posted November 30, 2014
The Ukraine Crisis Deepens

Over the course of the last few weeks the crisis in the Ukraine has been deepening –economically, politically, and perhaps soon militarily as well.

Both Kiev and Moscow, as well as forces of both sides on the ground, that is the Western Europe OSCE observers as well as spokespersons of the newly elected governments in Donetsk and Luhansk – have all been increasingly reporting troop and equipment movements by both sides, moving up to the borders that were established by the Minsk cease fire agreement in September. The Minsk agreement itself has so far proved to be a cease fire in name only, as shelling has continued into various urban areas by Kiev government forces. Fighting to obtain control of the Donetsk airport by both sides has continued sporadically since September. As of mid-November 2014, the most likely scenario is one where more intense fighting may erupt any day along various fronts.

Developments on the political front appear to be moving in a similar direction of more confrontation. Ukrainian President Poroshenko’s recent trip to the USA resulted in a $53 million emergency loan to Ukraine by the USA. While that amount is insignificant with regard to any effect on Ukraine’s rapidly deteriorating economy, it is likely earmarked for emergency military supplies to Ukraine’s military, with the objective of replenishing equipment and material lost in the July-August fighting and to upgrade the equipment to more advanced NATO standards. It is generally agreed, moreover, that USA special forces advisers and forward based training units are already operating in the Ukraine.

There is also some evidence that suggests Ukraine’s government signed the September Minsk peace agreement in order to buy time to recover and reorganize after its military setbacks last August. And now it is moving troops and equipment back to the cease fire border in anticipation of another assault. Recently a spokesperson for Ukraine’s Security Service, Markiyan Lubkivskiy, publicly admitted, “I believe that sooner or later we will have to start very active actions.” His remarks were echoed by Yury Lutsenko, an aide to Ukrainian President, who said that Kiev “only needed the ceasefire to get military and financial aid from the West.”

Politically as well, the Kiev government has made frequent requests to join NATO quickly, and it appears in the West that “fast track” negotiations are underway to at least admit it as a preliminary partner, if not yet a full member.

Buying time by signing the September Minsk cease fire accords was also likely necessary for the Kiev government to conclude its recent deal. Strongly recommended by the IMF, it involved a US$3 billion gas back payments to Russia’s energy corporation, Gazprom, and to arrange for electricity and gas reverse flows through other eastern European countries, like Slovakia and Poland, to ensure sufficient gas supplies for Ukraine this winter should military hostilities erupt once again.

While the USA and NATO are clearly propping up Ukraine on the military front, they are simultaneously intensifying political pressure on Russia in the event of another military offensive. Threats of more economic sanctions against Russia, Western banks’ and speculators’ growing attacks on Russia’s currency, the Ruble, already reeling due to falling world oil prices, media campaigns painting Russia president, Putin, as a global ‘bogeyman’, and, most recently in that regard, efforts to create the impression all heads of state at last week’s G20 global meeting in Australia were criticizing Putin.

In one of the more bizarre statements made at the G20 meeting, President Obama declared, according to the New York Times, that countries should not “finance proxies and support them in ways that break up a country that has mechanisms for democratic elections.” Apparently he forgot the role of USA NGOs that the USA spent $5 billion on (including proto-fascist organizations) in recent decades—which was admitted publicly by USA undersecretary of State, Virginia Nuland—in destabilizing the elected government of Ukraine last February 2014.

Then there’s the USA and the Western media’s current rising drumbeat that Russia is again invading, sending troops into the eastern Ukraine regions—a media development that provides a possible cover for the Ukraine government if and when it launches its own new offensive.

But if the USA, EU, and NATO are ramping up support for Kiev politically and militarily, their colleagues on the economic front—led by the International Monetary Fund and the European Commission—have been faced with growing failure in their efforts to revive Ukraine’s economy. Ever since April 30, 2014, when the IMF’s initial economic ‘rescue’ package was announced, Ukraine’s economy has been rapidly deteriorating on a number of fronts involving a wide list of economic indicators.

In the IMF’s first comprehensive review of the results of its April US$17 billion rescue package, which took place this past September 2, 2014, the IMF noted a long list of growing problems with Ukraine’s economy that were getting worse. Key indicators reflecting the decline were gas prices and inflation running higher than forecast, falling business confidence, rapidly deteriorating currency and balance of payments (exports, imports, falling foreign investment), deposit outflows (i.e. capital flight), faster decline in GDP and tax collections, rising budget deficits, and a growing fragility in Ukraine’s banking system.
As the IMF’s report of September 2 noted “the economic environment has become much more challenging than envisaged at the time of the program approval”, leading to “a notable deterioration in the economic outlook.” The IMF further remarked that if the fighting continued, it would need “to reconsider the program’s strategy” and Ukraine’s international partners (e.g. USA, EU) would have to come up with more assistance.

