The west is in danger of losing Ukraine unless there is a significant change in the scale and nature of its engagement with the country over the coming weeks and months. That is the somber reality European and US policy makers need to grasp as Ukraine is hit by a wave of protests, terrorist attacks and continued violations of the ceasefire by separatists in the east. Against a background of deepening hardship and rising political frustration, there is a very real risk that the reformist drive of the last few months will give way to a new populism that takes Ukraine backwards and opens the door to renewed Russian influence. Complacent western leaders must act before it’s too late. Read more
The good news is that Russian and Donbas separatist leaders have called an end to the “New Russia” project, which had targeted eight Russian-speaking regions of eastern and southern Ukraine for separatist agitation and union with Russia. The bad news is that while it always was a mistake to assume Ukraine’s Russian-speakers were fans of president Vladimir Putin, Ukraine’s political vacuum and its selective “de-oligarchisation” are allowing diehards from the former ruling Party of Regions grouped in the Opposition Bloc and funded by Ukraine’s powerful gas lobby to retain influence in eastern and southern Ukraine. Read more
Germany – and its chancellor Angela Merkel – deserve credit for the continuation of the EU’s sanctions regime against Russia. But Germany happens also to be home to the energy giant E.ON, which recently signed a (non-binding) memorandum, together with Russia’s Gazprom, Austria’s OMV, and Shell from the UK and the Netherlands, agreeing to the extension of the Nord Stream pipeline, which brings Russian gas into the European Union (EU).
The extension, to be completed by 2020, would double the transit capacity of the pipeline, currently at 55bn cubic meters per year. Together with Turkish Stream, another project Gazprom is toying with, it would make gas transit through Ukraine redundant by the time the country’s current contract with Gazprom expires in 2019. Read more
The Financial Times and Bloomberg have reported that the IMF is intending to categorise a $3bn 2-year eurobond sold by Ukraine in December 2013 to a Russian sovereign wealth fund as ‘official’ government to government lending. This decision, if confirmed, will directly effect not only the implementation of Ukraine’s $40bn IMF-led bailout agreed in March 2015 but also Russia’s leverage over Kiev at a time when Russian-backed separatists are fighting the Ukrainian army and allied volunteer battalions in two breakaway oblasts in the east of the country.
Ukraine, the Financial Times argued, would be weakened by the IMF’s decision as it would compel it to service and repay the Russian bond because the IMF is not allowed to disburse funds to countries in arrears to other IMF member governments. Bloomberg argued that Ukraine’s remaining private western bondholders would have to shoulder an even greater burden of the IMF-imposed ‘debt operations’ making it more difficult for Ukraine to reach an agreement to reduce its private sovereign debt obligations.
However, the unusual structuring of the $3bn Russian eurobond and the new western-backed Ukrainian government’s policy of trying to detach itself from Russia suggest otherwise. Read more
Austria’s refusal to extradite Dmitry Firtash to the US is confirmation that Europe holds two contradictory positions on corruption. While the European Union urges Ukraine to fight corruption, some of its member states – such as Latvia, Cyprus (still the largest ‘foreign investor’ into Ukraine), the UK, Austria, France, Monaco and Switzerland, along with Caribbean offshore zones such as the Virgin Islands – continue to enjoy the fruits of corrupt proceeds that are laundered abroad.
Firtash, a Ukrainian gas mogul and former partner of Gazprom, had been charged in the US with involvement in an international racketeering conspiracy that allegedly paid $18.5m in bribes to government officials in India in exchange for permits to mine titanium for export to Boeing in Chicago. Read more
By Taras Kuzio of the University of Alberta
This week, St Petersburg hosted a bizarre gathering organized by the Rodina (Motherland) party of 150 European fascist and nationalist-populist political parties united in their opposition to the EU and US and in support of Russia’s annexation of Crimea and invasion of eastern Ukraine. Rodina is the loyal nationalist ally of President Vladimir Putin’s United Russia party and consequently plays a similar role to the Radical Party’s alliance with the Serbian Socialist party. Read more
By David Clark of the Russia Foundation
Natalie Jaresko, Ukraine’s finance minister, is in London this week to drum up support for her country’s ailing economy. It is badly needed. The physical destruction of property, the loss of production and the disruption to trade and finance caused by Russia’s military intervention mean that Ukraine has lost around a fifth of its economy in the last year. Forecasts that it will contract by a further 5.5 per cent this year are widely seen as optimistic. With the value of the hryvnia down by 70 per cent, inflation at around 35 per cent and foreign currency reserves running low, the IMF’s recently agreed $17.5bn support package already looks like a sticking plaster solution for an economy that needs a blood transfusion. Read more
It would be hard to put it another way. Volodymyr Lavrenchuk, chairman of the board at Raiffeisen Bank Aval, the biggest foreign lender in Ukraine, describes the situation on the market there as “very complicated”.
