From Poroshenko to Putin – it’s all downhill

The temporary truce between Ukraine and Russia seems over, with the news that the Kiev government has launched a new offensive against the separatist enclaves in eastern Ukraine, which are backed by the Russians.

This military upsurge has followed quickly after the two elections in Ukraine. The first was in the bulk of the country, where the pro-EU parties won a significant majority in a new parliament in Kiev, dividing the bulk of the vote between the party of President Poroshenko, the chocolate manufacturing oligarch and the neo-liberal party of the current prime minister Arseniy Yatsenyuk. The second was in the separatist areas, where the pro-Russian militia groups rule by the gun. This provoked the new action by the Ukraine military and the corresponding mobilisation again across the border by Russian forces.

Ironically, just before this Ukraine and Russia had finally agreed a deal for Ukraine to get its energy supplies for the winter, with Ukraine agreeing to pay its back debts of $1bn and to pay for future energy in instalments. The issue here, however, is whether Ukraine is really going to find the money to pay for it. It is going to need a substantial commitment from the EU and the IMF, both of which are stalling on stumping up more money because the Ukraine economy is on its knees and both the government and Ukraine’s private sector are close to defaulting on their debts.

Ukraine’s central bank reserves have fallen to a near decade low of just $12.6bn, after the country spent billions servicing foreign debts, protecting the currency and repaying parts of a Russian gas bill.

UKraine reserves

The decline in reserves from $16.3bn at the end of September pushes Ukraine perilously close to a danger zone where its reserves only cover a few months of imports and Ukraine is unlikely to receive the second tranche of its $17bn loan programme from the IMF. Kiev had expected that a second tranche, worth $2.7bn, would come in December after the Fund’s mission later this month. But that now looks unlikely because, despite the election of a new parliament, a new coalition government has not yet been formed.

And $17bn anyway is not likely to be enough. That’s because the Ukraine economy has imploded, as predicted last August (see my post, The economy has contracted by nearly 10% in one year, as a result of the collapse of production in mining and other basic industries, much of which are in the separatist areas, and, of course, the ‘collateral’ damage from the war has been significant. So it is more likely the IMF will have to cough up nearer $20bn, and with the real risk that it may never see that money paid back.

So Kiev only has €760m in aid from the EU this year. The finance ministry says it has enough funds to cover its external debt obligations until the end of January, but Kiev has asked Europe for an additional $2bn euros to cover its gas company Naftogaz’s bills for the current heating season. And the Russians are expecting $4.5bn in payments for energy supplied.

Ukraine’s currency, the hryvnia, continues to dive to new lows against the dollar and the euro, making payments for imports and existing debts ever more difficult. Ukraine’s public don’t want to hold hryvnias and desperately look for dollars and other foreign currencies.  Earlier this year, the IMF estimated that if the hyrvnia dropped below 13 to the US$, then Ukraine’s debt burden would be too much to manage on its own. The currency is now below that level.


And the government is still supposed to honour its existing debts, repaying bonds that mature in 2015. Usually governments just issue new bonds to pay for old ones maturing. But who wants to buy Ukraine government bonds now?   And who has the greatest burden of foreign currency debt among emerging capitalist economies? First, Romania (within the EU) and then Ukraine.


Ironically, the existing bonds are mostly owned by Russian banks. In addition, an American hedge fund Templeton owns about $5bn worth, or 40%, which they bought last year as a punt on Ukraine getting IMF support and turning things round. Both the Russians and the Americans are looking sick right now.

What’s worse is that the former ousted pro-Russian president Viktor Yanukovich had arranged a special €3bn bond from Putin to help out before he was booted out and there is a clause in that contract that allows Putin to ask for his money back if Ukraine government debt rises above 67%, or two-thirds of GDP. Well, given the fall in GDP this year and the collapse of the currency, that debt ratio has been reached now.  The EU could bail Ukraine out but wants Ukraine to sign a free trade deal first. The Russians say if the trade deal is signed, they will call the bond in. So the EU has postponed a trade deal until the Russian special bond expires at the end of 2015.

Putin could engineer a default by calling in that bond. The problem is that it would mean the Russian banks taking a big hit to their balance sheets. Indeed, Russia itself is in serious economic trouble. With falling oil prices and sanctions imposed by the EU and the US on Putin, the Russian rouble has taken an almighty plunge too. Last week the rouble fell 8%, the biggest weekly fall in eleven years.

