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. Oilprice.com 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.