Jack Rasmus, author of Obama’s Economy: Recovery for the Few (Pluto, 2012) and Epic Recession (Pluto, 2010) has written a new article on the Ukraine economic crisis. We’ve reproduced it here in full. Click on the cover images below for details on how to buy Jack’s books – both come with a 10% discount and free UK P&P from the Pluto website.
Today, Sunday March 16, 2014, 83% of the Crimea’s eligible voters have voted by 97% to secede from Ukraine and join Russia. Simultaneously, negotiations between the European Union and IMF with the interim government in the Ukraine, brought to power by a Coup D’etat on February 22, continue toward a conclusion set tentatively for March 21. Extreme political uncertainty thus promises to continue for weeks and perhaps months given these events, while economic conditions consequently continue to deteriorate in the Ukraine from an already extremely precarious state.
Most accounts of the situation in the Ukraine and Crimea have focused to date on political events and conditions. Little has been said in the press about the economic consequences of the Coup and subsequent events, or likely scenarios for the future.
What interests—in the Ukraine and global (i.e. western Europe, USA, Russia)—stand to benefit economically from recent and future events in the Ukraine? Who stands to lose? There’s a well-worn saying, if you want to find out ‘who benefits’, then “follow the money trail”. That trail will also lead to the inverse, ‘Who Pays’.
1. The IMF Deal of March 2014: Who Benefits, Who Pays
While the final version of the latest IMF package for the Ukraine is still in development, past relations and deals between the IMF and Ukraine indicate some likely characteristics of ‘Deal #2’ due on March 21. (Deal #1 was the agreement reached on February 21 between the IMF and the pre-Coup government of President Yanukovich. While that former deal was agreed to on the 21st, it was upset within 12 hours by the violent street actions of proto-fascist forces and the still unidentified sniper killings of more than 100 protestors and police forces in Kiev).
Former agreements and proposals between the IMF and Ukraine since the ‘Orange Revolution’ of 2004 resulted in IMF loans to the Ukraine as follows:
2005 IMF deal terms: $16.6 billion in loans to Ukraine
2010 IMF deal terms: $15.1 billion in loans to Ukraine
December 2013: Ukraine requests another $20 billion from IMF
The Orange Revolution of 2004 resulted in severing much (but not all) of the Ukrainian economy from Russia. That caused significant economic contraction for the Ukrainian economy for several years after. Think of the similar effects of the severance as if the west coast economy of the US—California, Oregon, Washington—were stripped from the USA and joined Canada. While the rest of the world economy, including Russia, enjoyed a moderate real economic recovery from 2004-07, Ukraine did not benefit much due to the economic severance from Russia that followed 2004 and the Orange Revolution. Ukrainian GDP declined or stagnated. In other words, the IMF deal of 2005 did little for the Ukrainian economy.
Then came the global economic collapse of 2008-09, generated largely by US, UK and western banks’ over-speculation in financial securities. The Ukrainian economy and GDP, like many economies, collapsed by more than -15% during those two years. That led to the second IMF deal of 2010. Ukraine believed the second deal would open its exports to western Europe and that would generate recovery. However, the European economy (EU) itself slipped into a second, ‘double dip’ recession in 2011-13, and demand for Ukrainian exports did not follow as anticipated. Ukrainian GDP again stagnated after a short, modest recovery, and then slipped into a recession again in the second half of 2013. In short, the 2010 IMF deal did little for Ukraine as well.
In fact, the 2010 IMF probably slowed economic recovery, as it required a 50% increase in household gas prices and corresponding cuts in subsidies for the same. That significantly reduced aggregate consumption demand by Ukrainian households and slowed the economy. So did corresponding IMF demands for reductions in government spending, which were a precondition for the $15.1 billion 2010 IMF package.
One of the reasons no doubt that the Yanukovich government last December 2013 decided to forego another IMF deal was the reported requirement by the IMF that household subsidies for gas be reduced by 50% more once again. Other onerous IMF requirements included cuts to pensions, government employment, and the privatization (read: let western corporations purchase) of government assets and property. It is therefore likely that the most recent IMF deal currently in negotiation, and due out March 21, 2014, will include once again major reductions in gas subsidies, cuts in pensions, immediate government job cuts, as well as other reductions in social spending programs in the Ukraine.