The Russian central bank has been trying to prop up the rouble by selling its FX reserves of dollars. Russia has built up a sizeable arsenal of dollars and gold over the years of high energy prices, but now it is leaking these like a boat with a big hole. So bad was the recent leakage that it decided to stop selling its reserves and let the rouble slide. And slide it did – to a record low against the dollar. And nobody wants Russian government bonds or to invest in Russian companies any more. On the contrary, Russia’s oligarchs want to get their money out. But as they rely on Putin’s support, they must be careful.


Russia’s FX reserves have fallen to $439bn from $509bn at the start of the year and Russia’s former finance minister and current chairman of the Committee of Civil Initiatives Alexei Kudrin reckons that available reserves now barely cover six months of imports at current prices. Six months is the critical level to insure the Russian population against the possibility of severe hardship in case the crisis deepens and the Russians are deprived of foreign goods. (Russia imports a large amount of staples including butter, cheese, and meat.)

Oil and gas revenues still account for almost half of Russia’s federal budget along with 10% of the country’s GDP and with prices dropping, Putin looks set to impose a big round of austerity on the Russian people. Russia’s Ministry of Finance is proposing a 10% cut in the budget over the next three years.

The Russian economy is virtually in recession now and Russia’s ‘empire’, the so-called Commonwealth of Independent States and the oil-rich Kazakhstan and not so rich Tajikistan, Kyrgyzstan, Uzbekistan, Belarus, Armenia and Azerbaijan, are also taking the pain. The problem is the massive trade dependency these countries have on their former soviet master. Kazakhstan, the second largest of the ex-Soviet economies, already devalued its currency, the tenge, last April by 19%. But now it faces another devaluation with the rouble dropping 30%. The Kazakh government also slashed its growth estimates last month.

CIS loss

Putin may have weakened the ability of the neoliberal, pro-EU leaders in Kiev to join ‘Europe’ so Ukraine will remain an economic disaster, but, in turn, American and European imperialism is inflicting significant economic pain on Russia.

Addendum: Tuesday 11 November from the FT:

“Ukraine’s hryvnia has dived 6.7 per cent to a new record low of 15.85. The IMF programme now looks wildly off-track, and an increasing number of analysts and fund managers predict the country will have to default on its sovereign debts and restructure.

18 thoughts on “From Poroshenko to Putin – it’s all downhill

    1. In short, yes. Even mainstream sources like Business Insider readily admit this. The deals are highly beneficial for both Russia and China. I can provide you with the links if you wish.

  1. In referring to the two votes in Ukraine: one in the west, where it was split between two pro eu (oligarchic) parties, the other in separatist-controlled enclaves, where the “guns” of the “militias” rule. Do you mean to imply that voters in the east would vote for the eu if not cowed by “pro Russian” militias? and that the color revolutionary process of mere voting for bourgeois candidates in Kiev was democratic? Also, have you changed your mind and now think that the eu has something–other than more de-industrialization and impoverishment (which Putin was forced to resist in Russia)–to offer Ukraine? Shouldn’t marxists support all workers’ struggles (certainly a significant force among the “separatists” in the east), whatever the political ambiguities involved? Given the present behavior and history of the “left”, we have little to lose.

  2. Since the Russian economy is now under severe strain, mainly due to the fall in the oil price, I am slightly surprised that the “West” is not at all more willing to provide money for their puppet regime in Kiev, something which will boost their chances of coming out on top in this struggle. On the other hand, this must indicate a certain weakness on the part of the US and its minions. From the Russian perspective, the recent fall in the value of the ruble is definitely alarming but definitely also contains a great deal of speculation as well. In either case, Russia is fighting for survival in this case and they will have to sit this out. What the Americans probably hope to take out of this is a serious dent to the domestic popularity of Putin and even a possible regime change event, if the Russian economy truly starts spinning out of control. Up until now though, putin’s popularity has not been dented at all. Another thing. The falling oil price is not just bad news for Russia. It’s bad news for Western supermajors, for opec, and crucially for American frackers as well. Their breakeven points remain largely a mystery but they are definitely higher than Russia’s or Opec’s. This explains why the Americans insisted so much on sanctions being imposed on the supply of oil drilling equipment for Russia and its corporations. It seems that American frackers want to see the oil production of the rest of the planet fall so that they can remain in business. But the possibility of them biting the dust before Russia does is a very real one. As for the poroshenko regime, it is not only made up of neoliberals and oligarchs, it is also made up by Nazis. In my opinion, lots of leftists get it completely wrong when it comes to putin and Russia. Russia is not an Imperialist country (in the leninist sense) and the fact that putin himself is so intensely reviled by Anglo-American imperialism and their lackeys in the press should be instructive for us. Moreover, the reason why the donbass is currently being run at the barrel of a gun is precisely because that region has been attacked by Nazis/Western stooges. There can be zero debate over which side a leftist should take in this struggle.

