The Ukraine Economic Crisis

The Ukraine economy is a basket case—one of the weakest in the world. That was true before the events of February 20, 2014 and the collapse of the Yanukovich regime. It is increasingly true since, and will continue to deteriorate even more rapidly in the weeks to come.

What are the dimensions of the current economic crisis in the Ukraine? And its origins in the preceding decade?

From 2000 to the ‘Orange Revolution’ of 2004 Ukrainian per capita GDP actually rose compared to the GDP of its t hen CIS neighbors, from 61% to 68%. From 2004 forward, however, it declined precipitously, from the 68% to a low of 57% in 2013.  In 2013 the Ukraine economy was in recession. That recession is about to accelerate in 2014, with some reports predicting the Ukrainian economy will experience a 5%-10% drop in GDP terms in the coming year. That’s not a recession. That’s a ‘Greece-like’, bonafide depression.

The immediate crisis is not only associated with declining real GDP and falling average incomes.  The crisis is most evident short term in the rapid collapse of the Ukrainian currency and the even more rapid depletion of its foreign currency reserves that are critical to financing its trade, to paying its already significantly high foreign debt load, and for its central bank to intervene to stem the collapse of its currency.  If currency collapses and there are little foreign exchange reserves available, the crisis escalates rapidly. And the Ukraine is desperately close to that point at present.

Since the beginning of the year that currency value has fallen by 20% in relation to the dollar. That means rising inflation for imported goods of all kinds, less consumption spending by Ukrainians, less investment by businesses in Ukraine, and consequent further slower economic growth.

Currency collapse means the Ukrainian central bank will also have to raise domestic interest rates, which will slow the economy another notch, as domestic consumption and investment decline still further. Rising rates also translate into a slowing of foreign direct investment into the Ukraine, with similar effects.

The current collapse of the currency is exacerbated by the economy’s accelerating loss of foreign currency reserves. Foreign exchange is required to make payments on debts (bonds) to foreign investors. No payments mean default. Default means no further loans, production cutbacks and more job loss. Loss of foreign exchange reserves also means no money to finance imports of critical production goods and consumption goods.  And foreign exchange (currency) is disappearing rapidly in the Ukraine. First, in the form of capital flight as Ukrainian consumers, investors and businesses convert the national currency to foreign exchange and send it out of the country to protect their investment. Secondly, in the form of the Ukrainian central bank, which uses the foreign exchange to prop up the Ukrainian currency from further collapse.

It is estimated that the Ukraine had about $20 billion in foreign currency exchange at the start of the 2014 calendar year. As of March 1, western estimates are it now has about $12 billion.  The further depletion of reserves will mean an even faster collapse of its currency, even more rapid capital flight from the country, and a good part of the economy coming to a virtual halt.

Recent estimates are currency reserves are depleting at around $4 billion a week. Should the worst case scenario materialize, and defaults begin on debt payments to western bondholders and lenders (who are heavily concentrated in Austrian and Italian banks) then a run on banks in the Ukraine are a real possibility and the risk of contagion to Europe via Austria-Italy becomes increasingly likely.

There has been a lot of talk about how much of a ‘rescue package’ Ukraine will need from the west—i.e. from Europe, the IMF, and the USA.  Ukraine’s new finance ministers and central bankers are saying $35 billion over the next two years. That is a gross underestimation, however. Should the currency collapse continue, which is almost a certainty given political events now unfolding, that currency decline actually raises the amount of debt that needs to be paid. A $20 billion rescue package by the west may be required well before May 1, 2014 instead of by year end.

Ukraine’s total debt is now estimated around $80 billion. That will escalate rapidly as well by this summer to over $100 billion, with still more in the year beyond.

Will western European capitalist interests, and US capitalists ‘backstopping’ the Europeans financially, provide that kind of immediate short term ($20 billion) rescue and an open-ended further increase beyond to cover the $100 billion from default? Very unlikely.

The IMF has initially indicated it would provide $27 billion, but that would be doled out over 7 years in delivery. As in typical IMF deals, most of that $27 billion would go to cover payments to western bankers first, to ensure they’re protected and covered. Little would be left to stimulate the Ukrainian economy or to relieve the average Ukrainian household. Moreover, the ‘terms’ of the IMF deal (as any IMF deal has shown) would prove disastrous to the real economy. Already IMF officials are making it clear the rescue package would be available only with the proviso that the Ukraine cut government spending and jobs, pensions, and especially the large subsidies now provided to Ukrainian families to offset the high gas and oil costs to households.

