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Ukraine

Situation and cooperation

Building in Kyiv, the capital of the Ukraine

In 2004, Ukraine's Orange Revolution raised great hopes that democracy and the rule of law might be established. But the fresh political start failed, and a long period of political inertia followed. Ukraine now faces a massive backlog of reforms and major impediments to its long-term development. Public administration, the social welfare system and health care are underfunded and there is a lack of competent managers in these sectors. The country's infrastructure is in a miserable state. Corruption and legal uncertainty are a deterrent to potential investors. Entrenched bureaucracy and a centralised power system are slowing down the implementation of important steps.

Ukraine is officially classed as a lower-middle-income country by the World Bank. The Human Development Index compiled by the United Nations Development Programme ranks Ukraine 84th out of a total of 188 countries listed (HDI 2015).

There is a wide gap between incomes in the capital Kyiv and the rest of the country. Poverty particularly affects older persons, large families, single parents and persons with disabilities. The rate of HIV infection is also alarming: 1.2 per cent of the population in the 15-49 age group is now infected. This means that the infection rate is one of the highest in Europe.

Since Poland's accession to the EU in 2004, Ukraine has been a neighbour of the European Union and, thus, one of the main addressees of the European Neighbourhood Policy in Central and Eastern Europe. In February 2011, Ukraine joined the European Energy Community, thus moving closer to the European energy market. An Association Agreement with the EU was ready to be signed. The decision by the then Ukrainian President Viktor Yanukovych to postpone the signing of the Agreement triggered mass demonstrations in November 2013. His decision was the starting point of the current crisis in Ukraine.


Governance and human rights

View of Kyiv at sunrise

Ukraine has signed the majority of the human rights conventions sponsored by the Council of Europe and the United Nations. However, there are marked deficits with regard to the rule of law in Ukraine. This was evident, not least, from the trial of former Prime Minister Yulia Tymoshenko, which drew a great deal of international attention and criticism. In 2011, she was found guilty of abuse of office and sentenced to seven years in prison. The European Court of Human Rights found in April 2013 that her trial had been unlawful and arbitrary. One of the first actions of the new interim government in February 2014 was to release Tymoshenko.

Human rights organisations describe conditions inside prisons as problematic. There are reports of abuse and inadequate medical care.

Since the beginning of fighting between government forces and pro-Russian militias in 2014, the human rights situation has deteriorated further. A recent report by the United Nations High Commissioner for Human Rights (UNHCHR) says that, notwithstanding a decline in violence following the Minsk ceasefire, there are still massive human rights violations, especially in the eastern parts of the country that are not controlled by the government.

Widespread corruption, too, continues to pose a major problem. The 2015 Corruption Perceptions Index (CPI) drawn up by the non-governmental organisation Transparency International ranks Ukraine 130th out of 167 countries assessed.


Economy

Employees in a Ukrainian chocolate factory

Ukraine's economic development has been seriously affected by the current national crisis. In 2014, gross domestic product declined by 6.8 per cent. The World Bank estimates that the economy shrunk by another 12 per cent in 2015. Ukraine's economy had already experienced a dramatic downturn after the collapse of the Soviet Union. It recovered temporarily in the late 1990s, but the international financial crisis put an end to these developments from 2007 onwards. Industrial production slumped, unemployment climbed, banks experienced liquidity problems and government finances came under strong pressure.

Ukraine's most important economic sectors are the chemical and metal industries, food and agriculture, and mechanical engineering. Internationally, Ukrainian industry remains largely uncompetitive because its plants are outdated and use too much energy. But there are also some very advanced industries, for instance aviation and aerospace.


Development potential

Ukraine offers many advantages for potential investors: with a population of around 46 million, the country has a large and attractive domestic market. There is a high level of unmet demand for consumer goods and a substantial need for modernisation. Ukraine's geographical proximity to EU and Eastern European markets is also an advantage. The population has a good level of education, while wage levels are comparatively low. The economy can only fulfil its potential, however, if the political situation can be stabilised, public financial management is improved, and effective measures are taken to combat corruption and legal uncertainty.


