By Pater Tenebrarum at Acting Man blog
Only a little over two months ago, the IMF approved a $17 bn. bailout package for the insolvent Ukrainian government. If memory serves, the US chipped in with an extra billion, and the EU's tax cows forked over billions as well – in the form of an aid package amounting to €11 billion in toto. Would it be petty-minded of us to point out that a lot of financial support for the Ukraine would have been available at zero cost to Western tax payers? Vladimir Putin offered a $15 billion loan package to Ukraine, which would surely have kept the ship afloat.
Anyway, we read with a mixture of mirth and trepidation that the “Ukraine may need a second bailout” – what, already? This is beginning to sound like Greece on steroids.
“The conflict in eastern Ukraine is driving the economy even deeper into crisis, which may force the government to seek another bailout. Ukrainian forces have been struggling to control a pro-Russian rebellion raging in eastern regions since March, when Moscow annexed Crimea.
The International Monetary Fund agreed in April to lend Ukraine $17 billion over the next two years to stave off the threat of economic collapse. But conditions in Ukraine have deteriorated since then, making it harder for the government to meet the terms of the bailout. Making matters worse, Russia has also cut off gas supplies.
Thursday's loss of a Malaysian Airlines plane – which the Ukrainian government says was shot down by rebels — will only ratchet up the tension.
"The conflict is putting increasing strain on the program and a number of key elements of the macroeconomic framework have had to be revised," the IMF said Friday. The IMF now expects Ukraine's economy to shrink by 6.5% this year, compared with 5% at the time the emergency loans were agreed. GDP stagnated last year.
Ukraine's government is spending more than expected on security as it battles the separatists. Having lost control of parts of the country, revenue collection is also falling behind schedule. And state gas firm Naftogaz is struggling to force customers to pay their debts.
In return for the bailout, Ukraine agreed to an austerity program that included shedding 24,000 government jobs, raising taxes, selling off state assets and gradually withdrawing subsidies on natural gas. It also pledged to tackle corruption.
The program was designed for most of the spending cuts to fall in 2015-2016. Ukraine's allies in the West wanted to avoid provoking a backlash and stoking further discontent among the Russian minorities in the east.
But with the costs of the conflict rising, the government has been forced to come up with spending cuts equivalent to about 1% of GDP that will be pushed through this year. Wages and pensions will be capped at the level of inflation next year, and more public sector jobs will go, the IMF said. Even that may not be enough.
"The program hinges crucially on the assumption that the conflict will begin to subside in the coming months," the IMF said. "A significant prolongation of the crisis would seriously strain their ability to [reform the economy] without a substantial increase in external support on adequate terms."
Since the article above fails to point this out, we will supply some complementary information: Russia isn't just willy-nilly “cutting off gas supplies”. Ukraine's government has stubbornly failed to accept the biggest discount any Russian gas customer has been offered, alleging it wasn't a “fair price”. Of the $3.5 billion it owed, it has paid only $786 m. so far – the rest remains outstanding. Moreover, the gas deliveries haven't just been “cut off” – instead, Ukraine is now on a prepayment plan, as a result of failing to meet previously agreed deadlines for debt repayment. In fact, this is what was contractually agreed beforehand (failure to pay results in being put on prepayment).
Obviously, Russia's government is enforcing these contract clauses mainly as a result of the conflict situation. There can be little doubt that it would have allowed Yanukovich to draw out the payment of gas debts for longer. On the other hand, one cannot accuse Gazprom of making unreasonable demands when it offers Ukraine a lower gas price than anyone else. Readers can test what happens if they stop paying their utility bills. Guess which of these options the the utility will go for: 1. forget about your debt and keep delivering energy to you in the hope that you might one day pay up. 2. offer you a lower price than anyone else gets because it “understands” your difficult situation, although you keep alleging in public that it is run by murderous thugs and are trying to persuade its customers and suppliers to boycott it. 3. offer to keep delivering gas to you if you prepay. 4. cut off your gas.
As to the IMF program, which means that Ukraine's population will have to prepare for a few more years of deprivation, it may well be argued that there is no way around austerity anyway. Beggars can't be choosers, and an insolvent government cannot grant subsidies and hand out goodies to buy votes. Take note though of the devious “let's implement the cuts later” method, which aims to deceive the population as to the true nature of the program.
We also wonder how serious the government's attempts to “tackle corruption” really are. A well-entrenched culture of corruption certainly cannot be eradicated from one day to the next, and corruption definitely flourished under Yanukovich and every single post-Soviet government that came before him. We are just wondering whether the new government will be any different. Previous rulers with a western Ukrainian support base have been just as kleptocratic as their eastern counterparts. However, we don't want to be prejudiced with regard to that. After all, we are not mind readers and have no special insight into the current state of corruption and whether any efforts to counter it are indeed underway. Perhaps things will improve in this respect under Poroshenko. Sooner or later, we will find out (in the worst case, approximately $30 billion later).
