- The Washington Times - Sunday, March 10, 2002

KIEV For Volodymyr Avramenko, the surest barometer of Ukraine's economic health is how well his company's high-end chocolates sell.
Three years ago, his confectionery company, AVK, struggled to sell boxed, luxury chocolates. Last year, however, the Donetsk-based enterprise posted $75 million in revenues, a modest increase from the year before.
"People have more money to spend," said Mr. Avramenko, who plans to expand his business. "Things are getting better."
While Ukraine continues to be criticized for sluggish reforms and Western governments voice concerns that its March 31 parliamentary elections will be manipulated to favor the ruling elite, a bright spot is emerging the economy.
To be sure, Ukraine's economy still faces many problems. The country's standard of living lags behind those of Russia and other Eastern European nations, legislators haven't passed a rational tax code, and foreign investment lags.
Yet with a 9 percent growth rate in 2001 and inflation at 6 percent, Ukraine had one of the fastest growing economies in Europe last year. January's inflation in Ukraine was 1 percent, down from 1.6 percent in December, the State Statistical Committee told Ukraine Interfax. In contrast, the country was battered by inflation of 26 percent in 2000 and 19 percent in 1999.
Small-business ownership is on the rise nationwide, while small and medium-size privatization is virtually complete. And late last year, after nearly a decade of stalemate, Ukraine's parliament finally approved private land ownership.
"Ukraine has had 24 months of consecutive growth," said Michael Bleyzer, chief executive officer and president of SigmaBleyzer, a U.S.-based equity-investment fund with significant investments here. "This is not a fluke when the rest of world is slowing down."
The state of the economy, and how competing political parties see the economic situation on the eve of the election, was discussed at an international roundtable last week.
Ukraine took several important steps in recent years to bring its economy out of the doldrums, particularly after the 1998 meltdown of the Russian economy, which sent shock waves through the region.
Kiev instituted fiscal discipline, reduced barter operations, passed deficit-free budgets, eliminated government intervention in the agricultural market and successfully restructured its external debt, according to Edilberto L. Segura, former head of the World Bank's mission here.
The government of former Prime Minister Victor Yushchenko, whose political group, Our Ukraine, is expected to make a strong showing in this month's elections, also eliminated indebtedness to pensioners and partially settled its debts with government employees.
"Implementation [of reforms] is the most important thing now," Mr. Segura said. "The situation in Ukraine is more favorable now than in the last 10 years."
The country's parliament, however, still has not been able to push through a Western-style tax code, which has hampered growth and foreign investment. The economy is expected to take center stage during the elections.
"We are concerned the pace of growth could slow dow … without a major revival of investments," said Mr. Segura, who is now Sigma-Bleyzer's chief economist and teaches at Oxford University.
Foreign direct investment reached $584 million in 2000, up from $437 million the year before. Total foreign investment in Ukraine's economy since independence has reached $3.9 billion, with the food sector being the largest investment recipient.
Some cautious investors have been scared off by a series of political scandals, including allegations that President Leonid Kuchma was involved in the death of Internet journalist Georgiy Gongadze, who reputed corruption within the administration.
But foreign investors already in Ukraine complain of layers of bureaucracy and arbitrary application of laws.
"The lack of rule of law and an independent judiciary is still Ukraine's greatest challenge," said Mark Iwashko, vice president of the Western NIS Enterprise Fund, a venture capital fund that invested $8 million in AVK and is now involved in a nasty lawsuit with one of its portfolio companies over non-payment of debts and violation of corporate governance rights.
Prime Minister Anatoliy Kinakh said he recognizes more must be done to protect foreign investors.
"To better the investment climate, we need to increase the level of protection of foreign investors," he said. "And that will depend on how effectively the three levels of government will be able to work together."
With government officials often at odds over reforms, many of Ukraine's regions have implemented their own programs to foster economic growth, some with surprising results.
The Donetsk region in eastern Ukraine, for instance, has gained a fair degree of autonomy from Kiev.


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