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Ukraine’s Fight to Fix Economy Is Also a Fight for Legitimacy Ukraine’s Fight to Fix Economy Is Also a Fight for Legitimacy
(12 days later)
KIEV, Ukraine — Young men in fatigues, bulletproof vests and masks patrol one of Kiev’s better hotels, the Dnipro, and they have occupied several floors. Armed with clubs, pistols and even slingshots, they are the militant Ukrainian nationalists of Pravy Sektor, or Right Sector.KIEV, Ukraine — Young men in fatigues, bulletproof vests and masks patrol one of Kiev’s better hotels, the Dnipro, and they have occupied several floors. Armed with clubs, pistols and even slingshots, they are the militant Ukrainian nationalists of Pravy Sektor, or Right Sector.
On schedule, they march out to the streets, to the encampment known as the Maidan, or Independence Square, where the bloody battle for Kiev was fought. To many they are heroes, but they are an intimidating presence. And their leader, Dmytro Yarosh — who is also the new deputy secretary of the National Security and Defense Council — has political ambitions, announcing on Friday that he will run for president in May.On schedule, they march out to the streets, to the encampment known as the Maidan, or Independence Square, where the bloody battle for Kiev was fought. To many they are heroes, but they are an intimidating presence. And their leader, Dmytro Yarosh — who is also the new deputy secretary of the National Security and Defense Council — has political ambitions, announcing on Friday that he will run for president in May.
The Maidan itself is a memorial, a grave site and a place for visiting dignitaries to lay wreaths to the 82 people who died here. It is a metaphor for the revolution, for people power. But on another level, the Maidan remains an ungoverned trash heap of smoky barricades, broken sidewalks, burned buildings, piles of sandbags and bricks and tents housing more “self-defense” units.The Maidan itself is a memorial, a grave site and a place for visiting dignitaries to lay wreaths to the 82 people who died here. It is a metaphor for the revolution, for people power. But on another level, the Maidan remains an ungoverned trash heap of smoky barricades, broken sidewalks, burned buildings, piles of sandbags and bricks and tents housing more “self-defense” units.
The scene, in the heart of the capital, is hardly conducive to the atmosphere of stability and business confidence that the new, interim government says it desperately needs. Yet the Maidan also represents the legitimacy the government requires.The scene, in the heart of the capital, is hardly conducive to the atmosphere of stability and business confidence that the new, interim government says it desperately needs. Yet the Maidan also represents the legitimacy the government requires.
Pavlo Sheremeta, Ukraine’s new minister of economy, said the urgent priority for the new government was cash in the banks. Hard currency reserves are estimated to be only about $12 billion, even with controls on the withdrawal of capital, and large debts are coming due. Pavlo Sheremeta, Ukraine’s new minister of the economy, said the urgent priority for the new government was cash in the banks. Hard currency reserves are estimated to be only about $12 billion, even with controls on the withdrawal of capital, and large debts are coming due.
The central bank is printing cash for now, as the value of the currency drops, and a team of economists from the International Monetary Fund should be able to come up with a better analysis of the country’s needs next week, Mr. Sheremeta said.The central bank is printing cash for now, as the value of the currency drops, and a team of economists from the International Monetary Fund should be able to come up with a better analysis of the country’s needs next week, Mr. Sheremeta said.
The second priority, he said, is “safety and security in the streets” to try to restore business confidence and attract new investment. “It’s hard to have business activity when you feel insecure,” he said. Crimea, in particular, is about to lose its tourist season. “Events in Crimea worry us in terms of the integrity of the country, but worry us even more in terms of tourist potential,” Mr. Sheremeta said.The second priority, he said, is “safety and security in the streets” to try to restore business confidence and attract new investment. “It’s hard to have business activity when you feel insecure,” he said. Crimea, in particular, is about to lose its tourist season. “Events in Crimea worry us in terms of the integrity of the country, but worry us even more in terms of tourist potential,” Mr. Sheremeta said.
But compared with 2009, the year of a “gas war” with Russia, when Ukraine’s gross domestic product fell by 15 percent, today’s zero growth is almost a blessing, Mr. Sheremeta said.But compared with 2009, the year of a “gas war” with Russia, when Ukraine’s gross domestic product fell by 15 percent, today’s zero growth is almost a blessing, Mr. Sheremeta said.
