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6 March, 2014  ▪  Yuriy Radchenko

Tycoon Wars: Elusive Hope

Economic changes should be deep. Otherwise there will be no change

Many felt outraged when MPs from oligarchs’ groups did not show up at the first session of the new Parliament. The next day, however, most deputies servicing the oligarch system were voting unanimously according to recommendations of their bosses on the phone.

Apparently, they are feeling optimistic. That runs counter to what could make the Maidan feel that way. Undoubtedly, this optimism is based on solid ground.

Firstly, the experts around the Maidan have barely raised the issue of deep reform of Ukraine’s feeble economy – and if they did, it was purely prognostic. Currently, two interesting concepts prevail there. One is that oligarchs are the force that will help lift the economy ruined by the Family out of the abyss. The other one is that nothing too bad will happen if Ukraine announces a default.

Secondly, the swift and virtually monopolistic takeover of the current government (and the future one too given Yulia Tymoshenko’s speech from the Maidan stage) by Batkivshchyna is very similar to 2009 when the Bloc of Yulia Tymoshenko (BYuT) and the Party of Regions (PR) tried to set up a broad coalition to turn Ukraine into a two-party country. Back then, the idea of ensuring long-term economic and political stability was another crucial argument in favour of the new coalition.

As to oligarchs, they always switched to a new government only after they were sure that the old one was facing a defeat. They did so when Viktor Yushchenko replaced Leonid Kuchma, and when Yushchenko lost the election to Viktor Yanukovych. This time, the first signal came from the Dnipropetrovsk-based oligarch Ihor Kolomoyskyi who publicly warned Kharkiv Mayor Hennadiy Kernes to stop fueling separatism.

Another key message in this sense is the interview by Hennadiy Korban, a one-time raider that is less well-known than Kernes, posted on the Economichna Pravda (Economic Truth) website on February 6. The interview promotes the idea of “old capitals” and mentions specific names, including those of oligarchs Rinat Akhmetov, Ihor Kolomoiskyi, Hennadiy Boholiubov and Viktor Pinchuk, are good and perfectly legitimate, and the revolutions should “engage them and ask them for help in running the country.” The capitals of “young oligarchs” accumulated over the years of the Family’s reign are bad because they came from unfair tenders and embezzlement of public funds. Ihor Kolomoiskyi was the one to provide his plane to Korban to flee to Israel from political persecution.

On February 24, Rina Akhmetov finally spoke his word against separatism. Apparently, the Family was ultimately betrayed. This impression grew stronger when, on March 2, Ihor Kolomoiskiy was appointed the Governor of Dnipropetrovsk Oblast, while another oligarch, Serhiy Taruta, headed the Donetsk Oblast Administration, without any discussions with the Maidan and in violation of all principles of separating business from power declared earlier. Taruta told the press immediately that he would “rely on Akhmetov’s shoulder”. Apparently, the Great-Absolutely-Legitimate-Capital promoted by the one-time raider, Hennadiy Korban, can now take over the crisis.

However, two purely economic problems are in their way in addition to the political one (the birth of the new Ukrainian social community). One is tactical. The previous government left a financial hole so deep that plugging it could prove too burdensome even for all Ukrainian oligarchs united if they were willing to do that.

Another one is strategic. If Ukraine’s economy goes under total control of the same old people, more political liberalization through economic liberalization will be its only difference from the old system.

Let us look at these problems in detail.

READ ALSO: The Ukrainian Myth – the Breadbasket of the World

The courage of people is not the only thing that ensures victory of the current social revolution. Another crucial factor is the fact that the system of power, cumbersome and expensive, is far less effective than the machine of the revolution in economic terms, even if it operates almost perfectly from tactical and strategic standpoints. When it makes serious mistakes, its efficiency plummets to zero. We have seen this in gradual escalations of tension around Maidan.CONFUSING CHAOS

The regime would need at least USD 15-20bn every year to secure weak protection for itself by compensating for the money transferred offshore by oligarchs and pacifying the part of the population employed in the public-funded sector, as well as maintaining law enforcers and the prosecutor apparatus. With the protest energy, USD 10-20bn is enough since youth extremism and actual protest sentiments constitute a free resource available, for instance, in the post-revolution Kyrgyzstan, Georgia, Yugoslavia and Middle East. So, the West has learned to work extremely effectively with the pyramid-like ideology as a leading post-industrial instrument.

