The Current Situation

Analysis of the figures shows us the following. According to the data of International Monetary Fund (IMF) for July 2014, Ukraine’s economic prospects have deteriorated notably with its GDP expected to contract by 6.5% this year, compared to the 5% that was foreseen in April. [1] For January 2014, the year-on-year decrease in Ukraine’s GDP was estimated at 4.7%, and at 3.6% for February 2014. The situation worsened by August 2014 as total production dropped by 21.4% [2] with heavy industry production, including machine building, falling by 30%, all in comparison with the August 2013 volumes. [3] This reality is unsurprising seeing that the two oblasts that declared their independence on 12 May, Donets’k and Luhans’k, are together responsible for 25.2% of Ukrainian exports, and that Donets’k furthermore used to be a leader in the sale of Ukraine’s industrial goods.[4]

The value of the hryvnia has depreciated over 40% against the dollar this year, [5] meaning that both businesses and consumers are having increased difficulty in paying their dollar-denominated loans. The country’s entire banking system is at risk of wholesale default. As the financial costs of war mount, Poroshenko has already announced $3 billion in additional defense spending for this year [6] while in 2013, the defense spending constituted $2.4 billion. [7]

Another issue is seen in the energy sector. Ukraine is required to increase natural gas and heating tariffs respectively by 56% and 40% for consumers in 2014, and by 20% to 40% annually from 2015 to 2017. At the same time, as gas prices sharply increase, gas subsidies for end users will be completely suspended over the next two years. With Russia halting its supply of gas to Ukraine since June as a result of a payment dispute, Ukrainian consumers may face further price increases unless Kiev is able to obtain gas from other sources. [8]

Russia vs the EU

The EU Association Agreement in itself also has pitfalls for the Ukrainian economy. Firstly, the Free Trade Zone is expected to have a negative impact on the agricultural sector of Ukraine due to protective policies of the EU in this field. The prices of import goods would rise due to the abrogation of the 20% subsidy on exports and generally higher tariffs in the EU on imported goods. Additionally, import prices would rise because of the negation of higher tariffs imposed on EU goods, previously Ukraine’s reply to EU protectionism.” Additionally, export prices would fall because of the higher tariffs on EU goods which is the reply to the EU protectionism. [9] In this regard, Ukraine would become a breadbasket for the European Union. [10]

Secondly, announcing a $3.5 billion aid program on May 22, World Bank President Jim Yong Kim lauded the Ukrainian authorities for developing a comprehensive program of reforms and their commitment to carry them out with support from the World Bank Group. However, he failed to mention the neo-liberal conditions imposed by the Bank on its loan package, including that the government must limit its own power by removing restrictions that hinder competition and relinquish state control over economic activities. [11]

Initially it was planned that the $30 billion in aid, of which the IMF pledged to provide $17 billion, would be enough to restore the economy. The April bailout was predicated on the expectation that the conflict in eastern Ukraine would end in the early autumn. However, updated in July, the IMF’s review showed that the country’s financing needs could rise by $19 billion if the civil war continues. [12]

Amid the current turmoil, the World Bank and the IMF are now pushing for more reforms to improve the business climate and increase private investment. In March 2014, the former prime minister ad interim, Arsenij Yatsenyuk, welcomed strict and painful structural reforms as part of the $17 billion IMF loan package, dismissing the need to negotiate any terms. [13] The IMF austerity reforms will affect monetary and exchange rate policies, the financial sector, fiscal policies, the energy sector, governance, and the business climate.

Besides, the loan is also a precondition for the issuance of further financial support from the European Union and the United States. If fully adopted, the reforms may lead to significant price increases for essential consumer goods, a 47% to 66% hike in personal income tax rates, and a 50% increase in gas bills. [14[ These measures, it is feared, will have a devastating social impact, resulting in a wide scale collapse of the standard of living and dramatic surges in poverty.

The World Bank’s activities and its loan and reform programs in Ukraine seem to be working toward the expansion of large industrial holdings in Ukrainian agriculture owned by foreign entities. [15] The East-West competition over Ukraine, however, is about the control of natural resources, including uranium and other minerals, as well as geopolitical issues such as Ukraine’s membership in the North Atlantic Treaty Organization (NATO). As a recent Bloomberg editorial noted, “In Ukraine, the IMF will in essence be trying an economic solution to a geopolitical problem.” [16]

Having signed the Association Agreement with the European Union, Ukraine now finds itself facing additional pressure from Russia: the Kremlin demanded that Kyiv delay the implementation of the Free Trade Zone procedures with the EU as a condition for not introducing additional customs duties for Ukrainian goods. [17] In response, Kyiv made a list of Russian goods whose importation to Ukraine could be banned. [18] This tactic resembled what was seen in August when Russia reacted to the economic sanctions of the EU and the US by launching trade bans on certain categories of goods originating from involved countries, as well as those from Ukraine and Moldova. [19] Furthermore, on October 10, Kyiv announced a ban on products from Crimea on the grounds of their disparity with the sanitary norms of Ukraine, demanding that food production companies of the Russian Federation mark their goods in a certain way. [20]