The struggle to right the economy is as much a struggle for sovereignty as the crisis in Crimea. A weak Ukraine is fated to be dominated by outsiders — Moscow wants to ensure those outsiders are Russian, not European or American.The struggle to right the economy is as much a struggle for sovereignty as the crisis in Crimea. A weak Ukraine is fated to be dominated by outsiders — Moscow wants to ensure those outsiders are Russian, not European or American.
“Stated simply, Ukraine is the economic equivalent of a failed state,” said Robert J. Shapiro, co-founder and chairman of Sonecon, a private firm that advises American and foreign businesses, in a post for The Globalist, an online magazine. Ukraine’s credit rating is worse than Greece’s and large debts will soon come due, with some $15 billion in sovereign bonds maturing this year and another $15 billion in 2015. With a current account deficit equal to 8 percent of its gross domestic product, Ukraine cannot pay off and refinance those debts without large-scale aid — some $35 billion over two years, the new government says.“Stated simply, Ukraine is the economic equivalent of a failed state,” said Robert J. Shapiro, co-founder and chairman of Sonecon, a private firm that advises American and foreign businesses, in a post for The Globalist, an online magazine. Ukraine’s credit rating is worse than Greece’s and large debts will soon come due, with some $15 billion in sovereign bonds maturing this year and another $15 billion in 2015. With a current account deficit equal to 8 percent of its gross domestic product, Ukraine cannot pay off and refinance those debts without large-scale aid — some $35 billion over two years, the new government says.
Ukraine’s vulnerabilities are enormous, partly a result of 23 years of mismanagement since independence from the Soviet Union, when early reforms were quickly jettisoned and the economy was distorted by corruption, favoritism, patronage and outright theft. That history damages Ukraine’s efforts now to hold the country together against Russian pressure, because ethnic Russians and many Russian speakers, both in Crimea and in the industrial east, see Russia as more successful and attractive than Ukraine. Since 1991, Ukraine’s economy has shrunk 30 percent while Russia’s has grown 20 percent.Ukraine’s vulnerabilities are enormous, partly a result of 23 years of mismanagement since independence from the Soviet Union, when early reforms were quickly jettisoned and the economy was distorted by corruption, favoritism, patronage and outright theft. That history damages Ukraine’s efforts now to hold the country together against Russian pressure, because ethnic Russians and many Russian speakers, both in Crimea and in the industrial east, see Russia as more successful and attractive than Ukraine. Since 1991, Ukraine’s economy has shrunk 30 percent while Russia’s has grown 20 percent.
And the connections of Russia and Ukraine keep Kiev in a subordinate position, subject to Russian economic and trade pressure.And the connections of Russia and Ukraine keep Kiev in a subordinate position, subject to Russian economic and trade pressure.
Take natural gas, which Georg Zachmann of Bruegel, an economic research institution, called “Ukraine’s expensive addiction.” Ukraine is dependent on Russia for 60 percent of its energy supplies, purchased at a price considerably higher than that paid by Russian natural gas customers in Western Europe.Take natural gas, which Georg Zachmann of Bruegel, an economic research institution, called “Ukraine’s expensive addiction.” Ukraine is dependent on Russia for 60 percent of its energy supplies, purchased at a price considerably higher than that paid by Russian natural gas customers in Western Europe.
Before the Orange Revolution of 2004, which shook Moscow, Ukraine paid about $100 per thousand cubic meters of Russian gas, Mr. Zachmann noted. On April 1, after Moscow ends a political discount, the price will again be roughly $400, while in Germany it is closer to $330.Before the Orange Revolution of 2004, which shook Moscow, Ukraine paid about $100 per thousand cubic meters of Russian gas, Mr. Zachmann noted. On April 1, after Moscow ends a political discount, the price will again be roughly $400, while in Germany it is closer to $330.
On Friday, Gazprom, Russia’s state-run natural gas company, warned Ukraine that it could cut off gas exports, as it did in 2009, if Kiev did not pay its debts that are now at $1.89 billion, said the company’s chief executive, Alexei B. Miller.On Friday, Gazprom, Russia’s state-run natural gas company, warned Ukraine that it could cut off gas exports, as it did in 2009, if Kiev did not pay its debts that are now at $1.89 billion, said the company’s chief executive, Alexei B. Miller.
