Ukraine: a rock and a hard place

The news that Ukraine PM Yatsenyuk has resigned shows that, while the fighting continues in eastern Ukraine between the Ukraine armed forces and the Russian-backed separatists, the crisis in the Ukraine economy is worsening.

Even before the separatist struggle erupted, Ukraine was suffering from a flight of capital as rich Ukrainians spirited their money out, and ordinary Ukrainians tried to buy dollars and put their savings under mattresses. Bank withdrawals have rocketed and the cost of borrowing has surged.

UKraine bank deposits

Not only is Ukraine’s capitalist state machine is tatters with the break-up of its borders, so is its capitalist economy. Indeed, Ukraine has performed the worst among Eastern European states since the collapse of the Soviet Union. Belarus has more than doubled its real GDP (from the post-collapse low of 1993 and even Russia is up 50%.  But Ukraine’s GDP is at the same level that it was in 1993!  And the economy will contract 6.5% this year (an increase in the drop forecast back in February), while neighbouring states will manage at least a little growth.

Ukraine GDP

As I pointed out in my post on Ukraine’s economy back last February, Ukraine’s economy is no bigger than that of Ireland, but it must support a population of 45m compared to Ireland’s six (https://thenextrecession.wordpress.com/2014/02/27/ukraine-hobsons-choice/). The economy is dominated by a bunch of oligarchs, or billionaire owners of the major sectors of the economy, who took them over through the usual corrupt privatisation process under successive pro-capitalist governments.

Indeed, new president Poroshenko, now conducting the war against the separatists, is one such oligarch, from the confectionery business – the “chocolate king”. The resigning PM Yatsenyuk is a creature of discredited former PM Yulia Tymoshenko, who is also a gas oligarch. She was previously imprisoned by the pro-Russian regime under ousted Yanukovych for corruption in gas deals.

Yatsenyuk was desperate to impose the will of the IMF on the Ukrainian parliament and people. The IMF is offering funding to the government in return of a programme of ‘reforms’. The government needs to find $9bn to cover payments to Gazprom (unpaid debts of $5bn). But so far it has failed to reach a deal with the Russian gas company in making back payments on its gas imports. The Russians want cash up front and Ukraine wants credit. In addition, the economy needs another $20bn to cover the trade gap and other maturing debt. It has only $18bn in FX reserves and these are set to fall fast, along with the value of the currency, the hryvnia, reducing the ability of pay for its imports (particularly energy). At the same time, debt owed to foreigners is rising sharply as a share of GDP as the economy shrinks.

The IMF has already insisted on a huge rise in energy tariffs to try and cover a government budget deficit now hitting 10% of GDP.  The government is imposing energy price rises of 40%-55% in 2014 and a further 20-40% in each of the next three years. The government and the IMF claim this is manageable because these price hikes start from a low level, are spread out over time and include “provisions to protect the most vulnerable 25-30% of the population”. So the IMF claims that they only raise heating and gas expenditures moderately from 3-7% of household budgets to 5-11%. Yet, despite these huge rate hikes, this will reduce the deficit being run up by the energy utility by only 1% of GDP by 2016 and not recover costs until 2018.

Winter approaches and the need to heat the people’s homes is becoming vital. As the government cannot reach an agreement with Gazprom, it must rely on its underground gas-storage facilities. They are full, but this gas is supposed to be passed onto Europe for their use. And “the EU has no intention of repaying Ukraine’s debts for Russian gas,” said Dominique Ristori, the director general of the European Commission’s Directorate-General for Energy, adding that all debt problems should be settled through the IMF. So the government will start to steal this gas for its own use, hardly likely to endear it to its EU and IMF financiers.

The IMF wants a complete ‘liberalisation’ of the gas sector i.e. privatisation and deregulation. When Yatsenyuk put this to parliament, as the IMF’s lapdog, it was rejected. So he has now resigned. At the same time, parliament increased taxes on private gas companies, which made them so upset that they have announced an end to further investment.

Thus, the Ukraine government is being pressed by the IMF and the EU to apply neo-liberal ‘reforms’ in return for funding but is opposed (partially) by a parliament that does not want to impose too much of burden on the people after the ‘Maidan’ uprising. And the war in the east splutters on.

7 Responses to “Ukraine: a rock and a hard place”

  1. BrianJay Says:

    Have a look at Booker http://www.telegraph.co.uk/news/worldnews/vladimir-putin/11023577/Fresh-evidence-of-how-the-West-lured-Ukraine-into-its-orbit.html

    So the EU is using German Banks to double the wages of engineers in the east of Ukraine. And we have just past the centenary of the shot that went round the world! WW3 here we come

  2. BrianJay Says:

    Forgot to add to double the wages of engineers in the east of Ukraine so that they come out on demonstrations carrying the EU flag.

  3. rrewaf Says:

    Just to nit-pick your previous post about ‘Ukraine’s Hobson’s choice’:

    “In public, Mr Putin can’t bring himself to call Ukraine anything but a “krai”, the Russian word for territory.”

    Krai means edge, Thats where U-krai-ne’s name comes from- the border edge.

  4. matthewrusso9 Says:

    Looks like we’ve entered one of those historical moments where what the Althusserians called the “political instance” dominates for the time being over the “economic instance”, though the latter “normally” is dominant.

    Ukraine was (is?) to Russia what Ireland was (is?) to England. Or Palestine is to Israel. A ‘krai’, a ‘Celtic fringe’, an ‘occupied territory’. Except in Ukraine right now in Donbas we have another reversal in dominance, as if the Irish army were pummeling the Northern Irish Protestants in Belfast and Londonderry with GRAD rocket artillery and airstrikes, while the UK was faced with threats from foreign powers should it overtly intervene even under a “humanitarian” pretext.

    It should be recalled that the Russian population in Donbas were immigrant settlers from the north from about the mid-19th century onwards when Tsarist Russia sought to develop the coalfields there, a trend greatly accelerated under Stalin’s USSR.

    • VN Gelis Says:

      Putin does not back the seperatists. If he did they wouldn’t be getting bombed or receiving 500k refugees.
      The IMF has inaugurated a war so Ukraine defaults on its Russian debts.

  5. sao Says:

    Michael Roberts gives us a clear picture of imperialist power struggle in this country, located between East and West, where each side wants a piece of it, or economic and political domination. The political aspects heighten the increasingly difficult economic problems: the debt, the corruption–the inpour of foreign money–, and the corporations plundering for its resources, specially human work power. It seems that Uckraine just cannot act on its own interest.

  6. VN Gelis Says:

    The economic effects of US sanctions on Russia lead to the conclusion that the EU may end up with rotting agricultural produce and cold winters due to the problems with Russian oil and gas that may arise. Collapsing America will seek to increase sanctions against Russia and the EU like the houseboy it is will comply. America having lost the Cold War no longer requires the EU to maintain any great standards of living and is taking measures to ensure a policy of last man standing. So it seeks to ensure Russia is sidelined on gas and oil exports and this vacuum is filled by Americas allies. At the moment this American fantasy is pretty difficult to fulfill as they seem to be losing one arab country after another.

    Putin is being dragged into conflict in the Ukraine. If he does not act they will remove him. As a superpower it is now being told what to do by a bunch of 3rd rate oligarchs in Kiev and at the same time has had to receive so many refugees. He could soon be faced with 2-3million people, thus destabilising southern russia.

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