Mark Adomanis in Philadelphia -
Alexander Motyl has long stood out among Ukraine boosters for his near-total unwillingness to admit that anything is going wrong. He even went so far as to write that Ukraine's volunteer battalions (which have been implicated by Amnesty International in a host of human rights violations and have also been involved in a series of murky inter-oligarch power struggles) are actually a good thing.
But Motyl has outdone himself with his latest missive "Out of Kiev's Hands", in which he argues that the economic and social collapse of the Donbas region of the east is not in any way a problem for Ukraine, but is actually "becoming a big headache for Russia."
It’s exactly the sort of “the worse the better” analysis that ideologues habitually produce. For Motyl it’s actually a good thing that Donbas residents have fled en masse and that continued fighting between Russia-backed separatists and government forces has laid waste to the countryside ("The longer the fighting continues, the less will the Donbass be able to sustain itself and its war-fighting capacity and the less will the separatists be able to create a functioning political entity").
While some parts of the article are up for debate, what seems very clear is that Motyl is confident in Ukraine’s long-term prospects. He boldly proclaims that, “the current stand-off is the best of all possible worlds for Kiev” and that “time is on Ukraine’s side”.
As always, it’s helpful to take a step away from political rhetoric and towards hard data.
As noted in the World Bank's most recent macroeconomic update, Ukraine's economic output contracted sharply over the course of 2014, with the year-over-year decrease in GDP hitting 14.8% in the fourth quarter. That is to say that the recent trend is of not of improving but of worsening economic performance. Ukraine’s recession isn’t slowing down, it’s actually speeding up.
Even more troublingly for the country's short- and mid-term prospects, this accelerating decline in output coincided with a further deterioration in the current account balance. After improving during 2013 and the first half of 2014, largely due to the impact of the hrynia’s devaluation, the current account balance was "almost zero" over the summer. However the current account balance then deteriorated for the next six months, ending the year with a deficit of 4.1% of GDP.
That is not sustainable. Even after the infusion of International Monetary Fund cash, by March Ukraine’s total foreign reserves were less than $10bn, half their level at the end of 2013. Given its extremely precarious financial situation, Ukraine simply cannot continue to run large deficits in the current account. Further devaluation (and the economic pain it will bring to the average Ukrainian) is essentially inevitable.
In contrast to Motyl’s optimism about East Ukraine’s economic implosion, it’s interesting to note what the World Bank thinks. Here’s what the report said:
The impact of the currency devaluation was dampened by conflict-related disruptions in export-oriented industries in the east and a seasonal increase in imports of gas and coal (after local coal production was damaged in the conflict areas).
Put simply, Ukraine needs to import a lot less foreign energy, but the only realistic way it has of doing so (coal production in the Donbas) is impossible because of the war. It’s not clear how or if that is a problem for Russia (whose current account is positive and whose foreign reserves are still more than $350 billion), but it’s very clearly an enormous problem for Kyiv.
As if that wasn't enough, there was also a noticeable weakening in Ukraine’s external debt position: huge expenditures to fund the government's ongoing military operations, cover a rising Naftogaz deficit, and recapitalize the Deposit Guarantee Fund resulted in a sharp increase in the ratio of public and publicly-guaranteed debt to GDP from 40.6% in 2013 to 70.3% in 2014. By the end of 2015, this debt is projected to be a full 88% of GDP, before starting to gradually decline. However, even by 2018 publicly guaranteed debt (72.6%) will remain higher than its 2014 level. Ukraine’s mid-term fiscal future, then, is a harrowing one full of a sea of red ink.
If, as Motyl says, "time is on Ukraine's side", then we should all tremble to think what the situation would look like if it wasn't.
Ukraine, far from being on course for rapid convergence with the West, remains on the edge of a harrowing economic collapse. You can, like Motyl, pretend that this isn’t the case, but reality has little patience for such illusions.
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