The conflicts wears on as the money wears thin. Can Ukraine survive and will Europe react?
Ever since it seceded from the Soviet Union in 1991, Ukraine has never enjoyed good health. At the time, the legacy of the USSR was for the most part obsolete and Ukraine hasn’t managed to upgrade its inefficient and energy-guzzling economy, largely supported by low-cost Russian gas. When Russia, around 2006, began setting gas prices with a more neighbourly and less brotherly attitude, the problems only increased.
The economic crisis did not spare Ukraine, nor did the various uprisings. From the Orange Revolution to the ‘colourless’ ones, they have all hindered economic recovery.
Similarly, even the latest change of government has left gaping holes in its wake. With transparency at an all time low, the Independence Square victors set out on witch hunts, purging former officials of the Party of Regions of ex-Ukrainian president Viktor Yanukovych, which led to many suspicious suicides: some shot themselves in the back of the head, others fell from 17th-storey windows, others still were found hanging. There were also property seizures with armed raids à la 1930s Chicago.
Until very recently, over 60% of Ukraine’s exports went to Soviet Union countries, above all Russia. When Yanukovych was negotiating his country’s entrance into the European orbit in 2013, he must have had reason for concern. How could they exclude their neighbour, on which they depended for over half of all exports, from the negotiating table? The operation required extreme care. It was like trying to replace a problematic limb with a highly sophisticated prosthesis.
The success of such a delicate operation depends on how it’s carried out, the surgeon’s skill, the new prosthesis’ quality and its cost. It’s always the patient who carries the can, in terms of both money and eventual errors. So when Vladimir Putin offered a $15 billion (€14.2bn) loan and a hefty discount on the price of gas, Yanukovych chose to postpone the operation. We know how that ended. Yanukovych had to flee to Russia and the new president, Petro Poroshenko, was faced with rampant internal conflicts and a comatose economy. Poroshenko also accused Yanukovych of stealing public funds. Poroshenko’s only solution was to ask for money – from the International Monetary Fund (IMF), Europe and the US – with little hope of paying it back. In 2014 the country’s GDP had fallen by 7.5%, the hryvnia lost two-thirds of its value and there was devaluation that still hasn’t slowed.
To halt the devaluation process, on 3 March the Ukraine Central Bank had to raise its refinancing rate from 19.5% to 30%, with inflation exceeding 30%. The country’s rating in late December 2014 was practically in default, according to Standard & Poor’s. The rosiest prediction for this year is a further 5.5% drop in GDP.
Given the circumstances, people expected the government and deputies to take salary cuts. Instead, in mid-March, Poroshenko lifted the restrictions on salary caps for deputies of the Verkhovna Rada (Ukraine’s parliament), members of Cabinet, prosecutors, public officials, National Bank of Ukraine employees and judges. The new law appeared in the Parliament newspaper Golos Ukrainy. Was it a ‘bonus’ for the first $5 billion tranche received from the IMF?
A few days earlier, the board of the IMF had approved a $17.5 billion (nearly €16.6bn) aid plan, with conditions that included cutting social programmes and raising gas and electricity tariffs. Clearly, a population already impoverished by the war and by the county’s political and economic instability will not be able to afford energy bills that have now tripled. So a new programme of social safeguards has to be put in place to help the approximately two million citizens in trouble.
All these expedients might have a hope of working in a transparent climate. But Ukraine has the worst levels of corruption in Europe and ranks 142nd on the 2014 Corruption Perceptions Index published by Transparency International. “Lack of transparency, mass corruption and a fearful business environment are responsible for bringing Ukraine to the brink of bankruptcy”, explains Volodymyr Vakhitov, an economics professor at the Kiev School of Economics.
Europe has also promised “at least €11 billion over the next couple of years”, said EC President Jose Manuel Barroso. “It is a package designed to assist a committed, inclusive and reforms-oriented Ukrainian government”. By some estimates, however, it will take at least $120 billion (€113bn) to fill the hole in Ukrainian coffers. And how Kiev can be expected to pay it off is anyone’s guess.
It is currently negotiating with creditors to restructure its external debt by June. Ukraine’s Minister of Finance Natalie Jaresko said that the restructuring “will probably involve the combination of a maturity extension, a coupon reduction and a principal reduction”, in order to pay back $15 billion (€14.2bn) in four years. The country’s top creditors are Russia and China. This IMF loan will essentially plug the holes of Ukraine’s budget, paying off creditors facing serious losses.
Meanwhile, Kiev’s sole concern seems to be arms procurement for its military. On 14 March, Poroshenko proudly announced that Ukraine has signed deals to import arms, including lethal ones, with 11 EU countries. Before disbursing the funds, however, Europe should make sure they will be used to modernise the economy, not to wage war. Otherwise the money will be wasted, or rather, soaked in the blood of innocent Ukrainian civilians, and no one will pay it back.
The conflicts wears on as the money wears thin. Can Ukraine survive and will Europe react?
