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Kyiv needs money, fast

Even if Ukraine can avoid a war with Russia, its economy is in dire straits.

Kyiv 03 19 2014Enlarge
On Kyiv's Maidan. Ukrainians already very hard-pressed will have to endure austerity in exchange for international financial aid. (Spencer Platt/Getty Images)

KYIV, Ukraine — Sadly, sales of flowers in downtown Besarabsky market are soaring.

Svitlana Sergivna offers discounted prices for customers buying bunches of carnations and tulips to expand the mounds of blossoms carpeting much of central Kyiv in honor of the protesters gunned down during last month's revolution.

Still, the 84-year-old vendor is struggling to make ends meet in a country that's facing an economic crisis as well as the threat of division and Russian invasion.

"My savings that I’ve been collecting all my life, that's all gone to zero,” she says. Her pension amounts to around $122 a month. “Meanwhile, the bandits keep making their millions.”

Swaddled in layers of bright sweaters against the winter chill, Sergivna gives a pretty good rundown of the economic troubles confronting Ukraine's new government.

"Everything is broken down here,” she says. “Agriculture is in ruins. Industry is in ruins. Everything has been sold off, sent offshore to Swiss banks.”

“With every step we take, we need to pay a bribe,” she adds. “You can't even get into the hospital without handing over some money. It's going to take decades before we clear out all this corruption."

In the 20 years since Ukraine gained its independence from the Soviet Union, both pro-Russian and Western-leaning governments have failed to modernize the economy.

Graft is rife. Last year, Ukraine ranked 144th out of 175 countries in Transparency International's global corruption index, the worst in Europe. Family and friends of the ousted Kremlin-backed President Viktor Yanukovych are estimated to have looted more than $30 billion from the state.

Corruption has scared away foreign investors, together with red tape and state-introduced market distortions. Among European countries, only Bosnia has a lower rating on the World Bank's "ease of doing business" rankings.

The pro-Western government that came into power after last month's revolution toppled Yanukovych says it’s committed to changing that.

"My first priority is a corruption-free public procurement act," Economy Minister Pavlo Sheremeta said in an interview. "No. 2 is deregulation, fully fledged and across the board."

He’s already won praise for taking public transportation to work, eschewing the shiny black limousines traditionally favored by the country's political and business elite. Prime Minister Arseniy Yatsenyuk has also surprised Ukrainians by flying economy as he shuttles between world capitals lobbying for support in the country's standoff with Russia.

But they face mind-boggling challenges.

With Russia implicitly threatening to follow Tuesday's annexation of Crimea with an invasion of Ukraine's eastern and southern regions, Kyiv is desperately trying to muster funding for its long-neglected military while under enormous financial pressure.

The country has only around two months of foreign reserves left. Fear of war and bankruptcy are making it virtually impossible to raise money on international markets. The budget deficit is running at 8 percent of gross domestic product. The hryvna currency is tumbling.

Help is on the way in the form of emergency international loans from the United States, International Monetary Fund and elsewhere. The European Union head office on Wednesday offered another $1.4 billion on top of $840 million already approved.

"It is in the essential interest of Ukraine and of the EU to maintain peace and political and financial stability in our continent," EU Finance Commissioner Olli Rehn said in Brussels. "This financial aid will help in stabilizing the worsening financial situation in Ukraine and therefore will be one vital part of achieving a solution to the crisis."

The EU has also agreed to tear down tariffs, opening up its markets to Ukrainian companies — at least those able to compete with Western rivals.

Still, the government says it needs $35 billion to meet its financial requirements over the next two years, even without a war.

That’s why some, including the billionaire investor George Soros, are calling for the West to go further by developing a Marshall Plan for Ukraine, along the lines of the aid package offered by the United States to Western Europe after World War II.

But Western aid comes with conditions. The government will have to push through reforms needed to knock the economy into shape, including belt-tightening for a population that’s already very hard-pressed. There's talk of higher taxes, cuts in pensions and drastic austerity to slash public spending.

At the top of the West's list of demands is an end to market-distorting energy subsidies, which could cut government spending by as much as 2 percent of GDP.

Although subsidies have been used to support firms owned by the government's oligarch buddies, they also keep heating bills for ordinary families low. Ending them as the country faces an end of cheap Russian gas supplies threatens serious hardship.

Asked if Ukrainians are prepared for such sacrifices, Sheremeta points to the flowers heaped on Instytutska street, where some of the deadliest clashes between protesters and Yanukovych's security forces took place last month.

"Wasn't that a sacrifice?” he says. “There were half a million people here willing to risk their lives. We had lower gas prices, but at the expense of our freedom and independence. Now we’ve chosen freedom, but it means we have to pay the price."

To make those sacrifices palatable, the government — or the new one that replaces it after elections scheduled for May 25 — will have to ensure the burden falls not only on poor pensioners like Sergivna, but also on customers frequenting the Bentley and Lamborghini dealerships and fancy French boutiques just a short walk from her stall.

Cleaning up the business world presents its own dangers: The authorities must tread carefully to avoid alienating those oligarchs who have taken their side against Russia.

The government is facing criticism for appointing two billionaire businessmen governors of their home regions in eastern Ukraine. It says the influential tycoons can bolster unity on the frontlines of Russian moves to split the country.

"In regular conditions, I’ve always said the authorities have to be separate from economic actors," Sheremeta told a news conference last week. "However, this is not a normal situation. We need mangers who can bring unity to the whole nation."

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Whatever happens, it’s clear Ukraine's acrimonious break with Russia will provide shock therapy to the country's economy.

With warmer weather approaching, the country should be able to ride out any cuts to Russian fuel supplies by relying on its own gas production together with new sources from the West. In the longer term, those could include exports from the United States, which has emerged as a major gas producer in recent years.

Ukrainian industry will have to adapt fast to compete in Europe and other international markets if the conflict with Russia undermines its reliance on exporting cheap, lower quality goods to its fellow former Soviet republic.

Some businesses are already being forced to rethink.

"There is a big problem with this conflict," says Arseniy Finberg, who runs a travel company in Kyiv and says Russians made up around 70 percent of tourists in Ukraine. “Now thanks to this propaganda, we'll lose most of them. That's a challenge, but we look forward to facing it, to turning our business upside down and welcoming thousands and thousands of Western tourists."

The young entrepreneur knows those hopes, together with any expectations of reviving the rest of Ukraine's fragile economy, will depend on a quick return to peace and stability. 

http://www.globalpost.com/dispatch/news/regions/europe/140319/kyiv-ukraine-economy-russia-eu-imf