So just how badly has Ukraine’s economy performed over the past six months since the IMF introduced its most recent $17 billion Ukraine bailout package? A brief overview reveals the Ukraine’s economy has not only been a disaster under IMF management thus far, but its future prospects portend even worse performance—especially if the fighting resumes in the east with more intensity. The Ukraine, and its USA and EU partners, may be betting on military and political initiatives, but in the process may be digging themselves a deeper economic hole, as Ukraine follows the west’s political and military recommendations.

The following is a brief overview of what has happened since last April under the IMF’s economic tutelage.

On April 30, 2014 the International Monetary Fund (IMF) provided Ukraine a two year, $17.1 billion standby loan, justified at the time as necessary to stem the country’s accelerating economic decline. In exchange, Ukraine turned over the macro-management, restructuring, and the future of its economy to the IMF. Today, six months later, it is reasonable to ask how Ukraine’s economy has fared in the interim? How has the IMF plan performed thus far? And what are the prospects for Ukraine’s economy in the months immediately ahead under continuing IMF management?

For the 18 months prior to April 30, 2014 Ukraine’s economy declined 1-3 percent every quarter except one. In the first three months of 2014 its GDP fell another 1.1 percent. But since the IMF deal was signed in April, the decline has accelerated. In the April-June 2014 period Ukraine’s GDP fell at a more rapid 4.6 percent. GDP figures are not yet available for the most recent, July-September 2014 period, but it appears very likely the economy is now deteriorating even faster.

For example, according to World Bank data, while industrial production fell 5.8 percent in the first half of 2014, in July and August its decline accelerated to 12 percent and 20.1 percent respectively. Other key indicators of the economy reveal a deterioration from January through August, especially business investment (-25.6%), construction (-15.6%), trade (-13.8%), exports (-14.4%) and imports (-21.2%). Those figures do not yet include the two most recent, and no doubt even worse, performing months of September-October.

Since April, Ukraine’s currency plummeted by 36 percent and has fallen by 60 percent since January, the most of any economy. Ukraine central bank’s foreign currency reserves—needed to stem its currency collapse, to finance desperately needed exports and imports, and to provide essential credit to its increasingly fragile private banking system—have been steadily evaporating throughout 2014. Foreign reserves fell US$4 billion in October alone, to a nine year low of barely US$12 billion. With currency, reserves, and credit all collapsing, capital flight continues to intensify, recently prompting Ukraine’s government in desperation to impose a US$200 a day limit on withdrawals.

Last April the IMF assured its initial US$17.1 billion program would result in only a 5 percent fall in Ukraine’s GDP this year, with a return to 2 percent positive growth in 2015.

However, an IMF preliminary review in mid-July of the program’s progress concluded that while “all performance criteria and benchmarks were being met” nonetheless, along a number of fronts the economy was deteriorating rapidly. The IMF therefore raised its GDP decline estimate to 6.5 percent.

In August, as the economy continued to further deteriorate, the IMF revised its April estimate again, predicting a 7.3 percent decline in 2014 and this time a 4.6 percent decline in 2015 instead of the predicted 2 percent growth.

As an indication of just how fast the economy has been deteriorating, just last month, in early October, the World Bank raised that number to an 8 percent GDP drop for 2014. The Bank noted an even worse scenario was likely, if gas prices continued to rise in 2014(which they will with the onset of weather and the recent Ukraine-Russia gas deal) and if military conflict continues in the eastern regions (which has been intensifying anew). The only growth sector of the Ukraine economy is government military spending, as it battles separatists in its eastern Donetsk-Luhansk regions.

Many economists considered the IMF’s initial April estimates for Ukraine absurdly optimistic, this writer included, who predicted last March that Ukraine’s GDP would collapse at least 10 percent to 15 percent in the coming twelve months. Furthermore, Ukraine would need a $50 billion bail-out in the next two years, not the IMF’s US$17 billion. That 8 percent GDP drop so far amounts to a US$14 billion reduction in Ukraine’s 2013 GDP of US$177 billion.

To date, the IMF has only distributed to Ukraine US$4.5 billion of the US$17 billion. But that US$4.5 billion disbursement has had little positive impact on Ukraine’s real economy and provides essentially no offset to the $14 billion real decline to date.
A significant percentage of that US$4.5 billion has already been paid by the IMF to itself and to western bankers for debt previously incurred. In fact, according to Bloomberg business, Ukraine has more than US$15 billion in payments coming due between now and the end of 2015. One could logically argue that the IMF’s initial US$17.1 billion will be used to pay back US$15 billion.

