Ukrainian industry in 2000

BREATH IS MORE FREE

Ukrainian industry in 2000

Tamara SHIGAEVA, Ph.D. (technical sciences), consultant at Harvard school of international development

By 1990, Ukraine turned into one of the most prosperous republics of the Soviet Union. Per capita national income in Ukraine made USD 2 ths. approximately (upon the official USD exchange rate), cash savings were equal to 3 ths. rubles per capita. Wheat crop of Ukraine accounted for 20% in total production in the USSR, potato – for 25%, meat production – 25%, milk – 25%, sunflower seeds – 50%, sugar beet – 60%, color TV sets – 45%, railway engines – 96%, steel – 37%, cast iron – 45%, and gas – 10%.

The republic used to be one of the most industrialized ones in the Union. Production of electric energy totaled 300 bln. kWh, which corresponded to the UK figure. Output of coal came to 165 mln. tons being equal to Canada’s indicator. Production of mineral fertilizers amounted to 4,815 ths. tons, which was 1.5 times up from similar figure in France and more than a double indicator of the production in Britain. Output of cement was slightly above the production in France and two times more than in Great Britain.

Production of essential foodstuffs also featured encouraging figures. Hence, sugar production was 1.5 times up from the figure in France, two times up from Germany’s figure, and even outran production of the product in the USA. In terms of meat production, Ukraine was leaping ahead of the UK, Italy, the Netherlands, and Japan. Production of butter was equal to the product’s output in France and Germany, while sunflower oil output corresponded to indicators in France and Italy. Wheat harvest equaled to France’s crop.

It seemed rather obvious that Ukraine had good prospects for favorable development of economic situation after the Union collapsed. However, economic transforming, which was attributable to the country’s transition to marketing economy, led to notable production decline. However, similar situation was reported in the rest of the USSR republics, as well as in former socialist countries. The smallest downturn was registered in the Czech Republic, Poland, and Hungary (20%). Recession in countries of the former Soviet Union made 50% and more.

As J. Rollanes and T. Verdieu emphasized in their research (Transition to the market and production decline. Economics of Transition, January 1999), virtually in all cases GDP in post-socialist countries started moving downwards after liberalization of foreign trade and prices. The process of liberalization of prices and turning to world prices was the hardest for republics of the former Soviet Union, since throughout more than 70 years, economy of the USSR was developed as a closed system, based on interior prices, which have few in common with world prices. At this, Ukraine experienced one on the weightiest GDP reductions, which made 60%. Worse results were reported in Georgia, Moldova, and Azerbaijan, where military actions were run. Trouble development of the situation in Ukraine was backed by both objective and subjective factors.

Objective reasons include the fact that only 20% of Ukrainian enterprises had manufacture captive within Ukraine (Savelyev Ye.V., Kurilyak V.Ye. Industrial structure of the economy of Ukraine. Finansy Ukrainy, No.1, 1997, pages 33-39), since Ukraine’s economic development was closely related to the economy of Russia and other republics of the Soviet Union. The structure of Ukrainian economy was oriented not towards domestic capacities, but rather towards the USSR-common facilities. In light of economic structure of 1990, Ukraine was only capable to produce 15% of output at the expense of own raw materials. Hence, after declaring of independence, the Ukrainian economic model became automatically open. Many countries of the former Soviet Union got into similar situation. For instance, Kazakhstan could only provide 30% due to internal resources, the figure for Belarus was even lower than 4%. Russia’ economy was the exception, being capable to manufacture some 70% of output on account of own raw material reserves. Thus, the latter was the next to the closed all-sufficient model among the former Union republics. Transition from the model closed in the framework of the USSR to the opened economic model, accompanied with transition to world prices, fostered production decline in all manufacturing sectors of the former Soviet republics, which was even larger than in other post-socialist countries.

Considering high raw material dependency of the Ukrainian economy and rather large scale of the industry, it was most likely to forecast the hardest fall in the industrial sector. The recession was indeed tremendous, industrial production ratio of 1998 coming to 49% as compared to 1990. Yet, it appeared rather comparable with decrease in one of the most advantageous sectors of Ukraine, which is agriculture (53% in 1998 against the figure 1990). At this, industrial downturn was still not so bad as in transportation, where it amounted to 73% from the figure of 1990, which is quite a surprise, considering Ukraine’s location. The mentioned below figures of Ukrainian recession evidence the paramount role of subjective factors, despite presence of objective reasons. The key ones are hyperinflation, poor industrial structure, and delayed transition to marketing relations.

Due to high rates of inflation (especially, hyperinflation), the number of domestic market places curtailed due to disastrous pauperization. It should be noted that considering reasonably high level of per capita cash savings, Ukraine had good chances to move smooth to market relations on account of wide development of small-scale businesses and increase of local demand. However, twisting hyperinflation not only left the country with no natural and simple transition to market relations, but also without interior markets.

Hyperinflation had effect on both population and companies’ current assets, which drove demand for products of adjacent industries way down. The industry that hyperinflation influenced the most was machine building, where the most sizable drop of output was registered. Current assets had been turning subject to economic erosion after another large twist of inflation. Companies, thus, had to repeatedly start business from ground up. Poor situation with current assets still remains crucial issue for many enterprises.

Industrial as well as general economic structure of Ukraine lacks efficiency, as it rules high economic dependence of the country on imported fuel and energy, as well as on import of machine-building industry. The mentioned subjection is among paramount reasons of production decline. Especially when considering that due to break-down of former economic relations with ex-USSR republics, Ukraine lost sizable markets not only of its own commodities, but also of low-cost power sources, which were previously supplied from Russia.

However, all of the problems above would be not so difficult to cope with, should there be no inner slowdown of market-oriented transition by some political groups, on the one hand, and numerous corrupted state officers, on the other hand.

Industrial sector of Ukrainian economy

Indicators of industrial performance

Recession of industrial production in Ukraine lasted for almost a decade. In 1999, Ukraine finally witnessed a 4.3% recovery of this indicator against the 1998’ figures although such augmentation was quite relative since in 1998, industrial production in Ukraine was notable for its severe setback. In 2000, further increment of industrial production amounted to 12.9% compared to the figures reported in 1999.

The following economic sectors boosted their industrial production:

• Light industry featured a +39% recovery, while textile, knitwear, and clothing industries improved industrial performance 1.5 times;

• Woodworking industry saw a 37.05% upsurge, while veneer, paper, and carton production as well as timber sawing grew 1.5 times and more;

• Medical industry reported a 28.8% increase (manufacturing of medical equipment went up 1.5 times);

• Food-processing industry registered a 26.1% increment (with fat-and-oil, food-concentrate, tobacco, fruit-and-vegetable, brewing, and confectionery industries being its most dynamic sub-sectors);

• Industrial performance of glass and porcelain-and-faience industries rose 21.2%;

• Ferrous metallurgy was notable for a 20.7% recovery, while tube production grew 1.5 times;

• Non-ferrous metallurgy (+ 18.8%);

• Industrial production of machine-building industry augmented by 16.8% while that of bearing-making, automobile, aircraft, shipbuilding, and electrotechnical industries drifted upward 1.4-2.2 times;

• Chemical industry saw a 8.4% upswing while production of synthetic resin and plastics, and varnish-and-paint production featured even greater increment.