This possibility does not seem to bother current interim prime minister, Arseny Yatsenyuk, who has publicly commented by the cuts, saying that “we have no other choice but to accept the IMF offer”. In fact, Yatsenyuk and his post-Coup government even stated before negotiations with the IMF began this past week that they would accept whatever offer the IMF and the EU made.
Early leaks of the forthcoming March 21 IMF/EU bailout deal appear that the EU/IMF will provide a $2 billion immediate grant and subsequent $11 billion in loans. The European Investment Bank will provide a couple billion more. For a total package of around $15 billion. But there is no reason to believe that the coming $15 billion will prove any more economically stimulative to the Ukraine than did the 2010 deal of $15.1 billion. The Ukraine, European, and world economy is even weaker today than it was in 2010 when a brief, modest economic recovery globally was in progress. Today the trend is economic stagnation in Europe, significant slowing growth in China, and collapsing emerging markets. Western Europe in general, and Germany in particular, will focus on subsidizing and expanding its own exports first, and will be little interested in encouraging Ukrainian exports to Europe at the expense of its own industries. Thus, as was the case with the post-2010 IMF deal, western Europe in 2014-15 will not represent a major source of export demand to stimulate Ukraine’s economy. More bailouts from the EU/IMF and the USA will quickly be required.
The $15 billion promised represents less than the $20 billion the Ukraine said it needed last December—i.e. before its currency fell 20% and its foreign exchange reserves fell to less than $10 billion. And less than the $35 billion the new interim prime minister, Yatsenyuk, admitted is needed. This writer in an earlier article has forecasted more than $50 billion will be required, given the projected 5%-15% GDP decline expected for the Ukraine over the next two years.
Even if one assumes all the IMF’s $15 billion will actually go into the Ukrainian economy directly the concurrent cuts to gas subsidies, pensions, government jobs and government spending demanded by the IMF/EU deal will almost certainly offset much, if not all, of the IMF/EU $15 billion.
Considering just the question of gas subsidies to households:
The latest Ukrainian GDP (2012) figures show its GDP was equivalent to $176 billion in nominal terms (and $335 billion if adjusted to global prices, or in ‘PPP’, purchasing power parity, terms). Household gas subsidies reportedly amounted to 7.5% of GDP in 2012. That’s about $13 billion in nominal terms. So if the IMF deal pending reportedly requires a cut of gas subsidies of 50%, that’s about -$6.5 billion taken out of the Ukrainian economy based on the 2012 GDP. So the $15 billion IMF results in roughly only half that in terms of real stimulus effects. The $15 billion becomes only a net $8.5 billion to the Ukrainian economy.
Cutting gas subsidies will not only result in removal of income for household spending who lose the subsidies, it will also result in sharp increases in gas prices that will reduce spending by nearly all households.
Then there’s the likely IMF demand for pension cuts. Particularly hard hit by the IMF deal will be elderly women households, who receive the majority of the pensions and which are spent to support children and grandchildren.
The cuts to gas subsidies and pensions, and rising gas prices, will reduce consumption immediately (and therefore GDP immediately) easily by more than $10 billion.
IMF-demanded cuts in other government spending will further offset the nominal IMF/EU $15 billion stimulus. Ukrainian government spending today represents 46% of GDP. The IMF will almost certainly therefore also demand a significant reduction in that 46%. That will mean in the short term even further GDP decline. That leaves a net real economic effect on the Ukrainian economy of well less than $5 billion.
But there may not even be the $5 billion to begin with.
The lion’s share of the $15 billion IMF loan will go to western banks (especially in Austria and Italy who are seriously exposed) to pay principle and interest on previous loans to the IMF and western banks (about $2 billion this year), will be used to finance future exports from the Ukraine (now running a $20 billion a year trade deficit), or will be used by the Ukrainian central bank to prop up the Ukrainian currency (now falling 20%). How much of the $15 billion in the IMF/EU package will be initially diverted to cover bank loan interest, finance trade deficits, and for Ukraine’s central bank efforts to slow the collapse of its currency remains to be seen. It past IMF deals are an indicator, much of that $15 billion will be used as a first priority for the preceding purposes. What’s left, if any, will go directly to the Ukraine economy. What’s left will no doubt amount to far less going into the real economy, than that which will ‘taken out’ of the Ukraine economy as a result of cutting gas subsidies, government spending, and pensions.
