a physical world, but we have our
capabilities, motivations, and will.
THE POLITICAL ECONOMY OF TRANSITION
The debate on a new economic model for the Ukrainian national economy has been going on for almost as long as independent Ukraine has existed. When this debate was launched, no one doubted that Ukraine was an industrial country capable of joining the international division of labor as a competitive manufacturer of high-value-added products.
The military-industrial complex and aerospace industry, shipbuilding, heavy and light mechanical engineering, ferrous metallurgy, and the chemical industry constituted a kind of “industrial core” capable of producing a full-fledged end product. Economic experts estimated that the “industrial core” could place Ukraine among the world’s 20 top- ranking countries, i.e., those that supply nationally-manufactured end products to the world market.
In fact, the “Great Transition” from a socialist to a market economy was aimed at changing the principles of economic activity, while the geo- economic potential and industrial profile were to be left intact. In simpler terms, the development of the institution of private property through privatizations and applying new patterns to industrial complexes (national and multinational companies) was the instrument, not the objective, of modernization reforms in post-Soviet Ukraine.
Entering the world market under the conditions of domestic transformations spontaneously changed the pattern: the industry gave way to raw materials. In the first decade of reforms this change was regarded as a temporary phenomenon caused by the difficulties of restructuring, sluggish modernization, and a search for domestic and foreign investments to promote modernization and enhance the competitiveness of the “industrial core.”
Yet, as a popular saying goes, nothing is more permanent than temporary things. The raw material- oriented specialization yielded handsome profits for Ukrainian big business. Firstly, the production of raw materials (metal, chemical products) required no large seed capital. Secondly, the cost of lobbying and providing in the world markets is far lower here than that of high-value-added products. Thirdly, and perhaps most importantly, major producers were far more inclined to see Ukraine as a new raw-material subject of the world market rather than allow this county to achieve its ambitions to glut the market with its aerospace products and military hardware.
This situation also suited the state apparatus: young, large capital of the raw material type offered to take on all economic planning and long-term strategy costs, which helped increase budget revenues and reduce long-term investment program risks. Year after year all governments would reap revenues from raw material exporters and energy traders, indefinitely postponing the capital-intensive programs of “industrial core” modernization. The question is not even of target-oriented government investment but in government management, which could promote the implementation of long-term modernization programs with the participation of all types of capital. As applied to modernization goals, the baffling notion of “innovation” has become nothing but a political mantra that lulls the vigilance of the average citizen.
The bottom line is: in 2005 iron and steel products account for a staggering 40% of the export structure. Export-oriented farming products also mostly consist of raw materials and semi-finished goods. The shares of mechanical engineering and services are 20% and 15%, respectively (chiefly, transportation of energy resources).
From this angle, the year 2005 may be a turning point. The high energy consumption and innovation conservatism of the “raw material pattern” are sure to stir up a crisis in one or two years’ time.
Changed priorities and stiff competition on the metal market, which has now grown to include players with higher-added-value products (China), as well as rising oil and gas prices, may become the catalyst of a crisis (budget deficit, slump in domestic investments, “shrinkage” of the domestic market) that will provoke a systemic structural collapse of the entire national economy. In addition to these risks, there are subjective factors, such as reprivatizations, now underway as a result of the change of power and redistribution of property in Ukraine.
What can trigger this in the nearest future?
a) The cost-ineffective and loss- making “raw material pattern” will make it impossible for the entire national economy to generate profits. High dependence on foreign fuel (oil, gas, and fuel rods for nuclear power stations) being supplied at world prices will constantly require heavy expenditures by the state (state budget and budgets of state-run companies) as well as big private capital. The only source that can provide at least a modicum of balance is the workforce. Hence, it will be impossible to avoid increasing the level of labor exploitation, and low incomes will inevitably become the norm in all sectors of the economy. Labor will remain the only domestic resource for accumulating the required profit under the conditions of a cost-inefficient or loss-making economy.
Reduced competitiveness of the raw material-based industry coupled with the low investment capacity (simpler, financial viability) of private capital in Ukraine will compel industrial enterprises to “dump” their property on foreign companies. Regional rival companies or large multinational corporations interested in expanding production and spheres of influence will be prepared for the redistribution of property and will only be playing in a “bear market.”
b) Furthermore, in this case the reprivatizations promised by the new government in 2005 are only a way to internationalize property. At the same time, national “raw-material people,” i.e., owners of mining and export-oriented companies, will be interested at least in attracting foreign companies to management or, at most, in “dumping” the facilities and reinvesting in safer assets, such as domestic market-oriented sectors, land, real estate, recreational business, and telecommunications. In any case, this will reduce investment proposals for the “industrial core:” foreign companies are not interested in this, while “ours” are not prepared for this kind of business.
