Monday, August 11, 2014

Ukraine: a rock and a hard place

by Michael Roberts

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 ( 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.

No comments: