Ukraine: time is running out.

Note kindly translated by Anne-Marie de Grazia

The situation in Ukraine keeps degrading and it is now its economic and political dimensions  which are challenging the key players. We must keep in mind that at present around 60% of tax-incomes do not find their way into the state treasury, either because they are not collected, or because they are held back by local authorities, and that the budget deficit on the basis of the first two months of the year 2014 reaches around 10% of GDP. It had been only 4.3%  last year. Clearly, the degradation of the economic situation will have political consequences. The regions to the East of the country, where pro-Russian feelings are already strong, could shift entirely in the coming weeks or months. It is this prospects which is truly worrisome and threatening. It is so because of the potential consequences on European politics it could have. If such a shift should happen, and if Russia were to accept the Ukrainian regions in secession from Kiev, there is little doubt that the European countries would react with the equivalent of a new cold war against Moscow, even if (and maybe especially if) their responsibilities in such an evolution in Ukraine were major.

Sanctions or discussions ?

The countries of the European Union and the United States convened at the occasion of the summit on nuclear security which took place in The Hague and discussed the principle of new sanctions. But what can be the function as well as the efficacy of these new measures? The NATO countries pretend to « punish » Russia for its action in Crimea. On the one side, it would have been better not to have created the conditions which have made such an action possible and, from the standpoint of Russia, necessary. On the other hand, reason advises, unless one wants to engage in a logic of confrontation on a large scale, against taking measures about which one knows in advance that they will not change the decision being challenged. As for the efficacy of these sanctions, it is evidently most limited. We must keep in mind that the money of a country which trades on a large scale with its neighbors and which imports a great amount of what it consumes, also represents work and employment for said neighbors. This is the evident reason why the “sanctions” will as a matter of course be limited. With Europe in an economic crisis, Russian imports are much too important for our industries and our economies for measures to be taken which are susceptible to provoke their decrease.

But other factors must also be kept in mind. Russia cooperates, in a way indeed discreet but vital, with France in the military operations which we are carrying out in Mali as well as in Central Africa. Part of the logistics of our forces depend on Russian cargo planes. Is it conceivable that we turn down this cooperation which could, in the coming weeks, extend to other domains, considering the Russian presence in Africa? In the same way, we have a tendency to forget that Europe and the United States are no longer the only providers of high technology goods in the world. We are no longer living in the 1960s. At present, in order to carry through the modernization of its economy, Russia can rely on the potential of Japan, Korea, Taiwan and, of course, China. In other words, do we want to push Russia to amplify and systematize the turn which it is already taking in the direction of Southeast Asia? In the Energetic Strategy published several years ago already by the Russian government, the project of a strong increase of energy exports towards the Far East was clearly spelled out. Do we wish for Russia to go beyond the goals which it has set to itself and that it become integrated with the economy of this part of the world?

There is a profoundly incoherent dimension to the discourse about sanctions held by the European countries. One can understand the logic of such declarations coming from the United States. But for France, Germany, Italy or Great Britain, they are in fact suicidal. They are even more so if one considers the worse, if Ukraine goes to pieces in the coming months, for it will be the richest part which Russia will recuperate. This must be known. The annual trade deficit which we will have to make up for will no longer be 13.6 billion, but over 22 billion. We will have inherited a country the problems of which, economic as well as political, will be hard to overcome, and which will drain part of the financial resources of the European Union. This is why the emergency of the hour – and there is an emergency indeed – is to reach an agreement with Russia in order to insure the good functioning of the Ukrainian economy.

The challenges of Ukraine.

It has been said already, Ukraine is at a crossroads. It can find back to economic and political stability, but if the economic situation continues to deteriorate, the odds are high that economic divergences will become politically unsurmountable.

Ukraine is in reality composed of three parts, an Eastern part which is largely agricultural, a Central part (to which were attached Crimea and the city of Sebastopol) and a Western part which is the heart of productive Ukraine.

Repartition of regions

Region

Zone

Region

Zone

Region

Zone

Donetsk EAST Kyiv-Ville CENTER Lviv WEST
Dnipropetrovsk EAST Mykolayiv CENTER Cherkasy WEST
Zaporizhzhya EAST Kyiv CENTER Vinnytsya WEST
Luhansk EAST Odesa CENTER Volyn WEST
Poltava EAST Sumy CENTER Zhytomyr WEST
Kharkiv EAST Kirovohrad CENTER Zakarpattya WEST
Chernihiv CENTER Rivne WEST
Kherson CENTER Khmelnytskiy WEST
Ivano-Frankivsk WEST
Ternopil WEST
Chernivtsi WEST

UKR-régionsMOD

The Eastern and Western zones are both zones of production, but the Eastern zone corresponds to the essential of the industrial production and, with its six regions, it realizes more than 40% of the GDP of Ukraine, as well as almost 60% of its exports. The Central zone is a consumption zone, weighted down by Kiev, the country’s capital, which receives a large part of the tax receipts of the country (in part coming from the Eastern zone). If the Western zone is composed of the agricultural regions of the country, the Eastern zone concentrates the country’s most developed industries. The gap in production, but also in average salaries and in exports, can be explained without difficulty, considering that industrial activities have a higher added value than agriculture or trade. Only the command services, largely regrouped in the city of Kiev, have a composition in added value which is more important.

