In the first years of the 21st century the Ukrainian economy began internationalizing, especially after Viktor Yushchenko came to power following the “Orange Revolution” uprising. Like all senior politicians in the country at the time, he protected economic elites. However, in comparison with other political actors Yushchenko was more open towards international, and especially Western, capital. His policy of openness was made possible by the fact that he relied politically on “second-tier” capitalists, who had a smaller stake in isolating the country from foreign competitors, as well as on importers, who stood to benefit from greater internationalization of Ukraine’s economy. At the same time the presidential campaign of 2004 unleashed the growth of voter incomes as a political tool; one of the key elements here was allowing increased imports of cheap consumer goods in order to raise the ‘standard of living’. Much more importantly, foreign capital began operating within Ukraine on a massive scale during this period. Although a number of foreign banks entered Ukraine, it was domestic banks that took the lead. Having low reserves they started borrowing on the international market and providing loans in Ukraine at inflated interest rates. This strongly contributed to the “dollarization”3 of the economy. The National Bank of Ukraine created the perfect conditions for this to happen by informally pegging the Ukrainian currency to the USD. As a consequence, private financial capital fuelled the economy throughout this period.
These changes in the Ukrainian economy, its short-lived growth and the crisis which followed, had a major impact on the city of Kiev. Firstly, the population of Kiev increased significantly during this time. This was mainly as a result of internal migration to Kiev and other major cities from rural areas and smaller cities within Ukraine. In 2002 the officially registered population of Kiev was 2,611,327 while in 2009 it reached 2,765,531, an increase of 5.91% in just seven years. To compare, in the previous seven years (1995-2002) the population of the city decreased by 1.23%. This dramatic growth was a result of investments coming into the country, and concentrating in the capital city.
Secondly, the intensive housing growth which had started in 1999-2000 continued in this period: between 8,000 – 14,000 new apartments were built per year. By comparison, in 1998 just 5.5 thousand apartments were constructed. These figures also do not include the suburbs of Kiev, which became veritable playgrounds for housing developers. This growth was interrupted only briefly by the recession of 2005, from which the market quickly recovered.
Thirdly, house prices in Kiev skyrocketed alongside the rapid growth of housing stock. Between 2003 and 2008, prices for newly built housing in Kiev increased 7.3 times. This was a general trend in Ukraine, but Kiev led in terms of absolute figures.
Finally, the boom is also reflected in the increasing number of developers in the city. If in the previous period KGS was the biggest player, with smaller developers occupying niches left vacant by KGS rather than competing with the behemoth directly, after 2003 the total number of developers mushroomed. The housing boom was going hand in hand with the commodification of land and the emergence of a new type of housing finance.
During the 1990s, development in the city proceeded mainly by filling in ‘pockets’ that had been left vacant or less developed by the previous plan – mainly in the Southern part of the Left Bank neighbourhood. As growth itself had slowed down drastically in this period, there was no need to modify the existing plan. However the rapid growth in the early 2000s, both of the city itself and of real estate, required the development of a new plan. This plan was adopted in 2002 with a planning horizon until 2020, and laid the groundwork for land commodification. Although land in Kiev remained officially a public good belonging, on paper, to the community there are numerous ways in which it is becoming a means of profit extraction.
First of all, the allocation of land plots for building purposes is a costly and extremely non-transparent process. Land for housing development in Ukraine cannot be sold, but only rented/leased by city councils. This makes the municipality dependent on the rental income, and makes bureaucrats of municipal departments dependent on bribes from developers. This all makes the land allocation process prone to corruption. In the end, although the price of land might rise for the developer, this cost is automatically incorporated into the price of apartments, so all increases are ultimately borne by homebuyers.
