Ukraine on the brink of default – a shock doctrine in the making

EU and IMF loans will hurt ordinary Ukrainians, argues Kate Deer.

Media coverage of the Crimea crisis has largely focused on the military threat facing the Ukraine. Even now, after Crimea has voted to remain a part of Russia, the western powers are still reluctant to back large scale military intervention, meaning economic threats are now a key aspect in the battle to control the outcome of the revolt.

In the middle of this battle between geopolitical superpowers are the interests of ordinary Ukrainians, which are unlikely to be served by either Russia or the West.

It is worth returning to the trigger of the protests – Yanukovych’s plan to sign a trade agreement with Russia and subsequent cancellation of EU talks. Historically, the Ukraine has been economically dependent on Russia. Despite its independence from Russia in 1991, Ukrainian politics have continued to be heavily dominated by Russia. The protests in 2004, dubbed the “Orange revolution” represented a stand-off between the pro-Russian prime minister Yanukovych and pro-European candidate Viktor Yushchenko.

Gas politics

In 2005, Yushchenko came to power in the midst of street protests and a heavily contested election. Relations with Russia subsequently deteriorated, as was indicated in the battle over gas prices, which culminated in Russia’s state-owned company Gazprom repeatedly shutting down gas supplies to the Ukraine. The vast majority of Ukrainian gas is imported from Gazprom, which offers reduced prices in exchange for a political affiliation with Russia. Gas is a key factor in the Ukrainian economy. As of 2012, gas subsidies topped 7.5 percent of the country’s GDP. While these subsidies are a lifeline for many Ukrainians, they also make the country heavily dependent on Russia, since a rise in gas prices could have devastating economic consequences.

It was anger over this continuing influence by Russia that drove the protestors onto the streets in November 2013. Meanwhile, Yanukovych faced severe pressure to renegotiate the sovereign debt and protect the value of the hryvnia, (the Ukrainian currency). In order to finance gas prices and repay debt, the Ukrainian central bank kept the value of the currency at an artificially high level. In November 2013 alone, the Central Bank spent $800 million stabilising the value of the hryvnia, depleting the country’s currency reserves and driving up borrowing costs. As of December 2013, the government faced interest payments of more than eight percent if they wanted to borrow on international markets. The government of Viktor Yanukovych, was caught between a rock and a hard place.

Russian dolls

By the end of 2013, Ukraine had conducted negotiations with the EU for a Ukraine-EU Association Agreement, yet at that point Brussels only offered up to $383 million in bailout money, while Ukraine faced a funding gap of a massive $17 billion. In addition to that, Yankovych faced both political pressure from the EU over his repression of opponents, and economic pressure from Russia. Russia’s carrot and stick approach saw them threatening a rise in gas prices and economic sanctions if Ukraine signed the agreement, while also offering a $15 billion bailout if they chose to ally with Russia. Unsurprisingly, Yanukovych choose the latter and cancelled talks with the EU in December 2013.

Undoubtedly, the protestors had good reasons to question Yanukovych’s alliance with Russia, which was likely to increase economic dependency and political repression in the Ukraine. However, with Yanukovych being successfully overthrown and replaced by a technocratic, pro-western government, it becomes increasingly clear that the western alternatives to the Yanukovych regime will further aggravate living standards for ordinary Ukrainians.

Musical chairs

In a discrete game of musical chairs, Arseniy Yatsenyuk, former Chief of the Ukrainian Central Bank and economics minister for Crimea, was nominated prime minister by the Ukrainian parliament. Yatsenyuk came to power with the backing of Ukrainian oligarch Rinat Akhmetov, one of the wealthiest men in the Ukraine with an estimated net wealth of more than $15 billion. Ironically, Akhmetov had established himself politically through an alliance with the former prime minister Yanukovych, but in the context of mass protests and threats of a civil war, he did not hesitate to turn around and ally with the opposition. The newly appointed prime minister Yatsenyuk has already demonstrated its willingness to crack down on the revolution. When appointed, he tellingly described the task facing him as “political suicide”

Yatsenyuk is now preparing an “emergency plan” in collaboration with the EU and IMF in order to borrow $2 billion at the end of next month and at least another $9 billion at the end of this year to prevent a default. This time the IMF was quick to respond, a “fact finding mission” visited the country between 4-14th of March to provide recommendations for economic restructuring.

The consequences for ordinary Ukrainians will be devastating. The fact finding mission is likely to recommend a devaluation of the Ukrainian currency in order to reduce exports and make the country more competitive. The downside of that is that real wages will be slashed, which will further deteriorate living conditions for Ukrainians. Inflation will be exacerbated by the IMF’s intention to push for a freeze in minimum wage, (which was set at around $134 per month in 2013). Russia is likely to continue exercising pressure on energy prices, but the IMF will recommend cutting energy subsidies sharply, thereby placing the burden for rising energy prices on Ukrainian citizens. If Ukraine follows this path, the real suffering for Ukrainian people is yet to come. As Michael Roberts highlighted, an IMF bailout would double the Ukrainian sovereign debt and create a vicious circle of economic dependence.

Is there really no alternative? Ukraine is not the first country to face an IMF shock doctrine. On the contrary, the list of economies devastated by the IMF spreads right across the world, from Latin America to Africa, Russia and most recently much of Europe. Important lessons can be learned from previous defaults. Rather than affiliating with either Russian or western interests, a government in the interest of ordinary Ukrainians should refuse to repay the debt, which should be considered odious, just as Rafael Correa refused to repay the Ecuadorian debt. It should seize the wealth of oligarchs such as Akhmetov and invest the money in social services, pensions and decent wages. The Ukrainian people have already managed to overthrow Yanukovych, but they now face the challenge of fighting for genuine independence.