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Ukraine's Economic Rankings Mired In Decline Despite Attempts At Reform

Ukrainian President Viktor Yanukovych attends a session at the World Economic Forum in Davos last year. A new report highlights his administration's lack of progress in implementing economic reform.
KYIV -- Ukraine continues to languish in a leading global index of economic freedom, despite promises of reform from President Viktor Yanukovych.

The 2012 Index of Economic Freedom, a joint project by the U.S.-based think tank the Heritage Foundation and "The Wall Street Journal," ranked Ukraine 163rd of 179 countries, just behind the Solomon Islands and just ahead of Uzbekistan.

Ukraine ranked dead last among the 43 countries of the European region, pulling up the rear behind Belarus (153) and Russia (144).

The low rating continued a pattern of decline and stagnation for Ukraine that began about five years ago.

In 2008, Ukraine ranked 133rd, but the next year -- amid a political standoff between then-President Viktor Yushchenko and then-Prime Minister Yulia Tymoshenko -- the rating collapsed to 152nd.

Ukraine's rating continued to languish in subsequent years -- it fell to 162nd in 2010, the first year of Yanukovych's presidency, 164th in 2011, and 163rd in the latest survey.

The Index's report on Ukraine cited "fragile" economic foundations as the main problem in the country.

"Poor protection of property rights and widespread corruption discourage entrepreneurial activity, severely undermining prospects for long-term economic expansion," the report says. "The rule of law is weak, and the judicial system remains susceptible to substantial political interference."

The poor results come despite repeated statements by the Yanukovych administration that economic reforms are a top priority.

'Idiotic Legislation'

At various times since Yanukovych became president early in 2010 officials have promised regulatory reform, tax relief, anticorruption measures, and judicial reform.

However, on January 11, Yanukovych told government officials at a meeting of the Economic Reform Committee that he is disappointed with the lack of progress.

"I remember our first meeting last year [2011]. We had a lot of plans," he said. "There were big expectations about how we will work in the coming year. Our dreams and expectations were sincere. But what results did we get for the year? I think no one in this room is satisfied with the results."

The owner of a clothing store in Kyiv, who asked not to be identified, told RFE/RL's Ukraine Service that the problem is simple.

"Our problem is our idiotic legislation, which only creates difficulties," he said. "For example, I pay under the unified income tax [a simplified tax regime for small entrepreneurs]. Previously, I made one payment in one place. Now I have to make several payments. There is a new law on the protection of personal data that is written in such a way as to be incomprehensible."

Yaroslav Zhalilo, an analyst with the National Institute of Strategic Research, maintains that the early stages of such massive reform are inevitably difficult and frustrating.

"Regulatory reform is just in the initial stages," she said. "Regulatory reform is just in the initial stages. Perversely, some procedures seem more cumbersome than before because the mechanisms are not yet in place. Second, as we all know, there is a high level of corruption. Third, Ukraine is currently at a stage where it is necessary to bring order to significant areas of activity that earlier were uncontrolled.

"This is being done, as well as the introduction of tougher requirements for the safety of goods and services, for the organization of certain types of businesses, for the necessity to pay taxes from various categories of revenues. Business perceives this sort of organization as a limitation on economic freedom."

'We've Lost Confidence In Tomorrow'

Nonetheless, businesspeople around the country continue to press their case. Anatoliy Hyrshfeld is board chairman of the Organization of Employers of Kharkiv Oblast:

"There are problems with customs, with the timely refunding of VAT," he said. "So potential investors, when they are asked, mention this and so a negative rating emerges. The recent governments have not added to Ukraine's competitive advantages.

"They only settled immediate questions: how to pay salaries to state-sector employees, how to pay pensions, and other social matters. They think that business will survive, will get used to this. But they forget that it is business which creates the country's material well-being through taxes."

The Heritage Foundation/"Wall Street Journal" report echoes Hyrshfeld's opinion. "Recent large deficits have strained public finances," the report says, "forcing Ukraine to confront the challenge of restoring sustainable levels of public spending."

The owner of a retail outlet in Zaporizhzhya, who like his counterpart in Kyiv asked not to be identified, claimed pessimism is growing.

"Over the last year or two we have really lost confidence in tomorrow," he said. "There is no confidence because small business is being robbed by the state.

"A huge number of laws are passed that contradict one another but under which it is possible to assess fines, to close businesses, and to prevent us from working. I might just close my business and go work for a pittance at some large enterprise."

RFE/RL correspondent Robert Coalson contributed to this story from Prague