c) Redistributing the “raw-material sector” of the national economy, which has been the virtual skeleton of the “raw-material pattern” in the past few years, will make the economy directly dependent on foreign development strategies, primarily, the corporate strategies of some multinationals. Given the virtual fiasco of the modernization policy in the past decade, the national government will not be able to have a positive impact on Ukraine’s geo-economic prospects and will be relegated to the role of managing social budgetary programs and local compensation measures (subsidizing the agrarian sector, restructuring coal mining, completing high-profile capital projects launched by the previous governments). Under these conditions, the “industrial core” will be doomed to slow restructuring, conversion, and sellout in line with the still surviving technological chains (Pivdenmash, which builds trolley buses, is the symbolic manifestation of the “industrial core’s” collapse).
UKRAINE AS A PROVIDER OF FOREIGN STRATEGIES
Redistribution of property during a crisis of the “raw-material pattern” will step up the already stiff competition for influencing the Ukrainian economy. The competition is unfolding in several directions:
* the abundant domestic market of Ukraine: goods and services (including communications), know-how and equipment, infrastructure;
* industrial facilities and land, as a component of the corporate strategies of regional companies and multinational corporations related to the extension of production chains and transferring domestic manufacturing to other countries;
* energy and transport infrastructure, as a geo-economic resource in the geopolitical game of influencing the EU.
The third direction assumes paramount importance as the national economy’s development pattern is being changed.
The “industrial core,” technologically linked to the former division of labor inherited by the CIS countries from the USSR, has proved unable to capture new and plentiful sales markets. Local programs of product advancement (e.g., the Pakistan tank supply contract) are of no strategic importance. The participation of the space industry in the Sea Launch program is an exception that confirms the sad truth. The program statements of presidents and cabinets in the past five years about the expansion of sales markets for the “industrial core” and participation in the international division of labor as a country of a so-called “industrial group” have remained a pipe dream of state managers, who are ill-versed in the practice of national industrial strategies.
On the other hand, having encountered the risk of exhausting the national raw-material industry’s resource of fixed assets and bitter political competition for redistributed property, big raw-material business has opted for the strategy of transferring its capitals to related economic sectors of neighboring countries (corporate strategies of the Industrial League of Donbas and System Capital Management) or is looking for a way to “dump” part of its assets on its foreign partners (Interpipe group, etc.).
As Ukraine is being evolutionarily “deprived” of industrial country status, it is gradually being drawn into compensatory external strategies in the role of a transit provider-state of foreign strategies.
Formidable competition over Ukraine’s infrastructure and energy resources is unfolding between Russia and the US, the two big geo-economic players.
Russia, as embodied by the national government and loyal private capital, is interested in attracting Ukraine as a participant in its own energy strategy: consolidating the geo-economic assets of other producing and transporting countries (gas and oil fields, pipelines and their maintenance) and formulating a long-term policy for supplying fuel to EU countries. That is the reason why the gas transportation consortium was established a year ago with the exclusive participation of Ukraine and Russia, with plans to use the Odesa-Brody Ukrainian project in reverse mode.
Although Germany (one of the pillars of “Old Europe”) failed to successfully negotiate the participation of German capital in the gas transportation consortium, it is interested in the further existence and stable performance of the Ukrainian-Russian alliance, which guarantees effective cooperation in the energy sector between the EU and Russia as well as other CIS countries. The 2-billion loan that Ukraine received in 2005 as part of Naftohaz Ukrayiny transactions should be viewed through this prism.
Another component directly related to the Ukrainian energy sector is the maximum utilization of existing facilities and the creation of new ones to produce the end product, i.e., electrical power, as a strategic export resource for the EU. The privatization of regional power-supply and power-generating companies and, later, increasing output by building new power stations (including the gas-turbine type that will consume Russian gas) are technological elements of this strategy. Also taken into account is the dependence of Ukrainian nuclear power plants on Russian nuclear fuel. This is why domestic and foreign lobbies have long been slowing down and even obstructing the project to organize the closed-cycle production of nuclear fuels in Ukraine.
In this context, the Single Economic Space project binding the key CIS countries and the long-term commitments between Russia and Turkmenistan have become organic political components of Russia’s new energy-related and geo-economic strategy. Ukraine, as the owner of pipelines, ports, a powerful energy sector and transport communications, was to play the role of a key “provider” of this strategy.
