Ukraine's black hole economy

Events in Ukraine are accelerating fast. On Wednesday, there were skirmishes in Crimea between pro-Russian demonstrators and Muslim Tartars. Over in Moscow, meanwhile, Vladimir Putin, ordered his military to conduct exercises in Russia's western district, a region which – coincidentally or not – borders Ukraine.

The rhetoric has grown more heated, too. Russian officials have claimed the rights of Russians in Ukraine are being severely infringed. Foreign minister Sergei Lavrov has dismissed opposition protesters in Kiev who turfed out president Viktor Yanukovych as ultra-nationalists and "pogromists". Prime minister Dmitry Medvedev has said Ukraine's new rulers are not legitimate.

Still, President Putin's latest war games do not mean Russia is planning a military intervention in Ukraine. Such a scenario is unlikely, but the Kremlin has plenty of other options short of full-scale invasion to stir up trouble for Ukraine's new European-leaning interim team, unveiled on Wednesday evening in Kiev, and to destabilise the government before it has even started.

The most obvious is to encourage pro-secessionist forces in Crimea. On Monday, pro-Russian demonstrators in the port of Sevastopol – the home of Russia's Black Sea fleet – staged their own "counter-coup",installing a Russian citizen as mayor and demanding union with Russia. The mood is febrile. The spectre is of Ukraine splitting up.

But Russia's simplest instrument of control is economic. As Andrew Wilson of the European Council of Foreign Relations puts it in a new briefing paper, Ukraine is on the verge of economic collapse. Ironically, he notes, this dire situation is "entirely self-inflicted". Foreign reserves are dwindling fast. The Ukrainian currency, the hryvna, is tumbling precipitously against the dollar, the graph of the two currencies resembling a ski-slope. But it isn't trade sanctions from Moscow that have taken Ukraine to the brink. Rather, Wilson argues, it was corruption by Yanukovych and his entourage, which sucked an estimated $8bn to $10bn from the economy between 2010 and 2013.

As a result, Ukraine is now staring into a fiscal black hole. Last December, Russia promised to bail out Ukraine with a $15bn bond-buying scheme plus a 30% cut in the country's gas price. In return Yanukovych scrapped plans to enter into a trade association with the EU, a move that sparked the street demonstrations which led to his overthrow two months later. Only $3bn of the loan was ever delivered. Moscow won't now pay the rest.

The International Monetary Fund has promised assistance, as have other EU states including the UK. But any new tranche of aid is only likely to materialise following elections for a new government in May.

In the meantime, the country, now run by a disparate, untested group of opposition politicians, hurtles towards default. The new acting president Oleksander Turchinov has indicated that his country needs $35bn for the next two years to avoid running out of cash.
While Russia is in a position to hit Ukraine hard, it would not be in its interest to try to subjugate it.  Actually there heavy handed approach is what caused the current revolution.  It would be smart for Russia to stop being a bully and start being a good neighbor are it will push Ukraine into the arms of Europe and West permanently.


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