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With Friends Like the IMF and EU, Ukraine Doesn’t Need Enemies

If they are fortunate enough to avoid war, Ukrainians may be in for an unpleasant surprise as their current and even soon-to-be-elected leaders negotiate their economic future with their new, unelected European deciders.

Kyiv, Ukraine - January 24. (Image: Sasha Maksymenko / Flickr)

Euromaidan protesters took to Kyiv’s streets last year in the hopes of Ukraine’s becoming part of the European Union. The Europe they admired was one of material comforts and living standards far beyond the reach of most Ukrainians, whose average income is about the level of El Salvadorans’. The demonstrators wanted for themselves something approaching Europe’s prosperity — a market economy, advanced technology, quality public transportation, universal health care, adequate pensions and paid vacations that average five weeks.

If they are fortunate enough to avoid war, Ukrainians may be in for an unpleasant surprise as their current and even soon-to-be-elected leaders negotiate their economic future with their new, unelected European deciders. The Europe of their near and intermediate future may be more like Greece’s or Spain’s — but with less than a third of their per capita income and with a small fraction of those countries’ now shrunken social safety nets.

The International Monetary Fund (IMF) has announced that one of the conditions of its lending to Kyiv (along with that of the EU and U.S.) will be fiscal austerity for the next two and a half years. Ukraine’s economy is already in recession, with the IMF projecting a steep 5 percent decline in GDP for 2014. The danger is that this fiscal tightening could become a moving target as the economy and therefore tax revenues shrink further and the government has to cut even more spending to meet the IMF’s deficit goals. This downward spiral is what happened in Greece, where an adjustment that the European authorities could have accomplished relatively easily and painlessly turned into a six-year recession that has cost Greece a quarter of its national income and left 27.5 percent of the labor force out of work.

Is this scenario unlikely? Consider German Finance Minister Wolfgang Schaeuble’s comments to the press last month that Greece could serve as a model for Ukraine. This is like saying that the United States’ Great Depression could serve as a model for Ukraine.

But we don’t have to look to Greece or Spain to see the risks of signing on to a program of fiscal austerity and reforms run by the IMF and its European directors. Ukraine has had its own recent experience to draw on: In just four years, from 1992 to 1996, Ukraine lost half of its GDP as the IMF and friends took the wrecking ball to both the Russian and Ukrainian economies. Ukraine’s economy didn’t start growing again until the 2000s. For comparison, the worst years of the U.S. Great Depression (1929 to 1934) saw a real GDP loss of 36 percent.

Even more disconcerting, Ukraine is facing a number of downside risks that make austerity particularly dangerous at this moment. Ukraine’s exports are about 50 percent of GDP, and half of them go to the EU and Russia, both of whose economies could underperform in the near future — Europe’s because of the prolonged, self-induced downturn that it is only weakly emerging from and Russia’s because of possible further sanctions and conflict with the U.S. and its allies. If Russia decides to retaliate by cutting off energy exports to Ukraine (or EU countries), Ukraine’s economy could slide further into recession. Investment in Ukraine was very weak last year (about half its pre–Great Recession peak) and is likely to worsen further due to the potential for escalating civil conflict. The country’s banking system is also vulnerable, weakened by the recent depreciation of the Ukrainian currency (because much of its borrowing has been in foreign currency). This depreciation will, in turn, raise inflation — currently at just 1.2 percent annually — even as the economy shrinks, as will the increase in energy prices that the IMF is demanding. Unfortunately, the IMF wants Ukraine’s Central Bank to adopt an inflation-targeting regime, which could contribute to deepening the recession.

To be fair, some of the adjustments and reforms that the IMF and Europe want may be necessary or beneficial. Ukraine’s current account (mostly trade) deficit of 9.2 percent needs to come down. But the fastest way to do this — reducing imports by shrinking an economy that is already in recession — is too brutal and unfair as well as risky. The IMF was right to endorse a more flexible currency exchange rate, which was implemented in February; the country’s highly energy-intensive economy, with large government subsidies to fossil fuels, also needs reform.

But you can’t destroy an economy in order to save it. The whole purpose of European lending should be to cushion any adjustments and allow Ukraine’s economy and employment to grow and avoid a downward spiral. Unfortunately, as Schaeuble’s remarks (and IMF documents) indicate, EU and IMF leaders all too often see crisis as an opportunity to remake the economy in the divine image that they worship, regardless of costs and consequences. As with the Portuguese colonialists in 16th century Brazil who wanted not only the land and labor but also the souls of the indigenous people whom they sought to convert to Christianity, neoliberal theology is playing a role here. Nobody has apologized for the unnecessary destruction of Ukraine’s economy (or Russia’s for that matter) in the 1990s.

“F—- the EU,” U.S. Assistant Secretary of State Victoria Nuland said in February as she discussed with the U.S. ambassador to Ukraine their plans to help midwife a new government in Ukraine. If the new government follows the IMF-EU program, many Ukrainians may be saying the same thing.

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