Ukraine’s economic crisis could have profound (geo)political consequences for European security. A default in Ukraine could lead to higher unemployment, a drastic fall in governance standards, a rise in emigration, organised crime, and an even deeper political crisis. Or these might happen even without a formal default, but with a seriously ill economy for the next few years. A failed economy in Ukraine will hit hard Belarus and Moldova (and Transnistria) putting under strain all of EU’s immediate Eastern neighbours. It will also affect some EU member states, including Austria whose banks have lend heavily in Ukraine. Any of these developments will affect the EU and could lead to a significant throw back to its anyway-unimpressive European neighbourhood policy.
Ukraine might be about to collapse economically. It is unable to meet the conditions of the International Monetary Fund to qualify for a USD 16 billion bail-out. Because it will face presidential elections in a year from now – a divided government in Ukraine is not able to meet the IMF’s condition on cutting (to zero) the budget deficit. Ukraine’s political mess was sustainable in times of economic growth, but not during the global economic crisis.
A failed economy is not yet a failed state. But the big question is what will Russia do. So far Russia treats the economic crisis as an opportunity to advance a reconsolidation of its sphere of influence in the post-Soviet space. Kyrgyzstan received economic assistance for expelling the US air base in Manas and proceed with deeper integration with Russia. On a recent visit to Moldova, Russian foreign minister Sergey Lavrov offered solidarity in case of financial difficulties. “Money, not promises” was his message in a disguised reference to the EU and international financial institutions that either don’t respect promises, or take years to deliver on them. In Ukraine, Russia stepped in with an offer of a USD 5 billion bailout. Russia’s conditions are not clear, but the price will most probably be political – a push for Ukraine to drop its NATO integration aspirations, or maybe an implicit deal on maintaining the Russian Black Sea fleet in Crimea beyond its current 2017 deadline. Voices in Russia also call for an imposed neutrality on Ukraine ( without a withdrawal of the Russian Black Sea fleet from Crimea).
In 1939 Edward Hallet Carr wrote a book called the Twenty Years Crisis referring to the interwar period of 1919-1939. He was wrong on many accounts. But he described how it took twenty years for the “end of history” optimism of 1919 to degenerate into a new World War. Ukraine (and all other post-Soviet states) is now in its 18th year of independence. The next two years will probably be decisive whether there will be a return to a bi-polar Europe or not. Certainly, perpetual political and economic crises in countries like Ukraine, Moldova or Georgia have been a modus vivendi for the last two decades, which made them more fragile, but also (paradoxically) more resilient in the face of the current economic crisis. But still, an economically and politically collapsed Ukraine will raise the spectre of the end of post-Cold War Europe. Such a negative scenario is far from certain, but looks less unlikley than a few months ago.
#1 by Alex on March 1, 2009 - 8:23 am
Seven ways of stealing from budget
1. \Make an order\.
Speed limiters, for instance. Do you know why they appeared recently? And why they are being mounted three or even four in a row? The answer is very simple: capital authorities pay Uah 50000 for mounting the single one, while wholesale cost of it is Uah 300. They earn 100 times including installations maintenance. Sudden replacement of old traffic lights that took place all over Kiev hardly could be explained by sudden care of pedestrians ‘cause no \zebra\ markings were refreshed .
http://ua-ru-news.blogspot.com/2009/02/seven-legal-ways-of-stealing-from.html
#2 by I. on March 2, 2009 - 8:54 am
THE CASE FOR UKRAINE
By Anders Aslund, Senior Fellow, Peterson Institute for International Economics
RealTime Economic Issues Watch, Global Financial Crisis
Washington, D.C., Thursday, February 26th, 2009
Pessimists believe that Ukraine is on the verge of default. Fortunately, such a calamity is unlikely, but Ukraine badly needs more international financial support to handle a tremendous external shock.
A year ago, Ukraine’s economy was in sound health after eight years of an average annual economic growth of 7.6 percent. Ukraine has maintained a minimal budget deficit, and its public debt was as small as 12 percent of GDP in 2007.
Ukraine’s mistake, however, was to keep its exchange rate pegged to the US dollar, which encouraged speculative short-term capital inflows, driving up inflation to 31 percent last May and the current account deficit to 6.7 percent of GDP last year.
These flaws were not major, but Ukraine became a prime victim of the freezing of international financial markets after the Lehman Brothers bankruptcy. Without credit, most construction just stopped. Steel is Ukraine’s main export product, accounting for over 40 percent of exports, and both prices and volume of sales plummeted by half.
#3 by I. on March 2, 2009 - 9:00 am
The blow to the Ukrainian economy has been horrendous. In January, industrial production fell by no less than 34 percent over January 2008, and GDP is estimated to have plunged by 20 percent. Steel production, mining and construction have fallen by half.
In current dollars, Ukraine’s GDP is likely to plummet by 40 percent this year. Exports are likely to drop by half, and imports even more, reducing the current account deficit to an insignificant level. Millions of workers are being laid off, and the stock market has contracted by 90 percent.
No other country has been hit as hard as Ukraine, and it needs all the support it can get to mitigate the social shock. The Ukrainian government reacted swiftly, asking the International Monetary Fund for support last October. Within four weeks, Ukraine and the IMF had agreed on a large, strong two-year standby agreement with $16.4 billion of IMF credits.
The IMF had three key demands: A balanced budget, a floating exchange rate, and bank restructuring. Ukraine has delivered. It has done more on bank restructuring than most Western countries. After some hesitation, the National Bank of Ukraine let the exchange rate float. It has depreciated by about 50 percent and stabilized, endowing Ukraine with new cost competitiveness. The Ukrainian government has maintained the budget close to balance in spite of collapsing state revenues. Inflation has fallen to 22 percent.
