An Economic Overview of Ukraine at a Critical Juncture

Nationalism often has been a force of political deadlock and economic stagnation. In a place like Quebec, it is possible for voters to decide they are wearisome of separatism and it is time their elected officials focus on economic growth and job creation. In Ukraine, things are much more complicated. One third of Ukrainian exports go to Russia, and the country depends on Russian energy to produce most of its goods. Decades of dependence have nurtured a wasteful and tangled economy, and now Russia is doing everything in its power to undermine the new Ukrainian government.

Unnatural Natural Gas Wars

Ukraine’s energy infrastructure is inefficient and wasteful, making gas imports crucial to economic production. Half of these imports come from Russia. Ukraine’s economy has been built on subsidized gas, as Russia has been discounting sales by a third of market price. Putin claimed that “during the past four years, Russia has been subsidizing Ukraine’s economy by offering slashed natural gas prices worth 35.4 billion U.S. dollars.” Years of discounted gas prices have left its industry with a large and unquenchable thirst. In Ukraine’s current state, industrial production requires twice as much energy as an advanced industrial nation.

Furthermore, the subsidies have led to an energy sector riddled with debilitating corruption. Oligarchs have made billions as middlemen, buying up cheap gas intended for families and reselling it to industrial producers. The lack of industrial innovation, accountability and transparency has led to a ballooning energy debt, with no one willing to risk investment in a solution.

Problems in the energy sector have compounded, and the currency has spun downwards. Ukraine’s currency, the hryvnia, was pegged against the dollar until February to control the cost of imports. The Central Bank of Ukraine decided to float the currency, making its goods cheaper to other countries, in an effort to boost exports. The value of the currency has fallen 27 percent this year, making it the worst performer globally. Cheap currency makes Ukrainian agricultural and industrial products more appealing abroad, but it makes debt obligations hard to stomach.

Ukraine has $35 billion in sovereign debt that will become due over the next two years, one billion of which is due on June 4. As a part of the International Monetary Fund reform program, the international community will contribute $27 billion over the next two years. Of that amount, the IMF will put forward $14-18 billion, depending on the amounts of bilateral and multilateral support.

The main contingency of the IMF loan is to eliminate subsidies and corruption. The IMF stated in a press release that “the program will focus also on improving the transparency of Naftogaz’s [Ukrainian state-owned gas supplier] accounts and restructuring of the company to reduce its costs and raise efficiency.” If history is any indication, this will be much easier said than done. The IMF has helped Ukraine twice before with similar loans, but both programs resulted in failure. Eliminating subsidies requires raising the cost of gas for families, a very unpopular move politically.

Even with the IMF bailout, Russia has been making it all but impossible for the Ukrainian economy to survive. Ukrainian Naftogaz owes Russian Gazprom $2.2 billion, and last month Russia aggressively raised its price 80 percent. Additionally, Putin issued a letter to European leaders stating, “Gazprom is compelled to switch over to advance payment for gas deliveries.” He added that in order to deter Ukraine from syphoning off gas intended for Europe, Russia would require Ukraine to pay $5 billion up front for 11.5 billion cubic meters to hold in reserve. Putin is setting Ukraine up for financial failure at every opportunity.

After news of the IMF package to loan up to $18 billion to Ukraine, Russian Prime Minister Dmitry Medvedev announced a total energy debt of $16.6 billion. If Russian demands are not met, it may cut gas supplies to both Ukraine and Europe. Europe gets a quarter of its gas from Russia, half of which travels through pipes in the Ukraine. If Russia cuts off Ukraine, it would reduce the flow through Ukraine to ensure none goes missing along the way. It has been a mild spring, and gas reserves remain high, but Europe would face significant challenges if its energy supplies were suddenly cut.

On The Brink

Russia is demanding Ukrainian federalization. It wants Ukraine to adopt a new constitution that decentralizes the government, shifting power to each region. Each region would be able to choose its own economic policy, retain tax revenue and determine which foreign relations to strengthen. Federalization, assigning federal status to territories, could be successful, but it requires a strong central government to bind the regions together with political and economic purpose.

Federalization may sound like a small price to pay for peace, but granting more autonomy to regions would also exacerbate the already present instability and divisions. The government is in political shambles, the Ukrainian economy is on the verge of economic collapse, and Russian troops wait for an excuse to invade. Federalization would only encourage regions in Eastern Ukraine to gravitate to Russia’s larger and more stable economic body. Eastern Ukraine is already heavily dependent on Russia, and granting autonomy will only facilitate Russian annexation.

Kiev has scheduled presidential elections for May 25, and parliamentary elections will take place soon after. Participation by all regions in the elections is necessary to lend legitimacy to the fledgling government. Putin is expected to exert economic, military and political pressure to ensure failure for the Ukrainian government. Chaos will escalate during this next month leading up to the elections, but if a unified Ukraine stands under a central governing body, it could emerge from this crisis with a stronger national identity and the will to untangle economic dependencies.

Revolution in Ukraine

When fellow Clemson alumnus Tom Kapp and I agreed to meet in Kiev on Thursday, February 20, we had no idea that the events of the coming days would consume the entire country and possibly the region at large.

Two days prior, police snipers had begun targeting protestors in downtown Kiev. Some 90 people were killed as the protest reached a fever pitch. I was covering the events for The Daily Beast and had been covering the situation in Ukraine since late November, when now-fugitive Ukrainian President Viktor Yanukovych caved to pressure from Russian President Vladimir Putin and walked away from a trade deal with the European Union that had come to signify Ukraine’s last chance for western European integration.

