Putin´s statement a strong indicator that Putin and Russia are involved in the Ukrainian superficially domestic power struggle between Yanukovych and Tymoshenko.
the Tymoshenko verdict: Ukraine’s economy is unsustainable
By Anders Åslund, Svensk Tidskrift | October 21,
Stock Exchange was the worst in the world this year, with a nosedive, and the
stock market is in fact dead. The Ukrainian government has a number of
unpleasant options, corruption has alienated investors and funding sources,
writes Anders Åslund.
Since the economic crisis in 2008-09, the citizens of Ukraine expressed concern
for a second wave of problems. I argued that it did not have to happen and was
unlikely. To my surprise, the current regime had not counteracted potential
causalities, but rather brought about new inceptives for a rerun.
In the past this has been the main reason the exchange rate was linked to the
dollar. It remains so, despite the fact that almost all economists believe,
that such a large country which is dependent on exports of few commodities,
should allow the exchange rate to float. The dollar link undermines the current
Another problem in 2008 was the exposure to the global financial markets that
occurred when the foreign public debt reached over one hundred billion dollars.
Today, it has increased further, to 130 billion U.S. dollars, from 57 per cent
of GDP to 79, counting together the private and public debt. It has contributed
to an increased sensitivity to a sudden stop of international liquidity flow.
The national debt was not a major headache in 2008, when it amounted to only 20
percent of GDP, but since then the International Monetary Fund contributed a
total of $ 14 billion in some years, to 39 percent of GDP. Repayment will begin
in August 2012, but the next state budget indicates that there is a need for
new loans of approximately $ 11 billion in addition to payments of around
seven. Finding those over 18 billion dollars can be difficult at the moment,
especially since the government anticipated that some would come from Eurobonds
– a market that has just been closed for Ukraine.
One factor contributing to the new crisis was that 17 Western banks in 2008
accounted for 40 percent of total banking assets in Ukraine and they continued
the funding through the crisis. Today, the proportion has decreased to 27
percent and several of the banks have given up. The only clear progress in the
economy is that inflation is much lower, as is the foreign exchange deficit.
But while the IMF rushed to help the country in both 2008 and 2010, the Fund
has now backed out because of the government’s actions. Of four announced
decisions to make new contributions, the regime has refused to raise gas prices
for households and businesses. As a result, the total subsidies of Russian
natural gas is over four percent of GDP. Instead of supporting the poor they
This means that the budget deficit will increase more than what is acceptable
according to the IMF, which consequently will not put up with additional
funding. And without help from the IMF, the World Bank won´t help either. The
government´s repeated assurances of the contrary, has not strengthened its
For various reasons, also the relationship with Russia has deteriorated.
Despite repeated assertions that Russia will cut gas prices, there is nothing
to suggest this, or that Russian oil and gas will transit through Ukraine to
come. Contrary to earlier expansion in the country by Russian banks, at least one
of them has started a collection recovery.
Last summer, President Yanukovych claimed that progress had been made in the
relations with China, which would mean that a loan of four billion dollars were
on the way, something that still awaits realization and is doubted by many.
Sure, the EU set up an emergency loan that has been granted to Iceland and
Serbia, but after the extensive European protests against the unjust conviction
of former Prime Minister Tymoshenko, the probability of this seems to have decreased.
A remaining possibility is privatization. Ukraine has prepared a substantial
But it is bound to benefit a handful of supporters of the regime, which already
owns many large companies. At the moment they are raising their intermediary
prices, reducing maintenance and lowering stock prices, Ukraine´s stock exchange
market has had the worst development in the world this year with a nosedive,
and the stock market is practically dead. The owners lift their untaxed profits
in Cyprus, which is the largest ”foreign” investor in the country.
The current seize upon assets is similar to those in Russia in 1996.
Few foreign investors want to invest in such a market. The European Business
Association has recently registered an unexpected decline in its investment
index for the country, mainly due to the increased extortion, corruption,
bureaucracy and taxation. The new Tax Code has been designed to hit small
contractors and at least a million legitimate small businesses have been forced
In this way, the regime has managed to alienate all possible funding sources.
The decline in international foreign exchange reserves is developing as a
natural consequence from ordinary citizens switching their savings into foreign
currency. The lack of confidence in government policy makes a devaluation of
the currency inevitable. It is no solution that tougher regulations now are in
A devaluation would mean deeper problems for both the public and private debt
management. A new round of fallen banks and corporate bankruptcies would
follow. The regime has a number of unpleasant alternatives: one is real cuts in
government spending, another a price increase for the gas during winter to
appease the IMF. A third would be to sell the
”family jewels” in the form of attractive state assets like gas
pipelines, and storage to Russian investors, because no one else is willing to
take the ground risk. Finally there remains state bankruptcy, extensive
reserves are a lifeline, but no solution.
Anders Åslund, eastern expert at the Peterson Institute for International
Economics in Washington, DC, is a member of the think tank Frivärlds Advisory
Board. He has among other books written ”How
Ukraine Became a Market Economy and Democracy.” (2009) The article is
originally published in the Kiev Post (14/10).
Swedish into English; Roger Klang, with a little help from Google translate.
ministry sees the ruled sentence against Tymoshenko as
”anti-Russian”. Putin “doesn´t understand it”. I
figured Putin´s recent statement out immediately, about the ruling, when I read
this article. Putin wants to raise gas prices but he cannot say it, he need to
pretend that Russian gas prices follow the market prices. Like the article says
various reasons, also the relationship with Russia has deteriorated. Despite
repeated assertions that Russia will cut gas prices, there is nothing to
suggest this, or that Russian oil and gas will transit through Ukraine to come…”
By stating that which
Putin did, Yanukovych can go scot free when Putin raises the gas price, since a
non-statement from Putin could imply that Yanukovych himself would make bad gas
deals in the future. Now it seems that Yanukovych will just be a victim of
raised gas prices on the free market. The statement is also a strong indicator
that Putin and Russia are involved in the Ukrainian superficially domestic
power struggle between Yanukovych and Tymoshenko. So, as I feared it would be,
Putin´s statement was just maskirovka on the highest level. But you got to
respect Putin´s statesmanship abilities!
Roger Klang, Lund
Scaniae Sweden, 10/22/2011