Apart from the IMF, the EU has said nothing as yet about financial aid. Apparently Poland and the USA are cooking up something. But the USA has only indicated so far it would provide an emergency loan of $1 billion, although Secretary of State, John Kerry, and Senate hawk, John McCain (who personally went to Maidan Square to stir up the street) are huddling in back rooms to discuss other possibilities. But it is hard to imagine Obama and the USA would provide much substantially to Ukraine in a US election year coming this November 2014.

In a revealing editorial in the British Financial Times newspaper recently, one academic mouthpiece well connected to western banks and think tanks, and a former adviser to the Ukrainian government, Anders Aslund, downplayed the amount needed to bail out the Ukraine, but put the cost to Ukrainians of the bailout more bluntly—saying the rescue would require a western-type ‘austerity’ program for average Ukrainians to pay for the bailout. That included Ukrainians accepting fewer jobs, inflation, and loss of the generous gas subsidies to households. The Ukraine in an IMF bailout would almost certain replicate the still continuing Austerity crisis in Greece.

Another theme appearing repeatedly of late in the western press and media is that the economic collapse in the Ukraine today is totally the result of the corruption and ineptness of the Yanukovich regime. But this view ignores the bigger picture, and is more a political, and even ideological, analysis of the Ukraine’s economy than an economic one.

Economic trends do not occur overnight, or even in terms of weeks or months. It is a fact that Ukraine’s GDP per capita was rising steadily until the ‘Orange Revolution’ of 2004. After that it began to fall sharply in relation to its neighbors. That is because the Ukrainian economy had been until 2004 tightly integrated with the Russian Federation’s. Attempting to break that integration after 2004 would understandably lead to an adjustment period of slower growth, as the Ukraine attempted to orient to the west in its exports and financial dealings. Its economy understandably weakened therefore as part of the immediate post-2004 transition.

A second major negative impact on the Ukraine, also in some ways a consequence of its break with the Russian Federation post-2004, was energy prices. With few oil and gas reserves of its own, when the global oil markets and inflation hit between 2006-08, driven largely by western oil cartels and global speculators, the Ukraine’s GDP took another major economic ‘hit’. That was followed by a third impact, in late 2008-2010 in the form of the global economic downturn and the near standstill in global trade, which had a particularly serious effect on the Ukraine, dependent as it is on exports for GDP growth.

In 2010 the Ukraine tried further to orient its exports and trade to western Europe. However Europe fell into a second ‘double dip’ recession starting late 2010 that continued into 2013. Western Europe economies, banks and businesses could not increase their demand for Ukrainian exports, nor send capital for investment into the Ukraine in any great degree. Europe itself was mired in a second recession and deeply preoccupied with bailing out governments and banks in its own ‘periphery’ (Greece, Italy, Spain, Portugal, Ireland, Baltics, Hungary, etc.) Real investment internally in Europe was already weak and bank lending even within the EU was declining. Providing loans and more direct investment to the Ukraine was not high on the EU agenda. It was economically and politically not possible from the European Union’s own interests.

Notwithstanding the public statements by western European governments and bankers to provide financial aid to the Ukraine now, post-February 20, the reality is that the EU still cannot afford to deliver on promises of significant financial aid. Nor will the USA, which is quietly trying in the background to convince western European governments it will ‘backstop’ (restore) financial aid Europe may commit to the Ukraine.  Obama will not risk a Ukraine aid package of any significant dimensions in a US election year.

Like the post-2004 attempt to restructure the Ukrainian economy, like the global oil speculation bubble of 2006-08, and like the EU’s double dip recession of 2008-09 and 2011-13, the current collapse of emerging markets and their currencies that has been underway since last summer 2013 has added yet a fourth major negative impact to the Ukrainian economy.

The current emerging markets’ currency crisis, which is producing massive capital flight back to the west and a corresponding slowing of their real economies, has embroiled the Ukrainian economy as well.  If economies like Brazil, South Africa, and others—once booming and now declining or stagnating—have been devastated the past year by the major monetary policy shift that has come out of central banks in the US, Europe and Japan, then it is understandable the Ukrainian economy has been no less negatively impacted over the past year. If the US central bank, the Federal Reserve, and other central banks’ reversal of the money injection policies in effect since 2008 are generating the massive economic disruption in emerging market economies today, then the Ukrainian economy is no doubt suffering from the same: i.e. collapsing currency values, capital flight, declining foreign exchange, and slowing real economy. Ukraine has it even worse than other emerging markets, as recent political events have further exacerbated the emerging market effect.

