by Michael Roberts
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
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.
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
And $17bn anyway is not likely to be enough. That’s because the
Ukraine economy has imploded, as predicted last August (see my post, http://thenextrecession.wordpress.com/2014/08/31/ukraine-a-grim-winter-ahead/).
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 $4.5bn in payments for
Ukraine’s currency, the hryvnia, continues to dive to new lows
against the dollar and the euro, making payments for imports and
existing debts ever more difficult. Ukraine’s public don’t want to hold
hryvnias and desperately look for dollars and other foreign currencies.
Earlier this year, the IMF estimated that if the hyrvnia dropped below
13 to the US$, 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
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.
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