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Economist explains how Ukraine’s economy can withstand Russian pressure

Feb 8, 2022 | Featured

Olena Goncharova, special to NP-UN.

When it comes to Russian military buildup on the border with Ukraine, the Western world is mostly focused on geopolitical issues it might entail. As tensions mounted, the Kremlin sought to raise its stakes by issuing a list of security demands calling for a complete reset of the European security system.

But while discussing Ukraine’s security and readiness for the potential further invasion, it is also important to highlight the country’s economic situation which would be directly affected. This became the focus of the Jan. 31 lecture by Anders Aslund, Swedish analyst at Stockholm Free World Forum who closely follows Ukraine. The lecture was organized by the Contemporary Ukraine Studies Program, a research program of the Canadian Institute of Ukrainian Studies at the University of Alberta.

Ukraine’s economy is highly vulnerable to Russian aggression despite lower trade volumes with Russia, Aslund explains.

In the event of a major escalation, Ukraine’s armed forces are better prepared in 2022 than they were eight years ago: they are bigger, better managed and trained, and better equipped. However, the economic situation remains challenging with persistent corruption, weakened Ukrainian hryvnia, unreformed judiciary and the impact of Covid-19.

Aslund believes the country needs to institute an anti-crisis program, with the long-delayed reforms of the judiciary and the Prosecutor-General’s Office, and ample financing from the international community.

High price

As the war talk in 2022 shakes the Ukrainian economy, causing panic in financial markets, Aslund says the country is better placed to withstand pressure on its currency and bonds unlike in 2014, when Russia invaded and seized the Crimean peninsula.

The events of 2014-2015 were “a tremendous blow” to Ukraine’s economy after former President Viktor Yanukovych and his cronies robbed already cash-strapped Ukraine of almost $40 billion, according to Aslund. Followed by the hostilities in eastern Ukraine, it emptied Ukraine’s international reserves, leaving it with bare $5 billion in 2015. The country entered a deep recession and its currency lost some 70% of its value. Many Ukrainian businesses also halted contact with longtime counterparts in Russia, direct flights between the two countries stopped and Ukraine stopped buying Russian gas.

Russia’s war in the parts of Donetsk and Luhansk oblasts also displaced at least 1.7 million people, while 14,000 have been killed. Overall, Ukraine lost 7 percent of its territory where 17 percent of the country’s GDP was produced.

Another significant marker to consider for a healthy economy is human capital.

But for the last decades Ukraine has been losing a large number of people due to immigration and low birth rates: back in 1991, the country boasted to have some 52 million people, now according to Aslund, this number might be as low as 35 million.

Stabilizing the country

Despite the challenges posed by Russia’s war, Ukraine’s government, namely when it was led by Aresniy Yatseniuk and Volodymyr Groysman made good progress because “they put the Ukrainian macroeconomic situation in a reasonably good shape,” Aslund says. Today, Ukraine’s international reserves are back to $31 billion, reaching the level of 2011 while its public debt sits below 50 percent of the GDP.

But difficulties remain: “The (main) problem in Ukraine’s economy is the same as in most former Soviet countries and can be summarized in two words – property rights. Property rights are not safe in Ukraine. And there’s no mystery why. That’s because the judicial system doesn’t work properly.” As a result it becomes difficult to invest, because it’s difficult to defend your property, Aslund explains.

Now the problem is exacerbated by close to 130,000 Russian soldiers on the border with Ukraine, forcing many investors to freeze funding and suspend expansion plans, waiting to see how the crisis ends. The value of the hryvnia has declined 7% against the dollar since the year began, making it one of the world’s worst-performing currencies alongside the Russian ruble.

Summarizing Ukraine’s challenges, Aslund names courts as the top one, followed by corruption and “state regulation or oligarchs, depending on how you look at it.”

“It might sound controversial, but you really have to be an oligarch in Ukraine to protect your property,” he says. The solution sounds easy – Ukraine needs to fix the courts but it hasn’t been done in the last 30 years of Ukrainian independence.

“Each ruler who comes to power wants to control the courts, so they are not really trying to fix them. It is very difficult to reform the courts and Ukraine’s Western partners want the courts to be independent,” Aslund explains. “(Right now) they are independently corrupt.”

“Ukraine had a three percent growth last year and was expected to have a bit more growth now (before the Russian threats). Why couldn’t it grow more? Because the Ukrainian government has not undertaken sufficient reforms to make it possible to invest in Ukraine while they did carry out macroeconomic stabilization,” Aslund says.

Another major challenge is that Ukraine has no access to international finance. In November, Ukraine had bond deals on the international markets of state bonds of around 5-6%. Now the corresponding yields are about 14%.

This is a serious concern, the expert explains, as it means that international finance is simply too expensive and Ukraine can not get it any longer.

To deter Russia

As a result of mounting pressure on Ukraine from the Kremlin, the exchange rate has fallen temporarily to UAH 29 to the U.S. dollar.

“It has not been so cheap in dollar terms since 2015. And it’s really caused by the Russian threat,” Aslund says. However, it’s not just Ukrainians who suffer from Putin’s muscle flexing. The Russian stock market has fallen 30% since the end of October. And the Russian ruble has fallen by about as much as the Ukrainian hryvnia, by about 7 percent.

“If you ask whether Putin cares about this, well, surprisingly, he couldn’t care less,” Aslund says. However, the Russian president has already given a clue to what affects him.

“In 2014, the U.S. sanctioned four of his closest friends and Putin complained about it in public. He even said it was a violation of human rights as if Putin ever complains about human rights or even considers this concept worth discussing,” Aslund recalls. “So if we want to do something to Putin, sanction his closest allies.”

Among other important sanctions to deter Russia, Aslund mentions the sanction of Nord Stream 2 and Russian big state enterprises. The third group of sanctions should be focused on prohibiting the exports of technology – from semiconductors to chips to Russia and the fourth is to sanction people close to Putin while going after shady Russian capital in Europe that, according to Aslund, amounts to 1 trillion dollars of the private Russian money abroad.

The Kremlin elite loves keeping their money in the U.K. and western Europe, buying apartments in Vienna and sending their children to study at top European universities. The U.K. already vowed to go after the multibillion-dollar assets in London owned by Russians close to the Kremlin’s inner circle. Targeting these assets could be one of the strongest instruments that the West has against Putin’s regime, and yet it has barely been used.

At the same time, the Ukrainian government needs to work closely with Canada, the U.S. and the EU to find a solution to the legal problems in the country. And when the situation on the border stabilizes, the West should come in with a big support package to Ukraine combined with a big program to build the rule of law.

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