Add in rising inflation from ending of gas subsidies and inevitable rising unemployment from cuts in government spending, it is not difficult to estimate that the latest IMF deal will have no more positive impact on the Ukrainian economy than did the prior 2010 and 2005 IMF deals. Indeed, it will most likely have an even greater negative impact on the economy in general, and the average Ukrainian in particular.
To briefly summarize in terms of just the net impacts of the EU/IMF deal, ‘Who Benefits’ include: western European banks who will continue to receive principal and interest payments from the IMF that would had defaulted; global currency speculators who will be able to sell Ukrainian currency to the Ukrainian central bank at a subsidized price, Ukrainian companies that will be given export credits to continue selling to western Europe and the western Europe companies that import the Ukrainian exports at a more attractive price.
Those ‘Who Pay’ and who lose include:majority of Ukrainian households that will have their real income reduced as they pay higher prices for gas, Ukrainian elderly who will have their pensions cut, Ukrainian government workers who will lose their jobs, and all Ukrainian households who will lose other government services.
But all the foregoing only refers to the negative net economic impacts from the pending March 2014 IMF deal. What about the general economy, apart from the IMF deal, which is predicted to contract by 5%-15% over the next two years even assuming no worse development in political instability?
Who gains longer term from the Ukraine being more completely integrated into the western economy? Who loses longer term?
2. Russian Loses from the Crisis
The recent Coup D’etat of February 22 should be viewed as the continuation of the west’s plan to sever the Ukraine economy from Russia, a plan that began in 2004 with the Orange Revolution but was not fully realized in 2004 by the west. The consequence of 2004 represents economically a partial severing of the Russian and Ukrainian economies; the February 22 Coup represents the beginning of the completion of that separation, a plan to totally strip of the Ukrainian economy from the Russian. 2004 and 2014 are thus not mutually exclusive events; they are linked and part of a continuum.
As a result of the 2004 ‘half revolution’, Russia and the European Union settled into a rough equal sharing of Trade with the Ukraine, about a third of Ukrainian trade each. Post-coup that will no doubt shift dramatically, and Russia’s trade balance will decline with the Ukraine as the west’s rises significantly, to well more than half of the Ukraine’s total trade in the future.
In the immediate term, what Russia also stands to lose from the crisis economically is the $1-$2 billion of its previously offered ‘deal’ of February that has been already disbursed to the Ukraine and will not likely be repaid. It also stands to lose $2 billion in unpaid gas bills by the Ukraine.
Longer term, there are the USA-EU economic sanctions that will be forthcoming. How extensive they will prove to be and how focused remains to be determined. However, this writer suspects western sanctions may prove more window dressing than serious, at least initially. The USA wants tough sanctions, since it has little to lose; the Europeans, on the other hand, are not as convinced and prefer token sanctions at first.
The UK in particular wants continued Russian wealthy investors money to flow to the UK to prop up its shaky property boomlet, that artificially underlies its current fragile and weak economic recovery. France has recently gone to the USA, with hat in hand, requesting the USA help its economy. Its president, Hollande, will do whatever Washington wants. Europe likes Russia’s crony capitalists and oligarchs and will therefore be selective in its sanctions, focusing on Russian political figures and staunch Russian-Putin supporters rather than freezing of assets for Oligarchs with investments in the west across the board. Germany is significantly dependent on Russian natural gas, but also has a large trade relationship with Russia, more than $75 billion a year. It will ‘talk tough’ to please the USA, but will not act so until it has assurances from the USA with regard to the latter supplying it with low cost USA natural gas—and that will take months if not years.
Concern about counter-sanctions from Russia targeting the extensive western corporate investments in Russia will also serve to reduce the severity of initial western ‘sanctions’. Capitalists on both sides of the dispute, in Russia and in the west, will pressure their governments to not undertake serious sanctions precipitously. They will want to ‘wait it out’ and hope the crisis blows over in time.
Russian stock market and currency losses will prove relatively short term for Russia. It is difficult to distinguish the declines in stock prices and currency from the political crisis, on the one hand, and the general decline in emerging markets that began last year and is accelerating today.
Russian exports to the west in general, and to the Ukraine in particular, could take a more serious hit in the short run, and potentially in the longer run even more so. But Russia is likely able to offset losses longer term by turning ‘east’ and selling more to China and Asia.