In turn, the following economic sectors shrank their output:

Petrochemical industry (- 10.3%);

Fuel industry (- 4.1%), though industrial performance of natural gas and coal-mining industries grew 2% and 3% correspondingly;

Power industry (- 2.9%);

Production of construction materials (- 0.4%); cement production abridged by 17%, while a number of subindustries insignificantly boosted their industrial production.

High growth rate of industrial production registered in 2000 has never been reported in the years of Ukraine’s independence. At the same time, its monthly pattern was notable for its instability since a number of industries witnessed noteworthy fluctuations of industrial production (by 150% and even more).

Considerable augmentation of industrial performance in 1999 and especially in 2000 brought almost to naught the industrial slowdown traced since 1991. For various products, their industrial production today reached the level of 1993-1998.

Distribution of industrial production by months and years is shown on diagram 1. Should the smoothed trend curve be considered as estimation criterion and seasonal fluctuations not taken into account, current industrial performance would correspond to the level reported in mid-1996 (however, according to estimates with the State Statistics Committee, it corresponds to the 1995’s figures).

 

Diagram 1. Industrial growth dynamics

At present, different industries are characterized with quite different industrial performance and feature quite contrary tendencies. To define current trends and level of industrial production, special trend curves for every industry were made, which did not include seasonal fluctuations. Such trends took into account chain indices of monthly output since 1994, whereas data on previous years was unavailable. In brief, distribution of final results by industries is illustrated by table 1 and diagrams 2 and 3.

 

Diagram 2. Dynamics of output in ferrous metallurgy

 

Diagram 3. Dynamics of output in machine building sector

What is more, every industry witnessed quite heterogeneous development of its segments since some of them were notable for continued setback, other segments saw the slight recovery of industrial production and the rest suffered from continuous fluctuations. As regards food-processing industry, for instance, production of meat, sausages, sugar, flour, bread, and pasta products continued their downward drifting. At the same time, production of nonalcoholic beverages, beer, sunflower-seed oil, and confectionery products featured stable augmentation and managed to reach the 1991-1993’s figures. Indicators of industrial performance embracing main industrial products are shown on diagram 2.

Despite noteworthy augmentation of industrial production and structural changes in a number of industries, the pattern of industrial sector featured no significant improvements although share of basic industries (power engineering and metallurgy) insignificantly shrank (by 1.5%). Power industry was notable for the greatest curtailment (- 4.1%) of industrial performance mostly stipulated by broader utilization of the most inexpensive electric power generated by nuclear power stations. At the same time, overall curtailment of electric power generation amounted to meager 1%. Fuel industry also saw quite insignificant lowering of industrial production (-1.3%). As regards basic industries, share of metallurgy grew by 4%.

Unfortunately, machine-building industry continued its downward movement (- 0.6%). Speaking of positive shifts in the pattern of industrial sector, augmented share of industries engaged in manufacturing of finished products should be mentioned. Share of food-processing industry grew by 2.2% while that of light and woodworking industries also featured quite insignificant increase (diagrams 4,5).

 

Diagram 4. Industry’s structure in 1999

 

Diagram 5. Industry’s structure in 2000

Primary factors of growth

The primary factors that contributed to the industrial growth in 2000 were as follows:

• significantly reformed property relations;

• low figures registered in the period of January-July 1999, which were used for comparative analysis of the performance figures reported in 2000;

• higher activity on foreign markets, which exhibited augmented growth and higher quotations for most of the products exported by Ukraine;

• a reduction of the Ukrainian hryvnya’s rate of exchange in the first half-year, which improved competitive capacity of Ukrainian products on foreign markets;

• some growth of the population’s income;

• return on augmented capital investments in 1998 and 1999;

• certain positive structural changes in a number of industries;

• mutual non-interest commodity crediting of enterprises, which led to a growth of their indebtedness to electric energy-generating companies.

Let us discuss these factors in detail and analyze their effect on individual industries.

1. Reforming of property is deemed to be the most important factor that has deepened market relations in the Ukrainian economy and enabled all other factors of economic growth.

The highest growth figures were reported by the industries where reforms were launched earlier than in the other ones and in which there are almost no State-owned companies any more. Namely, these were light, woodworking and food industries. Average increments of production in the indicated sectors are 2.5-3 times higher than the average figures registered in the whole industrial sector. In 2000, this tendency became also prominent in machine building, which had been indicating a constant decline of production until that year.

Taking into account the population’s permanently-lowering purchasing capacity, it was not possible to expect a quick positive result produced by the property reform in the sectors that make consumer goods. However, the market conditions forced the privatized enterprises to improve the assortment and quality of their products, introduce new technologies, and expand exports, which eventually brought success to the most reformed industries.

Simultaneously, the industries that are, to a significant extent, regulated by the State indicate the continuous worsening of performance. These, first of all, include fuel industry and electric power-generating sector, in which production continued going down in 2000.

The conducted correlation-regression analysis indicated a prominent direct correlation between the figures of industrial development and the degree of privatization in individual industries. The degree of privatization was estimated proceeding from shares of the products made by the privatized enterprises in the total output by individual industries and shares of the privatized enterprises in the aggregate assets accumulated by all enterprises of an industry (including separate shares of current and fixed assets). The results yielded by this research led to the following conclusion: the higher the share of State-owned property in an industry is the lower indices of industrial production are reported by this industry.

The analysis indicated that this correlation between the industrial production figures and the degree of privatization began to show in 1999.

In the previous years, the correlation between the industrial production figures and the degree of privatization in an industry (or the share of State-owned property in it) was completely absent. Thus, the property became the key factor that reinforced all other industrial growth factors.

2. Low performance figures registered in the first 7 months of 1999, when production was declining in nearly all industries except for woodworking and food industry, became another significant growth factor in 2000, because these figures were used for comparative analysis with those reported in 2000.

By August, the factor of favorable comparative basis was exhausted. However, the industrial production growth continued. The significantly reformed property relations played an important role in this growth, which is proven by the conducted regression analysis. According to results of this analysis, the correlation between the rate of growth of industrial production and the degree of privatization had increased by the end of the year, as compared with the figure of the first half-year (63% against 55%). This indicated that the factor of the favorable comparative basis was rather unimportant for the industries with high degrees of privatization.

