intense combat operations, the focus should be on not complicating the lives of businesses. The state should concentrate its efforts on transparency and ensuring the normal functioning of courts, as well as restricting the ability of corrupt law enforcement to hinder the operation of enterprises. Additionally, I am convinced that we can already work on creating specialized industrial zones in the western part of the country. This includes guaranteeing new productions a transparent and accessible scheme for connecting to utilities. Currently, when you want to open a production facility, you often have to wait a year for electricity connection. This unhealthy situation can be easily addressed by the state through adequate regulation.
In the long term, we need to work on shaping an economic model that takes into account both the strengths and weaknesses of Ukraine. We must realistically assess ourselves and our economic potential. Our two main long-term weaknesses are proximity to Russia (its aggression and threat are likely to persist) and demographics (Ukrainians are an aging nation that has experienced the largest population outflow in Europe since World War II). Both of these problems have no simple solutions and must be considered in building a new economic model. Our two main strengths are the presence of a large resource potential (both agricultural, energy, and metallurgical) and proximity to the world’s largest market – Europe.
The demographic challenge requires us not only to work on repatriating Ukrainians who have left but also to focus on quality rather than quantity of the workforce. Quality education. Quality healthcare. An attractive social model. High-skilled and technological industry.
The security challenge requires prioritizing the military-industrial complex, where Ukraine can become, based on its historical experience in military industry, one of the world leaders. Producing weapons and equipment for ourselves, for future NATO partners, and for all countries that are forced to be constantly prepared to defend against dictators.
Ukrainian resources should be used not within the framework of the old oligarchic model but as an opportunity for the development of a technological economy. We already have a successful experience where restrictions on timber exports helped the Ukrainian furniture industry become a successful exporter to the European Union. Ukrainian furniture is sold in Europe. The same can be done with metal products, industrial equipment, and weapons. For example, significant lithium deposits have been discovered in Ukrainian Donbas, which are critically important for the “green transition”. Should Ukraine export lithium? Or should it attract investments to produce batteries and other deep processing products? In the new economic policy, it’s the latter.
Finally, our integration into the Western world and the European Union create significant opportunities for export-oriented industries. We already see how the Ukrainian agricultural sector is creating real or perceived problems for Polish, Hungarian, and Romanian farmers.
But our opportunity for economic expansion in Europe is not only about exporting grains and other agricultural raw materials to the EU. Considering how quickly instability is growing worldwide and how quickly trade routes from Asia to Europe are becoming dangerous due to terrorists and dictators, Ukraine can become an industrial base where some production of European companies from East and Southeast Asia will relocate. Yes, this will require us to address fundamental problems, such as the specific nature of our judicial system, but without this, any development of Ukraine will be impossible.
Therefore, right now, when Ukrainian politicians, economists, sociologists, and our international partners are discussing the reconstruction of Ukraine after the war, we need to work on the problems and opportunities of Ukraine in strategic economic development. Because without this, neither long-term security nor the survival of the Ukrainian state and people as a nation will be possible. We need to stop stepping on rakes.
Alexander Katsuba — Ukrainian entrepreneur, expert in the energy sector, owner of the company ALFA GAZ.
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