Priority areas of German cooperation with Ukraine

Bilateral development cooperation between Germany and Ukraine began in 2002. At the government negotiations in November 2016, the German government committed a total of 72 million euros for development cooperation.

The priority areas of cooperation are:

  • Sustainable economic development, investment promotion, SME support
  • Energy and energy efficiency
  • Democracy, civil society and public administration

Since 2014, the BMZ has made available a total of 325 million euros to Ukraine for new cooperation projects under official bilateral development cooperation.


Reconstruction and assistance for displaced people

BMZ State Secretary Friedrich Kitschelt (left) with Mykola Tschetschotkin (right), head of the Ukrainian disaster relief services and Vasyl Antoshchenko, interpreter of the German Embassy at the handing over twelve emergency vehicles funded by the BMZ

Four projects have been set up for the period from 2015 to 2018 to help Ukraine with reconstruction and with assisting internally displaced persons:

  • Building the capacity of Ukraine's State Emergency Service by providing training and advice to its staff and equipment and consumer goods for displaced people
  • Assisting municipalities that are hosting displaced people – through vocational training programmes, youth recreation programmes, capacity building in the fields of trauma counselling and conflict management, and support for municipalities with regard to the provision of social infrastructure
  • Improving the housing situation of displaced persons by repairing buildings and providing advice, for example on budget planning
  • Rebuilding destroyed roads, bridges and public facilities such as hospitals and schools

The German government has also provided a guarantee for loans of up to 500 million euros to be channelled through KfW Development Bank. The loans are intended for infrastructure modernisation projects.


Sustainable economic development

Paper for the production of bank notes in the Malyn paper factory, Ukraine

Small and medium-sized enterprises (SMEs) can become a driver of growth for the Ukrainian economy, and reduce unemployment and poverty. However, the general environment is unfavourable to private sector engagement: excessive bureaucracy and state control, non-transparent administration, widespread corruption, a shortage of management personnel and inadequate access to financial services (which are usually excessively expensive) are all deterrents to potential investors.

Under the Association Agreement with the EU that was ratified in mid-2014, Ukraine has made a commitment to introduce a broad range of legal and economic standards. The Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) is assisting Ukraine's finance, economic development and regional development ministries and other important institutions in launching and implementing reforms in the areas of public financial management, decentralisation and sustainable economic development.

On behalf of the BMZ, KfW Development Bank is supporting Ukraine through loans. The capital provided enables local banks to secure financing for themselves and, thus, to refinance loans for SMEs. Moreover, KfW has been helping to strengthen Ukraine's deposit guarantee fund in order to protect the deposits of small savers.


Energy and energy efficiency

Substation

So far, energy has been used extremely inefficiently in Ukraine. Outdated power plants and network systems cause high losses and place an unnecessary burden on the global climate. The country's high level of energy consumption makes the economy highly dependent on energy imports – and, thus, very vulnerable to price volatility and supply constraints.

Through KfW Development Bank, Germany is providing Ukraine with loans that the country can use to modernise parts of its power supply infrastructure. Initially, five substations for the distribution of power from the high-voltage grid to local low-voltage networks are to be renovated. Furthermore, KfW Development Bank is providing loans through local banks to Ukrainian companies, especially SMEs, which they can use to finance, at favourable terms, investment in improved energy efficiency.

Germany is also advising the competent authorities on developing strategies to improve energy efficiency in buildings, and on introducing EU-compliant technical standards.


Democracy, civil society and public administration

In this priority area, German development cooperation with Ukraine is geared towards implementing reforms at national, regional and local authorities. Advice is being provided to the finance ministry, the supreme audit institution and the parliamentary budget committee with regard to the introduction of EU standards. The application of such standards is a requirement under the Association Agreement and will help improve external auditing. Moreover, the standards are helpful with a view to tax reform and strategic budget planning.

Cooperation programmes also include capacity building for municipalities, especially in rural areas. Often, local authorities lack the money and powers needed to finance social services and infrastructure. Germany supports Ukraine's Social Investment Fund. The Fund finances infrastructure projects in villages and small towns that are planned and implemented by the local population.


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