On the contrary, State-owned enterprises were more rapidly curtailing production at the end of the year, which means that the factor of the low comparative basis became more important for them towards the year’s end, and the inverse dependence between production indicators and the share of State property increased (78% at the end of the year against 62% in the first half-year).

3. Higher economic activity on foreign markets was another important reason for the industrial production growth in 2000. In the first 10 months of 2000, commodity exports added 24.4% in comparison with the corresponding 1999’ figure. Imports also augmented by 21.2%. In terms of commodity export in the first 10 months of 2000, the country had a positive foreign trade balance at USD 527.77 million.

According to estimates, the Ukrainian industry now exports over a half of its commodity output. The regression analysis exhibited a direct relation between the share of exported products in the total output of each industry and production indexes in these industries.

However, the rate of export growth and that of industrial production growth were not directly related. This is evident from the presented regression, which reveals an important role of the country’s domestic market in the production growth.

The situation was ambiguous in most industries. For example, as regards machine building, exports of cars, water and electricity counters, compression pumps, forge-and-press equipment, and tractors increased, whereas exports of metal-cutting machines, excavators, and buses went down. Table 3 exhibits export shares in outputs of the primary industrial products and their production growth rates.

4. Although smooth, reduction of the Ukrainian hryvnya’s rate of exchange was rather substantial and contributed to a growth of exports in the first half of 2000. Later, the national currency stabilized, and in fall, taking into account high inflation rates, a revaluation process was launched. On the whole, in 2000, the Ukrainian national currency’s rate of exchange added 4.2%. However, during most of the year, the rate of exchange of the USD for the UAH kept within the limits, under which import of goods consumed directly by the population was unprofitable for traders. No wonder that imports of the mentioned commodity groups went down, which, in turn, was a reason for import substitution of the indicated goods. Exports of most of these products increased as well. All these factors contributed to the production growth in the corresponding industries.

Lately, the factor of reduction of the UAH’s rate of exchange has decreased its effect, which, under the growing inflation, may further lead to an increase in imports and curtailment of exports.

5. To an extent, the industrial growth was incited by an augmentation of the population’s income, which added up 6.2% in the first 11 months of 2000, as compared with the corresponding period of 1999. The most substantial rates of growth were registered in the year’s first two months. In March, May, September, and October the population’s incomes were decreasing.

The situation in the food industry accurately mirrored the dynamics of the population’s income. The regression analysis yielded the conclusion that the relation between indices of food production and the population’s income is very high with the correlation coefficient of 0.95. It is natural, because the population spends most of its income on foodstuffs, and most of Ukrainian citizens have incomes below the minimum living wage. This is why, the most substantial portion of the income increment is spent on food, which presumes the corresponding growth of food production and sales. In other industries, no considerable correlation between production indices and the population’s income was revealed.

However, it is remarkable that notwithstanding the considerable rate of augmentation of industrial production in 2000, such a growth was not accompanied by a corresponding increase of the population’s income. The correlation between the rate of industrial production growth in general and that of the population’s income turned out to be extremely low, notwithstanding the fact that the industrial sector is the key one in Ukraine and for quite a long time period, it has defined the population’s living conditions and standards. It is especially notable that wages in a number of other sectors are calculated based on the average wages in the industry.

It also must be noted that in the indicated period, the growth of the population’s income was also accompanied by a 1.4% decrease of wages, notwithstanding the approval by the government of a number of measures aimed at an increase of salaries in the budget-funded sector of economy. Thus, it was not a wage growth that provided the population with increased income, but such other sources of income as land tenure, lease of real estate, earnings from land shares allocated for farming purposes, gain from auxiliary commercial activity, sales of real estate, etc. This is a proof of the statement that the salary in Ukraine is not an incentive for the economic growth. This tendency is extremely dangerous for the economy.

It must be emphasized that over 1994-1999, the patterns of changes in the real salary and GDP were inversely correlated. This tendency kept in 2000 as well. To a significant extent, this situation was brought about by attraction of additional employees to production from the unemployed on the condition that an enterprise exhibited a production growth. In this situation, employers had an opportunity even to lower salaries rather than had to increase them, which led to a decline of the real per-capita wages paid out. This downward salary tendency accompanied by a growth of production explains the inverse negative relation between the GDP and the real-wage index.

The inverse correlation between the two indicators shows a number of important tendencies that have become prominent in the Ukrainian society and economy:

• the extensive economic growth;

• poor social protection and welfare;

• extremely low activity and influence of trade unions in the country.

6. There are grounds to suggest that return on augmented capital investments in 1998 and 1999 weightily contributed to the industrial production growth in 2000.

Since 1994, the GDP index and the capital investment index have been directly related.

Taking into account the 6.1% growth of aggregate capital investments in 1998, and another 2.9% growth in 1999, it was possible to expect positive GDP dynamics in 2000. The industrial sector was the target of most of investments in the previous years. In particular, such industries as ferrous and non-ferrous metallurgy, woodworking, food, and chemical production, as well as power generation accounted for the largest shares in the aggregate investments. Although not all of them brought in return, the direct correlation between the previous years’ investment indices and the current year’s economic growth kept for the year 2000.

Taking into account the prevalence of self-investment over external investments and a decline of the rate of the GDP curtailment with a year’s lag caused, in turn, a resulting slow-down of the rate of capital investments’ decline or even led to their growth.

The return-on-investment is a long-term factor, which is effective only on the condition of stable demand for products made by an enterprise. Taking into consideration the fact that investment activity did not subside in 2000, it is natural to expect this factor’s positive effect on the situation in the following years as well, unless the demand for the corresponding products changes substantially.

7. In many industries, production growth was accompanied by an advance growth of output of the most labor-consuming products. For example, in ferrous metallurgy, the most substantial growth was exhibited by tube production; in machine-building – by aviation, electrotechnical, shipbuilding, automotive, and bearing sub-industries; in food industry – by confectionery; in light industry – by tailoring and knitting sub-industries; and in woodworking – by paper and cardboard production. Thus, high-technology products accounted for the highest rates of production growth providing the highest added value. It is no wonder that in many industries, the production growth was accompanied by a cutback of energy consumption, which was an indirect proof of positive changes in the structure of the product output (Table 4).

The factor of positive structural changes is likely to have a long-term effect on a number of industries and, thus, indicates that these industries have already readjusted themselves to manufacturing of more up-to-date products, implemented efficient marketing methods, and are now capable of quickly reacting to the changing economic environment.

8. In the first months of 2000, the growth of production was simultaneous with that of arrears. However, by the end of the year, the rates of indebtedness growth had slowed down considerably. According to the statistical data for 2000, the aggregate accounts receivable in Ukraine came to UAH 185,277.6 mln. (which is slightly higher than that year’s GDP) and the aggregate accounts payable totaled UAH 258,401.8 mln. (which is nearly 1.5 times higher than 2000’ GDP). Thus, in the year 2000, accounts receivable added UAH 15,004.6 mln. and accounts payable went UAH 29,167.4 mln. up.

