Short term pessimism on 09.02.2014

Feb 10th, 2014 | By | Category: Events, News, Opinion, Politics, Protests, Ukraine

Today was “Viche” day on Maidan – the day that tens of thousands of Kyiv residents traditionally join the encamped protestors on Independence Square, show their support for the demonstrators en masse, and listen to the speeches of Ukraine’s political opposition leaders. Unfortunately, the leaders usually have little new to say each week (this was the 10th weekly Viche), and today was no different: they called for regime change (early Presidential and Parliamentary elections), constitutional change (a shift from a Presidential to a Parliamentary-presidential system), and an end to persecution of activists. Each speech was long on demands, but very unclear on how to achieve them. It should be said however, that this week the speeches seemed to be better prepared: more emotional, more personal, less instructive, more collegial.

But having returned from the Maidan today, I could not help but think that the end-game of this revolution has begun. Many analysts have suggested that it is in Russia’s interests to find a solution to “the Ukrainian question” during or immediately after the Winter Olympics, and now that these are underway, I cannot help but await some sort of attempt at a culmination. Yesterday, Yanukovych attended the opening ceremonies in Sochi, but apparently was unable to secure a private meeting with Putin. What does this mean? Is it at all significant? No one really knows…

The current standoff cannot last forever, but it is unlikely (in my opinion) to be solved in Ukraine’s Parliament. Although there is hope that the Party of Regions faction may yet split, and that a more “democratic” group of formerly-regime-supporting MP’s may yet join the opposition (possibly under the leadership of former Presidential candidate Serhiy Tihipko), even if this reorientation of the Party of Power occurs, it is unlikely to matter. The most that such a reconstitution of the Parliamentary majority would accomplish would be to force Yanukovych to appoint a new government from their ranks, but the President himself would remain in power. Any constitutional changes that the new majority might propose would still need to go through the amendment procedure spelled out in the existing constitution, which means no possible passage of a new document until the autumn. By that time Yanukovych could fire the new majority’s government and/or continue repressions against Maidan activists using the full force of Ukraine’s Prosecutor General (a Presidential appointee) and controlled judges. Such a “settlement” would certainly not satisfy the Maidan, and it is very unlikely that the demonstrators would disperse any time soon.

One thing is clear: while political instability grows, the economy suffers. However, the problem is not as dramatic as a French reporter that I met today would have us believe: even if the Ukrainian government defaults on its loans (on Friday, Fitch lowered Ukraine’s rating to CCC – a pre-default status), this is likely to have a very minimal effect on the everyday lives of the population. The level of foreign investment in the country’s economy is exceedingly low, and the multinational companies that are here (e.g. CocaCola, Kraft, Nestle, etc.) are here for the long term. The main risk, of course, is currency devaluation, but it is my experience that those few Ukrainians who have savings, converted these to USD or EUR long ago. Therefore, the short-term impact of any sharp devaluation is likely to be more psychological than real.

Nevertheless, in an effort to ebb the tide of devaluation, the National Bank of Ukraine (NBU) issued Edict №49 on Friday. Now, in order to buy hard currency to pay for imported goods, any company operating in Ukraine must first deposit an amount of hryvnia into a special correspondent account at the NBU where the amount is frozen for 6 business days. When the 6 day period expires, the NBU promises to convert this money into dollars/euro and release it for transfer to a foreign supplier – at the exchange rate that will be current at that time. Given that the official USD-UAH exchange rate jumped from 1:7.99 to 1:8.708 – almost 9% – in one day on Friday, and that spot market rates on Thursday were reported to have climbed to 1:9.5 and higher, predicting what the exchange rate will be at the end of next week is an exercise comparable to high stakes gambling. Furthermore, if a foreign supplier does not extend credit, in order to import goods, a Ukrainian company must freeze its operating capital for one week before any pre-payments can be processed – only then can goods cross the Ukrainian border. Needless to say, imports have effectively been frozen.

Internally, the flow of money between companies has also been slowed. According to the same NBU Edict, any funds received as payment for goods/services by a Ukrainian company are frozen in that company’s accounts for 24 hours; disbursement of money received as payment cannot happen on the same day as receipt. Apparently, this measure is supposed to crack down on “domestic money laundering”, but as any basic economics textbook will tell you, the NBU has effectively reduced the velocity of money, and therefore has diminished any Keynesian multiplier effect that may have been present in the Ukrainian economy to nil. In reality, this multiplier was already greatly reduced because few banks have been lending any money since the political crisis began. Nevertheless, the effect on consumer spending and economic outlooks of such restrictions on transactions are likely unlikely to be conducive to economic growth.

The Ukrainian economy cannot survive for long with such restrictions. If last week many Ukrainians could afford to ignore the Maidan protests, and go on with their normal lives, next week currency devaluation will have hit everyone – most visibly, petrol prices have already risen by 10% and are expected to rise further. With no Parliamentary solution likely, many analysts seem to be looking to Ukraine’s oligarchs for a solution, but a logical question arises – what can they do? Presumably they could remove Yanukovych from power, but identifying a mechanism for how can this can be done legally remains a problem…

With an economy that is spiraling out of control, and with political forces both in Parliament and on the street at an impasse, an “end-game” of some sort must be coming. But personally, I have doubts that this end-game will be peaceful…

God help us!

Mychailo Wynnyckyj PhD
Kyiv-Mohyla Academy


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