Disintegration, Price and Trade Liberalization
9.3 NIS Trade: Microeconomic Effects
The Ukrainian trade within of the former Soviet Union is experiencing three main problems: disintegration, structural changes, and diversification of prices and cur- rencies.
Disintegration was caused mainly by political reasons. The majority of NIS have presumably overestimated the economic difficulties connected with their sovereignty and self-management - a natural reaction in the wake of the crash of the former overcentralized system. After the collapse of the single Soviet market, NIS have initiated protection of own markets with regulations, restrictions, and licensing. The tendency for economic autarky is slowly but surely giving way to the realistic estimation of trade preferences and prospects.
The disintegration of the former centralized Soviet Union has created specific problems with market performance. The general inelasticity of supply on the do- mestic market was negatively influenced by the loss of traditional markets within the
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Shevchenko Table 9.1 Exchange Rate of Ukrainian Karbovanets to Russian Ruble(Selected Dates)
Source: Uryadovy Courier, November 1992-April 1993.
former Soviet Union and Eastern Europe. Substantial market segments previously classified as domestic, became foreign or quasi-foreign and were accompanied by many of the unfavorable elements of foreign trade, such as barriers to entry. The marginal costs of retaining or, in fact, re-entering such traditional markets often ex- ceed the margin profits. The immediate or even long-term substitution of domestic production for goods formerly imported from the NIS is not feasible in many cases.
Furthermore, the distortions of relative prices has been accentuated by exchange rate problems, and inter-enterprise arrears across new borders; the latter generally being considered as semi-governmental debts. The reconstellation of markets -
disintegrationhe-establishment, as well as world market reorientation - have a crucial impact on enterprise behavior. Thus, the fluctuating market segmentation could be considered as a special problem for the Ukraine and other NIS countries.
The economic impacts of disintegration have been evaluated mainly with respect to the effects on changes in terms of trade and enterprises' optimization.
The Ukraine has a positive trend in terms of trade with the world market because of the gap in domestic and international trade prices. For example, the domestic price for coal (in USD equivalent) was estimated as only 1 6 2 5 % of the international market price and 28-30% for steel in 1993: the situation in other sectors was more or less similar. Energy was an exception since prices moved more rapidly to world levels. Such correlation would be maintained during the time of high inflation because cost and domestic prices grow comparatively slower than the inflation rate, resulting in a depreciation of the Ukrainian currency.
The changes in the exchange rate of Ukrainian karbovanets (UAK) to the Russian ruble (RBL) are unpredictable and have been periodically erratic, mainly
Microeconomic Preconditions for Macroeconomic (In)Stability 175 due to a large supply of money to the market as a result of credit emission or substantial increase in demand for rubles. The exchange rate of UAK to the ruble was announced officially in mid-November 1992. However, as a consequence of an earlier decision of the Central Bank of Russia to freeze money transactions between Russian and Ukrainian enterprises since 1 July 1992, the 'black market' exchange rate grew rapidly between July and November 1992 due to the high demand for rubles by Ukrainian enterprises and companies with bank accounts in Moscow, as well as the high risk of such semi-legal transactions. According to unofficial sources, the 'payments' for such transactions rose from 1 % to 15% in cash.
Such an unmanaged establishment of UAKIruble exchange rate have had some important consequences for enterprises:
1. During 1992-1993, the supply of many products and raw materials from Russia to the Ukraine and also in the reverse direction have been suspended or, in numerous cases, completely stopped.
2. The bilateral debt between enterprises grew rapidly, so that domestic enterprise arrears are multiplied by cross-border enterprise arrears.
3. The debt of Ukrainian enterprises to those in Russia was essentially covered until March 1993. At the same time, Russian enterprise debt to the Ukraine continued to grow because of continued supply of commodities without pay- ment guarantees. Such a phenomenon could be considered as a combination of self-crediting of Ukrainian enterprises and inertia of long-lasting supplier ties.
4. The internal variability throughout the ruble zone, different rates of exchange, and difficulties of transferring money to other republics had a depressive influ- ence on inter-enterprise turnover and caused both output decline and autarky.
Our currencies, with parallel connection to ruble zone, imply instability in financial infrastructure.
5. The enterprises and banks have started to use the semi-covered forward rate of exchange which is up to 30% higher than the officially announced rate in order to hedge against risks arising due to difficulties associated with money transactions and inflation.
In summary, the monetary and banking situation stimulated enterprises not to increase production and to decrease the number of customers, tending to exclude primarily those from NIS.
Economic dependence on Russia due to rapid growth of oil and gas prices has become a major factor influencing Ukrainian economic prospects - either slow stabilization or continuing destabilization. Another move of oil and gas prices towards the world level will cause a further deterioration of the economic situation
176 I! Shevchenko in the Ukraine. The energy factor will increase the trade balance deficit with Russia, the domestic inflation rate, costs of production, and, finally, a greater decline in output and incomes. Thus, the unpredictable energy situation is now the major factor of macro- and microeconomic instability. In order to avoid a full-fledged subsequent energy crisis, time and investment is required to diversify the oil and gas supply, modernize the economy to promote lower energy consumption, and overcome the total dependence on a single source and type of energy supply.
The existing political instability in Russia can not be overcome soon because of complicated and multifaceted processes regarding the distribution of powers and their foreseen decentralization. The political frustration in Russia will produce un- predictable stresses for the Ukrainian economy. Generally speaking, the Ukrainian economy will eventually become more dependent on exogenous factors as, for instance, relations with other NIS and the world economy.