The accumulation of the aggregate arrears in the situation when the economy is actively developing cannot be unambiguously defined as a negative factor (a growth of outstanding indebtedness can). The main financial result of the year is a UAH 2.5 bln. reduction of accounts payable. This amount, although insignificant, is an indication of some stabilization of the financial situation in the country. A separate chapter will analyze the economy’s financial state in detail.

The enumerated factors influenced industries to different extents. This is why, the situations in them developed in varying ways.

Situation in different industries

Electric energy sector

In 2000, the production index in the country’s electric power-generating sector decreased by 2.1% in the monetary expression, as compared with the 1999’ figure. 169 bln. KWh of electric energy were generated, which was 1% lower than in the previous year. The month-by-month production dynamics was defined by the industry’s production structure. Until September, output of more expensive energy generated by thermal power plants had been increasing, owing to which statistical data were indicating production growth in the industry, whereas the output of the energy itself was going down. In September, the situation switched to the contrary: cheaper power generation at nuclear power plants was augmenting, whereas the amount of energy generated by thermal power plants was lowering, and the statistical data exhibited a production decline in the monetary expression notwithstanding the fact that energy output was increasing (Table 5).

In 2000, the sector’s main problem was fuel provision. As of the beginning of winter, the stockpiled quantities of coal and fuel oil were substantially lower than those at the beginning of 1999. In December 2000, the average daily supply of these products was significantly less than in the previous year (Table 6).

Problems connected with fuel supplies to power-generating plants are caused solely by the inadequate payment schedule adopted by the industry’s debtors. These include nearly all Ukrainian industries. The largest amounts are due to the power-generating sector from the housing sector (27.3%), coal industry (14.5%), agricultural sector (13%), i. e. the industries with the least reformed property relations. In this situation, electric-energy sector has to subsidize other industries, most of which are State-protected. At the same time, the power-generating industry has the highest rate of accounts payable per unit of produce, which, in turn, means that all other industries and the State budget subsidize the electric-energy sector.

If the current situation is to keep, the power-generating industry will have no reliable basis for development. Just as a number of other industries, it is managed through a system of administrative measures, and, consequently, has artificially been withdrawn from the system of market relations. However, taking into account this sector’s powerful influence on other industries, it is not only degrading by itself but is also impeding formation of market relations in other industries.

Fuel industry

Ukraine’s fuel industry showed a 4.1% decline of production in 2000.

This curtailment of production was caused mainly by the situation in the oil-refining industry, which had to cut back its output by 25.7% (Table 7).

Coal sub-industry is responsible for nearly a half of the fuel industry’s output. In 2000, coal production indicated an increase in the output of coking coal and a decrease in that of power-generating (thermal) coal. The primary reason for this tendency was significantly more timely and full money payments for coal made by metallurgical companies, as compared with payments by power-generating plants (80% against 42.7% of the corresponding total amounts due to the fuel industry). At the same time, metallurgists paid the remaining 20% of the total quantity of coal consumed through barter, whereas power-generating plants bartered 37% of the indebtedness to coal mines for power. Owing to these figures, the structure of coal-mining changed in favor of the more expensive coking coal, which explains why the statistical figures indicate the aggregate production growth in the monetary expression. At the same time, the total physical quantity of coal mined in 2000 dropped by 800,000 tons against the figure registered in 1999.

As a result of the increased share of expensive coking coal in the total coal output, the average price of one ton of coal added 12% reaching UAH 103.95. At the same time, the average cost of mining increased to a higher extent (+13.3%) making up UAH/ton 111.37, which further worsened the industry’s economic state.

The budgetary funding provided for the fuel industry accounts for 60.4% of the required amount. The draft State Budget for 2001 appropriates the funding, which is equal to only 50% of the fuel industry’s needs. This means that social tension in coal-mining regions is bound to alleviate. This is why, it is necessary to speed up the structural reforms in the industry. Moreover, only 17 mines (6 and 11 respectively) are classified as profitable and prospective making up only 8.4% of the total number. 158 mines (77.8% of the total) were supported by the State in 2000 and the remaining 28 mines (13.8% of the total number) were subject to liquidation in 2000. As of January 1, 2000, 82 mines ceased operation, 52 of which were closed. In 2001, 25 mines and pits are scheduled to be closed.

With the purpose of reforming the country’s coal industry, the Cabinet of Ministers has started working out of the Conception of the coal industry’s development. The December attempt to sell coal through exchanges faced a boycott initiated by coal consumers, which could be explained by the coal industry’s unpaid debts to the primary coal consumer – electric energy-generating sector. In any case, development of market trade between the two industries will be impossible unless the coal industry’s indebtedness, as well as that of the power-generating sector, is restructured in one way or another.

Oil and gas companies continue their usual operations successfully avoiding substantial cutbacks in oil and gas extraction, although over a half of the explored oil and gas deposits are classified as those involving complex extraction techniques. In order to substantially increase oil extraction, it is necessary to speed up exploration and transfer potential oil and gas deposits into the category of explored reserves. As compared with the previous year’s corresponding period, these works were considerably expanded. However, oil and gas extraction itself somewhat curtailed in 2000 (2.9% and 0.9% down respectively).

Under the present insufficient budgetary financing, the enterprises of NJSC Neftegaz Ukrainy are conducting exploration works at the expense of their own earnings. Incomplete and untimely payments for the industry’s products, especially, those for gas, impede the exploration work. JSC Ukrnafta somewhat improved the situation with outstanding payments by organizing auctions with the purpose of selling oil and condensed gas absolutely transparently and obtaining monetary payments for the indicated products. These auctions contributed to a reduction of wage indebtedness and a gradual repayment of budgetary arrears by JSC Ukrnafta in compliance with the approved schedule. 8 auctions aimed at sales of Ukrainian natural gas were also successfully completed providing full payments for the gas sold and making the industry’s pricing transparent.

Gas imports

Under the present shortage of its own natural gas, Ukraine has to import it, mainly, from Russia. In 2000, NJSC Neftegaz Ukrainy received from OJSC Gazprom gas worth the total of USD 600 mln. The indebtedness of NJSC Neftegaz Ukrainy to OJSC Gazprom for the gas supplied in 1997-2000 added up to USD 1,221.87. The amount that Neftegaz Ukrainy owes to Itera company is equal to USD 49.5 mln. Thus, Ukraine’s aggregate indebtedness to the indicated companies came to USD 1,271.37 mln., as of December 13, 2000. Taking into account all penalty interests and fines, this sum goes up to USD 1,413.12 mln. The main reason for such a high accrued debt for the imported gas is the fact that the mechanisms employed for its sales and pricing are completely non-transparent. It is absolutely incomprehensible why the State is performing this economic function, which is quite unusual for it, instead of inciting sales of the imported gas through exchanges.

