(The following is an excerpt from the just published in depth article, ‘Who Benefits from the Ukraine Economic Crisis’. For the full 5k Word Article, go to the website, http://www.kyklosproductions.com/articles.html, for a discussion of the outcomes of the crisis for Russia, Europe, and US interests, as well as the Ukraine)
“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 -$7.5 billion taken out of the Ukrainian economy. So the $15 billion IMF results in only half that in terms of real stimulus effects. The $15 billion becomes only a net $7.5 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?
(For parts 2 through 7 of this article, go to the website, http://www.kyklosproductions.com/articles.html.)