Note: Due to rapidly developing events on the ground in Ukraine, some of the information in this article may be outdated at time of publication.
Kyiv is on fire. Violence between Ukraine’s internal security and protestors has left one hundred people dead and over one thousand injured. How far Ukraine will tumble down the rabbit hole is anyone’s guess. Already there is a chorus warning of civil war, its break up, and regional separatism. Viktor Yanukovych,
in the meantime, had been holding firm, but signs suggest he’s ready to reach a compromise that would end the immediate crisis. In an address to the nation, the Ukrainian president blamed “radical elements who seek bloodshed and conflict” for the violence and charged the opposition with staging a coup. “Without any mandate from the people, illegally and in breach of the constitution of Ukraine, these politicians - if I may use that term - have resorted to pogroms, arson and murder to try to seize power,” he declared. Amid all of this smoke, fire, and vitriol is Ukraine’s reeling economy. The country is on the verge of collapse and, even if Yanukovych were to step down, nobody in Ukraine seems to have any answers for what comes next.
The fluctuations in Ukraine’s currency, the hryvnia, reflect this economic turmoil. Since the protests began in November, the hryvnia has lost 10 percent of its value. This has provoked Ukrainians to make a run on the country’s banks out of fears of currency devaluation. Between January 27 and 31, for example, depositors withdrew over seven billion hryvnia from their accounts. The hryvnia was brought back from the brink when the central bank placed capital controls on foreign exchanges. Nevertheless, Tatiana Orlova, an emerging markets strategist at RBS in London, predicts that “The result will be a flourishing black market (in dollars).” This certainly conjures images of the turbulent 1990s. In addition, Ukraine’s currency reserves are dwindling. They currently stand at a low of $17.8 billion down from $20.4 billion two months ago. To make matters worse, the ratings agency Fitch recently downgraded Ukraine’s credit rating from “B-” to “CCC,” which puts it lower than Greece. The recent violence has only made things worse. The hyrivnia has fallen once again, Ukraine’s bonds have suffered their worst selloff to date, and investors are ditching Ukrainian assets. Volodymyr Ovcharenko, an analyst for Kinto, an asset management company, summed up the situation best: “Giving money to Ukraine is like throwing it in a black hole.”
“Political instability is putting pressure on the currency market," Serhiy Arbuzov, Ukraine’s acting prime minister, recently declared in an interim cabinet meeting. “Every day of confrontation and a lack of desire to find a compromise weaken our country economically.” While the political instability has certainly hastened Ukraine’s economic woes, it would be too quick to lay all the blame on the Euromaidan. The Ukrainian economy has sputtered for the last eighteen months. Foreign debt has been mounting since Yanukovych took office in 2010, and, while it is true that Ukraine’s foreign debt isn’t outrageous by international standards—it’s only 45 percent of GDP—the problem is that the country has less and less capital to pay its debts. Ukraine must pony up $7.9 billion in foreign debt, almost half its current reserves, this year alone. Two more statistics highlight Ukraine’s deep-rooted problems: in 1992, its GDP was $113 billion. In 2013, it was only $97 billion. Ukraine’s GDP per capita lingers below its 1989 levels. These long term trends are hardly the fault of those camping in the center of Kyiv.
The real issue is the main economic scourge of the post-Soviet world: corruption. Since Yanukovych became president in 2010, members of his “family” have become very rich and powerful men. These include current acting prime minister and former Central Bank head, Serhiy Arbuzov, Oleksandr Klymenko, the minister Ukraine’s tax authority, and Vitaliy Zakharchenko, the interior minister. But one the biggest beneficiaries has been Yanukovych’s son, Oleksandr. Since 2010, Oleksandr’s wealth has increased from $7 million to $510 million, or by 7285 percent. Much of this was done through corrupt means, using government positions to get lucrative state contracts and then skimming off the top. Other methods included reiderstvo, or the illegal seizure of businesses. By using Klymenko’s tax inspection powers, Yanukovych’s allies have “raided” companies of would-be opponents. As Oleksandr Akymenko, a former editor for Forbes Ukraine, told the Christian Science Monitor, “Corruption under Yanukovych has increased significantly in the sense that during the previous administrations, the country’s corruption was diversified—every oligarch had their own section of the corruption pie. Under Yanukovych, corruption has been centralized.” One Russian commentator simply labeled the corruption of Yanukovych’s family “economic suicide.”