Russian-European cooperation, which serves Russia’s long-term interests on the EU market as well as the interests of “Old Europe” (above all, Germany) in Russia, presents geostrategic threats to the US and the leading raw-material multinational corporations. The threats range from the strengthening of the European economy at the expense of an exclusive energy partnership with Russia and its CIS client states to the reform of NATO and formation of a full-fledged and self-sufficient European state surrounded by friendly regimes in Eastern Europe, Eurasia, and the Mediterranean region.
Actually, “EU containment” has been one of the US’s main concerns over the past decade. The blockade of Iraq and NATO involvement in military operations in that country, the creation of a “cordon sanitaire” around Eurasia and the use of “color revolutions” as an instrument for geopolitical containment of Russia, the steady move of multinational corporations into the Central Asian raw material area, and implementation of the Baku-Ceyhan oil pipeline project (US companies to deliver energy resources to European ports) are stratified links in the same chain.
Ukraine is also becoming an energy-related and geopolitical component of the “containment” policy. In any case, there may be a certain clear logic to drawing Ukraine and its national economy (to be more exact, its sectors under discussion) into this geostrategy.
The use of the Odesa-Brody oil pipeline in the European direction is an important but very small part of this strategy. What is far more interesting is the readiness of US companies to enter the Ukrainian energy sector. The intention to purchase nuclear power plant fuel in the US so far looks to be the Ukrainian leadership’s ambition finally and irreversibly to diversify the supplies of nuclear fuel, even though, according to media reports, this fuel will be 40% costlier than Russian fuel. It has not been ruled out that the US may pursue a strategic interest in the form of more active participation in modernizing the Ukrainian energy sector (for example, by helping to build nuclear fuel-producing factories and taking part in the privatization of power-generating facilities). In this event, US companies stand a chance of becoming large exporters of electrical power from Ukraine to the EU within a few years: this expensive end product will be able to reduce any benefit that might accrue to the EU from increased energy resource supplies from Russia.
The same purpose will be served by the Europe-bound version of the Odesa-Brody project: it is quite likely that US oil companies, which have a share in Kazakhstan oil production and the Caspian Pipeline Consortium, will work there.
The intention to “Americanize” the Ukrainian energy sector may also be beneficial for the Ukrainian government because a close partnership with US corporations will guarantee political support and faster movement toward European markets.
In this sense, it is logical that the US would want to speed up Ukraine’s accession to NATO: NATO’s eastward expansion suppresses reform sentiments in Europe and, at the same time, relieves Ukraine of Russia’s direct political influence. That this approach is geostrategically conservative and fraught with conflicts is of little concern to the US and, evidently, to the Ukrainian leadership.
Undue haste in seeking WTO membership, without taking into account the new geo-economic threats and interests of national producers, can turn Ukraine’s national economy from a subject into a hostage of the international and regional division of labor. At any rate, there are bound to be trade conflicts “on the eastern front,” starting with fuel prices and ending with the expansion of the list of withdrawals and exclusions in trade with Russia and other Eurasian Economic Community countries. The attempt to set the SES and GUAM against one another as alternative regional free trade areas is more a topic for discussion by sophisticated diplomats than for a serious geo-economic analysis and forecast.
It is also possible that US capital will be involved in a partial rehabilitation of that part of the “industrial core” that fits in with the “EU containment” strategy. In particular, the US may be interested in the high-tech space industry as a subcontractor of new space and rocket programs, including antimissile defense. But this will be discussed elsewhere.
This article does not aim to provide a detailed analysis of possible scenarios. Here we have reached an important general politico-economic conclusion: Ukraine is losing its last chances to rehabilitate its “industrial core” on its own and is being drawn into objectionable strategies of development much to the detriment of the national economy. The problem lies not so much in which of the leading geopolitical players Ukraine is going to play with as in the fact that the choice itself is limited by bleak economic prospects and that the national elite lacks the will and desire to properly understand the current development of this country and its rivals’ economies.
FROM STAGNATION THROUGH IDLENESS TO A NEW REVOLUTION?
The current political buffoonery involving “domestic enemies” and “foreign threats” proved to be so compelling that it took development strategies of the national economy and its “industrial core” right off the political agenda.
A compensatory pattern of geo-economic development in the form of a co-participant in foreign energy- related and geo-economic strategies is the upper limit of what the political and business elite is capable of. At the same time, the danger of deindustrialization in the field of high-tech production and the “colonization” of the raw material sector may produce a negative social effect patterned after the 1914-1916 events in Russia.
The formation of class consciousness during the oncoming systemic crisis of the national economy (from 2006 onward) may turn the “Orange Bourgeois” Revolution into a social one. It is not enough “to seize the Winter Palace”: one must know what to do in it. It is still an open question who will finance and take advantage of this revolution and who can avert this threat.