In short, Russia will suffer some economic losses from the Ukrainian crisis but not nearly as severe as threats and claims made by the USA and European media and governments.
3. How the USA Benefits From the Crisis
In this Ukrainian crisis the USA has the least economically to lose in the short run, and the most economically to gain in the longer run.
To begin with, the USA has committed a paltry $1 billion to the Ukrainian government so far. And it is not likely to commit significantly more, given the strategically critical USA mid-term Congressional elections coming up in November. The Neocons and Republicans have maneuvered the Obama administration into a box over the Ukraine crisis. If Obama comes down too strongly in terms of a military response, he loses the support of his liberal wing for the elections which already has turned against him in large part for his pro-corporate and pro-war policies to date. If he doesn’t come down hard with big financial commitments to the Ukraine, and is unwilling to implement significant economic sanctions, then the Republicans and political sociopaths like Senator John McCain in Congress will attack him severely. Based on his past history, Obama will likely try to ‘waffle’ between the two poles of pressure, satisfying neither before the November elections.
What this means is that here is a strong political and economic element in the USA that would like a military confrontation with Russia, or at minimum a major economic break and attempt to totally isolate Russia economically. There has been growing concern within the ranks of this element that western Europe—and especially Germany—have forged too deep and too close economic ties with Russia. They want to break those ties and replace them with greater European dependency on the USA economically.
The long term objective is to have Germany and Europe dependent on US natural gas, at the expense of Russian gas. The USA now has a surplus of natural gas as a result of ‘fracking’ and new exploration. That surplus is reducing the price of natural gas in the US, and therefore profits. It wants to export the gas, which will raise prices and profits in the US while increasing profits from sales abroad. However, current legislation prevents the export of that gas. A crisis in Europe and the latter’s need for natural gas provides the perfect excuse for lifting US gas export controls. Oil and energy companies, facing lower demand for oil, want to boosts profits by increased production of natural gas both domestically and to Europe. But the latter requires a breaking of Europe’s relationship on Russian natural gas.
US agribusiness also stands to gain from a Ukrainian crisis. A separating of Europe from Russia economically means an opportunity for increased US wheat exports to Europe. Not least, the US defense and military hardware industry stands to gain as well. With projected $50 billion potential reduction in US arms production next year, a crisis in Europe will certainly provide a strong argument to restore those projected cuts.
4. The European Economy: Mixed Gains and Losses
The Ukrainian crisis poses a number of potential losses for the European economies. First, should the crisis deepen, it will mean a hike in natural gas and oil prices, food prices, and prices for certain raw materials. It could also mean a reduction in natural gas availability—not just from a Russian reduction, which is less likely, but from destruction of gas pipelines by the proto-fascist Ukrainian nationalists who have already threatened to blow up pipelines from Russia through the Ukraine to western Europe.
Also negative is the consequences for the Euro currency and European stock markets. The Euro has already risen significantly, and is under pressure from global forces to rise further as well. That currency appreciation will make Euro products less competitive and more costly, in addition to the cost of energy. Euro exports, especially Germany’s, to the rest of the world will slow and the Euro economic recovery, barely underway, could stall and even enter another recession, its third since 2008.
Shorter term, Euro stock markets have already begun to decline and will accelerate should the Ukraine crisis worsen politically. Trade with Russia dislocations in the short term will also reduce European economic growth, notwithstanding assurances from the USA it will offset the differences.
In the short term, European banks will benefit from the IMF deal, which is crucial at a time that certain major banking institutions, like the big Italian Unicredit bank, have recently recorded huge losses. European multinational companies will do well, getting to buy up key Ukrainian companies and industries ‘on the cheap’. But in the shorter run, the general crisis in the Ukraine and the latter’s continued steep economic decline in coming months will result in European companies ‘rushing to safe havens’—currencies like the dollar, the Yen, and the Euro—as they move money ‘to the sidelines’ until the crisis abates.
5. What USA-EU Multinational Corporations Want in the Ukraine
It is generally thought that the Ukrainian economy is largely uncompetitive and overly represented by outmoded basic industries like coal mining, steel, metals and other ‘pre-information’ society industries. But that is a gross misrepresentation. The Ukraine offers an especially attractive economic ‘plum’ ripe for picking by western multinational companies. Here’s just some evidence of this latter point:
The Ukrainian economy is heavily invested in nuclear power generation and hydroelectric generation. This offers significant new investment opportunities for western nuclear power construction companies, who are facing growing public opposition to further nuclear plant construction in the west.