    1. Break even points for US fracking is “officially” reported at or below $40/barrel. Saudi Arabia, Kuwait, Iraq have significantly lower production costs, but the cost and speed of transport give US oil producers a significant advantage in the US, Canadian, and Mexican markets.

      The falling oil price is indeed very bad news for Putin, and the Russian capitalists; just as it was in the 1980s, and in the mid 90s. The problem for US capitalists with fracking is the problem of generalized overproduction– exactly what we see going on now with the major iron ore producers, who, having spent billions to increase output since 2006 to feed China’s steel sector, continue to ramp up production despite the 50% decline in prices for ore, since the bigger producers “offset” the decline in profitability by aggrandizing a larger portion of the total available profits until……….until their own overproduction drives self-devaluation.

      1. If the break-even point of fracked up oil in the US shale plays were anywhere near $40/bbl then there would be zero need for any kind of sanctions against Iran or indeed Russia. Uber-efficient US frackers would have driven literally any US geo-strategic enemy out of business with this admirable efficiency. In fact, transport costs for light-tight oil in North America are extremely high due to the fact that production is dispersed (little bit by little bit) along literally thousands of wells around the continent and sometimes in remote places. It has to be transported by trucks from each and every oil rig. The heavy equipment and chemicals necessary for fracking must also be transported in the same way. The break-even point for light-tight oil is way, way higher than $40/bbl. It is for this reason that the stock prices of firms involved in this latest speculative bubble have recently collapsed (even 70% in some extreme cases, but in any case, anywhere between that and 30%) despite the recent general upswing on the S&p 500.
        The falling oil price is indeed bad news for Putin, but my assessment is that that holds true only in the short-term, maybe the medium-term as well. Russia simply has too much of it, and at a significantly lower cost to the light-tight oil variety (despite what western MSM propaganda likes to claim) And this is, I claim, the fundamental reason why American imperialism has gone out all guns blazing against Russia and Putin. By the way, Russia may indeed by a cynical capitalist country nowadays, but they are also (along with the PRC) the only power on the face of the earth able to resist Anglo-American imperialism (surely the greatest threat to the oppressed people of the planet) I would even consider the BRICS initiative as relatively progressive (considering all other alternatives in the world today)
        Back to light-tight oil. Even with oil prices above $100/bbl, US frackers have been burning cash at an astonishing clip ($1.50 for every $1 in revenue) and have been issuing HY bonds (or junk bonds) in order to finance their capex. Let me provide you with some links: You can readily find dozens of analysts who agree that the shale boom is wholly unsustainable. Even in the MSM press. Putin knows all this, and is willing to sit the storm out. You can bet your bottom dollar (or ruble, or yuan) that the Chinese know it as well.

      2. As for the Mid-East oil producers. While they indeed produce oil at lower cost than anyone else, they are still hurting at the moment due to the fact that they have to maintain extreme levels of public spending at home, lavish corruption for themselves, bribe a hell of a lot of politicians in the West, sustain their portfolios in London and New York etc etc…

      3. The $40/bbl you are quoting is the “official” break-even price for the Eagle Ford’s (TX) sweetest spot as can be found in Wall Street documents of such fraudulent organizations such as Goldman Sachs. Even if that is true, it tells us next to nothing about the costs in dozens of other plays across North America (remember that Canada is also deeply involved in the unconventional extraction of oil) Moreover, that is still not the full cost of production, since the quoted price only refers to the amount of money required to get the oil up the surface. From there on then, it has to be transported (expensively, since there are no big pipelines for frackers) by trucks and/or railways (Oracle-of-Omaha-Warren Baffet himself deeply involved in this) to the refineries.

      4. Nonsense, transportation costs have declined dramatically in the US since 2009 for fracked oil; and that’s because of the dramatic increase in shipments by… not trucks… but RAIL.

