The Ukraine is going through a perfect economic storm. Ravaged by civil war, left with no parliament, and led by a self-styled “kamikaze government”, the country is on the verge of a full-fledged economic disaster. Obviously, the Ukrainian economic crisis is self-inflicted, despite the government’s attempts to blame Russia’s allegedly hostile actions and the lack of Western help. According to estimates made by Ukrainian “Prime Minister” Yatsenyuk in April, the Ukraine needs at least 35 billion USD (1.29 trillion Roubles. 216 billion Renminbi. 2.12 trillion INR. 38 billion CAD. 37.4 billion AUD. 26.6 billion Euros. 21.1 billion UK Pounds) to keep the economy afloat until the end of 2014. The total sum of credit obtained so far from the IMF, the EU, and the World Bank is less than five billion USD (184 billion Roubles. 31 billion Renminbi. 303 billion INR. 5.43 billion CAD. 5.35 billion AUD. 3.8 billion Euros. 3 billion UK Pounds). It hasn’t yet received the IMF’s second tranche of a promised 17 billion USD (625 billion Roubles. 105 billion Renminbi. 1.03 trillion INR. 18.5 billion CAD. 18.2 trillion AUD. 12.9 billion Euros. 10.3 billion UK Pounds) loan, despite the fact that it was due in June. Given that the IMF made subsequent tranches contingent upon Kiev’s ability to regain control of Novorossiya, it’s likely that the Ukraine won’t get some or all the remaining tranches.
“President” Poroshenko worsened the situation with his decision to sign an EU Association Treaty, which resulted in a flurry of Russian measures enacted to protect the Russian market from the re-export of European goods through the Ukraine. This locked Ukrainian business out of the Russian market, which was its top export destination; yet, at the same time, it’s unable to penetrate the oversaturated European market in a meaningful way. Kiev received repeated warnings about this scenario, but Poroshenko made the stunningly unwise choice of ignoring Russian concerns and warnings. Now, the economy is suffocating, and faces a serious currency crisis. The Grivna is trading at around 13.89 Grivna/1 USD (having traded at about 8 Grivna/1 USD in the years following the 2008 economic crisis), causing investors to flee. On 22 August, Fitch Ratings downgraded local-currency-denominated Ukrainian debt to its lowest possible level (CCC). According to finance.ua, Yatsenyuk recently stated, “The Ukrainian economy can’t handle an exchange rate higher than 12 Grivna per dollar”. The exchange rate is 15 percent higher than its critical level and shows no signs of returning to previous levels. The central bank can’t use market interventions to prop up the Grivna because it has almost no hard currency left; a significant part of its currency reserves are in illiquid government bonds. The currency is collapsing and this is visible to everyone. Political analyst Mark Sleboda put it best in a scathing tweet:
#Ukraine currency, economy collapsing fast, nothing at all it can do to stop it (apart from begging #Russia)
On top of the currency crisis, there’s an energy crisis brewing. Last week, the government announced its intention to import coal, once considered a staple of the Ukrainian industrial economy, from Australia because its mines in Novorossiya are unusable. It depends on Russian gas and coal from its former eastern regions; now, it has neither. A week ago, the Cabinet outlined a procedure for declaring a state of emergency in the energy sector, so, blackouts are becoming more and more likely. It’ll be a long, cold, and probably dark autumn and winter for Kiev. Judging by its previous actions, the West won’t come to rescue the Ukraine from its economic misery.
28 August 2014