So far the Russians have given the Ukrainians their only economic lifeline. The continuing political crisis, however, has created a stumbling block. Directly after Ukraine’s government resigned on January 29, the Russians placed their $15 billion bailout on hold until a new government is formed. It has since agreed to release the second tranche of $2 billion this week, which will inject Ukraine with some much needed cash. Moscow is also working its magic on Ukraine in other ways. It’s is putting a lot of extra pressures on Ukraine’s economy by stifling Ukrainian exports with a virtual goods embargo. Sadly, an economically worse Ukraine is in Russia’s interest in this east-west tug of war. A disorganized EU policy won’t help matters, and will likely only push an economically strapped Yanukovych to seek a solution to his east.
The EU and the United States are making things easy for Moscow. Though both powers are limping toward their own rumored $30 billion bailout, it’s likely to come with tight strings. "With regard to financial assistance, there are conditions. These conditions are the following: reforms, reforms, reforms," says Stefan Fule, the EU Commissioner for Enlargement and European Neighborhood Policy. And the terms of those reforms include returning to the 2004 constitution, forming a “new inclusive” government and “ensuring free and fair elections.” According to Fule, the fine print will be set by the International Monetary Fund, though Yanukovych has already walked away from an IMF deal that called for austerity. It seems that the EU is betting any political settlement will weaken if not replace Yanukovych and produce a government more favorable to an IMF deal, and appears to be waiting for a new government before it releases any cash. Thus, any economic lifeline to Ukraine will come only after there’s a political settlement. In the meantime, the new round of violence has only exposed the failure of EU and US policy. As the New York Times forcibly stated, “The violence . . . exposed the impotence, in this dispute, of the United States and the European Union, which had engaged in a week of fruitless efforts to mediate a peaceful settlement.” While the US and EU dawdle, Ukraine teeters on the precipice.
To make matters worse, no one—not Yanukovych, the opposition, nor Euromaidan—is offering anything substantive to lift Ukraine out of the economic morass. In fact, economic issues have mostly been ignored. Anger at corruption is a driving force of the protests, but few concrete solutions have been advanced. The current crisis is mostly a political and moral struggle. Yanukovych’s economic policy seems to boil down to playing the West and Russia off each other. The Euromaidan and opposition appear to offer nothing besides faith in future EU integration and paeans to the rule of law and transparency.
Betting Ukraine’s economic future on the EU might offers false hope, though. Any economic solution must involve Russia. The bulk of Ukraine’s economy lies in the east and exports are heavily tilted toward Russia. Despite their declining population, the eastern provinces of Donetsk and Dnepropetrovsk, where much of Ukraine’s manufacturing and coal mining lay, amount to 35 percent of the nation’s exports—more than seven of Ukraine’s most western provinces combined. Moreover, the “Russian” east has a higher standard of living than the “Ukrainian” west. The average salary in Donetsk is $458 a month, while the western province of Lviv is $348. To a large extent the east bankrolls the west. In 2013, Donetsk contributed 1.7 billion hryvnia to Ukraine’s coffers but only received 362 million in return. If the causes of Ukraine’s “Eurorevolution” are put in pure socioeconomic terms, it’s not surprising the “east” is less inclined to give its support.
The violence will undoubtedly harden each side in the conflict. Hopefully something will pull Ukraine back from destruction, and when it does, what will the country’s economy be like after Euromaidan? Writing in Ukrainska pravda, the economist Alexander Savchenko offers three potential scenarios. The first is some kind of deal between Yanukovych and the opposition where the former allows the latter a piece of the rents from corruption. The system would remain unchanged despite accepting EU association. Savchenko suggests that this scenario has a 50 percent chance of happening. Second, Yanukovych and company could take the Russian and Belorussian route: close ranks, use violence, and keep the all the rents for themselves. He gives this a 40 percent chance. Finally, the Euromaidan could succeed in getting a “radical transformation” of the government: Ukraine accepts the EU Association Agreement and institutes sweeping reforms that institute transparency and fair competition. Savchenko gives this scenario a mere 10 percent chance.
Could Ukraine’s economy be a factor in a political compromise? And if so what would it look like? If Savchenko is correct, the corrupt nature of Ukraine’s economy will remain largely intact. Even if he’s wrong, and a new government accepts EU association, breaking from Russia’s orbit will prove difficult, if not impossible. Ukraine is stuck between an economic rock and a hard place. At the moment, none of Ukraine’s political players has a plan to squeeze out of it.
Sean Guillory is a postdoctoral fellow in the Center for Russian and East European Studies at the University of Pittsburgh. In addition, he is an avid “Russia Watcher” and blogs about contemporary Russian politics and society at Sean’s Russia Blog (seansrussiablog.org/) and hosts the podcast New Books in Russian and Eurasian Studies (newbooksinrussianstudies.com/). You can follow him on Twitter @seansrussiablog