In addition, it should be noted the Ukraine, unlike Brazil and others, did not benefit from the western central banks’ massive flooding of the global economy with liquidity after 2008 to save their banks and financial institutions. That flood of cheap money boosted the emerging markets for a time; that is, until the past year. Now that the money is being ‘pulled back’ to the west as result of another monetary policy shift. Thus the Ukrainian economy since last year has been experiencing, like other emerging markets, the severe negative effects of a global central banks policy shift, while never having experienced the benefits of other emerging markets during the 2008-13 ‘free’ money period that flooded emerging markets.

In short, the Ukraine has been the unfortunate victim of several long term negative economic trends that were set in motion by political decisions in 2004 long before Yanukovich came into office.  It has been the victim, like many other economies, of the oil price bubble of 2006-08. And it has never received the export and foreign direct investment support from Western Europe it has anticipated due to the collapse of the global economy and trade in 2008 and the EU’s double dip recession of 2011-13. On top of all that, now the Ukraine is being especially hard hit by the emerging market crisis, which has its roots and origins in the policy shifts of the US central bank.

What this means is that the current Ukrainian economic crisis cannot be laid exclusively at the doorstep of Yanukovich. The corruption and policy ineptness of his regime may well be included among the various causes of the Ukraine’s current economic problems, but nonetheless broader historical economic causes are involved as well. The abrupt severance of the Ukrainian economy from the Russian Federation after 2004 and global western capitalist mismanagement of the past decade (i.e. oil price shocks, financial crash of 2008, inability of western economies to generate a robust sustained recovery since 2008, emerging markets crisis today) also are critical to understanding the economic plight of the Ukraine’s average citizen.

The preceding analysis is not an apology for the economic mal-performance of the Yanukovich regime. Rather it is an effort to look behind the obvious ideological and political motives of those who argue in the west today that the protestors on Maidan Square are there because of the corruption of the regime; or that they are there because of the ineptness or personal thievery of the Ukraine’s Treasury by Yanukovich. That is a political analysis wrapped in ideological trappings of a bad economic analysis.

Clearly the Ukraine’s economic problems are deeper, much deeper. And if  current economic problems have been caused longer term by western capitalism’s economic crash of 2008 and subsequent policy shifts, one should perhaps think twice whether any long term (let alone short term) solution to Ukraine’s economic crisis will result from the same source, the western economies.

For the economic crisis in the west is itself not ‘over’. The EU economy remains stagnant at best, Germany continues to slowly grow but at the expense of its exports to the EU periphery and China demand that is slowing. The UK economy is desperately soliciting super-wealthy investors around the globe to buy up London property, creating its own bubble, while courting China to bring in capital to rebuild the UK’s crumbling infrastructure. Meanwhile, Japan has embarked upon a ‘US Federal Reserve-like’ monetary stimulus that is stimulating only financial asset prices while its real economy slows again. Not least, since the middle of 2013 the west is trying to keep its sputtering economic engine going by throwing the emerging markets ‘under the bus’, as they say.  Europe and even the US are in no condition to bail out the Ukrainian economy to the tune of $30-$50 billion over the next year that will likely be required.

If one may speculate, perhaps one reason Yanukovich chose the Russian $15 billion offer over Europe’s lesser offer is that the EU deal was less and with more IMF austerity strings attached. Moreover, the possibility of energy relief from the Russian Federation may have appeared a better deal than the EU’s energy deprived, high energy cost, economic partnership. That’s not an apology for Yanukovich, but he has been as much an economic thorn in the side of Russian interests as he has been for the EU, trying to play both against the other.  He has also been a desperate politician, especially dependent on oligarch money and support in the Ukraine. He has been attempting since 2010 to walk the tightrope and has now fallen off.

As for the USA, like the EU, it too can be counted on to deliver little in the way of real aid apart from promises that, like the EU and IMF promises, are designed primarily to influence the Ukrainian elections in the short run in May.

Both the EU and USA want reliable (and pliable) capitalist politicians in Parliament and the Ukrainian government. That means politicians who will follow their economic policies and integrate the Ukraine into the western economic orbit. In other words, politicians that respond correctly when threats to freeze their personal assets in Switzerland and Luxembourg are raised, as has been the case in the days immediately preceding February 20.

