Vultures circle Ukraine as economy collapses
The formation of an acceptable new government in Ukraine reflecting the multi-dimensional aspirations of the popular uprising that saw off the Yanukovych kleptocracy is proving difficult enough. Dealing with its collapsing economy is an even bigger problem.
Ukraine’s economy is relatively small – at around $7,000, its annual gross domestic product for each of its 45 million people is around one fifth of the UK’s – but the country’s potential is being sized up by external forces.
All the actors on the global political and economic stage – including the International Monetary Fund, the European Union, Russia, China and not least the global corporations are eying up the prospects for collapse. They are weighing the advantages that can be gained from an intervention and studying the likely impact on themselves.
In the 20 years or so following the break up of the Soviet Union, most of the former state industries were “privatised”, or rather handed over to oligarchs, including Yanukovych’s family members. After years of their self-enrichment, and recent economic decline intensified by the effects of the global crash, the country is now dangerously close to bankrupt.
World prices for steel, Ukraine’s biggest export, have fallen by half since the Chinese economy began to slow in 2011. At the same time the country’s cash balance has been declining and its external debt – including overdue payments due to the IMF and Russia’s Gazprom – soaring.
As is well-known, due to its geographical location Ukraine plays host to a network of pipelines that carry gas and oil from Russia, and a number of the other former Soviet states to Western Europe. But the global oil corporations are eager for action.
Shell and Chevron signed agreements last year to drill unexplored shale formations in Ukraine, offering the chance to upgrade the country’s energy infrastructure and boost domestic production, thus reducing the amount of gas imported from Russia. Before the crisis erupted last year, Exxon, the largest US oil company, was also close to signing a pact to explore the Black Sea.
The country is the fourth largest of the world’s arms exporters, and has become increasingly dependent on sales to China’s rapid build-up of military equipment. Last year, Ukraine agreed to lease 5% of its extremely fertile, but relatively undeveloped land to China to grow crops and raise pigs for sale to Chinese state-owned companies. As part of that deal China promised to build highways and bridges in the country.
A new report from the Institute of International Finance sets the immediate context. It says that budget financing “has become virtually unavailable”. The acting president, it noted, says that Ukraine’s pension fund does not have enough money to meet pension obligations. The report warns:
On the other hand, tax revenues appear to have collapsed along with economic activity during the weeks of the political standoff. With no access to foreign markets, and domestic banks under intense liquidity pressure, the central bank has become the sole financier of the government.
Estimates of Ukraine’s’ need for emergency funding vary from $12- $30 billion this year. On the world scale these are relatively small sums – the bailout for Greece amounts to 237 billion euros – and small change in relation to the trillions pumped into the financial system in the wake of the 2007-8 crash.
Some have even suggested that the emerging Ukrainian government should approach former citizen Jan Koum for help. He has just sold his instant mobile messaging application WhatsApp to Facebook for $19bn. More seriously, the IMF will only lend to a stable government, one that is prepared to impose a severe programme of austerity on its restive population.
That is certain to lead to further social upheaval. Ukraine’s struggle for political and economic self-determination has only just begun.
26 February 2014