As for the gas issue, with Ukraine owing Russia more than $5 billion for gas imports, Russia cut off the supply of gas to Ukraine in 2014, thus forcing the country to receive its gas from Europe, which is unable to fulfill its needs. Moreover, Kyiv argued that the $5 billion figure provided by Russia is false, and only serves to fulfill the Kremlin’s political ambitions. [21] Estimates show that Ukraine will need 9-10 billion cubic meters of gas this season, and while Russia was willing to provide 5 billion cubic meters according to the pre-paid system, later this amount dropped to 4 billion cubic meters upon the decision of the Ukrainian government. Recently, Kyiv expressed its demand to change the pre-paid system to a payment upon delivery system while requesting the Kremlin deliver 1 billion cubic meters of natural gas for the technical needs of the transit pipelines. Announced this week, Moscow agreed to lower Ukraine’s first debt payment from $2 billion to $1.454 billion amidst preparations for the leaders of both countries to sit down in the next stage of negotiations which will be held on 17 October. [22]

Conclusion

The EU Association Agreement opened the way for financial aid from Western institutions, however, it also impedes Kyiv’s attempts to control its own economy, thus facilitating the rise of prices and poverty in the country. Indeed, the IMF loans actually represent attempts at finding an economic solution to a geopolitical problem. As to Ukraine’s relations with Russia, Kyiv is trying to strengthen its bargaining position vis-à-vis the Kremlin by showing that it has leverage. Nonetheless, Ukraine remains very vulnerable due to the gas and trade issues with the Russian Federation, and in the end, the fundamental problems in Ukraine remain geopolitical and domestic in nature, not economic.
——————-
1. IMF Announces Staff Level Agreement with Ukraine on First Review under the Stand-By Arrangement, Press Release No. 14/351, July 18, 2014, available at https://www.imf.org/external/np/sec/pr/2014/pr14351.htm
2. Industrial Production Indexes of Ukraine, 2011 – 2014, Data of the State Statistics Committee, available at http://ukrstat.org/operativ/operativ2014/pr/ipp/ipp_r/ipp_r14.htm
3. Industrial Production Indexes of Ukraine, according to the sector, January – August 2014, Data of the State Statistics Committee, available at http://www.ukrstat.gov.ua/operativ/operativ2014/pr/ipp_vd_m/ipp_vd_m_u/ipp_vdm0814_u.htm
4. Volumes of the Industrial production in Ukrainian regions, Data of the State Committee of Statistics of Ukraine, 2013, available at http://ukrstat.org/operativ/operativ2013/pr/tpo/tpo_r/tpo_1213_r.html
5. “On Top of a War, Ukraine Faces a Mortgage Crisis”, Bloomberg Businessweek, June 26, 2014.
6. “Ukraine Can’t Afford the IMF’s Shock Therapy”, Foreign Policy, September 10, 2014
7. Military Expenditure of Ukraine, the World Banka Data, available at http://data.worldbank.org/indicator/MS.MIL.XPND.GD.ZS
8. Reza Moghadam, “Stabilizing Ukraine”, The International Monetary Fund’s Global Economy Forum, available at http://blog-imfdirect.imf.org/2014/04/30/stabilizing-ukraine/
9. Oksana Harbuzyuk & Stefan Lutz Analyzing “Trade Opening in Ukraine: Effects of a Customs Union with the EU”, Economic Change & Restructuring (2008), Vol. 41, No. 2, pp. 221–238
10. Frederic Mousseau, “What Do the World Bank and IMF Have to Do With the Ukraine Conflict?”,Inter Press Service, August 12 2014
11. Ukraine – First Development Policy Loan Program (English), World Bank, 22 May 2014, available at http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2014/05/23/000414397_20140527145854/Rendered/PDF/Ukraine0DPO0PID0May02302014.pdf
12. Reza Moghadam, “Stabilizing Ukraine”, The International Monetary Fund’s Global Economy Forum, available at http://blog-imfdirect.imf.org/2014/04/30/stabilizing-ukraine/
13. Speech of the Prime-Minister of Ukraine at the Verkhovna Rada of Ukraine on 27 March, 2014, Department of Information and Communication of the Public Secretariat of the Cabinet of Ministers of Ukraine, available at http://www.kmu.gov.ua/control/uk/publish/article?art_id=247147805
14. Frederic Mousseau, “What Do the World Bank and IMF Have to Do With the Ukraine Conflict?”, Inter Press Service, August 12 2014
15. Ibid.
16. “Shock Therapy Would Traumatize Ukraine”, BloombergView, Editorial, March 30, 2014
17. “Óêðàèíå ïðåäúÿâèëè ïÿòûé ïóíêò”, RIA-Novosti, September 10, 2014
18. “ Êèåâå ñîñòàâèëè ïåðå÷åíü ðîññèéñêèõ òîâàðîâ, êîòîðûå ìîãóò îáëîæèòü äîïîëíèòåëüíîé ïîøëèíîé”, Zerkalo Nedeli,October 6, 2014
19. ”Ïðàâèòåëüñòâî ñîêðàòèëî ñïèñîê çàïðåùåííûõ ê ââîçó â ÐÔ ïðîäóêòîâ” , Rossiyskaya Gazeta, August 20, 2014
20. “Êèåâ çàïðåòèë ñî ñëåäóþùåé íåäåëè ââîç íà Óêðàèíó ïðîäóêòîâ èç Êðûìà”,RIA-Novosti, October 10, 2014
21. “Ukraine Crisis: Russia Halts Gas Supplies to Kiev”, BBC News Europe, June 16, 2014
22. “Ìîñêâà ñíèçèëà ðàçìåð ïåðâîãî òðàíøà äîëãà Êèåâà çà ãàç”, Ðóññêàÿ Ñëóæáà BBC, October 13, 2014