However, the municipality is not the only authority responsible for distributing land in Ukraine. Many state institutions such as the army, hospitals, and universities were awarded large areas of land during Soviet times, and many have started using this for profit. A particular type of investment agreement was developed to facilitate this: the public body gives the land to the developer, in exchange for a certain number of apartments which are to be transferred to the employees of the institution. Unsurprisingly this mechanism is seriously abused by the upper management of many public bodies.
The most notorious period of land use and allocation was from 2006-2010, under mayor Leonid Chernovetskyi, also known as ‘Lyonia the Cosmonaut’ or Lyonia Kosmos, a nickname which he received after one of his eccentric statements that he was going to fly into space with his cat. However, the only space exploration mission that he embarked on during his term was one to explore spaces in Kiev where land could be allocated for business.
Chernovetskyi was elected in 2006 after allegedly bribing impoverished elderly voters with food. He is known for singing at rallies and has offered to auction off kisses. Although public figures openly speculated about the need for a medical examination to judge his (mental) fitness for office, Chernovetskyi was clearly not stupid. Being the founder and main shareholder of Pravex Bank (later sold to the Italian Intesa Sanpaolo Group) he was already a wealthy person when he took office. During his time in office allegations of corruption surfaced constantly, particularly in relation to land use and urban planning decisions.
These scandals led to snap mayoral and city council elections in 2008, but these resulted in his re-election. The flamboyant mayor was accused of arranging the sale of historical buildings in the city centre for a tiny fraction of their true value, as well as incompetent management more generally and insider sales of land and municipal companies. One of the main mechanisms used by Chernovetskyi was the creation of communal companies to manage municipal assets and resources, which he appointed to people close to him to lead. Under his rule it is estimated that up to 3,000 hectares of land in Kiev were misallocated and ‘lost’ by the city. His mayoral position was so advantageous and profitable for him that, despite winning a seat in the parliament, he decided to remain in the municipal government instead. The land use decisions that were made under the rule of Chernovetskyi and his ‘young team’ (moloda komanda, as he called his deputies in the council) were later incorporated into the new master plan for the city, which was intended to regulate land use up to 2025, but which was ultimately never adopted. One of the key arguments for developing a new plan was the large number of developments in the city not covered by the existing plan: rather than halting or reversing development projects, it was proposed to update the plan to incorporate these. The land decisions made during this period have had a serious impact on the current situation.
Apart from land use and urban planning decisions, Chernovetskyi implemented a kind of ‘asset-based welfare’ mechanism in Kiev. He claimed that lonely elderly people were sitting in their apartments, “asset-rich, but resource- poor”. The communal company called ‘Better Home’ was created in 2008 to help those elderly people, who had to sign a contract to transfer their apartments to the company after their death, in exchange for lifelong care. The company was closed in 2010 when Chernovetskyi himself fled the country.
In sum, during this period land became commodified through both official and semi-official pathways. As a consequence, land became one of the main links between developers and public bodies. Still, land was not privatized and did not become a full-scale commodity, which kept the financial sector away from land speculation by e.g. using it as a credit guarantee.
Financialisation without securitization
As the Ukrainian economy “opened up” it became a battlefield for international banks, and real estate was no exception. Data on mortgages is publicly available only from 2006 onwards, but even these limited numbers show the degree to which the housing boom depended on international investment in the Ukrainian financial system.
According to data obtained from the National Bank of Ukraine, between the beginning of 2006 and the end of 2007 the value of mortgage loans provided in Ukraine increased by 3.6 times, from 20.52 million UAH to 73.08 million UAH. During the next year, the figure almost doubled again, to 143.42 million UAH. It is important to note that the currency rate in these years was relatively stable. Mortgages in this period were completely dominated by USD: 76 – 84 % of all mortgage loans were provided in USD, while the rest were predominantly in UAH, with just 1-2% issued in Euros. The data analysed is national, but it can be assumed that the level of dollarization in Kiev, as the capital city, was even higher than the national average. Compared to other countries, the Ukrainian mortgage market was not very extensive, but its rapid development nonetheless attracted many international players. Several European banks entered the Ukrainian economy after 2004, offering loans in USD. Ukrainian banks, in order to compete, began taking loans from abroad and reselling them in Ukraine in USD. Thus, the vast majority of the Ukrainian mortgage system immediately before the global financial crisis of 2008 was operating in US dollars.