With Ukraine in economic and political crisis, with Crimea annexed by Russia and a pro-Russian rebellion in the Donbas, state and corporate finances have been badly hit with predictable effects on the country’s banks. “What we are seeing is a set of dramatic events that is hard to encounter anywhere else,” Lavrenchuk tells beyondbrics. Read more
By Matthew Duhan, Global Counsel
Despite the economic and currency crisis engulfing Ukraine, by 7 o’clock in the evening the National Bank of Ukraine (NBU) is virtually empty. But as the majority of its 12,000 employees head home, lights remain on in a few offices and footsteps echo through dark hallways as a small group of reform-minded individuals arrive for their unofficial night shift. To paraphrase the old line about the Indian economy, at the National Bank of Ukraine reform happens in the night while the government sleeps. Read more
So, how would you go about bailing out a war-zone? The IMF’s rescue plan for Ukraine, agreed by the fund’s executive board last week, has to grapple with an extraordinary combination of problems. On top of the usual party pack of issues endured by IMF borrowers – a collapsing currency, a large debt burden, a corrupt and sclerotic economy – Ukraine faces the unusual challenge of a belligerent nuclear-armed neighbour fomenting a civil war.
In this context, the critical question of whether to restructure private sector debt becomes an unusual one. The IMF made obvious mistakes in previous crisis countries such as Argentina and Greece, where debt restructurings were delayed until the situation had gone critical. This experience suggests a rapid early reduction in net present value, including a cut in face value if necessary, to tip debt dynamics towards stability. But where there is a large and completely uncontrollable risk that might instantly change the situation, there is a strong case for giving Ukraine medium-term breathing space rather than a once-and-for-all write-off. Read more
By Andrew Foxall of The Henry Jackson Society
Unwilling to go to war with Russia, the west’s main levers for persuading Vladimir Putin to back down over Ukraine are economic sanctions. Their importance was underscored last week, when the US announced new measures against 14 individuals and two entities. While the attention-grabbing name on the US list was Aleksandr Dugin, the academic-turned-policymaker whose musings on ‘Eurasianism’ has led some to refer to him as “Putin’s Brain”, another entity was the little-known Russian National Commercial Bank (RNCB). Read more
By Simon Saradzhyan
To hear Vladimir Putin say it, Russia is not at war with Ukraine. “I think that this apocalyptic scenario is highly unlikely, and I hope it never comes to that,” Putin said when asked on Russia’s Defender of the Fatherland Day whether his fellow citizens may “wake up one day to learn we are at war” with Ukraine. It can be inferred that the commander-in-chief of the Russian armed force believes (or wants us to believe) that there will be no war between Russia and Ukraine for as long as Moscow refuses to admit to its involvement in the conflict. But is there such a thing as a declared war any more? And how should other European nations respond if they become the target of an undeclared war? What can be done to prevent repetition of the Ukraine scenario elsewhere in Europe?
Ukraine’s billionaires are losing their cash, especially those with significant assets in the Donbas, an area that has become a battlefield between pro-Russian rebels and units loyal to Kiev. According to Forbes’ 2015 billionaires list, Rinat Akhmetov, Ukraine’s richest man, has lost as much as $5.8bn over the past year.
The mining, steel-making, energy and heavy engineering units of Akhmetov’s SCM Group have been forced to halt operations or reduce their capacity in territories controlled by separatists or near the front line. The Group’s media, telecommunications and banking businesses are also feeling the effects of the rebellion. Read more
By Taras Kuzio of the University of Alberta
One of the most challenging tasks faced by journalists writing on international affairs is to compare and contrast language used by neo-Soviet authoritarians and western diplomats with reality on the ground.