As of January 1, 2001, timely gas payments significantly increased. Industrial enterprises are still the main debtors (Table 8).

In the report year, the oil-refining sector suffered the most unfavorable situation. The state of that industry lacked stability throughout the year and was worsening under the influence of the following factors:

• a 31% drop of oil supplies to oil refineries, primarily owing to curtailed oil supplies from Russia (50% down), because of a substantial difference between prices offered by Ukrainian oil consumers and the worldwide prices for oil;

• a growth of global prices for oil and its products;

• low profitability of oil refining at Ukrainian enterprises with the purpose of further sales of derived products on the Ukrainian market, because domestic prices for the oil products are substantially lower than those in many neighboring countries;

• the low technological level of Ukrainian oil refineries, which disallows them to provide a deep level of oil refining and, hence, the sufficient rate of return;

• Russia’s increase of its export duty on oil from EUR/ton 20 to EUR/ton 27;

• failure to fulfill investment obligations as concerns provision of enterprises with raw materials, in accordance with sales-purchase acts or agreements on trust-management of State-owned interests;

• the decision by governments of oil-importing countries as regards the top priority of provision of their domestic markets with oil.

All the mentioned factors produced the following production curtailments: petrol – 14.5% down, diesel fuel – 19% down, furnace fuel oil – 24.4% down. As a result, petrol and diesel-fuel imports augmented by 10% and 29% respectively. The most important problem of Ukrainian oil refineries is a high share of raw materials supplied to refineries through tolling schemes (66% to 73% of the total). This situation is primarily caused by the lack of current assets at refineries. Work through tolling schemes 5 to 6 times reduces oil-processing enterprises’ efficiency.

Metallurgy

The country’s metallurgical sector accounted for 29.9% of the total industrial production since the beginning of 2000 having added nearly 4% against the previous year’s figure. It must be noted that in most of the developed countries, metallurgy accounts for only 5 to 10% of the total industrial production. This is why, for Ukraine, which is poor in energy resources, such a high share of metal industry in the total industrial production is a serious problem.

The continuous increase of the metallurgy’s share was determined by its export orientation, a spur of economic activity on foreign commodity markets, improvement of the global market situation for Ukrainian manufacturers in terms of prices in 2000, and the economic experiment, which was conducted in the metal-making industry in the report year. The experiment provided the industry with tax incentives and led to a restructuring of its debts. The output growth in ferrous metallurgy in 2000 came to 20.7% and that in non-ferrous metallurgy – to 18.8% (Diagrams 6 and 7).

 

Diagram 6. Production tempos in ferrous metallurgy

 

Diagram 7. Production tempos in nonferrous metallurgy

In 2000, output in all the sub-industries of the metallurgical sector augmented. Tube production exhibited the most substantial growth, which can be considered the most positive tendency in the structure of this industry’s product range (Table 9).

The production growth in Ukrainian metal industry, as well as a 25% increment of scrap supplies, enabled the country’s metallurgical mills to substantially cut back electric-energy and gas consumption and, consequently, increase the rate of return. The average profitability of the industry’s enterprises went up to 18.3% (at some enterprises, this figure reached 29%). Metallurgical mills’ earnings allowed them to begin a replenishment of their fixed assets and launch new competitive products.

The growth of export earnings and success of the economic experiment in the industry made it possible for metal-makers to unblock their accounts, make timely payments to partners, employees, and the budget, and repay outstanding debts. For example, the total indebtedness for electric energy consumed was reduced by one-third and that for natural gas – by 41%. However, the latter still remains high, thus impeding development of the corresponding industries.

Over 80% of the manufactured metallurgical products were exported in 2000. Over 1999-2000, the domestic metal consumption curtailed from 26 million tons to 3.7 million tons, although in 2000, domestic prices exceeded those on foreign markets no more. It must be pointed out that most of Ukrainian metal consumers prefer to import metal products from Russia. Such passivity of the domestic metal market and a spur of activity on the foreign markets pre-determined a growth of metal exports from USD 3.6 bln. in 1999 to USD 4.7 bln. in 2000. Thus, the situation in the Ukrainian metallurgical sector is increasingly determined by the global metal market.

In turn, taking into account its share in the country’s industrial output, the metal industry, to a significant extent, determines the general situation in the Ukrainian industry. It is no wonder that production decline in metal making leads to that in the country’s industry in general (Diagram 8).

 

Diagram 8. Production dynamics in industry and ferrous metallurgy in 2000

Notwithstanding successes of the Ukrainian metallurgy in 2000, it must be pointed out that the global market for metallurgical products is a perfect-competition market, which does not keep a favorable situation for a long time. With a change of price situation on world metal markets, the state of the Ukrainian metallurgy may significantly worsen, taking into account inflexibility of prices offered by Ukrainian metal manufacturers. This is why, the industry’s development strategy must, first of all, be aimed at an increase of price flexibility, which can be achieved in a number of ways, but will mainly be determined by the investment strategy adopted by the metal industry.

Machine-building and metalworking

For the first time in the recent years, machine building exhibited a stable growth of production in 2000, which came to 16.8% in the report year (Diagram 9).

 

Diagram 9. Production tempos in machine building and metalworking

The most labor-consuming sub-industries contributed the most to this growth: aircraft construction, shipbuilding, automotive industry, bearing and electrotechnical production, as well as the sub-industries that manufacture products for light and food industries. Production declined in the following sub-industries: diesel construction (85% down), construction of communication devices (12.4% down), mining machine building (10.1% down), and chemical and oil-chemical machinery construction (2.2% down). The structural changes in the industry are aimed at the most solvent consumers and indicate the increasing market orientation of machine-building enterprises. This gives hope that the current tendencies in Ukrainian machine-building are long-term ones, which is extremely important for this industry, taking into consideration its former potential for development.

The positive dynamics registered in the industry was, to a significant extent, defined by an augmentation of its export capacity. First of all, this statement concerns aircraft construction and shipbuilding, which export most of the products that they manufacture. Electrotechnical industry exported over a third of its products (including transformers, electric welding equipment, telephone cable, high-voltage electric equipment, and so on). Improved quality of the industry’s products weightily contributed to augmented exports of farm machinery from Ukraine. In 2000, farm machinery construction sub-industry exported around one-fifth of its products and the previous downward tendency switched to a gradual production growth

It is notable that State-initiated attempts to support this or that machine-building branch or individual enterprise were totally fruitless, whereas market mechanisms were successful in attaining this goal. In addition to the situation with farm machinery building, that in the automotive industry is illustrative as well. No protectionism measures produced a positive effect on the situation in the car industry. On the other hand, increased market demand for vans similar to those made by GAZ forced such Ukrainian JSCs as Chernigovdetal and Krymavtogaz to reorient themselves to the component assembly of GAZ vans, buses, and cars. Taking into account the growth of domestic prices for the indicated haulage units in Russia, GAZ cars and vans assembled in Ukraine were able to benefit from their increased competitive capacity. As a result, Ukrainian car industry indicated one of the highest production growth figures in 2000. Along with that, it must be noted that only 15% of this industry’s productive capacities are currently used for car manufacturing.

