Ukraine's Economic Predicament

As the Minsk 2.0 ceasefire dies aborning because Poroshenko refused to admit that 8,000 troops of the Ukrainian Army were surrounded in Debaltseve, Michael Hudson has a tremendous article, "Ukraine Denouement – The Russian Loan and the IMF’s One-Two Punch," that reminds us that at the root of the civil war is a U.S.-backed neoliberal orthodoxy. It is always a fruitful exercise to remind oneself that the Maidan sprang to life when Yanukovych balked at signing an association agreement with Europe because, after crunching the numbers, it was apparent to him that the cost was not sustainable politically.

So Yanukovych took the Russian lifeline instead, and not too long thereafter the Ukrainian president was fleeing for his life.

Hudson begins his piece by outlining Ukraine's current dire economic straits:

The fate of Ukraine is now shifting from the military battlefield back to the arena that counts most: that of international finance. Kiev is broke, having depleted its foreign reserves on waging war that has destroyed its industrial export and coal mining capacity in the Donbass (especially vis-à-vis Russia, which normally has bought 38 percent of Ukraine’s exports). Deeply in debt (with €3 billion falling due on December 20 to Russia), Ukraine faces insolvency if the IMF and Europe do not release new loans next month to pay for new imports as well as Russian and foreign bondholders.

Finance Minister Natalia Yaresko announced on Friday that she hopes to see the money begin to flow in by early March. But Ukraine must meet conditions that seem almost impossible: It must implement an honest budget and start reforming its corrupt oligarchs (who dominate in the Rada and control the bureaucracy), implement more austerity, abolish its environmental protection, and make its industry “attractive” to foreign investors to buy Ukraine’s land, natural resources, monopolies and other assets, presumably at distress prices in view of the country’s recent devastation.

Looming over the IMF loan is the military situation. On January 28, Christine Lagarde said that the IMF would not release more money as long as Ukraine remains at war. Cessation of fighting was to begin Sunday morning. But Right Sector leader Dmytro Yarosh announced that his private army and that of the Azov Battalion will ignore the Minsk agreement and fight against Russian-speakers. He remains a major force within the Rada.

Poroshenko is on record -- not that this means anything for a junta predicated on one fiction peddled after the next -- saying that he will declare martial law if the situation in the Debaltseve is not resolved to Kiev's satisfaction. Given that the junta needs the IMF funds to remain afloat, this provides a powerful incentive for the Novorossiyan Armed Forces (NAF) to keep the 8,000 Ukrainian soldiers bottled up in the Debaltseve cauldron.

Hudson's piece does a good job explaining how the IMF might give short shrift to the €3 billion loan Russia extended to Ukraine:

The IMF has been drawn into U.S. confrontation with Russia in its role as coordinating Kiev foreign debt refinancing. It has stated that private-sector creditors must take a haircut, given that Kiev can’t pay the money its oligarchs have either stolen or spent on war. But what of the €3 billion that Russia’s sovereign wealth fund loaned Ukraine, under London rules that prevent such haircuts? Russia has complained that Ukraine’s budget makes no provision for payment. Will the IMF accept this budget as qualifying for a bailout, treating Russia as an odious creditor? If so, what kind of legal precedent would this set for sovereign debt negotiations in years to come?

International debt settlement rules were thrown into a turmoil last year when U.S. Judge Griesa gave a highly idiosyncratic interpretation of the pari passu clause with regard to Argentina’s sovereign debts. The clause states that all creditors must be treated equally. According to Griesa (uniquely), this means that if any creditor or vulture fund refuses to participate in a debt writedown, no such agreement can be reached and the sovereign government cannot pay any bondholders anywhere in the world, regardless of what foreign jurisdiction the bonds were issued under.