That threat aside, the answer, everyone agrees, is the politically fraught increase of domestic gas prices to market levels, or close to them, reducing the government’s subsidy and encouraging other gas producers to invest. In 2012, according to the International Monetary Fund, the energy subsidies alone were 7.5 percent of the country’s gross domestic product — the rough equivalent of the entire budget deficit — encouraging wasteful use.That threat aside, the answer, everyone agrees, is the politically fraught increase of domestic gas prices to market levels, or close to them, reducing the government’s subsidy and encouraging other gas producers to invest. In 2012, according to the International Monetary Fund, the energy subsidies alone were 7.5 percent of the country’s gross domestic product — the rough equivalent of the entire budget deficit — encouraging wasteful use.
The fund is almost sure to repeat earlier demands for domestic gas prices to increase, and Mr. Sheremeta, the finance minister, said that the new government would simply have to do it. Officials will argue, he said, that higher gas bills are the price of freedom. The fund is almost sure to repeat earlier demands for domestic gas prices to increase, and Mr. Sheremeta, the economy minister, said that the new government would simply have to do it. Officials will argue, he said, that higher gas bills are the price of freedom.
“We had the option to choose to pay a lower price to Russia or to choose freedom,” he said, then referred to the deaths of protesters at the Maidan. “If we paid so much for freedom, can’t we find the money to pay more for gas?”“We had the option to choose to pay a lower price to Russia or to choose freedom,” he said, then referred to the deaths of protesters at the Maidan. “If we paid so much for freedom, can’t we find the money to pay more for gas?”
New American and European offers of loans are in part intended to soften the immediate blow to voters of economic reform and higher prices, especially in a country with a weak social welfare system. Some suggest charging sharply different prices for corporate and residential gas consumption. But the heavy industry of the east was built on cheap gas, and on the side deals that Gazprom made with friendly Ukrainian businessmen.New American and European offers of loans are in part intended to soften the immediate blow to voters of economic reform and higher prices, especially in a country with a weak social welfare system. Some suggest charging sharply different prices for corporate and residential gas consumption. But the heavy industry of the east was built on cheap gas, and on the side deals that Gazprom made with friendly Ukrainian businessmen.
Trade is the other obvious weapon Russia has to keep Ukraine unstable. About a quarter of Ukraine’s trade is with Russia. Last week Russia banned pork imports from Ukraine, citing supposedly uncertain safety standards under the new government. Earlier this year, Moscow used tariffs to warn and penalize Ukrainian businessmen and oligarchs who favored the proposed trade and political accords with Europe. A disruption of that trade could be devastating for Ukraine’s economy and stir further separatist feeling in the mostly Russian-speaking region of eastern Ukraine.Trade is the other obvious weapon Russia has to keep Ukraine unstable. About a quarter of Ukraine’s trade is with Russia. Last week Russia banned pork imports from Ukraine, citing supposedly uncertain safety standards under the new government. Earlier this year, Moscow used tariffs to warn and penalize Ukrainian businessmen and oligarchs who favored the proposed trade and political accords with Europe. A disruption of that trade could be devastating for Ukraine’s economy and stir further separatist feeling in the mostly Russian-speaking region of eastern Ukraine.
Some analysts estimate that Ukraine needs about $3 billion to $4 billion before the May presidential vote and at least $15 billion this year. The European and American aid offers are intended to tide the new government over until what is expected to be an I.M.F. stabilization program and longer-term loan.Some analysts estimate that Ukraine needs about $3 billion to $4 billion before the May presidential vote and at least $15 billion this year. The European and American aid offers are intended to tide the new government over until what is expected to be an I.M.F. stabilization program and longer-term loan.
At some point, government officials say, they will have to deal with the autonomy of the Maidan, but they also understand that the demonstrators want to ensure that the new government responds to popular demands for honesty and transparency and does not repeat the mistakes of the past, as in 2004.At some point, government officials say, they will have to deal with the autonomy of the Maidan, but they also understand that the demonstrators want to ensure that the new government responds to popular demands for honesty and transparency and does not repeat the mistakes of the past, as in 2004.
However messy, “The Maidan is a constant reminder to the new government and officials around the country of the reasons people protested,” Mr. Sheremeta said. “We understand there is still concern that the authorities not slip back into the former way of ruling.” In the end, he said, “The answer is free, fair and democratic elections.” However messy, “the Maidan is a constant reminder to the new government and officials around the country of the reasons people protested,” Mr. Sheremeta said. “We understand there is still concern that the authorities not slip back into the former way of ruling.” In the end, he said, “The answer is free, fair and democratic elections.”