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Ukraine’s economy is stuck in 1993

Ukraine’s government will owe foreigners around $25 billion this year, and the country’s central bank only has around $12 billion in foreign currency tucked away. Where will they find the other $13 billion? Ukraine’s economy has slowed because of the instability, and the loss of Crimea to Russia (whether through a referendum or military force) would only damage Kiev’s economic position further. Besides the military situation in Crimea, that $13 billion is the other immediate problem that Ukraine’s new leaders must solve right away.

Europe and the United States have offered loans to Ukraine, and larger aid is expected soon from the International Monetary Fund — but the fund is likely to demand unpleasant reforms from Ukrainian leaders, starting with an end to the energy subsidies that have saved ordinary Ukrainians from paying Moscow’s full price for imported natural gas.

Elsewhere, fiscal austerity demanded by the international community in exchange for aid has hampered troubled economies, as reductions in welfare and government spending have forced households to spend less and business has slowed overall. Ukraine might be in even worse shape than other countries that have fallen on the IMF for help. As the chart above from the Canadian International Council shows, Ukraine’s economy now (represented by the outer red circle) is about the same size as it was at the collapse of the Soviet Union (represented by the smaller pink circle). The Ukrainian economy has barely grown in two decades. The other former Soviet states are shown for comparison.

There are several reasons for Ukraine’s poor economic performance. One, to be sure, is the gas subsidies, which have allowed Ukrainians to use gas inefficiently and have drained the government’s reserves of foreign currency. (There is unfortunately little the United States can do to reduce Ukraine’s dependence on imported Russian gas, despite what some proponents of the domestic fossil-fuel industry have opportunistically claimed.) Another is corruption: about 50 percent of business in Ukraine is conducted under the table, out of sight of the tax collector.

Awkwardly for Ukraine’s new governors, they could soon owe Russia a payment of $3 billion on the loan Moscow extended to Kiev in December, the agreement that incited protests in the streets of Kiev. Whether Russia is paid or whether Ukraine keeps the money depends partly on some obscure problems in international contract law and partly on who is willing to play hardball. The loan, however, is just one of several economic levers Russia can use to try to pry Crimea away from Ukraine. Click below for more on Ukraine’s contemporary economic history.

Max Ehrenfreund | March 10 at 9:42 am
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