The Ukraine is the 6th largest exporter of aircraft military goods, especially transport equipment and has an advanced rocket systems industry. It ranks 4th in the world in terms of IT technology professionals, behind only the USA, India and Russia, and has an exceptionally well educated technical workforce and tech-oriented education system that is growing 20% a year. Its tech market is more than $4 billion a year. 90% of its populace is internet connected and has 125 mobile phones per 100 population. Its shipbuilding industry is one of the most advanced, including natural gas tankers. It has a thriving automobile, truck, and public bus production industry. And it has 30% of the world’s richest soil, producing grains, sugar and vegetable oils at costs well below Europe’s. It also has its own proven, significant, but yet totally undeveloped shale gas reserves.
What the west wants is for its corporations to get its hands on these industries and their products and to integrate them into their multinational corporations’ global expansion and production plans. They will be aided by the IMF as part of its ‘foreign direct investment’ requirements of any EU/IMF bailout deal. As these multinationals ‘invest’ in the Ukraine, western banks will be paid significant fees (and allow Ukrainian banks to share as junior partners in the process). Downsizing and ‘restructuring’ of these Ukrainian industries will follow to integrate them to the global plans of the western multinationals. Ukrainians will lose jobs in these promising sectors, as their wages stagnant, and benefits are cut—as is the case going on globally for workers in all these industries today including the EU and USA.
6. Ukraine Crony Capitalists-USA Capitalists Connections
Little has been written to date about the close connections between the Ukraine’s ‘crony capitalists’ pro-western wing’s connections to western capitalist interests, and USA capitalists in particular.
There are two wings of Ukrainian ‘cronys’—the pro-western and the pro-Russian. Both are composed of opportunist bureaucrats of the Soviet era turned capitalist when the Soviet Union imploded more than 20 years ago. Both wings have been fighting it out openly since the Orange Revolution of 2004, now one in ascendancy, now the other. The pro-western wing is loosely associated with the ‘Fatherland’ Party, once led by Timoshenko and her predecessors; the other by Yanukovich and his predecessors, associated with the ‘Regions’ Party. All the top politicians in both are multi-millionaires and billionaires, having alternating between themselves in raping the Ukraine economically for more than two decades now. The Ukraine in the early 1990s had an economy and standard of living well above the other new ex-Soviet Republics. Today its GDP and average income is less than Belarus and well below Russia’s.
The Yanukovich cronies have been deposed in the recent coup of February 22, or are at least in retreat economically and trying to consolidate their economic forces. Ousted from political control are Yanukovich and ‘Regions’ party billionaire cronies like Rinat Akhmetov, richest man in the Ukraine worth $15 billion, with big holdings in energy and metals; Vadim Novinsky, the third richest; Dymtro Firtash, with billions in chemicals, banking and real estate, who was recently arrested in western Europe; and Sehiy Tihipko, former head of the Ukraine central bank.
The Fatherland party billionaires are now in control, with their very wealthy compatriot, newly minted prime minister, Arseniy Yatsenyuk, running the new government. But behind the scenes lurk the real new crony powerbrokers.
At the top of this list is Victor Pinchuk, the second richest man in the Ukraine with an empire in Media and other business interests. His foundation has been central in funding NGOs (non-government organizations) in the Ukraine, which have been the conduits for western money to help destabilize the Ukraine for years. Pinchuk’s foundation works closely with Yatsenyuk’s foundation. Pinchuk is also close to Wall St. and the Council on Foreign Relations in the USA, the premier foreign policy strategy organization of capitalists in the US. Pinchuk is also on the board of the Petersen Institute in the USA, another key organization influencing US economic and foreign policy. Pinchuk interfaces frequently with the Clinton and Blair Foundations, and is a major participant in the annual gathering of big capitalists at the World Economic Forum in Davos, Switzerland. He is friends with Bill Gates and Warren Buffet.