Once the government is replaced, the long anticipated technical government comes into play. What does it face? Where will it get the funds to cover the gap between proceeds and expenditures if the current economic system remains unchanged? Recent hysterical talks of the upcoming default and unpopular yet vital measures are a perfect illustration to the scale of systemic crisis in Ukraine.

The cap budget deficit of 2014 was set at UAH 71.5bn. According to Viktor Pynzenyk, ex-Minsiter of Finance and ex-Vice Premier in several Cabinets, the real number is UAH 200bn, while financial analyst and investment manager Eric Naiman spoke of UAH 100bn.

The new Ministry of Finance estimated the amount of macrofinancial assistance in 2014-2015 at USD 35bn, i.e. UAH 280bn by the old “stable” exchange rate of UAH 8/USD 1. Those who anticipate a default speak of up to USD 60bn which Ukraine needs in 2014 and 2015. This includes the balance of payments deficit, repayments of public debt plus payments under loans taken earlier, uncollected taxes, transport and utility charges, pension fund deficit, expenditures on the start of the farming season, outstanding payments on wages, repayments of direct government-backed debt and corporate debt, and more.

This chaos that leaves even the top economists confused is further aggravated by horrendous unemployment. The official statistics only covers people registered at the public unemployment service, showing a meager 1.5%. This does not include shell Individual Entrepreneurs, employees reporting minimum wages while getting the rest in envelopes (this is a widespread tax-minimization practice), temporary employment or holders of three to four jobs, each paying peanuts. Maidans all over Ukraine show that official unemployment statistics is nonsense.

WHAT’S NEXT

It is obviously pre-term to speak of any further methods now. Moreover, the threat of a war ruins any projections. Still, there are a few points to note.

1. It may well happen that the endless gaps in Ukraine’s budget will have to be plugged by not by Europe and US or Russia alone, but by all of them jointly, after the current turmoil abates. Europe still needs Russian gas. The idea that the offer of a choice between western or eastern partnership that excluded cooperation with the opposite party was too much for Ukraine was already discussed by Berlin and Moscow at the Russia-EU Summit in Brussels on January 28. Now, many publications write that Ukraine is an independent player only politically, and all big European players, unlike the US or new EU member-states were fairly restrained during the Maidan conflict. After all, one thing to remember is that Russia’s proposals from December 2013 were more about programmes of technical and trade cooperation for a much bigger sum than the USD 15bn loan without any specific obligations on Russia’s part that would secure strategic contracts for Ukrainian enterprises. Ukraine always survived by balancing between much bigger political players. Its economy in the current state would hardly let it quit these political privileges now, unless some global geostrategic shifts take place in the near future.

2. It is now clear that Ukrainian economy should undergo structural reforms if it aims at survival rather than dissolution into a more powerful neighbour. The problem is that its fundamental production level is either ruined or privatized. For many years, the budget has been filled with one-time proceeds from a sold enterprise and loans when the government ran out of those proceeds. As long as this fundamental level of local production agglomerations and core city, county or region enterprises is revived to meet modern standards, not those of the 1990s, no foreign loans will help Ukraine as they will be eaten out even if Ukraine plummets into default and applies austerity measures. A structural reform to revive production is hardly possible without partial economic autarky whereby the product manufactured domestically enjoys preferences over imported goods to provide employment as high as possible. Meanwhile, anything not produced domestically should have open access to the country’s market under quotas and customs rules entailed by international trade agreements. Opponents to this method insist on expanding the service industry. However, the 2000 crisis (when the dotcom bubble exploded) proves that services can be expanded to a limit. This will of course run counter to the WTO arrangements but the state has diplomacy to secure its economic interests.

Since the pre-Maidan MPs failed to solve the WTO trouble when it came to tariffs on the critical 371 trade items, it is doubtful that external forces will let Ukraine revive its independent economy. And even if they do, Ukrainians will end up on another Maidan. That one will be a revolution of work. It will teach people to revive and preserve their own production (including that in the public sector), not just embezzle something built by others. It is hard to predict how the nation will go through that without courage, adrenalin or free breakfasts, just long and painstaking work.

3. Oligarchs and their “creative class” know better than anyone else that money lose value with time when not circulating and bringing profits that exceed inflation. However, that money should not vanish. They can return to the country as foreign investment or reinvestment. They can convert into jewelry, luxury goods and real estate. They can also convert into securities, fixed and non-fixed assets. But they stay in Ukraine, especially when it comes to basic infrastructure industries and systems.

In this sense, the magic words “re-privatization, nationalization and restitution” come very helpful regardless of what new posts Ukrainian businessmen have taken. 


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