Ukraine took the historic step of joining the World Trade Organization on Friday, May 16. While the government hopes membership will boost the economy, the country seems headed for trouble.
Ukraine hopes to boost its economy
WTO membership will mean reduced tariffs and increased competition in Ukraine. But as the former Soviet states slides towards yet another political crisis, many observers wonder whether the market reforms are going to do much good.
Soaring inflation and slowing growth has been at the center of Ukraine’s latest political crisis, which threatened to break apart the coalition of President Viktor Yushchenko and Prime Minister Yulia Tymoshenko.
Yushchenko, an ex-gas magnate turned social crusader, has pinned his hopes on WTO membership, saying it will bump up the country's gross domestic product and drop consumer prices.
"These are (economic) results that no one can oppose," Yushchenko said when he signed the agreement to join the WTO in February.
Yet observers question the government’s hope that WTO membership is the ticket to slowing inflation. In the three months since the WTO deal was signed, Ukraine’s consumer prices have gone up 10 to 15 percent with annual inflation close to 50 percent.
Business elite set to profit
Food prices have increased sharply in Ukraine
Ukraine's Economics Minister Bohdan Danilishin was adamant on Thursday that WTO membership would help average Ukrainians.
"Consumers will receive a double benefit," Danilishin was quoted by Interfax as saying. "Lower income consumers will be able to buy cheaper food, while non-poor consumers will benefit from greater access to telecoms and financial services."
But Ukrainian media and economists have questioned the government's rosy outlook. They predict that Ukrainian oligarchs will profit handsomely while average consumers will see few benefits. WTO membership is likely to give a boost to the lucky few who control industries such fertilizer, wheat, chemicals and sunflower seeds, according to the Fakty newspaper.
Ukrainian steel barons are among those expected to profit the most, as export duties for lucrative markets such as the United States and European Union will automatically be halved. Furthermore, Ukrainian steel can no longer be excluded from certain markets, which has happened in the past triggered by worries that it would undercut the price.
Food prices rise steeply
Tymoshenko has made the economy a central theme
Ukrainian agricultural barons raised their prices steeply in recent months, anticipating a hit they will take once WTO rules cancel government-imposed quotas on foreign agricultural products and impose sales tax, according to the Silski Novyny newspaper.
Ukrainian farmers face 20 to 40 percent price increases over night, which in turn caused an increase in retail food prices by as much as 50 percent since the beginning of the year, Korrespondent newspaper reported.
While that might give imported food a competitive edge, that “assumes we have a free and open foods market here," Bogoslav Pilishinsky, a Kiev-based food industry trader, told the DPA news agency.
"Our foods market is overregulated, expensive to enter, and has a few major players," he said.
"Foreign food will probably replace Ukrainian food on supermarket shelves, but I don't see any incentives for supermarket chains to cut their prices."
Retail goods, particularly those not produced in quantity in Ukraine, are expected to become somewhat cheaper, including household appliances, apparel, medical supplies, and automobiles.
"But it's hard to say how much good that is going to do across the board," Vadym Kozachenko, a Kiev-based economist, told DPA. "The poor ones just buy food, and the rich ones are going to buy in any case."
"The risk factor here is that WTO membership typically benefits middle class consumers," Kozachenko said. "There aren't that many mid-range consumers like that in our economy - we have a few very rich, and a great many poor."
Political crisis looming
The WTO has 152 members
Ukraine's entry into the 152-member global trading community has been heralded as a major step for the former Soviet state. It shows the distance Ukraine has come since the first half of the 1990s, when the country experienced hyperinflation exceeding 1,400 percent.
Yet there have been troubling signs that the post-Soviet republic is headed towards yet another political crisis. Ukraine’s government has seen constant political infighting since the 2004 elections and mass protests which brought pro-Western parties to power. And the alliance between the former “Orange” revolution proponents has shown signs of strain.
On Wednesday, Prime Minister Yulia Tymoshenko, a former central banker, threatened to break off her alliance with Yushchenko. Her supporters barred the president from giving his annual parliamentary address. It was the president’s second abortive attempt to give the speech this year.
"If the situation in the country does not improve, the prime minister cannot be the partner and ally of the president," Tymoshenko said in a statement.
Yushchenko hopes WTO membership will slow inflation
"To humiliate your own country, practically destroy in the economy everything that we are creating -- this is no way to fight for the next presidential election," she said.
Tymoshenko is now making open accusations against Yushchenko which she has not done before. This could mean that the coalition is on the verge of collapse, analyst Volodymyr Fesenko, director of the Penta think tank told Reuters earlier this week.
Simmering disagreements between Ukraine’s two top politicians have “now boiled over into outright political confrontation,” Fesenko said.
Tymoshenko’s ruling coalition has a mere one vote majority. The government, in place since December, has been accused by “populist” spending measures which they say are contributing to the price increases. Yushchenko has called for the government to stop preaching populism "and instead work on precise anti-inflationary measures."