Notwithstanding the described positive changes that influenced Ukrainian machine building in 2000, the situation here is still far from prosperous. Machine building is a priority industry for Ukraine. The country has a sufficient potential of top-expertise specialists and can attract them to the industry, especially taking into account the low standards of labor pay in Ukraine. To an extent, the share of machine-building in a country’s overall industrial output defines a level of its development. In this respect, Ukraine’s index is 2.5-3 times lower than that of most of the developed countries, and, unfortunately, the share of machine building in Ukraine’s industrial production continues going down.

Barter and monetary receipts

According to the resulting data for 11 months of 2000, in most industries, a growth of monetary receipts was accompanied by a reduction of barter transactions’ share. In general, the Ukrainian industry was able to cut the share of barter operations by 15%, as compared with the previous year’s corresponding figures, and the aggregate monetary receipts added 18.8%, however, this index significantly differed in individual industries (Diagram 10, Table 10).

 

Diagram 10. By-sector growth of cash receipts
and reduction of commodity exchange share in 11 months of 2000

There is a close correlation between the decline of the share of barter transactions in their total amount and a growth of money payments.

It is also worth paying attention to the fact that in all the industries, with the sole exception of fuel-and-energy sector, the sum of barter transactions and money payments is within 90-100%, i. e. this sum covers nearly all product sales. The energy sector has exhibited a completely different situation. For example, in the electric-energy industry, the sum of barter operations and money payments made up only 53% of the total sales in 2000, although some positive dynamics could be observed in the industry during the last months of the year in terms of money payments. For example, as of the beginning of summer, only 20% of the industry’s products were paid for by money, whereas the resulting share of money payments for 11 months of the same year increased to 33%. As concerns the fuel industry, 78% of the due payments were made either by money or through barter transactions (money payments accounted for 52% in this figure) (Diagram 11).

 

Diagram 11. Portion of goods shipped upon commodity exhange terms and sold for cash in 11 months of 2000, %

The share of monetary receipts made a significant effect on settling accounts between industries and the State budget. It is possible to draw the following conclusion: the higher was the share of money payments to an industry the lower was its indebtedness to the budget. This correlation has pre-determined the State’s interest in getting rid of the non-monetary payment methods used between legal entities.

Arrears in 2000

According to the statistical estimates for 2000, the aggregate accounts receivable in Ukraine came to UAH 185,277.6 mln. and the accounts payable totaled UAH 258,401.8 mln. Thus, in 2000, accounts receivable added UAH 15,004.6 mln. and accounts payable went UAH 29,167.4 mln. up. The growth of accrued arrears is not necessarily a negative factor under the present economic growth. Moreover, for the Ukrainian economy, which has no source of low-interest credit resources, the growth of arrears is justified as the only way of industries’ mutual crediting with the corresponding products.

At the same time, there must be no outstanding debts, which undoubtedly make up the most negative factor. The outstanding payments mirror the so-called “flexible budgetary limitations”, which are peculiar of the current state of the Ukrainian economy and impede its development, including that of the most promising enterprises.

As of today, the overdue payments account for nearly a half of both accounts receivable and payable (45% and 46% respectively). The debts between Ukrainian enterprises make up 96% of the accounts receivable and 86% of the accounts payable. The remaining portions are debts between Ukrainian enterprises and their foreign partners (Table 11).

Indebtedness-GDP correlation

It is notable that the total amount of accounts payable 1.5 times exceeds the country’s GDP in 2000. The outstanding accounts payable in the Ukrainian economy are equal to two-thirds of GDP in the report year. Most of these accounts payable are bad debts, which are often transferred from one creditor to another.

The statistical reports include the accounts payable that were accrued quite a long time ago into the current total indebtedness figures. However, the increments of accounts payable in certain time periods and their ratio to GDP are much more illustrative and important figures than their total amount. By analyzing the indebtedness figures in this way, it is possible to give objective estimates for the financial state of the country’s economy during each time period. Analysis of the mentioned parameters since 1997 indicates that the best ratio between GDP and arrears was reached in 2000, which is quite logical, taking into consideration a substantial growth of production in 1999. However, the main financial result of the year was a UAH 2,455.7 mln. reduction of accounts payable. This reduction, although meager, is an indication of an improvement of the financial state of the country’s economy (Table 12).

2000 was characterized by an extremely unstable situation as regards arrears accumulation. The year started with a very unfavorable tendency: the debts accrued in the first 4 months were collectively equal to nearly one-third of that period’s GDP. The government’s toughening of policy towards accrued indebtedness gradually improved the situation. The growth rate of the aggregate indebtedness and that of outstanding payments began to slow down. As a result, figures for the third quarter of the year showed a substantial improvement: the ratio of that period’s GDP and overdue debts indicated that a number of components of the total outstanding indebtedness were reduced 2 to 3 times. By the end of the year, the situation had improved significantly: the accrual of outstanding payments ceased, and enterprises began to gradually repay their overdue debts. These changes prove that the executive power is capable of significantly influencing formation of debts in Ukraine. As long as the government is tough on accumulation of arrears (at least, on accrual of outstanding payments), i. e. when it imposes more strict limitations on business entities in terms of their indebtedness, the situation with payments is improving.

Under the continuous GDP growth, a slow-down of the rates of indebtedness accumulation has produced a reduction of the indebtedness increment per 1 UAH of GDP.

The share of outstanding payments

The share of outstanding payments in the total amount of arrears curtailed in the report year in comparison with 1999: accounts payable – 6% down and accounts receivable – 1% down. Thus, the growth of the aggregate arrears did not produce the corresponding accumulation of overdue debts. Rather, such a growth was caused by enterprises’ higher economic activity and production growth (Table 13).

However, the economic situation varied in different industries, a number of which indicated an accrual of both outstanding accounts payable and receivable (Table 14).

As the presented data indicate, the shares of overdue accounts payable and receivable vary substantially in different industries. It is remarkable that the industries, which have been privatized earlier and now depend least on the State, have reported the outstanding indebtedness 1.5 to 2 times lower (in some cases, overdue accounts receivable are up to 3 times lower) than the corresponding figures reported by the industries, which are, to some extent, regulated by the State. It is no wonder that the conducted regression analysis has shown a strong dependence between the degree of an industry’s privatization and the share of its outstanding debts.

