Graft, red tape, addiction to cheap gas kept Ukraine from fulfilling post-Soviet potential

The Associated Press

View on Independence Square, the epicenter of the country's current unrest, Kiev, Ukraine, Thursday, Feb. 20, 2014. Fierce clashes between police and protesters in Ukraine's capital have shattered the brief truce Thursday and an Associated Press reporter has seen dozens of bodies laid out on the edge of the protest encampment. (AP Photo/Efrem Lukatsky)

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Ukraine ranked 144 out of 175 countries in the 2013 corruption perception index compiled by Transparency International, an anti-corruption group, behind Papua New Guinea, Nigeria, and Iran.

RED TAPE: Business advocates say owners sometimes prefer paying bribes to obeying regulations and taxes that are so complicated and burdensome that they would be out of business if they complied. The country's complex business tax laws require 390 hours a year to comply with and take 54.9 percent of profits. That put Ukraine 164th out of 189 countries in ease of paying taxes in a World Bank survey.

BROKEN FINANCES: Ukraine's finances now are in such bad shape that it will have trouble paying its debts this year without outside help. With continuing deficits, it faces borrowing needs of between $7 billion and $10 billion this year. Its poor prospects mean it's unlikely to be able to borrow more on bond markets.

On top of that, the central bank has been spending its dwindling foreign currency reserves, which were down to $17.8 billion at the end of January, to prop up the exchange rate of the hryvnia currency. One reason it is doing so is likely that many businesses and consumers owe money in dollars — a sharp drop in the hryvnia could trigger widespread bankruptcies.

Unfortunately, keeping the currency artificially strong hurts exports.

Russia had promised $15 billion in credit — an inducement to abandon closer ties with the EU and join a Russian-sponsored trade group. Even that money, however, seems to be on hold due to uncertainty about the fate of the Yanukovych government. Ratings agency Standard & Poors said Friday Ukraine would likely default without a significant improvement in the political crisis.

Sutela said that even Russian help would only be a stopgap and couldn't paper over the need for fundamental change.

"Next autumn, they will go cap in hand and beg the Russians for money again," he said.

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