The economy: New Ukraine president's other big threat

The winner of Ukraine's election will not only have to avert the country's imminent breakup but also force a frustrated public to accept painful belt-tightening measures that could save the economy from outright collapse. The agriculturally-rich but investment-starved nation of 46 million faces a litany of problems ranging from a wasteful Soviet-era subsidies programme to red tape and corruption that last year saw it ranked 140th among the 189 economies analysed by the World Bank's Doing Business survey. Its future is further imperilled by a possible Russian gas cut and trade sanctions imposed over the interim leaders' decision to seek a closer alliance with Europe that had been rejected by the deposed pro-Kremlin regime. "The challenge that any new set of authorities in Ukraine will face is immense," said UniCredit Research economist Gillian Edgeworth in reference to Sunday's vote. - Zero post-Soviet growth - Ukraine's economic statistics make for grim reading that has concerned analysts and outraged the public for years. International Monetary Fund data show Ukraine's economy to have grown by precisely 0.050 percent since 1993 -- the worst performance of any eastern European state. Its 2013 per capita GDP figure of $3,920 is nearly 20 percent smaller than Albania's and one-tenth that of New Zealand. And all agree that things are about to get considerably worse. The IMF expects the economy to shrink by 5.0 percent in 2014 despite a promise of up to $27 billion in global economic assistance should unpopular but long-overdue economic restructuring measures be pursued over the coming two years. Moody's said a worst-case scenario in which the separatist eastern regions of Lugansk and Donetsk -- its powerful smelters and coal mines churning out more than 15 percent of Ukraine's output -- break away could see growth plunge by 10 percent. That possibility crystallised further on Thursday when militants for the first time manage to seize control of four Lugansk coal mines after being repelled in a similar effort earlier in the week in Donetsk. Many also worry that an economic implosion on the European Union's eastern frontier might not be that easily contained. A Fitch Ratings survey found that 80 percent of respondents thought the crisis posed a "high risk" to European credit markets in the coming 12 months. - 'Cancer' of corruption - Ukraine's pro-Western leaders have vowed to stop paying lip service to reform pledges and actually slash government waste. They intend to phase out gas and electricity bill subsidies that have seen households and factories give little thought to their energy use and become some of the most wasteful consumers in the world. Taxes are due to be raised on the rich and social benefits cut for the poor. None of this is particularly popular and might be especially difficult to implement in Russian-speaking regions that already view Kiev's new leaders with a heavy degree of distrust. "Parliament might decide to block some of the reforms. But my main concern is that the president will be unwilling to push through real change," said Oleksandr Zholud of Kiev's International Centre for Policy Studies. One of Kiev's biggest headaches is that corruption has grown so pervasive that US Vice President Joe Biden compared it to a "cancer" eating away at Ukraine. This means that authorities in some particularly lawless regions have only a general notion about what profits companies are making and how much tax they should be able to collect. "We have little information about how companies in the east actually work," said Zholud. - Russia threat - Neither does Kiev know how Moscow intends to punish its former fiefdom for its unflinching new Western drive. One threatened retaliation is tariff and customs hikes whose immediate impact might make Ukraine reconsider waiting for the long term and far less tangible benefits of free trade with the 28-nation EU bloc. Ukraine sends 27 percent of its exports to its eastern neighbour -- slightly less than the 29 percent its ships to EU states. But any punitive Moscow move would be particularly painful for the restive eastern regions' giant machine and military hardware manufacturers that survive on Russian sales. The second danger is that Russia might next month cut off Ukraine's gas shipments over billions of dollars in unpaid debt. Kiev refuses to settle the bill in protest over an 81 percent price hike that Russia imposed on Ukraine following the February overthrow of the old Kremlin-backed guard. Chief Commerzbank emerging markets analyst Simon Quijano-Evans said Ukraine probably had enough gas reserves to last two or three months. "They would need to introduce a savings programme to reduce gas consumption if no agreement is reached," Quijano-Evans said by telephone from London. But he also predicted a gas price solution that would see Kiev and Moscow agree on a rate somewhere between the new one charged by Russia and the old one preferred by Ukraine. "There is little for either side to win strategically," said Quijano-Evans. "Russia has an interest in continuing to deliver the gas."