For months I had been writing about a new wave of pressure from Moscow, which also led to Armenia’s similar rejection of a EU trade deal. When we arrived in Ukraine, pro-EU demonstrators had been living out in the cold on Kiev’s Maidan Square — the name that would come to symbolize their EuroMaidan movement — for three months.

An Escalating Situation

On February 18, something changed:  Snipers — by most accounts, police snipers — began to target protestors. The shots were not intended simply to stop the protestors’ advance or protect the police on the ground. These were kill shots to the head, neck and upper torso. Simultaneously, police under Yanukovych’s command blitzed the Maidan Square from four directions in an attempt to forcibly remove the protestors.

The protestors, armed with Molotov cocktails, truncheons and riot shields taken from police, began to set fire to everything they could, notably the large stacks of tires they had amassed — tires burn for a remarkably long time — in one final effort to hold onto the square. Protestors tossed tents, tires and debris into the flames creating a ring of fire around the square as police moved in with tear gas and flash grenades with nails taped to the outside to make them more deadly. Both sides resorted to extreme measures of violence. Downtown Kiev became a warzone. When we arrived two days later, the fires still burned, but most of the shooting had ceased.

I can only hope that such gunfire will never resume, though 500 miles to the south, Ukraine’s Crimea is about to explode. By the time this goes to print, Ukraine may again be a war zone.  The longer we spent in Kiev, the more vigils, flowers and pictures of loved ones began to appear. The tiny glow from thousands of candles soon replaced the smoldering inferno of tires. Violence and mayhem were not the full story.

We also witnessed a different side of the EuroMaidan, one that was not represented in the nightly apocalyptic news clips. Paradoxically, there was also a peaceful and generous side to the movement.

As Tom pointed out, the first thing he received upon arrival at one of Maidan’s improvised checkpoints — a passageway in the walls of debris manned by Maidan’s own border guards — was a free sandwich and a smile. EuroMaidan had its own hospital and medical team, its own kitchens and serving tables, and its own security force — a force that became increasingly ominous and more organized in their hourly patrols marching through the camp.


At the Tbilisi airport, Headed for Kiev

In Tbilisi, where I’ve been living for several years, I checked my bullet-proof vest and helmet. The check-in lady wasn’t surprised. The security guard was.

“You say this is some kind of battle armor?” the security guy with the radio asked. “Bullet proof?” The check-in lady assured him in Georgian that it was fine. She’d been down this road. Turns out Western journalists are rather crotchety about their flak jackets being taken away and messed with.

“We’ve had many similar passengers with this equipment,” she explained reassuringly. I wanted to tell her that this was probably not a good sign for the airline, but I didn’t because she was being sweet, and it was god-awful thirty in the morning, and the process was going oddly swimmingly, especially for a  Tbilisi airport.

When the shuttle bus got to the airplane, three Georgian police cars were parked on the tarmac beside the aircraft, their blue lights flashing. A twinge of reality — where I was headed — began to set in.

The Constant is Change

The biggest indicator that I was perhaps in over my head was the earth-shattering booms coming from “enhanced” fireworks which the protestors were testing out that morning in preparation for another possible night raid by riot police.  The front doors of the hotel were locked and barricaded. To get inside via the only functioning side door, I had to enter the Maidan checkpoint, guarded by extremely serious characters in full armor comprised of random equipment like knee pads, Kevlar, face masks, second-hand fireproof military jackets and orange construction hats. The coming days would reveal every possible random variation of these uniforms.

I quickly learned that the only thing constant about EuroMaidan (and now it seems Ukraine at large) is change — change at an astonishing rate. By Saturday, the country’s president had fled, wanted for the murder of almost 90 people. That night we watched the freshly released Yulia Tymoshenko roll her wheelchair onto the EuroMaidan stage and address the crowd after three years in prison. Tymoshenko, who also has a questionable past, wasted no time. Representatives from her party, which was one of the central three EuroMaidan opposition parties, now held the top two positions in the country. Yet this wasn’t the Orange Revolution part two. Tymoshenko’s “Fatherland” party had not taken over the government. EuroMaiden, the movement, had, and protestors were quick to tell me that Tymoshenko was not their leader. Many didn’t support her at all.

The future of Ukraine remains uncertain, and the fate of Crimea looks more ominous by the hour. It will take more than competent leadership to unite Ukraine and simultaneously save its economy. All parties involved, especially Putin — but also the United States and Ukraine — are going to have to swallow their pride, or we may have a conflict on our hands far larger than the one brooding in Crimea.

Will Cathcart is a former media adviser to the president of the republic of Georgia and former managing editor of the Charleston Mercury newspaper. A contributor to The Daily Beast, he works in media and business development in the Black Sea region.

 An Economic Overview of Ukraine at a Critical Juncture

ukraine-euro-maidainNationalism often has been a force of political deadlock and economic stagnation. In a place like Quebec, it is possible for voters to decide they are wearisome of separatism and it is time their elected officials focus on economic growth and job creation. In Ukraine, things are much more complicated. One third of Ukrainian exports go to Russia, and the country depends on Russian energy to produce most of its goods. Decades of dependence have nurtured a wasteful and tangled economy, and now Russia is doing everything in its power to undermine the new Ukrainian government.

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On Feb. 22, the Euromaidan protests in Ukraine resulted in a parliamentary vote to remove Viktor Yanukovych as President. The vote passed with 73 percent approval of Ukraine’s MPs. The Russian government responded three days later with a show of approximately 150,000 soldiers on Ukraine’s border. Within one week, the Russian military had put into motion a de facto occupation of Crimea that escalated in tone this past Monday, when Russia demanded the surrender of Ukraine’s defense forces in Crimea. The new government in Ukraine has not granted this wish from the Kremlin and it does not appear as if it will. This situation looks to only deteriorate within the coming days.

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