The west’s gamble is their hope they can exclude the radical, ultranationalist and proto-fascist forces on the ground that served as the battering ram to bust down the door of the Yanukovich regime; or at least minimize their influence in the government. But that task that will not prove so easy, they may find. What the west wants is to have the Yanukovich ‘crony capitalists’ in the Parliament and government to grow up, come in ‘out of the cold’, stop relying on cronyism and learn to become one of the respected capitalists of the west in a new partnership.

A final note on the politics of the situation: The current foreign policy of the Obama regime is essentially the same as George W. Bush’s foreign policy. It is the policy of the Neocons in the US, who have remained entrenched in US government throughout the Obama regime. It is no accident that the USA’s ‘point person’ in the Ukraine during all the recent events has been Virginia Nuland.  Nuland has always been a Neocon, and was for several years a direct personal advisor to the ‘King-Neocon’ in the USA, former Vice-President, Dick Cheney, during the Bush period.

US policy is not to deliver the amount of hard cash that Ukraine needs to restore its economy. Nor will multinational corporations step up their foreign direct investment into the Ukraine for the foreseeable future. What multinational businesses want is not the agricultural products and small industries of the western Ukraine; they want is the industrial base of the eastern Ukraine. They want to buy up, ‘downsize’ and convert the east Ukraine’s industrial base, in dire need of re-investment, to their own global corporate plans. But so long as the political crisis continues, there will be little multinational corporate foreign investment into the Ukraine.

So where is the economic bailout from the west to come from, if neither from the Europe, USA, or multinational corporations? That answer is easy. It won’t come—beyond superficial promises and token aid injections in the short run to influence upcoming Ukrainian elections in May.

Looking longer term, should the USA and the west prevail politically somehow in the coming contest for the Ukraine, the Ukrainian economy will be in shambles far worse than it is even today. Ukraine’s currency will be near-worthless. Inflation rampant. Government subsidies stripped from households. And economic hardship severe, as a ‘Greek-Style’ austerity is imposed.  But western banks and multinational corporations will have a field day, as they say, buying up industries and companies on the cheap in the east and restructuring them to fit their global economic plans.

It appears many Ukrainians do not yet understand the fundamental economic and political dynamics at play in the Ukraine.  On the one hand, they don’t want Yanukovich ‘crony capitalist’ regimes that do little for them and much for themselves. But the crony capitalists still remain in Kiev, in Parliament and government, even though Yanukovich himself is gone; they have only switched sides to protect their personal interests (and of course their western bank accounts and investments when threats were made to freeze them). The Ukrainians are therefore about to trade one set of economic vultures (e.g. Oligarchs) for another in Kiev: The formerly homegrown Oligarch who is now in the process of remaking himself with new, closer western ties.

On the other hand, perhaps many average Ukrainians do understand. As one was quoted in an interview in Kiev on the street, “’We need new people who can say no to the oligarchs, not just the old faces’, referring to the billionaires who control blocks of votes in Parliament”. (New York Times, February 25, 2014).

Unfortunately, the average Ukrainian is not driving the current situation. The proto-fascist street parties are dominating and directing the ‘outside’ strategy, while the ‘crony capitalists’ on the ‘inside’ in Parliament are being played like a violin by western interests. The EU and USA may be in the process of consolidating their inside strategy with upcoming elections, but they may find controlling the radical, ultra-right elements, and denying those elements a real role in government, may prove more difficult than they think. The historical analogy of Weimar Germany capitalists in the early 1930s thinking they could control the Nazis in the street is not totally inappropriate here. Nor is the concern that the latter street elements could drive the situation toward a military confrontation.

Indeed, perhaps the greatest concern at the moment is that the radical street elements may retain influence the situation sufficient to push the new Ukrainian government into a direct military confrontation with Russia before the May elections—and before the EU and USA can effectively neutralize their influence.

Jack Rasmus is the author of the book, ‘Obama’s Economy: Recovery for the Few’, Pluto press, 2012 and ‘Epic Recession: Prelude to Global Depression’, Pluto, 2010. He is the host of the weekly radio show, ‘Alternative Visions’, on the Progressive Radio Network. His website is, his blog,, and twitter handle, @drjackrasmus.

Jack Rasmus is author of  ’The Scourge of Neoliberalism: US Economic Policy from Reagan to Trump, Clarity Press, January 2020. He blogs at and hosts the weekly radio show, Alternative Visions on the Progressive Radio Network on Fridays at 2pm est. His twitter handle is @drjackrasmus.