Ukraine: the story of an economic racket
Ukraine is nowhere
near bankrupt – the bankruptcy narrative misled its population and observers
into an economic racket that steered the country away from the EU’s economic
and political bloc and pushed it closer to Russia’s projected economic and
political Eurasian Union. Five pro-EU protesters
were killed yesterday as the Yanukovich government adopted a tough stance on
protesters, indicating a possible Ukrainian drift towards
authoritarianism.
Ukrainian bankruptcy
– a myth
Ukraine has been
said to be on the verge of bankruptcy and to have trouble refinancing its
external debt. Although it indeed has
trouble with the second for motives of national politics, it is nowhere near
bankrupt – its macroeconomic health indicators show a story similar to many
other Post-Soviet countries, with its national debt being 37% of GDP and
comparing advantageously to an EU average of 85% for 2012[1]. What is at the center of Ukraine’s perceived
insolvency is the refusal of the IMF to finance its foreign for one important
yet little-known reason: the cut of gas subsidies to Ukrainian households, a
USSR legacy[2]. The Ukrainian government cripples its
macroeconomic situation in two ways: it spends a hefty sum of money in gas
subsidies, effectively raising gas consumption above market levels,
consequently subsidizing Russian Gazprom’s gas exports to Ukraine; heavy gas
consumption artificially raises the need for foreign currencies above the
natural level, stimulating a trade deficit.
In the current
situation, an IMF loan to Ukraine would see some of its funds transformed as a
subsidy to Russian Gazprom, which could hardly be acceptable to Western lenders. However, a slashing of subsidies would be
extremely unpopular among Ukrainians.
The EU accession agreement theater
The Yanukovich
government, who refused to cut household heating subsidies on gas in order to
obtain a loan from the IMF to refinance its external debt, invoked a narrative
of imminent bankruptcy to demand 20B euros of financial support from its
neighbours in return for the signing of the accession treaty[3]. The EU, pressured in handing out a hefty sum
of money to sign an accession treaty with Ukraine that would bring Ukraine
firmly Western influence, refused to give in to Yanukovich’s extortion.
At that time, the
IMF had already engaged in a dialogue with Ukrainian authorities about its external
debt and published a statement on October 31 2013 detailing the problems
affecting Ukraine. Given that nothing
had been done to remedy these problems, the Yanukovych government knew very
well that the EU would refuse to be extorted.
It was then safe for the pro-Russian Ukrainian government to create this
external debt crisis and then feign surprise at the European refusal. It then shouted its distress out to the world
and carried this theatre to its logical ending: a Russian rescue.
Economic racketeering
It could be argued that the Ukrainian
government’s position on this issue was a miscalculation, a fluke. However, Nicu Popescu from the European Union
Institute for Security Studies reported that the Russian strategy “[...]
would also be complemented with carrots, with the strategy speaking of the need
to provide more opportunities for business groups that take heed of the Russian
message and start working against the Association Agreement, and the need to
incentivise Yanukovich’s family and inner circle by offering them specific
money-making opportunities on the Russian market.”[4]
Either the Yanukovich government is
extremely amateurish and failed to appreciate the thought that Ukraine couldn’t
extort its way into the EU or it just plain sold its country to foreign
interests. Either way, economic
racketeering itself should wash away any legitimacy the Yanukovich government
has to rule Ukraine - and that is not even considering the violent repression
of its population or the 2004 Orange Revolution triggered by massive election
fraud in favour of current-president Yanukovich.
Details and data
Reasons for the IMF to assess Ukraine’s macroeconomic
environment negatively: “The mission
and the authorities consider that a set of comprehensive and credible reforms
is needed to address vulnerabilities and revive growth. The mission recommends
that the reform agenda include: (i) increased exchange rate flexibility
combined with policies to strengthen the financial sector; (ii) ambitious
fiscal consolidation; (iii) increases in domestic energy tariffs, and (iv)
comprehensive structural reforms to improve the business climate and support
growth.”
International Monetary Fund.
Statement by IMF Mission to Ukraine.
Press Release No. 13/419
October 31, 2013. http://www.imf.org/external/np/sec/pr/2013/pr13419.htm
The IMF’s assessment of gas subsidies: “The large loss-making energy sector needs to
be reformed. The low retail tariffs (covering only a small fraction of economic
costs) generate quasi-fiscal losses, balance of payment weaknesses,
underinvestment in domestic production, and governance problems. As a priority
measure, we advise a significant upfront increase in gas and heating tariffs
for households and adoption of a schedule for further increases until cost
recovery is reached. To mitigate the effect of tariff adjustment on the less
affluent, we recommend scaling up targeted social assistance programs that
would cover up to 40 percent of the population.”
International Monetary Fund.
Statement by IMF Mission to Ukraine.
Press Release No. 13/419
October 31, 2013. http://www.imf.org/external/np/sec/pr/2013/pr13419.htm
Details on Ukraine’s debt and its refinancing: http://www.bloomberg.com/news/print/2013-11-08/ukraine-credit-rating-cut-by-fitch-as-foreign-funding-squeezed.html
Details on Ukraine’s demand of 20B euros in exchange of
signing the accession agreement: http://www.independent.co.uk/news/world/europe/ukraine-asks-eu-for-20bn-in-return-for-signing-association-agreement-8998714.html
Articles and press
releases
Popescu, Nicu. The
Russia-Ukraine trade spat. European
Institute for Security Issues. Alerts -
No26 - 30 August 2013. http://www.iss.europa.eu/publications/detail/article/the-russia-ukraine-trade-spat/
International Monetary Fund.
Statement by IMF Mission to Ukraine.
Press Release No. 13/419
October 31, 2013. http://www.imf.org/external/np/sec/pr/2013/pr13419.htm
Macroeconomic data
World Economic Outlook Database, October 2013 Edition. http://www.imf.org/external/pubs/ft/weo/2013/02/weodata/index.aspx. Data used for this article are series General government gross debt and General government primary net
lending/borrowing.
2012 data
|
Debt as % of GDP
|
Government Fiscal
Balance (% of GDP)
|
Armenia
|
38.91
|
-0.592
|
Belarus
|
41.87
|
1.981
|
Kazakhstan
|
12.45
|
3.883
|
Poland
|
55.59
|
-1.09
|
Russia
|
12.45
|
0.805
|
Uzbekistan
|
8.64
|
8.558
|
Ukraine
|
37.42
|
-2.55
|
Eurostat. gov_dd_edpt1
series; INDIC_NA = Government Consolidated Gross Debt. http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database
[1] Eurostat. gov_dd_edpt1 series; INDIC_NA = Government
Consolidated Gross Debt. http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database
World
Economic Outlook Database, October 2013 Edition. http://www.imf.org/external/pubs/ft/weo/2013/02/weodata/index.aspx.
Data used for this article are series General government gross debt and General government primary net lending/borrowing.
[4] Popescu, Nicu. The Russia-Ukraine trade spat. European Institute for Security Issues. Alerts - No26 - 30 August 2013. http://www.iss.europa.eu/publications/detail/article/the-russia-ukraine-trade-spat/
