Ukraine

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

By Taras Kuzio of the University of Alberta

European leaders desperate to avoid going down an Iranian-style route of economic and financial sanctions and to dissuade the US from sending weapons signed a second agreement to end the fighting in Ukraine on Thursday in the Belarus capital, Minsk. But it will be as unworkable as the first Minsk agreement signed in September 2014. The new agreement has weaknesses similar to those of its predecessor and will unravel in the next few months. Read more

By Simon Quijano-Evans of Commerzbank

Today’s surprise visit by President François Hollande and Chancellor Angela Merkel to Moscow must be seen as the final attempt to find peace in Ukraine. This can only be brought about through: 1) full coordination between the EU and Russia at all levels, with clear pledges from the Ukrainian government and separatist forces to do the same and 2) the presence of a meaningful international peacekeeping force to secure the agreed-on buffer zone in eastern Ukraine. Indeed, as we hear from the US debate on providing arms to Ukraine, the alternative to peace would be full escalation and definitely not a “frozen” conflict, given that Russia’s military doctrine sees Nato as one of the main threats to national security. Read more

By Taras Kuzio of the University of Alberta

Russia, despite its repeated denials, is sending large quantities of military equipment to the Donbas region of eastern Ukraine along with 9,000 of its troops. Movement of Russian forces, including the Pantsir-S1 missile system, are being tracked by think tanks and western intelligence agencies. Only Russian professional (not conscript) troops and intelligence officers can operate highly sophisticated Russian military equipment – not irregular separatist forces. Read more

Fighting between pro-Russian separatists and Kiev’s military units in south-eastern Ukraine has inflicted a painful blow upon Ukraine’s steel industry, which contributed about 15 per cent of economic output in the pre-crisis period.

Many factories in the Donbas, the industrial heartland of the country, have been closed or have been running with diminished production capacity. China’s aggressive export policy and Russia’s measures to defend its steel producers have exacerbated the disappointment for Ukraine’s steelmakers. Read more

By Taras Kuzio of the University of Alberta

The escalating hostilities around Donetsk airport, already dubbed Europe’s new Stalingrad, could lead to the first full-scale war between European countries since World War II. In the event that the fighting escalates, Petro Poroshenko, Ukraine’s president, has prepared a decree that would institute a state of emergency as a prelude to moving from an anti-terrorist operation to a state of war. Eighty per cent of Ukrainians already believe their county is at war with Russia. Read more

Timothy AshBy Timothy Ash of Standard Bank

This time last year I was asked to contribute an article for beyondbrics on the outlook for 2014, and I chose Ukraine (see Hello 2014: Ukraine’s crisis may run and run, December 20, 2014). That post turned out to be prescient, although even I could never have imagined the remarkable turn of events in that country this year.

For 2015 I think Ukraine will remain in the headlines, but its future is likely at least partially to be determined by events in its eastern neighbour, Russia. The new reform administration in Kiev can succeed, if Moscow gives it some breathing space and scales back its own direct intervention in Ukraine. Read more

By Taras Kuzio of the University of Alberta

A year ago I took the seven hour Hyundai Rotem intercity train from Kiev to Donetsk, introduced on this and two other routes for the Uefa Euro 2012 football championship to carry supporters to Ukraine’s newly built stadiums. The journey is now two hours shorter as the train only goes as far as Slovyansk and Kramatorsk, situated 30 kilometres from the front line of the Russian occupied enclave of the Donetsk People’s Republic (DNR). Read more

Ukraine’s prime minister said Thursday his cash-strapped government, currently in a race to unlock and boost bailouts from the donors including the International Monetary Fund, needs some $15bn in fresh aid for the war-torn and recession-battered country to avert default and rebuild, Roman Olearchyk reports from Kiev, fast FT reports.

“In order to survive, in order to prevent a default, we need an international donor conference, the adoption of a Ukrainian recovery plan at this conference and the help of our Western partners,” said Arseniy Yatseniuk (pictured), addressing lawmakers before they approved his newly appointed government’s reform action plan. Read more

By Olena Bilan of Dragon Capital and VoxUkraine

Despite securing sizeable financial support from western lenders in April — $27bn for two year — Ukraine is again finding itself precipitously close to a financial meltdown. The national currency lost 50 per cent of its value this year despite the central bank attempting to curb devaluation pressures through exchange controls and FX interventions. Foreign reserves have fallen close to $8bn, the lowest level in a decade and equivalent to a mere 1.3 months of imports. Ukraine needs $12-15bn of additional external funding next year, on top of the $16bn scheduled under the current support package, in order to repay $9bn of maturing FX debt, pay $8-9bn for imported gas and build up reserves to at least 2 months of import cover.

Were Ukrainian authorities solely responsible for pushing the country to the brink of disaster? Not this time. Read more

By Alan Riley of City Law School

Following South Stream’s demise the Danube nations must look again at their energy vulnerability. These low income states, locked into antique energy infrastructure and facing high renewable bills, face a major energy dilemma – a dilemma shared, in a less acute form, with the rest of the European Union. One way forward is to look again at whether a deal on gas between Russia and the EU could be made to work as a means of encouraging economic growth and helping to settle the dispute over Ukraine. Read more

By David Clark of the Russia Foundation

Marcos Sefcovic, the new European Commission vice-president responsible for energy, was in optimistic mood last week when he predicted a winter without any disruption to gas supplies from Russia. In truth, the trilateral agreement on gas signed by Russia, Ukraine and the European Union in Brussels five weeks ago has yet to be tested and the underlying tensions that made the agreement necessary are far from resolved. Ukraine and Russia remain in a state of undeclared war and this week’s manoeuverings over the proposed South Stream pipeline show that Russia’s desire for a controlling influence over the European energy market is undiminished. To imagine that Vladimir Putin will refrain from playing the energy card as demand for Russian gas reaches its annual peak requires a bold leap of faith, especially since he has just cut off coal supplies to Ukraine. Read more

“Today it is clear that Ukraine’s non-aligned status, proclaimed in 2010, cannot guarantee our security and territorial integrity. We must abolish it. This position has led to serious losses. That is why we have decided to return to the course of Nato integration.”

So said Petro Poroshenko, Ukraine’s president (pictured), in a speech to the new parliament in Kiev last week. It came just a fortnight after Moscow described the possibility of Ukraine joining Nato as a “red line” in its relations with the west and demanded, in the words of a Russian presidential spokesman, a “100 per cent guarantee that no-one would think about Ukraine joining Nato.” Read more

Two foreign-born investment fund managers and a reform-minded former official from the Caucasus republic of Georgia were on Tuesday appointed to top ministerial posts in Ukraine’s newly-formed, pro-EU integration coalition government.

The three “foreigners” were swiftly granted Ukrainian citizenship on Tuesday hours before being approved as ministers by lawmakers.

Their unorthodox appointment is seen as a desperate attempt by the war-torn and recession-battered country to jumpstart reforms, crack corruption and avert default by unlocking billions of dollars in bailout funds from the International Monetary Fund (IMF). Read more

By Taras Kuzio of the University of Alberta

US President Barrack Obama dare not utter the word ‘invasion’ and asks his advisers why Ukraine is so important. Russia denies it has troops in eastern Ukraine while Ukraine itself describes its own military actions there as an “anti-terrorist operation”. In reality, Europe is witnessing a war that is producing casualties for the Russian army on a scale not seen since the Soviet invasion of Afghanistan. It is time to recognise it as such. Read more