Because the analyzed arrears were accrued during the time period of many years, the results of this analysis mirrored not only the economic situation in 2000 but that in the previous years, during which these arrears were accrued. The discovered correlation shows that around 30% of these arrears were formed not under the influence of the property factor but rather of such other factors as inflation, insufficient liberalization of prices, and so on. The mentioned correlation proves a much better financial organization in the industries that were privatized earlier and to a greater extent than that in State-dependent industries. It is remarkable that this tendency has been prominent for several years already.

In the report year, most industries either slowed down the accrual rate of outstanding debts or their growth per UAH 1 of produce was insignificant, with the exception of the fuel industry, which exhibited a substantial growth of both outstanding accounts payable and receivable per UAH 1 of produce, and light industry with a considerable increase of outstanding accounts payable per UAH 1 of produce.

As it was already mentioned, the analysis of the Ukrainian industry’s operation in the report period excluded the electric energy-generating sector. Taking into account non-comparability of the annual data on this sector with those reported at the year’s beginning, it is reasonable to analyze this industry’s operation based on the data for the first 8 months of the report year. These figures indicate the industry’s better performance than those registered in the first 7 months of the year. For example, over the month, accounts payable went UAH 2 bln. down, primarily owing to a repayment of a portion of outstanding debts. December was the month of the most significant clearance of both accounts payable and receivable in the power-generating industry, largely owing to redemption of a large portion of overdue payments.

However, indebtedness for electric energy still remains very high. Apart from incomplete and untimely payments, another important reason for this situation is the current imbalance of prices in the Ukrainian economy caused by varied levels of price liberalization in different industries.

It is noteworthy that debt repayments at the end of the report year were made not only in the energy sector but in most other industries as well, which is usual for the Ukrainian economy at the end of a year. Still, the repayment sums in most industries differed drastically from those in the power-generating sector, in which billions of US dollars were transferred as repayment of overdue debts in December only.

This means that the electric-energy sector was other industries’ primary creditor throughout the year. Hence, other industries’ indebtedness to the energy sector was one of the key factors of production growth in those industries. Because the fuel industry is, in turn, the power sector’s main creditor, it is natural that the fuel industry exhibited the worst situation in the report year, as concerns received payments for outstanding debts at the end of that year.

Outstanding indebtedness for products

Debts for commodities (works, services) make up the most substantial share of enterprises’ aggregate arrears: namely, 89.4% of the aggregate accounts receivable (UAH 71,704.8 mln.) and 67.3% of accounts payable (UAH 69,333.7 mln.). The share of this debt category in the structure of overall outstanding accounts payable characterizes reliability of an industry as a business partner and its relationships with the State (mainly, its lobbying capacity in various official bodies). The share of this category of debts in the structure of outstanding accounts receivable characterizes the efficiency of an industry’s management, marketing, and reliability of its business partners. However, when estimating the indicating parameters it is always necessary to take into consideration the ratio of the outstanding accounts receivable and payable in individual industries.

In different industries, the shares of this debt category and ratios of the aggregate outstanding accounts receivable and payable vary. The largest shares of outstanding debts for commodities, works and services are reported by the following branches of the Ukrainian economy: trade (solely because of the debts of Energorynok enterprise, which was mentioned previously), transportation network, metallurgy, and electric energy-generating sector. The list of these industries mirrors the degree of their influence on official bodies. It is these industries that fall under the policy of so-called “flexible budgetary limitations”. The smallest shares of outstanding accounts payable for commodities, works, and services are reported by woodworking, communication industry, machine-building, construction and a number of other industries that do not enjoy the policy of “flexible budgetary limitations” (Table 15).

Transportation, communication, and electric-energy sectors indicated the highest shares of outstanding accounts receivable for commodities, works, and services, whereas the lowest figures were registered in light and milling industries and ferrous and non-ferrous metallurgy.

When comparing the outstanding debts of Ukrainian industries, it is necessary to take into account the difference between and ratio of the outstanding accounts receivable and payable for commodities, works, and services in these industries. For example, the communication industry is a pure creditor of other industries, because its outstanding accounts receivable for the rendered services are nearly 16 times higher than its outstanding accounts payable. Other creditors are construction, milling industry and a number of other branches of the Ukrainian economy.

On the other hand, in many industries, the aggregate outstanding accounts payable for products substantially exceed their outstanding accounts receivable. These are chemical, oil, light, food industries, ferrous and non-ferrous metallurgy, industry of construction materials, and agriculture.

It is also notable that a number of changes as regards the mechanisms of formation of indebtedness for products, which mainly depended on the degree of an industry’s privatization, occurred in 2000. For example, the industries with the greatest degrees of privatization reported the smallest increments of outstanding accounts receivable or, even more often, outstanding debts were repaid. This indicates establishment of pure market relations in the non-State-owned sector of the Ukrainian economy.

Analysis of 2000’ resulting figures also proved that the increments of accounts payable for products were smallest in the industries with the highest degrees of privatization, which means that non-State-owned enterprises are now far more reliable business partners than State-owned ones. As regards outstanding accounts payable, analysis yielded an inverse negative relationship, which, however, failed to prove its statistical reliability.

Non-State-owned enterprises were also far more accurate in settling accounts with their subsidiary companies in the report time period. Thus, it is natural that in 2000, the most privatized industries reported substantially lower increments of accounts payable to subsidiary companies per unit of produce sold than State-protected industries did.

Similar correlation was revealed for accounts receivable from subsidiary companies, which means that subsidiary companies operating in the industries with the highest degrees of privatization are indebted less to their parent companies for purchased products than the corresponding subsidiary companies in other industries. The problem of mutual liabilities between parent and subsidiary companies is extremely important for the Ukrainian economy, because various covert financial schemes are realized through subsidiary companies. The mentioned tendencies show that in this respect, such covert financial activity is less likely to be successful in the industries with higher privatization.

The presented results indicate that now there is a great difference in behavior of enterprises of different types of ownership. Non-State-owned enterprises aim, first of all, at financial stability. This is why, they are the most accurate payers and largely cooperate with similar partner companies. This tendency is the main hope and prerequisite for future financial stability in the Ukrainian economy in general.

Outstanding debt to the State budget

In the structure of the aggregate overdue accounts payable, outstanding debt to the State budget accounts for the considerable 13.8% (UAH 14,172.7 mln., as of January 1, 2001). At the end of 2000, the State budget owed to the Ukrainian industries the total of UAH 877.7 mln., which was UAH 13.3 bln. less than the aggregate accrued overdue deductions to the budget.

The situations vary in different industries. For example, ferrous metallurgical enterprises owe only 4.6% (UAH 227.6 mln.) of their total overdue accounts payable to the State budget. At the same time, the budget’s outstanding debts to ferrous metallurgical enterprises has added up to UAH 273.5 mln., which is over UAH 46 mln. higher than the aggregate indebtedness of metallurgical enterprises to the State budget. The budgetary debts to non-ferrous metallurgical enterprises also substantially exceed those of non-ferrous metallurgical enterprises to the State budget.

