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Kiev's Future
Ukraine's Economy Is in Meltdown

Ukraine’s economy is falling apart. Things have gotten so bad that, today, the Economic Minister appointed to institute reforms after Yanukovych’s ouster resigned in apparent disgust. According to the New York Times: “[Economic Minister] Sheremeta said on his Facebook page that he no longer wanted to ‘fight against yesterday’s system’.”

The country’s infrastructure has been devastated by the war, according to the WSJ:

As the fighting raged on, Prime Minister Arseniy Yatsenyuk warned that restoring infrastructure in eastern Ukraine could cost billions of dollars, while the conflict was hamstringing much-needed economic overhauls.

Ukraine is “losing economic potential by the day,” said Mr. Yatsenyuk, an economist who threatened to quit last month over the slow pace of reform.

Mr. Yatsenyuk accused the separatists of deliberately targeting infrastructure, such as mines, power plants and railways. “It is clear that this is an planned action to strangle us economically,” he told a government meeting Wednesday.

The Ukrainian economy relies heavily on the now war-torn eastern region, the seat of the industrial enterprises that produce, among other things, the energy resources that Ukrainians require for electricity and heat. reports that about half of Ukraine’s coal mines have stopped producing. The country could find its supply of coal gone within three weeks, and this in a country already “unable to get coal to thermal power plants that provide some 40 percent of the entire country’s electricity.” With winter approaching, the depletion of energy resources becomes an even more urgent problem.

Meanwhile, Ukraine has asked the IMF for help:

Underscoring the country’s need for funds, Finance Minister Oleksandr Shlapak called for the International Monetary Fund to advance the last of three credit installments totaling $3.6 billion that Kiev is expecting to receive this year. Mr. Yatsenyuk said he expects the IMF’s board of directors to decide on a $1.4 billion tranche on Aug. 29.

The IMF has demanded that Kiev cut spending, increase the price of gas for households and refrain from intervening to support the value of its currency, the hryvnia. But the government has been diverting funds to the military operation in the east, and Mr. Yatsenyuk said the conflict is hampering planned overhauls. The economy is expected to contract 6.5% this year, according to the IMF. The hryvnia has hit record lows in recent weeks, with $1 now buying more than 13 hryvnia.

The FT has a particularly good analysis of the country’s woeful finances, in which it warns of a worst case scenario where “the $17bn IMF programme signed in April could fall apart, possibly forcing the country to default and restructure its debts.” (Read the whole thing here).

If Ukraine’s leadership indeed cannot build a real economy and state, this revolution may end up being another blip in Ukraine’s long history of being run by tyrants and oligarchs. It’s a far bigger and more important question than what’s going on day-to-day in the shooting war, not only for Ukraine’s future as a country, but for Putin’s long-term strategy. Even after the armed conflict ends, an economically and politically fragile Ukraine would give Putin the advantage, allowing him to maintain his influence and rake in the cash from Western nations as they periodically bail out Ukraine by paying Russia for Kiev’s gas.

Ukraine’s ineffective governance and economic dysfunction are Putin’s two biggest assets and the West’s two biggest liabilities in this contest. There are few signs so far that Ukraine’s military successes have been matched by successes in these other areas.

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  • lukelea

    So will Western meddling turn out to be as big a disaster as in Libya?

  • Antipodeane

    The lose-lose logic of confrontation for all has been now been well demonstrated. It is Ukraine tearing itself apart as Henry Kissinger anticipated in the Washington Post last March 14 (



    Now it would pay to look very seriously at mapping out a future that can work for all such as he proposed: that is, for Ukraine to develop as a bridge between East and West, between Europe (the EU) and the newly emerging Silk Route(s). In other words, as a neutral buffer to play leading trade-facilitation and even diplomatic roles at the cross-roads of an emergent Eurasia.

    While it took hundreds of years for Europeans to learn how they needed to cooperate together in the EU, there is not the time to do that with respect to Eurasia given the terribly destructive weaponry that is now available. We have already had two too many “hot” world wars, and one too many cold wars to want to repeat any of these.

    I believe there are also other important lessons to learn, such as how not to get bound up in strait-jacketing bureaucracies, whether public or private or both. It could be important , for instance, to explore how social media can support new forms of economic and social participation. The new generation in particular expects as much.

    The forthcoming Minsk Eurasian Conference could provide the perfect context, with the relevant people present, for all concerned to come together to begin defining and moving towards a future that can work for all.

    Is this too optimistic? Given the manifest pain for all with the present trajectory, I hope not!

    • Dave Ralph

      I think this a bad proposal as it effectively cedes Ukraine to the Russian sphere of influence. The best solution is a re-drawing of the borders to exclude the Donbass provinces, and then moving full ahead to integrate the rest of Ukraine firmly into the West. This is outcome that Putin is trying to avoid and he is using the Donbass as a leash to hold Kiev back from the West. Cut the dead weight of the Donbass loose and Putin loses his ability to influence Kiev.

  • JT

    Is Ukraine broke? You bet. But the West has to understand that the war won’t just go away if the country collapses and Russia takes over – Ukrainians will continue to fight a guerrilla war. Imagine an enormous Chechnya on the EU borders. Do you really want that to happen? I bet the answer is no. Neither do the Ukrainians, who are fighting for their country, invaded by a large, formidable foe. A foe dangerous and belligerent enough to take the war to the West, if it so desires. Stop him now, when he is weak; build up Ukraine like the US did to the Western Europe and Japan after WWII – make it your bulwark. Long-term, such a move would benefit not only Ukraine, but the entire Europe, and likely the world.

  • Dave Ralph

    Good points here. Nobody has the guts to say straight out that Ukraine’s territorial integrity is a farce and that the country is unsustainable in its current borders. Continued military efforts to try to recapture Donetsk and Lugansk are going to destroy the entire nation’s economy. Obama and Merkel need to shove reality down Poroshenko’s throat: either give up the Donbass war, or lose everything east of Lviv. The diversion to the military of IMF funds meant for economic reforms is particularly egregious. The IMF should cut off the funding so that Poroshenko gets the message loud and clear.

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