Chart 1

Carte Ukr exptREG-Angl

This industry is to a large extend linked with Russia, be it through the energy consumed or through commodities. Yet the exports of this zone are still larger than its imports. The balance of trade of the Eastern zone is therefore in excess, whereas the Central zone is to a very large extent in deficit. This implies that, if the exterior deficit of Ukraine amounts to 13.5 billion dollars (in 2013), if one takes into account only the Western and Central zones, it amounts to 22.6 billion dollars (in 2013). This is one of the reasons why it is imperative to keep Ukraine united. In the same way, if the budget deficit is already high (4.3% of GDP in 2013), if one takes into account only the Western and Central zones, it climbs to 13% of GDP, a value which is unsustainable. The reduction of expenses, which the IMF is already imposing on the provisory government, will considerably aggravate the situation of the whole population, but in particularly of the poorest segments. Yet, if one want to bring the deficit down to 3% of GDP, it implies imposing on the populations of the Western and Central zones an adjustment of 10% of the amount of the GDP of a united Ukraine, and of 16.6% of a Ukraine reduced to its Western and Central zones.

Chart 2

Exports-Ukr AnglImport-Ukr Angl

The political consequences of the economic shock can easily be guessed at. Initially, pro-Russian sentiments will develop rapidly in the Eastern zone, which will reveal itself a fertile breeding ground for separatist and « Russia-attachist » politics. Second, social problems, a toppling into frightening destitution on the Greek model for the Western and Central zones, will bring about a rise of extremist parties but also of those qualified as pro-Russian. The situation will rapidly risk becoming uncontrollable. Not only would we have one part of Ukraine hitching up with Russia, but interethnic conflicts, and a civil war, are probable in the territories which would then compose “preserved Ukraine.”

Making reason prevail.

It will be understandable why, since the beginning of this crisis, we have not stopped calling for a unity of Ukraine [1], but also, and most of all, for the implementing of the conditions, political as well as economical, which would render this unity possible [2]. We want to restate here a number of simple and evident things, which still remain ignored.

  • (a)   There will be no solution to this crisis without Russia. Yet, the countries of the European Union who have provoked the Ukrainian crisis through their irresponsible attitude in 2013 in making some Ukrainian leaders believe that an integration into the EU was possible, have a historical responsibility to find a solution.
  • (b)  This solution must be found rapidly, for the more time passes, the more the economic situation in Ukraine is degrading. We are probably no longer very far from the point where events leading to a breaking up of the country will become irreversible.
  • (c)   Taking these two points into accounts, it behooves to the EU to take a first step in the direction of Russia in order to propose to it the bases of an economic stabilization which would guarantee Russia’s political as well as economic interests, in exchange of a suspension of these famous “sanctions.”

Voices keep speaking up in Europe in order to denounce the irresponsibility with which European leaders have treated the Ukrainian matter. The British leader of the Euro-sceptic party UKIP, Nigel Farage, stated it clearly[3]. Yet, he was rather known up to then for his pro-American declarations. It is time for European leaders to change their attitude. But time is running out.


[1] Sapir J., « The Ukraine Emergency, » note published on RussEurope, March 1st 2014, http://russeurope.hypotheses.org/2039

[2] Sapir J., « What future for l’Ukraine? », note published on RussEurope, March 13, 2014, http://russeurope.hypotheses.org/2086

[3] « Nigel Farage Says EU Has ‘Bloody Hands’ Over Ukraine Crisis During LBC Debate With Nick Clegg », Huffington Post UK, 26 mars 2014, http://www.huffingtonpost.co.uk/2014/03/26/nigel-farage-says-eu-has-blood-on-hands-in-ukraine-during-lbc-debate_n_5037811.html?utm_hp_ref=tw


 


Jacques Sapir

Ses travaux de chercheur se sont orientés dans trois dimensions, l’étude de l’économie russe et de la transition, l’analyse des crises financières et des recherches théoriques sur les institutions économiques et les interactions entre les comportements individuels. Il a poursuivi ses recherches à partir de 2000 sur les interactions entre les régimes de change, la structuration des systèmes financiers et les instabilités macroéconomiques. Depuis 2007 il s'est impliqué dans l’analyse de la crise financière actuelle, et en particulier dans la crise de la zone Euro.

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