Below Pinchuk are other key crony-billonaires like Igor Turchynov, interim President and Speaker of the Ukrainian parliament; Stepan Kuban, who heads the new Ukrainian central bank; Sergey Tartuta, billionaire coal and steel boss with extensive holdings in eastern Ukraine, who was just recently appointed the new governor of the Donetsk region in the east after the Yatsenyuk team fired its previous pro-Yanukovich governor. Tartuta has close economic ties with Poland and Hungarian capitalists. Still another is Ihor Kolomysky, similarly appointed in recent weeks as new governor of the Dnepopetrovsk region in the eastern Ukraine.
These billionaires who are either themselves in the Ukrainian parliament, or who were and continue to control blocks of 30-50 votes each, were undoubtedly behind the ‘inside strategy’ of the February 22 Coup. The ‘outside strategy’ was driven by the proto-fascists on the street and in Maidan square. As the latter stepped up the attack outside the Parliament, on the inside the vote to depose Yanukovich took place, as some of his own cronies deserted him to join the ‘Fatherland’ cronies—no doubt convinced in part by threats that arose simultaneously from the west that their assets in Swiss and Luxembourg banks would be frozen. As for the Maidan proto-fascists—the elements of the Svoboda party, the ‘Right Sector’, the UPA, and others—they have been nicely rewarded for their assistance with no fewer than six key positions in the new post-coup government of Yatsenyuk. These include formal positions of police and military power, such as Oleksandr Sych, new vice-premier (second to Yatsenyuk); Andrey Parubiy, National Security Secretary and head of the National Security Council; Dmytro Yarosh, Deputy Secretary for National Security; and Oleh Makhnitsky, Chief Prosecutor; Dimitri Balaatov, Minister of Youth. It is clear the proto-fascists have chosen positions in the government that will allow them to build, arm and organize their street gangs better in the future, now under official government cover.
7. The Ukrainian Economy—The Big Loser
As noted earlier, the Ukrainian people will be the big economic losers from the crisis. And after already having been for more than two decades. The pending third round of IMF austerity will mean that gas subsidies will be reduced, pensions cut, jobs lost, services eliminated, and inflation will rise. The standard of living will fall still further, as predicted depression conditions of 5%-15% drop in GDP in 2014-15 materialize.
As was estimated by Ukraine’s prime minister last December 2013, Ukraine will need a minimum of $17 billion to prevent default on payments to banks for government debt already incurred. Ukraine’s public debt as a percent of GDP was 39% in 2012. Measured in PPP terms, that’s more than $13 billion still owed with interest. Its foreign exchange reserves are almost exhausted and it needs $20 billion a year just to finance its annual current trade deficit of that amount. But if its currency continues to decline, if its exports decline, and if the cost of imports rise—all of which are highly likely—then the IMF’s pending $15 billion will prove grossly insufficient. Ukraine will need $50 billion, and the question remains whether the EU-IMF and/or the USA will be willing to provide such a large sum. The answer to that is highly unlikely. That means the Ukrainian government will agree to whatever terms the IMF-EU offer in exchange for the $15 billion, and then more for follow-on additional loans necessary. It means the government will cut services and privatize public assets, selling them to billionaires and western interests, at ‘firesale prices’ out of desperation. And it means that foreign capitalists will scoop up Ukrainian companies and industries at historic low prices as those companies and industries desperately try to prevent their collapse and bankruptcy in the coming months of economic severe decline in the Ukraine.
Given the strong trends in the global economy in general toward slowdown, and the decline of currencies in emerging markets, it is likely as well that Ukraine’s currency will continue to decline, further exacerbating all the above problems. The recent 20% drop in its value in relation to the dollar will continue, as the Ukraine is swept up in the general emerging markets crisis in addition to its own set of problems.
With the secession of the Crimea the Ukrainian crisis, economically and politically now shifts to a new level. As the economic crisis deepens in the country, demands for secession will grow elsewhere in the eastern Ukraine as well. How the Ukraine government and the USA/EU chooses to address that likelihood will be critical. Further political unrest and uncertainty will mean more economic crisis, as business investment and production stalls and employment and inflation rises.
The response to the growing economic problems by the post-Coup government in Kiev will also prove critical. With its security forces now being led by proto-fascist elements that want above all a military conflict between the EU/USA and Russia, the great danger is that those proto-fascist forces may provoke a military conflict in an attempt to draw in NATO forces. Should that occur, then Ukraine’s economic crisis will be the least of its problems.
Dr. Jack Rasmus
March 16, 2014