A destitute country: Can Ukraine survive its economic crisis?

Ordinary Ukrainians are already feeling the effect of the post-revolution economic downturn.

Loans and bailouts are good as a temporary solution, but the Ukrainian economy, just like the political system, requires a total makeover, writes Oleshko [Reuters]

A short 20-minute drive by car from downtown Kiev stands his luxurious property, which used to be one of the most guarded and secretive places in Ukraine. It is a 150-hectare plot with two big villas, a few garages, golf and tennis courts, lakes, parks, a private zoo and a helipad.

The Maidan’s self-defence teams, who were fighting with the police during the bloody clashes in mid-February, are now guarding the former president’s mansion and keep order, as thousands of ordinary people come to see the embodiment of Viktor Yanukovich’s corruption.

Regular visitors were not allowed inside, yet the guards make an exception for the media. I was shown into a ship-shaped banquet hall on the river bank, where Yanukovich used to welcome his guests. Endless rows of crystal-and-gold glasses, Versace plates, and bottles of alcohol extended beside Faberge eggs and other valuables on the huge dining table.

The cheapest glass cost about 250 Euro, according to invoices and checks the guards found on the “ship”. This is the equivalent of three-months-worth of pension for most Ukrainian retirees. One can only wonder how many years’-worth of pensions the gold-plated toilets, sinks and towel racks cost Ukraine.

The obscene amount of money spent on luxurious decor is a good illustration of the scale of waste and embezzlement, which took place during Yanukovich’s presidency.

Luckily, documents of Yanukovich’s spending excesses have been recovered from the nearby river, where they were – supposedly – thrown in an attempt to destroy them. Activists are reviewing and uploading all these documents, trying to figure out how much exactly Yanukovich stole.

Although currently the media spotlight has completely shifted to Crimea and the Russian troops there, ordinary Ukrainians continue to face the consequences of the country’s economic crisis. This will be among key challenges the new government will have to tackle.

The consequences of mismanagement

The new Ukrainian government was immediately nicknamed “kamikaze team“. It’s hardly an exaggeration. The ministers and their PM, Arseniy Yatsenyuk, have inherited from their predecessors billions in debt and a country on the verge of economic and social collapse.

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“The state treasury is empty, the country is at the edge of bankruptcy,” thus Yatsenyuk summarised [Ua] the current state of Ukraine’s economy. “This economic catastrophe is unprecedented in the history of independent Ukraine.”  

As of December 2013 the external debt of Ukraine skyrocketed to $140bn, which makes more than 77 percent of country’s GDP. About $65bn short-term debt can’t be paid at the moment, while the country’s gold and foreign currency reserves are estimated to have shrunk to $15bn.

The violence and the subsequent threat from Russia stirred up massive withdrawal of savings and deposits. The National Bank of Ukraine says [Ua] that over $3.1bn were withdrawn from banks just for a few days in mid-February.

The Ukrainian national currency hryvna is losing its value every day, which opens the door to massive speculations. The newly appointed minister of economic development, Pavlo Sheremeta, has foreseen that inflation will be 6-8 percent in 2014. But  – in fact – it can get much worse. The stores intend to push up prices of some goods while people’s salaries remain unchanged. This would significantly influence their purchasing capacity.

So far the prices for bread, milk, sugar and other basic goods did not go up. However, stores have started adjusting prices for imported goods, like food and electronics; the prices of bananas and oranges recently increased by 20 percent, for example. Eventually then prices for domestic products will also rise, just like during the crises in 1998 and 2008.

The $2bn debt from Russian gas monopolist Gazprom is yet another urgent problem Ukraine is facing. According to the current agreement, Gazprom is still pumping natural gas for $268.5 per 1,000 cubic meters, but as of April the price will go up to $400, unless Ukraine’s new government manages to get a discount. Chances to get a reduced price are almost non-existent since the Russian government froze contact with their Ukrainian counterparts.

Given Russia’s recent “invasion” of Crimea, the Kremlin and Gazprom are unlikely to consider any discount, and Ukraine’s industries will have to either deal with $400 price or move on with implementing energy saving technologies, as the EU had already suggested.

Pulling Ukraine out of bankruptcy

One of the most pressing problems to be resolved is the currency “hysteria” in Ukraine. The head of the National Bank Stepan Kubiv already introduced daily limits [Ua] for foreign currency withdrawals, as a first attempt to stabilise the situation. This had the effect of pulling down the exchange rates for US dollars and euros, but they remain much higher than before the crisis escalated.

On the other hand, Sheremeta said the government would implement programmes likely to boost business, those, however, are more long-term projects while the cash is badly needed now. The purchase of bonds worth $15bn, which Russia promised in December 2013, will not come through, so Ukraine will be looking West ward for help.

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The government is now preparing for a new round of talks with the International Monetary Fund (IMF) to request a $15bn loan. The EU  consider giving Ukraine $1bn in financial assistance and the United States might give as much in loan guarantees.

However, all these loans come with strings attached. They will probably require the government to apply a number of unpopular steps, such as reduction of social spendings, subsidy cuts, increasing prices for natural gas for households, as well as revising the 2014 state budget.

People will not be happy with social cuts and growing bills for natural gas. They will definitely make their frustration known during the upcoming election, but the government is ready to take a chance.

“The government will apply very unpopular steps”, prime minister Yatsenyuk said [Ua]. “We are not expecting IMF to mitigate the conditions for the loan. We will talk to IMF but they are not likely to change the conditions”.

The West is not Ukraine’s only potential source of funding. The local oligarchs are being actively involved in rebuilding of the country’s wrecked economy on regional level. Thus, metallurgical tycoon Sergiy Taruta has been appointed a governor [Ua] of the industrial Donetsk region, and the owner of one of Ukraine’s biggest banks Privat Bank, Igor Kolomoysky, is now a governor of his home town Dnipropetrovsk region.

The government is also looking for shortcuts to legally confiscate and repatriate funds embezzled by Yanukovich and his circle. Analyst and former adviser to the Ukrainian government, Anders Aslund estimated that Yanukovich and his family accumulated $12bn in assets. In fact, the hunt for Yanukovich’s treasures has already begun. On February 28 Austrian authorities froze bank accounts of Yanukovich and his 17 associates, including his older son Oleksandr. Switzerland announced that it will take similar measures.

However, frozen assets in western banks are difficult to repatriate. Even when returned, the funds might be enough to patch only a few gaps here and there in Ukraine’s budget, but they won’t make any significant difference. People, who expect immediate economic growth and improvement of living conditions, will be deeply disappointed. Ukraine’s economic recovery will be long and painful.

Loans and bailouts are good as a temporary solution, but the Ukrainian economy, just like the political system, requires a total makeover. This includes modernisation of industries, a shift to alternative energy, revitalisation of the agricultural sector, and most of all, the creation of corruption-free environment that will give both domestic and international business a chance to develop. 

Olesia Oleshko is a Ukrainian journalist. She holds an MA in Journalism from Indiana University (USA).