At the same time, such a seemingly prosperous industry as communication owes around UAH 19.4 mln. to the budget, the outstanding indebtedness of which to communication companies makes up only UAH 371 ths., which is UAH 19 mln. less than the industry’s indebtedness to the State budget. However, it is worth reminding that this industry’s outstanding accounts receivable for products and rendered services came to the total of nearly UAH 252 mln., and the most significant share of this sum falls on various State institutions. A similar situation is experienced by the construction industry.

The Ukrainian industry accounts for the largest share (61%) in the structure of outstanding debts to the budget. Among industries, the largest debtors are electric-energy sector and fuel industry (Diagram 12). Thus, the industries that suffer from untimely payments to them by their business partners are indirectly (through their non-payments to the budget) credited by the State. The non-payment loop is thus closed.

 

Diagram 12. Budget arrears by manufacturing sectors as of 01.01.2001

In 2000, outstanding debts to the budget were further accumulated by industrial, communication, construction, logistics and trading enterprises. Among industries, it is the Ukrainian fuel industry that has accrued the largest overdue debts. On the other hand, not only were metallurgy and milling industry able to avoid new outstanding debts, but they also redeemed a portion of accrued overdue payments (Table 16).

Taking into account different scales of production, the most illustrative index for all industries is the increment of indebtedness to the State budget per unit of produce. This increment, to a great extent, was determined by the degree of an industry’s privatization. The most privatized industries exhibited the lowest increments of budgetary debts per unit of produce, which was true of both non-outstanding and outstanding debts to the budget, for which the correlation coefficient reached as high as 0.95.

Outstanding wage indebtedness

As of January 1, 2001, the share of outstanding wage indebtedness came to 3.9% of the total amount (UAH 3,976.8 mln.). Industry and agriculture accounted for the largest portions in this sum. The main industrial debtors are fuel industry and machine-building (Diagram 13).

 

Diagram 13. Wage arreaars by manufacturing sectors as of 01.01.2001

The shares of outstanding wage indebtedness in the total amount of outstanding arrears differ in each industry. Agriculture, construction, machine building, fuel industry, woodworking, and light industry have the highest shares of wage debts.

In 2000, nearly all the industries tried to repay the accumulated wage debts. It is remarkable that the most privatized industries reported lower debt repayment per unit of produce. It is natural that the situation with insurance payments was the same. This indicates that the situation with wage payments is even worse in industries with the highest degree of privatization than in those where the State-owned property prevails. Although this correlation failed to prove the statistical reliability, it illustrated the management’s disrespectful attitude to employees and social vulnerability of the latter.

It should be pointed out that the growth of non-outstanding accounts payable for labor and the degree of privatization exhibited a statistical dependence, in respect of the share of privatized fixed assets. The presented regression indicates that not only did the industries with the highest degrees of privatization fail to repay the accumulated wage indebtedness, but also even further accrued this indebtedness.

In order to establish a statistical dependence between the increment of outstanding accounts payable for labor and the degree of privatization, the correlation coefficient was not sufficiently high. However, the displayed regression shows that enterprises of the most privatized industries either further accumulated their outstanding wage indebtedness or were reducing it extremely slowly.

Economizing on labor and untimely wage payments are not something new in market economy. These tendencies indicate employment of “wild capitalism” methods rather than establishment of pure market relations accompanied by the due social protection of workers and employees. Thus, it is no wonder that a large portion of the Ukrainian population condemn market reforms. This is why, it is necessary to impose penalties on directors for delays in wage payments, especially taking into account inactivity or minor role of trade unions or other associations of workers in Ukraine aimed at social protection of employees.

The conducted analysis drives the author to the conclusion that the most substantial production growth was achieved by industries with the highest degrees of privatization. These enterprises also exhibit accuracy and promptitude in their payments (with the exception of wage payments). Thus, notwithstanding all the obstacles to transformation of the State-owned property to private ownership posed by the most conservative political forces for many years, the factor of reformed property relations has become the main driving force that has helped the country’s economy overcome the crisis. Today, there is no doubt that the most reformed industries will indicate better results than the less reformed ones, irrespective of the situation on the domestic and foreign markets. Taking into consideration the fact that over 80% of the total number of industrial enterprises (which account for over a half of the aggregate assets of the industrial enterprises) have been transformed to private ownership, it is possible to state that the Ukrainian industry stands a good chance for successful development.

The privatization factor has significantly contributed to the country’s slow but irreversible transition to the system of market relations. Ukraine missed a good opportunity to speed up this transition, when it failed to start development of its small business at the beginning of the 1990s, the main impediment to which was hyperinflation at that time period. In order to successfully transfer to the market relations, it was necessary to provide liberalization of prices and foreign trade, reach financial stability, and launch privatization, and the following order of stages would have been the best way to complete the transition: liberalization – stabilization – privatization.

Now the liberalization of all prices (including those for electric energy, fuel resources, and railway tariffs) must be completed as soon as possible. Without price liberalization, reforming of the indicated industries would be impossible and their unprofitable operation and accumulation of huge indebtedness to them would be unavoidable. Prices for all energy resources are to be set solely through exchanges, without which it will neither be possible to balance prices nor to provide transparency of payments.

There are no grounds to expect high inflation of expenditures or a production decline because of the complete liberalization of all prices. The 2000’ situation in food industry supports this statement. Notwithstanding the worldwide prices for agricultural products and a 50-70% jump of consumer prices for the primary foodstuffs (flour, sugar, meat), no production decline occurred in this industry.

It will be impossible to reach financial stability in all branches of the country’s economy unless the price liberalization is irreversible and complete. Just as ten years ago, Ukraine has again faced the problem of complete liberalization of prices, which must be resolved as soon as possible.

Table 1. Trends in manufacturing sectors

Table 2. Output of key industrial products in 2000

Table 3. Production and export of main industrial products in 1999-2000

Table 4. Energy consumption by industrial sectors

Table 5. Electric power production in 2000

Table 6. Stocks of energy sources at power plants

Table 7. Indexes and structure of fuel production

Table 8. Payments for gas in 2000

 

Table 9. Production index and structure of sectors

Table 10. Ratio of counter-trade and cash flows in 1999-2000

Table 11. Debts of companies as of January 1, 2000 (excluding small businesses and budgetary organizations)

Table 12. Ratio of growth of outstanding debts and GDP

Table 13. Percentage of outstanding debt in total debt of economy

Table 14. Share and growth of outstanding debts by sectors

 

Table 15. Outstanding debt for goods, works, and services as of January 1, 2001

Table 16. Growth of budget debt outstanding by manufacturing sectors in 2000