Piotr Poroshenko and the gas princess. He cannot possibly be worse than she would have been.
The Cost of Waging War
The US, some of the more hawkish EU governments and hawkish elements in Poroshenko's own government (which is still the same government that was installed after the coup) keep urging him to wage war with the Eastern rebels in the name of “reestablishing the State's authority”. Imagine the (justified) outcry if Yanukovich had tried to seriously “reestablish the State's authority” by force – but now that “our” oligarch is doing it, it is not only considered perfectly fine, he is egged on to boot. However, waging civil war doesn't come cheap, and it cannot be done without getting a lot of blood on one's hands. In fact, it costs $130 million per month – and Ukraine's government is already indicating that Western tax payers will need to jump into the breach once more:
“Ukraine's Finance Minister Oleksander Shlapak has said the country's "anti-terrorist" campaign in the east of the country was costing Kiev 1.5bn hryvnias ($130m, £76m, €96m) a month and that it could not afford to finance the operations without assistance.
"We need to seek additional resources for this operation," he told a meeting of parliamentary party leaders.
To this we can only say: a ceasefire and negotiations would be a lot cheaper and far more likely to succeed. As far as we can tell, there is broad popular support in the Eastern Ukraine for federalization and a degree of autonomy/devolution of power within Ukraine. The more radical separatist demand of splitting from Ukraine has really only received a little more momentum once the war began in earnest.
It seems quite possible, even likely, that the government in Kiev will “win” against the separatists militarily – but the result will probably be never-ending strife and a deeply resentful eastern population. After all, it is already clear that achieving this victory involves shelling of civilian areas, attempts at “starving” the cities in which the rebels hide out by blockades, etc.
As Mish rightly suspects, the separatists may well become an underground guerrilla force if they are defeated, harassing Ukrainian government forces and committing acts of sabotage. In that event, Kiev would probably have to erect a full-scale military occupation of the disputed territories, with all that implies. Sometimes you have to break a few eggs if you want to make a “European values” omelet, right?
Realpolitik versus Prosperity and Peace
While it seems glaringly obvious that a ceasefire and negotiations would offer the best chance of achieving lasting success, the question is always what is in whose interest. As far as we can tell, the aspirations of Eastern Ukrainians are not just very low on the list of Western priorities, they are actually not even on that list. In fact, all of Ukraine is mainly a geostrategic plaything from the point of view of the big powers (including Russia as well of course) and Ukraine's citizens would do well to keep that in mind.
What is probably on the list are the shale gas deposits in the region and maybe some of its industrial infrastructure. Of course the encircling of Russia by NATO is to be continued as well. It is not only energy, but the geographical location of Ukraine that is of importance in this context. We suspect that one of the main reasons why the US establishment is so extremely miffed with Putin is because he dared to thwart a major component of the long term strategic plan without firing a single shot. The idea was to cut off Russia's access to the Black Sea. If you believe otherwise, we recommend reading up on realpolitik a bit, starting with Zbigniev Brzezinski's “Grand Chessboard”, which contains the following paragraph:
“Ukraine, a new and important space on the Eurasian chessboard, is a geopolitical pivot because its very existence as an independent country helps to transform Russia. Without Ukraine, Russia ceases to be a Eurasian empire.”
“However, if Moscow regains control over Ukraine, with its 52 million people and major resources as well as access to the Black Sea, Russia automatically again regains the wherewithal to become a powerful imperial state, spanning Europe and Asia.”
As you can see, cutting off Russia's access to Sevastopol was always on the wish list. However, getting control over the rest of the Ukraine is surely seen as a good second-best option, since it opens up the way for the very thing the Russian government has feared all along, namely “security agreements” that ultimately lead to encircling Russia with even more NATO hardware. It is as though nothing has been learned from history (reciprocal security guarantees were a major factor in triggering WW I).
By the way, we fully understand the historic fears informing the EU's hardliners (mainly Poland and the Baltic States), since these countries have frequently come under Russian domination. Most recently they were under Soviet communist domination, which has to count as an absolute low point and was undoubtedly an unmitigated horror-show.
As a result, people in these countries fear Russia, and will perennially suspect it of having designs on them. And surely there are elements in Russia's political landscape that actually deserve to be feared in this context. However, the best way of ensuring peace has always been commerce and good economic relations. In that sense, economic sanctions are surely counterproductive.
As a slogan often attributed to Bastiat states: “If goods don't cross borders, armies will”. Bastiat understood that free trade was the best route to achieving both prosperity and peace.
Whatever happens from here on out, it is apparently getting more expensive by the day. Maybe Mr. Poroshenko should send us some of his chocolate. Chocolate reportedly works well against depression symptoms.