The Economic Consequences of Ukrainian

Federalism
February 21, 2014 | 1754 GMT

Analysis
For a country like Ukraine, the appeal of federalism, which divides authority between the
central government and its constituent regions, is undeniable. Located in Europe's
borderlands, Ukraine has been contested by its neighbors for centuries, a competition that
has left it internally divided along linguistic, cultural and religious lines. Broadly speaking,
Ukraine is divided between the east and the west, with eastern Ukraine favoring Russia
and western Ukraine favoring Europe. Ukraine's regions are also distinct economically.

The country's industrial base is located in the east. The east's close proximity to Russia
creates strong cross-border trade that enriches regional economies. According to
Ukraine's government statistics service, manufacturing contributes at least three times
more than agriculture to the country's gross domestic product. Thus, eastern regions
generally have higher per capita GDP rates. In 2011, the per capita GDP in the eastern
region of Dnipropetrovsk, the country's most important industrial center, was 42,068
Ukrainian hryvnia ($4,748), while it was only 20,490 hryvnia ($2,312) in Lviv region,
which is one of western Ukraine's industrial centers.
Seven of Ukraine's 10 largest private companies by revenue are either headquartered or
maintain the majority of their operations in eastern Ukraine. These firms are owned by
some of Ukraine's wealthiest and most influential individuals. Three of these 10
corporations -- mining and steel company Metinvest, energy firm DTEK and its subsidiary
Donetskstal -- are based in the eastern industrial city of Donetsk and are owned by
Ukraine's wealthiest man, Rinat Akhmetov. Interpipe, the company that controls 10
percent of the world market share of railway wheels and more than 11 percent of the
world market share of manganese ferroalloys, is based in Dnipropetrovsk and belongs to
businessman and politician Victor Pinchuk. The country's most important businessmen are
embedded in the east, where their businesses make disproportionately high contributions
to the Ukrainian economy and national budget. Westerners staunchly oppose federalism
because they believe it would threaten their economic and security interests. Others
believe it could dissolve Ukraine as a country, leaving the west weak and defenseless
against the Russia-backed east. Whether or not these concerns are misplaced, federalism
would in fact benefit eastern regions disproportionately by giving them more control over
state revenue, aggravating the socioeconomic tensions between the regions.

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