Ukraine: The Greece of the East?

by Tomasz Konicz (Translated from the original German by Joe Keady)


If we take International Monetary Fund (IMF) officials at their word, Ukrainian citizens will have to start drilling new holes in their belts so they can buckle them even tighter than they would otherwise have needed to. After a visit to Ukraine in early March, Reza Moghadam, director of the European Department of the IMF, said that he was “pleasantly surprised” by the new rulers’ zeal for reform. The current authorities in Kiev, he said, are fiercely determined to take on “an economic reform agenda.”

Members of the transitional government clarified what this meant shortly after the revolution in Kiev. In late February, Prime Minister Arseniy Yatsenyuk announced “unpopular steps” that would lead Ukraine “out of its financial crisis.” In more concrete terms, Yatsenyuk was talking about cutting the national budget by laying off and reducing the wages of public servants.

In early March, shortly before Moghadam’s visit to Kiev, Yatsenyuk made himself even clearer by announcing the transitional government’s total subordination to the Monetary Fund’s dictates. According to a report in the Financial Times (FT), a few hours before the Monetary Fund’s delegation arrived, he declared that his administration would “meet all IMF conditions.” According to Yatsenyuk, there is a simple reason for this servile approach: “We don’t have any other options.” By saying so, the Prime Minister articulated the weakened negotiating position of a new transitional government that can no longer maneuver between East and West but rather has to meet the West’s demands in order to survive politically.

According to the FT, the Ukrainian leader made these comments before a “meeting of European business people in Kiev” – people who were obviously looking to explore Ukrainian investment and buyout opportunities firsthand. Yatsenyuk was apparently determined not to disappoint his illustrious audience. The Prime Minister affirmed that he would consider “privatizing parts of Ukraine’s crude oil and gas sectors.” The FT noted that these are, after all, “Ukraine’s strategic assets.”

According to a Voice of Russia report, the Crimean transitional government wants to make the initial details of this wave of privatization known. The report says that the Ukrainian gas pipeline system will be handed over to the US company Chevron while German groups are set to buy eastern Ukrainian steel mills. Additionally, a ban on sales of agricultural production land to foreigners has been lifted, enabling Western investors to gain quick access to the best “black earth” soil in the world. The Ukrainian transitional government has not yet responded to these (unproven) claims by the Crimean leadership.

Fixed exchange rate with dollar to be eliminated

Along with clear-cutting public servants and selling off state-owned “strategic assets” in the energy sector, the IMF is insisting that Ukraine eliminate its currency’s fixed exchange rate with the US dollar. A resulting currency decline would amount to an expropriation of savings because inflation would probably swell quickly. Moreover, that would make it much cheaper for Western capital to take over Ukrainian public enterprises, agricultural areas, real estate, and businesses. The further the Ukrainian currency falls against the euro, the less it will cost German and European groups to buy in due to the fact that, in general, real estate and land prices always lag a bit behind a high inflation rate.

In light of its 7.2% budget deficit (2012), Ukraine’s austerity program will be harsh due to the fact that demand-oriented policies (like stimulus packages) do not meet the Monetary Fund’s conditions. The poorest members of the population will be hit hardest by the elimination of natural gas subsidies, which is already taken as a given. Energy subsidies in Ukraine are the exact inverse of those in Germany: While businesses have to pay full price for gas, private homes only pay 16% of the actual cost. Ultimately, either Ukrainian retirees will have to accept cuts in their already meager pensions or the populace will have to prepare for a higher retirement age.

Neoliberal shock therapy

The precipitous announcement that the Ukraine-EU Association Agreement has been signed will make it clear that social clear-cutting and sell-offs are going to occur at a tempo reminiscent of neoliberal shock therapy. It will be signed in the next few weeks. [Note: The Agreement was signed on March 21, 2014. -ed.]

That is apparently what German Chancellor Angela Merkel and Polish Prime Minister Donald Tusk decided in Warsaw, which, incidentally, casts a peculiar light on decision-making processes in the “European Union.” As a “good will” gesture, Brussels has already suspended its tariffs on trade with Ukraine.