The international financial institutions recognize Ukraine’s dilemma and the government’s heroic achievements. The World Bank, the European Bank for Reconstruction and Development, and the European Investment Bank have contributed some $3 billion in new funds.
Their support is sufficient to avert default. Ukraine still has $28 billion in reserves, which reassuringly corresponds to eight months of imports. The only reason for talk about default is the loud, public acrimony between President Viktor Yushchenko and Prime Minister Yuliya Tymoshenko, who accuse each other of treason and corruption.
But we should not complain about open democracy. Apart from the Baltic countries, Ukraine is the only bona fide democracy with free media in the former Soviet Union, and it is committed to Euro-Atlantic integration. Such a country needs support when in peril…
#4 by I. on March 2, 2009 - 9:09 am
Amazingly, Ukraine has so far seen minimal social unrest, but unemployment is bound to skyrocket, especially in the East with its steelworks and mines. Naturally, the Ukrainian government is anxious to reinforce its social safety net and insists on a budget deficit of a moderate 3 percent of GDP.
The IMF understands the government’s predicament, but it cannot approve a budget deficit of more than 1 percent of GDP without additional financing. The finance gap in this year’s balance of payment amounts to $5 billion, quite a moderate amount.
Seventeen international banks have just given their vote of confidence in Ukraine’s economic policy, by making commitments to invest $2 billion of their own capital in their Ukrainian subsidiaries. Western governments should follow the example of their hard-tested banks.
The European Union has a vital interest in saving its banks that are heavily invested in Ukraine, and for the United States, Ukraine is of major geopolitical importance. The United States and the European Union should stand up and deliver. Ukraine has long been a loyal friend of the West. Now the time has come for the West to prove its friendship toward Ukraine.
NOTE: RealTime Economic Issues Watch: A website forum in which senior fellows of the Peterson Institute for International Economics discuss and debate their responses to global economic and financial developments as they occur each day and offer insights that others might overlook.
Global Financial Crisis: Views on the current crisis in global financial markets, their impact on the real economy and the public policy choices confronting the United States and other countries.
FOOTNOTE: Anders Aslund has served for several years as a Senior Advisor to the U.S.-Ukraine Business Council (USUBC), Washington, D.C., http://www.usubc.org.
LINK: http://www.petersoninstitute.org/realtime/?p=507
#5 by Wim Roffel on March 2, 2009 - 12:49 pm
I have to disagree with Anders Aslund. Ukraine had a huge trade deficit that was balanced by foreign investment and privatization. That was a model that is clearly unsustainable in the present era.
#6 by Marcel on March 10, 2009 - 12:46 pm
Let Ukraine ask Russia for assistance. They won’t get a damn dime from me. All those parasitic eastern european countries only want our money.
#7 by nicu on March 12, 2009 - 2:41 pm
well, western banks, energy companies, supermarkets, german exporters – make huge money in eastern europe. gas distrbution networks, electricity distribution systems, the entire banking systems of most new EU member states belong to western EU companies. trade balances are hugely in favour of older EU member states (particularly Germany). Car makers from peugeot to opel – have remained competitive and expanded their businesses becuase they could outsourced car-making to eastern europe. so it would be wrong to assume that EU companies do not and did not benefit from the Eastern markets… they benefited hugely, also in Ukraine.
#8 by Evghenia on March 23, 2009 - 2:03 pm
Ukraine should first pull itself together and look at itself in a mirror and not in a magician’s ‘foggy crystal glass’. Ukrainian policy makers don’t even want to accept the fact of how grave the corporate debt situation is, they are certain that foreign banks will bail out their Ukrainian subsidiaries, and that Ukraine is too big to fail for either Europe or Russia (let them both decide who ‘loves’ us more). They don’t even want to take a proper inventory of its accounts and publish them on a MoE or NBU web-site – which would already be a great step in increasing trust and even credit rating (they wrongly think that not disclosing anything will help). And of course only Russia will be ready to pay for something economically so murky, because it doesn’t care about the economic side…
And although i totally agree that Ukraine is indeed too big for Europe as well to let it fail, but that’s a bigger problem in the whole world now, for any country and any company – if you don’t pay the price, you don’t learn a lesson. and the more resilient the country is to economic turmoils, like transition economies are, the bigger needs to be a lesson….
on the other hand, why do ordinary people need to pay such a high price for the messiness of policy makers and politicians?… and they are paying much more than people in the western world, which was the engine of the credit crunch….
Indeed, letting Ukraine fall into bigger dependence on Russia would be unwise, but IMF has loosened its macro-economic conditions recently – so it is trying to appreciate the gravity of the situation. If even then Ukrainians will prefer not to do anything to get the rest of this loan, opt for pre-electoral convenience, and take Russia’s loan with its less immediate consequences – then there is nothing else to be added here – the ‘patient’ made his choice…
#9 by Payday Loan on May 1, 2009 - 6:58 am
If the system remains the same and does not even evolve, failure is likely to happen. Change for the better is therefore required.
The U.S. government is making a lot of program cuts. So are the states themselves; many are facing huge budget shortfalls as well. Obama is leading the charge as he takes a hatchet to the federal budget. (He did promise to.) The nation’s finances were a key issue in the last presidential campaign. A period of restructure was destined to happen in this recession. First to go is a facelift for Homeland Security, which will no longer be getting $3 million to design a new logo. More changes to federal spending are to follow, so we may save ourselves further installment loans through program cuts.
#10 by beasiswa on July 14, 2009 - 12:16 am
He’s a little bit sarcasm by saying that, “Money, not promises”
#11 by Josh on August 19, 2009 - 4:20 am
Yes, Global Economic Crisis make Ukraine on that condition