Foremost is the Orwellian doublespeak habitually used by neo-Soviet leaders such as Russia’s Present Vladimir Putin and Ukraine’s ex-President Viktor Yanukovych. Testifying before the US Senate’s Foreign Relations Committee, for example, Secretary of State John Kerry said Russian officials had repeatedly lied to him and other western leaders over their country’s intervention in eastern Ukraine. Read more
By Vitalii Kravchuk, Institute for Economic Research and Policy Consulting
Mat O’Brien’s recent contribution to the Washington Post’s Wonkblog on hyperinflation in Ukraine has had a huge impact. Drawing on work by Johns Hopkins professor Steve Hanke, O’Brien argues that, although the official rate of inflation from the Ukrainian State Committee on Statistics (Ukrstat) is 28.5 per cent, in reality it is more like 272 per cent.
Hanke is famous for his research on Zimbabwean hyperinflation, where the government was unable to calculate inflation and an alternative method had to be used. The main argument of Hanke’s article and of O’Brien’s blog post is that when a country’s currency collapses, it pushes up the prices of imports, which spill over to other prices. In this situation, Hanke argues, the true inflation rate can be calculated using “a rather straightforward application of a standard, time-tested economic theory” in the form of purchasing power parity, based on the free-market exchange rate (often the black market rate). This formula has been bluntly used in the case of Ukraine. Read more
By David Clark of the Russia Foundation
For all the attention given to the fighting in Donetsk and Luhansk, it is clear that Ukraine cannot solve its problems by military means alone. If there is a route to national salvation it lies in the field of domestic reform and the quest to find a new model of internal development. It is only by emulating the achievement of neighbouring Poland and becoming a well-governed country with a strong, dynamic economy that Ukraine can hope to escape from its current predicament. As a ‘Slavic tiger’ it could provide a source of attraction strong enough to regain eventual control over the territories it has lost and perhaps even become a catalyst for change in Russia itself. Stuck in a post-Soviet rut of dysfunctional institutions and economic stagnation, it will remain weak and vulnerable to Putin’s policy of divide and rule. Read more
By Timothy Ash of Standard Bank
The crisis in Ukraine shows no sign of abating any time soon.
Minsk I and II have failed to bring a real ceasefire or to provide a basis for negotiations over a lasting settlement. Indeed, Minsk II appears likely to follow the script from Minsk I, bringing only a temporary lull in fighting, as the two sides tactically re-position on the ground and in the international diplomatic scene before recommitting to the battle to ensure delivery on their longer term strategic objectives. Read more
By Taras Kuzio of the University of Alberta
Victory over Ukrainian forces at Debaltseve last week was the best present that Vladimir Putin, Russia’s president, could have hoped for on the first anniversary of the Euromaidan – a victory won with the increasingly open involvement of Russian military forces.
As European leaders marched with Ukrainian President Petro Poroshenko in Kiev, a terrorist attack on another march of dignity in Kharkiv killed two and wounded many more. Ukraine’s security service foiled further bomb attacks in Kharkiv and Odessa.
Why did it happen? Read more
By Alex Clackson, Global Political Insight
The peace agreement signed in Minsk, Belarus, last week regarding eastern Ukraine is undoubtedly welcome. Though fragile, the ceasefire provides some longed-for relief for the population of Donbass. A moment of relative tranquility on its territory is certainly something Ukraine needed desperately for two main reasons. The conflict was a huge drain on the Ukrainian economy. The currency is collapsing and inflation is growing rapidly. Secondly, President Petro Poroshenko’s popularity is diminishing.
According to a survey conducted by Kiev-based R&B Group, Poroshenko’s approval rating has fallen below 50 per cent for the first time. But despite the ceasefire, the Ukrainian leader will be left less satisfied with the final agreement than his Russian counterpart, President Vladimir Putin. Read more
By Dalibor Rohac of the Cato Institute
Are things finally turning around for Ukraine? In the space of a few hours on Thursday, a cease-fire with the Kremlin-sponsored separatists was agreed in Minsk, and the International Monetary Fund (IMF) pledged $17.5bn in financial assistance to the government as part of a package from various donors totalling $40bn.
The events on Kiev’s Maidan last year opened a window of opportunity to stop the economic, social and human devastation of Ukraine by its own political elites. The popular will to stop corruption and fix the country’s political and economic institutions was palpable. Two successive governments of Prime Minister Arseniy Yatsenyuk have included a number of promising reformists, raising hopes that this time might be different. Read more