Another part of the IMF’s paltry US$4.5 billion disbursement to date is directed to Ukraine’s central bank, in order to try to stabilize Ukraine’s currency, the hryvnia, that has been in freefall for months. And yet another US$2.7 billion disbursement, scheduled for later in 2014, will likely be used by Ukraine’s state owned gas company, Naftogaz, to pay Russia for natural gas through next winter, and for payments owed for past gas deliveries, both as part of an agreement recently reached with Russia’s Gazprom.

Concerning the impact of IMF policies involving natural gas, gas prices have already risen 50 percent for many consumers, devastating incomes and depressing consumption. But the other foot will fall after January 1, when subsidies to households, now covering up to 85 percent of the cost for gas, will start being discontinued.

So most of the US$17.1 billion original IMF deal has had, and will have, little positive impact on Ukraine’s real economy. The lion’s share of the US$17.1 billion goes to service past debts to creditors outside the country. And what remains in funding, that is what doesn’t go to creditors, goes mostly to Ukraine’s central bank which will be used to try to stabilize its currency, to finance external trade (exports-imports), and to replenish evaporating foreign exchange reserves. Meanwhile, gas policies, as well as government spending cuts, tax hikes on consumers, and other ‘fiscal’ measures in the IMF plan directly impact both household consumption and government spending.

The IMF’s US$17.1 billion April loan is classic IMF strategy, designed to take over an economy and manage it in the interests of Western banking and multinational corporate interests. IMF lending is foremost about ensuring interest and principal payments are made on schedule.
The first priority is to provide loans to ensure repayments. Bankers get paid first, along with the IMF. Second priority is to provide the country’s central bank funds necessary to stabilize its currency. A stable currency is needed to encourage western foreign direct investment into the country, i.e. to buy up and take over its domestic industry. Third priority is to enable indigenous businesses and consumers to purchase exports to the country from the West.

Thereafter the IMF plan is to fundamentally restructure the economy so that social spending programs are cut massively and wage pressures are reduced on business as layoffs take place as part of restructuring to make business more ‘efficient’. Social program cuts and layoffs tame the working classes to accept lower wages and to work harder, increasing productivity, if they want to keep their jobs. Finally, the classic IMF intervention program aims to reduce the size of the government and the public sector, so that it doesn’t compete with private businesses for credit or directly in markets. Reducing government spending and deficits also creates more budget room for business and investor tax reduction. That model is precisely what occurred in Greece, Portugal and elsewhere in recent years. And it’s being implemented today in Ukraine.

Contrary to IMF assurances last April, nearly everywhere since April the Ukraine economy is declining at double digits rates—industrial production, investment, consumption, trade, currency values, foreign exchange, and now GDP itself. So the Ukraine economy is currently spinning out of control—not stabilizing as the IMF April 2014 plan and deal originally assured—heading toward the 10-15 percent GDP collapse and the need for US$50 billion in bailout.

The IMF itself has recently recognized the seriousness of the situation, indicating it may have to add another US$19 billion in bailout. But that doesn’t mean it will provide it. Western Europe is descending into a third recession in five years and is in no mood to give more. And the USA is preoccupied with ISIL, Iran, and domestic politics.

In the interim, the European Commission has provided Ukraine US$1.15 billion of its promised US$2 billion loan earlier this year. Only US$9.7 million of that, or .008 percent, has been humanitarian aid to Ukraine, according to the Reuters International News Agency.

The IMF’s cover for the failure of its program in the Ukraine is to blame the accelerating decline on the continuing military conflict in the East and on the natural gas crisis, escalating prices, and growing Naftogaz debt. While military conflict has contributed, the scope and magnitude of the Ukraine economic collapse now underway is attributable to various economic forces well beyond the military conflict—not least of which is the IMF program itself.

The fact that the IMF continues to revise its economic estimates downward, almost monthly, and that it is raising the possibility of the need to provide as much as US$19 billion more in bailout, is ample testimony of the failure of the program. (The European Commission has promised another US$2.5 billion—earmarked, however, for payment of debt as well).
Meanwhile, Ukraine’s real economy and its citizens suffer severely as a result, with all indications that the economic crisis there will get worse, perhaps much worse, before it ever begins to get better.

Jack Rasmus is the author of ‘Epic Recession: Prelude to Global Depression’, 2010, and ‘Obama’s Economy’, 2012, both published by Pluto Press; and the forthcoming ‘Transitions to Global Depression’, by Clarity Press, 2015. His website is www.kyklosproductions.com and blog, jackrasmus.com.

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