March 27, 2014
Ukraine just can’t seem to catch a break these days. With the annexation of Crimea by it’s self-proclaimed motherland and a potential military conflict looming on the horizon, the government appears wholly unequipped to deal with the economic calamity that now faces Kiev. All heads have turned towards the IMF as it comes to lift Ukraine out of the doldrums.
Why is Ukraine’s economy such a mess? Many answers can be found by looking into the country’s troubled past. The Ukrainian economy emerged as one of the weakest in the region following the collapse of the Iron Curtain. It has been mired with inefficiencies, complicated by a lack of structural reforms and plagued by rampant corruption.
In the early 2000’s, prospects began to look up, buoyed by high commodity prices that helped Ukraine’s export-driven economy. The country missed its opportunity to reform, though, leaving the highly subsidised energy sector under the control of state giant Naftogaz, which charged Ukrainian citizens only one-quarter of the cost of importing gas.
This lapse came back to bite during the global financial crisis that hit Ukraine like a high-speed train. In 2009 alone, Ukraine’s GDP fell by 15%, a devastating blow to a country struggling to recover from the disastrous 90s.
No way out?
The recent political crisis has only made matters worse. Following Yanukovych’s decision not to sign the EU Association Agreement, opposition leaders took to the streets and managed to oust him after much internal wrangling. The uprisings placed the country in a political tug-of-war between Russia and the West with neither showing signs of avail. But regardless of which forces prevail in Ukraine, someone will inherit the country’s shambolic financial situation.
Luckily, some aid is already on the way for crisis-ridden Ukraine. On March 5, the EU provided a $15 billion support package, although this is contingent on Kiev signing a deal with the IMF, which will likely inflict a hefty amount of economic pain on the country. The US has also generously given Ukraine $1 billion in cash, upfront and with no strings attached. Unfortunately, this is not enough. The withering Ukrainian economy requires some $35 billion to pay off its outstanding debt, which will mature in the next two years.
Is a new IMF loan really the best way forward for Kiev? The IMF package, agreed upon on March 27, will provide Ukraine’s economy with $14 to $18 billion, but will be subject to Ukraine undertaking some initial measures of reform. In particular, these will entail removing gas subsidies and implementing the flexible exchange rate regime, moves that will be painful and wildly unpopular with already disgruntled Ukrainian citizens. In 2010, the fund had agreed to a $15 billion loan, which it subsequently froze after Kiev refused to touch the delicate issue of gas subsidies for consumers. Is there any reason the situation will unfold differently this time around?
Indeed, IMF conditionality can inflict much damage on an already fragile country’s economy.
A case in point, Hungary was on the brink of insolvency during the financial crisis’ first wave in 2008 and was forced to sign a deal with the IMF. When, in July 2013, relations between the IMF and Viktor Orbán hit an all time low due to the unpopularity of IMF conditions such as austerity and budget cuts, Hungary demanded that the IMF close its office in Budapest and then it paid back the multi-billion dollar loan.
Today, Hungary is enjoying boosted economic performance with the Fidesz coalition denouncing the policies of European austerity and instead focusing on increasing employment figures as well as providing tax cuts for its citizens. The statistics speak for themselves: unemployment in the country stands at 8.9%, the lowest point since 2009, the Hungarian economy is set to grow 2.1%, demand has risen and inflation is the lowest its been in 40 years.
Other countries, like Greece and Portugal, have resorted to the IMF in the past and suffered from endless spirals of debt and recession, raising further doubts about the fund’s effectiveness in tackling grave economic crises.
The painful reality.
But is there another choice for Ukraine? While IMF conditionality will likely drive the country into further economic distress, the EU offers a compelling alternative. On March 11, the European Commission came to the decision to offer Ukraine over 500 million euros in trade benefits to prop up the country’s teetering economy. The decision abolishes all duties placed on agricultural goods, industrial products, processed foods and textiles. Such a move will save Ukrainian businesses hundreds of millions, but unfortunately this is not enough and fails to tackle the country’s fundamental problem, endemic corruption.
All players currently trying to rescue Kiev from economic oblivion would be wise to take note of Ukraine’s underlying black market issues. One must not forget that Ukraine’s inefficient economy stems from its pervasive corruption and not from the country’s inability to compete on the global stage.
While Western leaders have been quick to encourage Ukraine in its move away from Russia’s political grasp, it remains to be seen if they are willing to take the steps necessary to address the country’s underlying economic problems.
This answer remains to be seen but, as the situation stands now, it does not appear that any power is willing to jump in and ‘take responsibility for Ukraine’. Even with the IMF loan, Kiev will soon feel the burn of its own transgressions.