As in many other cases from the so-called global periphery, including post-Soviet and Latin American countries, the financialisation of housing did not incorporate the full range of financial instruments present in core countries. While in the USA or Western Europe the liquidity of the mortgage market was backed by a mechanism of securitisation – the withdrawal of assets (i.e. loans) from the balance sheet of an enterprise or bank and refinancing them through the issuance of securities by another financial institution – in many other countries, liquidity was created without complicated financial tools.
Regulation of the mortgage market in Ukraine accelerated around 2003 when the new Civil and Economic Codes were adopted, as well as a Law on Mortgages. In 2004, the State Mortgage Institution was created to enhance the mortgage market by issuing covered bonds (a type of security) for mortgage loans. However, this special-purpose vehicle never fully lived up to its role. There are several reasons for this. Firstly, the main regulatory laws were adopted significantly later than other countries, in 2005 and 2006 respectively (‘On Mortgage Lending, Transactions with Consolidated Mortgage Debt and Mortgage Certificates’ and ‘On Mortgage Bonds’). Secondly, the State Mortgage Institution was supposed to deal only with loans issued in UAH, while the mortgage market was dominated by loans issued in USD. Thirdly, there was no demand for the bonds issued by this institution, as Ukraine had (and still has) no institutional investors (insurance companies, private pension funds, etc.), and bonds for loans in UAH could not attract private or international institutional investors.
But, if securitization was not a factor, then what did fuel the housing boom? The liquidity required by the Ukrainian market was provided by the difference between local and international financial markets. The Ukrainian macro-economic environment before the crisis, characterised by high inflation and a de facto peg to the USD, gave rise to high risks for investors, but also to high potential returns. It was possible to borrow cheaply and lend money in Ukraine with a much higher interest rate. This kind of speculation provided massive liquidity in the housing market, eliminating the need for legally-complicated securitization.
Urban expansion in Ukraine between 2003 and 2008 was fuelled by international financial capital. As a result the ‘housing bubble’ became enormous: by the end of 2006 the Ukrainian real estate market was valued at 400% of the national GDP – the valuation for the USA at that time was ‘just’ 160%. Inevitably, social consequences followed. However, unlike in the United States for example, the main victims of the bursting of the housing bubble were not the lower classes who were, and are, largely cut off from home ownership in Ukraine and rely on either the private rental market or on recently-privatized apartments where several generations often share a single apartment. Rather, the main victims of this boom and bust were the middle class, which emerged in this period, but vanished almost entirely in the subsequent waves of crises.
Though this period is commonly described as a period of growth, insufficient attention is given to the highly unequal nature of this growth. As capital accumulated predominantly in urban areas, rural areas were not developed. On the contrary, apart from the towns and villages where the industries were still strong (e.g. Krivbas), rural areas lost both wealth and population. Mykhnenko and Swain in their article ‘Ukraine’s diverging space-economy: The Orange Revolution, post-soviet development models and regional trajectories’ explore how this process was rooted in spatial inequalities formed in Soviet times. Analysing the pattern of regional incomes between 1900 and 2007 they conclude: “Whereas one-third of Ukraine’s regions gained relative to the national average, two-thirds lost. The biggest losers were the two adjacent central Ukrainian regions of Chernigovskaya and Sumskaya. Broadly, central Ukraine, lacking industry and cross-border activities, experienced the largest relative decline under post-communism. The east and south performed better, but Kiev was the biggest gainer in terms of percentage point change (+168 per cent), while Sevastopol and AR Krym were the biggest gainers by rank”. These trends became especially apparent after the “Orange revolution” uprising.