With the hasty elimination of tariffs and the introduction of free trade, “many sectors of the Ukrainian economy will probably come under extreme pressure,” in the AP news agency’s cautious words. In fact, many Ukrainian businesses simply will not be able to stand up to European competition; they will either go bankrupt or be taken over by their Western competitors at ridiculously low prices. Eastern Ukraine would be faced with de-industrialization and rapidly growing unemployment only to be subsequently turned into an elongated workbench for Western corporations. Agriculture will probably undergo similar processes.

If this austerity policy is in fact carried out with the anticipated brutality, it will give more fuel to growing separatist tendencies in eastern Ukraine and make the impending breakup of the crisis-ridden country even more likely. The impoverished population of the de-industrialized western Ukraine doesn’t have much to lose, but in the east, major clear-cutting threatens to bring with it massive waves of layoffs, likely triggering tremendous misery.

Given that none of the current cabinet members harbor any long-term political ambitions and that they will therefore simply be tossed into the political dustbin after the May elections, it seems probable that the transitional government will push through as much social cruelty and course shifting as possible before the voting starts. Shortly after taking office, Yatsenyuk joked that, “I will probably be the least popular prime minister in history.” In addition to that, the next administration will probably be stuck with a fait accompli in many policy areas as a result.

Kill-or-cure treatments expected in Eastern and Southern Europe

The example of the Central-Eastern European EU countries may provide a preview of what is in store for Ukrainian industry. Ukraine will no longer have any domestic industrial base to speak of. Instead, it will serve as a low-wage site for Western – primarily German – corporations (Deutsch-Mittelost). Poland, which is considered the model student of Eastern Europe’s transitioning countries, is still reporting a 14% unemployment rate.

Far-reaching budget cuts, burdening the poor, hasty privatization – this disastrous kill-or-cure treatment “sounds familiar,” as the Wall Street Journal put it. “Ignore … the Cold War rhetoric,” the situation in Ukraine recalls “Greece in March 2010 or Cyprus in early 2013,” as the Journal’s blog post says. Any “aid” would be subject to the “dreaded conditionality” that links credit with “budget cuts and structural reforms.”

The results of this kill-or-cure method have been famously disastrous in Southern Europe. In fact, the parallels between Ukraine and Southern Europe are inescapable now that even German Finance Minister Wolfgang Schäuble has come out with the usual demands for harsh austerity measures. During a press conference on February 28, Finance Ministry spokesman Hans Joachim Narzynski said, “The necessary reforms, which Ukraine must initiate, are always a requirement for aid. The IMF supports that conditionality as a requirement for aid. The German government’s position is that the IMF has to have a strong coordinating role in the process.”

Every ostensibly generous funding promise that has been made to Ukraine to date has been linked to this one requirement: arrangement of a structural adjustment program with the IMF. That applies, for example, to the € 11 billion in credit offered by the European Commission, which, according to Reuters, “perhaps by coincidence matched the amount Russia had offered Ukraine before president Viktor Yanukovych’s government collapsed.”
That “aid” would “require widespread reforms by the new Ukrainian government and the signing of a deal between Ukraine and the International Monetary Fund.” The World Bank has followed a similar line, promising $ 3 billion in exchange for reforms.”

But Kiev has a longer history with the IMF in this area – a history marked by tensions and breakdowns. Following the onset of the global economic crisis, Ukraine, where a debt bubble fueled by European banks burst in 2008, had to fall back on IMF credits totaling $ 16.4 billion to keep the debt crisis from escalating. The program was frozen again after a year because Kiev, led at the time by Yulia Tymoshenko’s government, refused to meet the IMF’s requirements.

Then as now, at issue were the elimination of gas subsidies and currency floating. A second credit program, negotiated in 2010 between Yanukovych and the IMF, followed a similar course. Now the IMF seems to have reached its goal on its third try.

href=“>Telepolis, March 14, 2014