Saturday, November 1, 2014

COMMENT: Ukraine's bad start | Business New Europe

This weekend's crucial parliamentary elections in Ukraine could mark the end of two decades of failure and the launch of the country's attempt to catch-up with the rest of the region. The trouble is that Ukraine is already off to a really bad start.

There has been no real reform in Ukraine since the collapse of the former Soviet Union in 1991, irrespective of the colour of the government - orange or blue. The Orange Revolution was a wasted opportunity. President Victor Yushchenko won a mandate from the people on the streets of Kyiv and ousted the kleptocratic government of Leonid Kuchma, but internecine fighting amongst his fellow revolutionaries and the machinations of Ukraine's leading oligarchs gutted any attempt at real reform. When ousted Ukrainian President Viktor Yanukovych took back control in 2010 in what were probably the country's first truly democratic elections, the stealing began in earnest. Leading to another revolution.

Ukraine is a case study in failure. It is one of only two states in the former Soviet Union not yet to get back to the 1991 level of GDP (The other is Kyrgyzstan). Per capital income is a mere $3,000 - a fifth of that in Russia and well behind even Belarus.

As Eurasia Group founder Ian Bremmer pointed out in his book "The J Curve", authoritarian rule brings stability but democracies, while more chaotic, offer a much higher standard of living. The difficulty is, to get from one to the other you have to pass through the bowl of the "J" and not everyone makes it.

Ukraine has not been helped by the duplicity of the west. Happy to welcome Ukraine into the European club of "shared values" politically, it is not prepared to pay for Ukraine's transformation. And the country is in desperate need of cash. The widely touted IMF $17bn stand-by loan sounds like more than the $15bn Russia offered in 2013, until you realise it is paid out over two years and doesn't even cover this year's bills for the $5.4bn Ukraine owes Russia in overdue gas bills, the approximately $2bn more it will have to pay for this winter's gas and the $1.6bn Eurobond that state-owned gas company Naftogaz had to redeem earlier this month.

Not paying the Russian bill is not an option so that leaves nothing left over for badly needed investments and recapitalisation of the banking sector, to name the most obvious pressing needs. Ukraine is in very real danger of total economic meltdown.

Ukraine's Naftogaz said it has set aside $3.1bn in a special escrow account to pay Russia's natural gas supplier Gazprom on October 24, but without a new deal on gas prices this amount remains about half what Ukraine owes.

Complete story at - COMMENT: Ukraine's bad start | Business New Europe

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