Ukraine: As the rear-echelon economy crumbles

(Baonghean) - On Friday, March 13th, negotiations to restructure Ukraine's public debt began with the aim of reducing the debt of up to US$15 billion, accounting for approximately one-third of the country's financial needs from now until 2019.

Prime Minister Arseny Yatseniuk (left) and Ukrainian Finance Minister Natalia Yaresko (right).

This event occurred less than 48 hours after the International Monetary Fund (IMF) approved a $17.5 billion aid program. The program, which will last for four years, is expected to help Ukraine emerge from its severe recession. Two years of recession, coupled with an industrial base destroyed by a protracted civil war that has claimed over 6,000 lives in the east of the country, have left the Ukrainian currency depreciating by 70% against the US dollar in the past year. Inflation is nearing 35%; public debt is massive and has doubled in just one year; foreign exchange reserves are even lower than a month's import value. The Ukrainian economy is on the brink of collapse, and its people are struggling with a mountain of hardship and shortages.

In this situation, the Ukrainian government advocated relying on international aid to revive its domestic economy, but every form of assistance comes at a price. The Ukrainian government had to implement measures that directly exacerbated poverty, at least initially. The IMF issued a warning: the first tranche of $5 billion in aid would be injected into Ukraine no later than Friday, March 13th, but only on the condition that the country implement more drastic reforms to clean up public accounts, reduce corruption, or restructure the banking sector. Since the overthrow of former President Viktor Yanukovych more than a year ago, voting on or implementing these reforms has been delayed until now.

To demonstrate its commitment to change and cooperation, in early March the Ukrainian government announced a threefold increase in the price of household gas and a 70% increase in heating costs. Simultaneously, the state-owned energy company Naftogaz is also expected to be privatized – these drastic measures show that the energy sector will be at the forefront of reform initiatives. Furthermore, pensions have been reduced: specifically, those still of working age who would have received over 1,423 hryvnia per month (53 euros per month) under the old regulations will now only receive 85% of that amount.

These measures, while appealing to foreign "benefactors," come at a significant social cost domestically. Last week, President Petro Poroshenko called on the entire nation to "face the truth." "As long as the civil war continues, there will be no investment in Ukraine," he warned. The Governor of the State Bank, Valeria Gontavera, stated: "Our country has not experienced such a difficult period since World War II." Minister of Economy Aivaras Abromavicius, however, expressed concern about the negative consequences of these drastic measures: "With the current exchange rate, salaries are falling below $200 a month. This opens the door to corruption. We must quickly vote on an administrative reform that allows for drastic reductions in staff and increases in salaries for the remaining positions in the system."

When discussing Ukraine today, people often think of the political and security crisis in the eastern part of the country and its troubled relationship with Russia and Europe. However, a source from Kyiv – a high-ranking security official – admitted a few weeks ago that the instability caused by the economic crisis is far more worrying for Ukraine. To illustrate the danger posed by rising poverty, he used himself as an example: along with wage cuts and the depreciation of the Ukrainian currency, his income decreased from $2,500 to $2,000 in a year. Meanwhile, in Kyiv, gasoline prices have increased 2.5 times in 14 months, inflation shows no sign of slowing down and reached 34.5% last February.

In recent weeks, the hryvnia has continued to depreciate by 40%. This trend accelerated on February 5th when the Central Bank of Ukraine requested the IMF to stop intervening to protect the currency. During the week of March 3rd to 9th, the official exchange rate reached 30 hryvnia to 1 US dollar. This rate was 16.32 at the beginning of 2015 and 8 at the beginning of 2014, completely depleting the purchasing power of the Ukrainian people.

In contrast to the reaction of the Ukrainian people, the government's efforts are clearly being positively recognized by international donors. IMF Managing Director Christine Lagarde affirmed: "The Kiev authorities are still demonstrating their determination to pursue radical reforms in an extremely difficult context." Perhaps that is Ukraine's only option at this time, and Kiev will not give up, especially since the Central Bank announced on Thursday, March 12th, that it is ready to strengthen capital controls if the exchange rate continues to decline. It seems that declaring war on Russia is never easy, no matter on which front. While the Russian economy has temporarily emerged from the depths of the crisis and is holding on quite resiliently, Ukraine's situation is far more critical. This adds another burden to Europe, which is already struggling with Greece's massive debt. This is further evidence of the "cause and effect" relationship between security, politics, and economics.

Thuc Anh

(According to Le Monde)