This bizarre interpretation of the “equal treatment” principle has never been strictly applied. Inter-governmental debts owed to the IMF, ECB and other international agencies have not been written down in keeping with private-sector debts. Russia’s loan was carefully framed in keeping with London rules. But U.S. diplomats have been openly – indeed, noisily and publicly – discussing how to “stiff” Russia. They even have thought about claiming that Russia’s Ukraine loans (to help it pay for gas to operate its factories and heat its homes) are an odious debt, or a form of foreign aid, or subject to anti-Russian sanctions. The aim is to make Russia “less equal,” transforming the concept of pari passu as it applies to sovereign debt.

Further, Hudson limns the rent-seeking logic that -- from Ireland and Greece to Ukraine -- lies behind the IMF's austerity diktats:

IMF loans are made mainly to enable governments to pay foreign bondholders and bankers, not spend on social programs or domestic economic recovery. Sovereign debtors must agree to IMF “conditionalities” in order to get enough credit to enable bondholders to take their money and run, avoiding haircuts and leaving “taxpayers” to bear the cost of capital flight and corruption.

The first conditionality is the guiding principle of neoliberal economics: that foreign debts can be paid by squeezing out a domestic budget surplus. The myth is that austerity programs and cuts in public spending will enable governments to pay foreign-currency debts – as if there is no “transfer problem.” 

The reality is that austerity causes deeper economic shrinkage and widens the budget deficit. And no matter how much domestic revenue the government squeezes out of the economy, it can pay foreign debts only in two ways: by exporting more, or by selling its public domain to foreign investors. The latter option leads to privatizing public infrastructure, replacing subsidized basic services with rent-extraction and future capital flight. So the IMF’s “solution” to the deb problem has the effect of making it worse – requiring yet further privatization sell-offs.

This is why the IMF has been wrong in its economic forecasts for Ukraine year after year, just as its prescriptions have devastated Ireland and Greece, and Third World economies from the 1970s onward. Its destructive financial policy must be seen as deliberate, not an innocent forecasting error. But the penalty for following this junk economics must be paid by the indebted victim.

In the wake of austerity, the IMF throws its Number Two punch. The debtor economy must pay by selling off whatever assets the government can find that foreign investors want. For Ukraine, investors want its rich farmland. Monsanto has been leasing its land and would like to buy. But Ukraine has a law against alienating its farmland and agricultural land to foreigners. The IMF no doubt will insist on repeal of this law, along with Ukraine’s dismantling of public regulations against foreign investment.

This is what Greece is fighting to free herself of. Since it is the very logic of Western capitalist hegemony, Yanis Varoufakis has repeatedly arrived at impasse with his interlocutors in Brussels. All he is asking for is a bridge loan of six months to discuss the technicalities of the troika's bailout. Not allowed.

And this is why war must continue in Ukraine. The IMF prescriptions Kiev must implement can only be carried out if the public is distracted by war. But herein lies the rub. The IMF cannot loan to a nation at war. Finally then after a year it seems that the Kiev junta has arrived at a day of reckoning.

Hudson holds out the possibility that Europe will come to its senses suddenly and break with the United States and align with Russia:

We can now see why the EU/IMF austerity plan that Yanukovich rejected made it clear why the United States sponsored last February’s coup in Kiev. The austerity that was called for, the removal of consumer subsidies and dismantling of public services would have led to an anti-West reaction turning Ukraine strongly back toward Russia. The Maidan coup sought to prevent this by making a war scar separating Western Ukraine from the East, leaving the country seemingly no choice but to turn West and lose its infrastructure to the privatizers and neo-rentiers. 

But the U.S. plan may lead Europe to seek an economic bridge to Russia and the BRICS, away from the U.S. orbit. That is the diplomatic risk when a great power forces other nations to choose one side or the other.

Sadly, I don't see this happening. The hive mind in Brussels, Berlin and other European capitals is still too melded with Washington D.C. If the junta can't get money from the IMF because Poroshenko has declared martial law, Kiev will widen the war and likely receive billions in direct military aid from the West. The war will go on until Kiev collapses.