      5. To sum up, Goldman Sachs is “fraudulent” but are trustworthy news sources.

        Well, that’s very interesting– and I’m glad to see you’ve found the only honest people on Wall Street (did you do a google search for “honest + analysts + Wall +Street”?), but my usual source is the US Energy Information Agency

      6. The guy who made extensive research over the results of thousands of fracked wells over a period of years is an acclaimed Canadian geologist who has been in the know for several decades. The person who did the video posted on zerohedge seems very knowledgeable and is not backed by any corporations or any other narrow interests. And one more thing, not even Goldman Sachs (inevitably heavily invested in shale oil) claims that the break-even cost for fracked oil is $40/bbl. Like I told you before, that is at best, the cost for bringing oil up the surface at the sweetest of sweet spots in the Eagle Ford formation of Texas. But again, you fail to ponder on any of the points that I am making:a) Why sanctions on two major oil producing countries? If shale oil was more efficient there would be no need for this extremely dangerous drama. Don’t you agree? b) Why are fracking firms burning so much cash? They should have been making record profits by your account? Why are they issuing HY bonds? They should have been self-financed if the break-even price was $40/bbl, especially since the price of oil was well above $100/bbl for so long. c) Why have their stock-prices plummeted in recent weeks?

  3. @sartesianare you trying to say mate?

    What are you trying to say mate? That fracked oil is cheap? You have not even attempted to address any of the points that I have made. And do you think that all across the thousands of fracked wells across North America there is a railway to pick the oil up? If it was as efficient as you claim it is, then what would the need be for the US to impose sanctions on the oil sectors of both Iran and Russia? The sanctions are a clear indication that fracked oil is wholly noncompetitive. Another very crucial point, why is it that fracking corporations are burning so much cash, and are continuously issuing HY bonds to stay in business? Why is it also that the supermajors have largely withdrawn from shale plays? You seem to fall for rank bourgeois propaganda.

  4. I’m only trying to say this: shale production is profitable; it is profitable even though moving oil by rail is about $10/barrel more expensive than moving it by pipeline. It’s just that simple. So as long as production costs are kept below that point, the shale producers will do just fine, as they have been doing. Cash returns on equity for the “tight-oil” producers have increased from an average 34% in 2012 to 40% in 2014.

    Is the railroad able to pick up every barrel of oil from every shale producer? Of course not, just as pipelines don’t pick up every barrel from every producer. However shipments of crude-by-rail (CBR) more than doubled between 2010 and 2013, and the shale producers made money.

    The need to impose sanctions on Russia and Iran has nothing to do with the “uncompetitive nature” of shale, or US production in general, and everything to do with overproduction and attempts to offset a declining rate of profit– but to grasp that you have to look at actual lifting costs; capital investment; net property, plant, equipment, and cash returns. You have to look at data, not ideology.

    I have no interest “reasoning backwards” from what you say is the cash-burn rate of the shale producers to their actual costs of production. I’ll simply refer you to the cash return on equity figures from the US EIA.

    Now can this “boon” be sustained? Exactly to the degree that ANY capitalist boon can be sustained– to the point where accumulation and overproduction drive the entire system into devaluation. But you know what? The capitalists don’t give a rat’s ass. That’s the point. They know a rich man can get through poor times better than a poor man. And right now, Russia is the poor man in this poker game.

    But in regards to your argument that sanctions are designed to protect the “costly basis” of production in the US, I’ll point out to you that the call for sanctions against Iraq follows just the opposite course. The moans and groans from the US oil majors against Iraq came in the post 1996 period when US lifting costs declined, and the spot price of oil dipped below $10 barrel. This drove down the rate of return of US oil capital. Iraq was producing nearly 3 million barrels a day, and the US bourgeoisie determined to drive that production from the market– hence the march to war. The precipitating “agency” here the INCREASED efficiency and decreasing price of production, not the decreased efficiency and increasing price of production.

    So as for sanctions 1) the sanctions against Iran well predate significant shale production in the US 2) sanctions against Russia, like the destruction of Iraq are designed to drive the oil off the market.

    You think Putin can “sit tight” and wait this out? See above remarks: the rich man gets through poor times better than the poor man.

    As for self-financing or the lack thereof being an index to profitability of shale production— that’s just ignorant; look at the record issuance in the bond markets over the past several years, despite record piles of cash on hand for the US non-financial 500 biggest companies– they’re playing the market, MATE, working the numbers, glomming the spread. It’s called arbitrage. That’s what capitalists do. And they pocket the difference. That’s called money.

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