16 Nov. IMF in Ukraine: first basic background

In April 2014, the Ukrainian government (Prime Minister Yatseniuk) agreed to a programme of economic reform, backed by $17.1 billion loaned from the International Monetary Fund (IMF). The IMF loan is based on a two-year stand-by arrangement to re-work and strengthen Ukraine’s economy and economic governance. 

The IMF loan agreement that Ukraine signed onto in April 2014 made $3.2 billion immediately available to Ukraine with the remainder subject to frequent reviews. The Stand-By Arrangement entails exceptional access to IMF resources, amounting to 800 percent of Ukraine's IMF quota.

Now, since April the IMF reports some progress (mainly willingness on the part of the Ukrainian government to implement these 'reforms') as well as significant challenges as a result of the continuing violence in the East. Report from Poul Thomsen, Acting Director of the IMF’s European Department:

Sept 2014: the economic environment has become much more challenging than envisaged at the time of the program approval. In fact a number of risks have already materialized, including an intensification of the conflict in the eastern part of the country and an escalation of the gas price and arrears dispute between Ukraine’s national gas company Naftogaz and Russia’s oil and gas company Gazprom. This in turn has led to a notable deterioration in the economic outlook, budget performance, and balance of payment flows.

It now envisages higher potential bank restructuring costs and larger support for Naftogaz to cover its increased deficit and repay external liabilities. These revised fiscal outlays will add to general government debt in 2014-15. 

The success of the program critically depends on the government’s ability to make a decisive break with a past riddled with weak governance, widespread corruption, and abysmal business climate. 

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The Ukrainian government is not only saddled with decades of corruption and gross mis-management of state funds, but has to somehow fund a war (aka. anti-terrorist operation). In addition, Ukraine continues its dispute (ongoing since before 2005, but see European Commission report 2009 for some background) with Russian state-owned gas company, Gazprom. 

The Russian-Ukrainian gas disputes concern the transit of Russian gas supplies to the European Union (via Ukraine), where previous Ukrainian leaders were involved in diverting gas supplies intended for European markets in Ukraine. 

Ukraine, in 2014, has had to secure the EU as a guarantor for their gas purchases from Russia in order that Russia continue supplying gas to Ukraine throughout this coming winter, in spite of debts owed to Gazprom. Ukraine’s state-owned company, Naftogaz, is in dispute with Gazprom over gas prices (of gas supplied from Gazprom to Naftogaz in Ukraine). Naftogaz is also filing a lawsuit against Russia for the expropriation of assets in Crimea.

Gas prices in Ukraine have been 4 to 9 times lower than in neighbouring gas-importing economies (in January 2014, Romania’s citizens paid about $ 414, Moldova’s $ 432, and Poland’s $ 687 for one thousand cubic meter. In Ukraine, before the current 2014 reforms, gas could be as low as $86). However with the IMF/economic adjustments, price increases for heating and gas are significant—40%-55% in 2014, and a further 20-40% in each of the next three years. 

These price increases are ostensibly matched by 'social assistance' funding programmes for low-income households. However, at least in the IMF reports, it is unclear how these programmes are being implemented and the extent to which the Ukrainian government will be able to allocate funds towards social assistance! 

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some background and some commentary:

As I have previously written in this blog (see 4, 19 May; 23 June), since independence in 1991, the Ukrainian government and economy has been largely defined by a corrupt, Russian-backed oligarchs and oil tycoons leadership (see Yanukovych, Tymoshenko). 

This is not the first time that the IMF has ‘stepped in’ to provide loans to Ukraine (1990s, hyperinflation) But for the most part, the Ukrainian government was never able to re-work post-Soviet Ukraine into a functioning economic system. Thus, Ukraine has remained a state on the brink of failure and economic crisis. Meanwhile oligarchs fed their off-shore accounts and Russian interests trumped any attempts at autonomous Ukrainian governance and economic independence. 

The annexation of Crimea in March 2014 builds on a historically entrenched ideology of Russian supremacy over Ukraine.

The Orange Revolution, in 2004, led by Yushchenko (see 22 Nov 2004), signalled that times were changing in Ukraine. However, Yushchenko, the former director of the Ukrainian National Bank (see 11 March 2014), nevertheless remained part of the old establishment. His attempt to reform and restructure the Ukrainain economic and political system failed, and Yanukovych stepped in and served two terms as President (CEO). Until Maidan.

As I have emphasised throughout these blog posts, Maidan symbolised a social and economic revolt (now termed a “Revolution of Dignity”). However, in spite of their organisation into self-defense units, medical units, food preparation and so on, ideologically the people who came together in Maidan were nowhere near as spectacularly organised or unified as the Russian propaganda or various leftist Western commentaries imply. 

This was not a neo-fascist take-over, but a conglomerate of a multi-faceted and diverse population who above and beyond their disagreements and differences agreed that the Ukrainian political and economic elite were corrupt and never had the interest of the people in mind. Maidan demanded a re-working of the system; nothing more, nothing less.

The new government that replaced Yanukovych in the spring of 2014 (again accused by the Left and the Right of being either neo-fascist or Western sell-outs), was made up of the ‘old guard’ of opposition leaders, and new Maidan activists, invited by the political opposition leaders to bring Maidan into Verkhovna Rada (Parliament) to work for the systemic changes called for by the protests. 

This new government, however, inherited the dysfunctional Ukrainian state. With 45,373,000 people to govern including over 9 million pensioners to fund, feed and house, they are saddled with a bankrupt country.

Inheriting such an economic state, the Ukrainian government (Poroshenko/Yatseniuk) orients its sights to the West (EU) and not to the East (Russia). The Ukrainian government has agreed to IMF loans and their accompanying structural adjustment agenda. Yes, Yatseniuk is an economist, educated in Harvard. But contrary to propaganda consumed by the European Left and ‘Western’ left commentators, he is not a neo-fascist, neo-liberal sell-out. It is more than significant that many neo-Nazi groups from Western Europe have in fact been outspokenly supporting those opposed to the revolution, including the eastern separatist fighters.

Such blame and blanket dismissals are not only false, but simplify a current economic crisis that needs solid analysis and imaginative alternatives. One would think, ideally, that the current posturing of alternatives and critiques of the troika (EU, IMF, European Central Bank) in Greece, could potentially bring the Greek opposition party, SYRIZA, for example, to see in Ukraine an opportunity for allies. The Ukrainian case is at the brink of these austerity measures and could offer an example, a demonstration of alternatives to IMF/EU reforms. 

Yet for all the talk of revolutionary alternatives and democratic possibility, the western Left often simply reaffirms a narrow-minded (and historically rooted) animosity towards Ukraine. This only fuels Putin's agenda. As Timothy Synder writes, "The European left has a real problem, it is not the Ukrainian far right. It is the European far right, which happens to be popular, and is supported by the Russian far right, which happens to be in power in Moscow." Rising anti-EU sentiment amongst populist parties, including UKIP in the UK, falls in step with the vicious politics and repressive practices of Vladimir Putin. 

The discussion now should be of what alternatives exist for Ukraine's economic recovery, and what alternatives exist for re-shaping, re-vitalising, Europe. Pro-European sentiment in Maidan was not a desire for IMF structural adjustment programmes. But the European values enshrined in the ECHR, the European Social Charter, or the wish to enjoy free movement as labourers in the EU. The discussion of how to re-work this Europe and these European values needs to be encouraged. This does not mean ignoring the various failings (in practice) of Europe. But understanding that the life enjoyed by populations in Europe nevertheless remains a dream for many of those whose daily existence is under Russia's repressive regime under Putin.