The fighting in the Donbas has abated significantly over the past several weeks since the debacle at Debaltseve. To Putin, a cease fire means anything he wants it to mean, and for the moment it means he has paused somewhat to consider his options. There are few people in Ukraine or elsewhere that believe that Putin will cease and desist from further expansion of the conflict into Ukraine, however most Ukrainians are grateful for at least some respite from the wanton destruction and rising body counts caused by his primitive imperialistic expansionism.
For the authorities in Kyiv, this lull gives the opportunity to focus more on the other, but equally important war they must fight, namely the one to eliminate the scourge of corruption and to rebuild a crumbling Ukrainian economy.
Make no mistake, the Ukrainian economy is in dire straits. One obvious measure of this is the fall in the value of Ukraine’s currency, the Hryvnia (UAH). For the past five years or so, the Hryvnia has remained relatively stable at around 8 UAH to the American dollar. Since the beginning of the year however, it has been in freefall, hitting a recent low of about 33 UAH to the $. Significant intervention by Ukraine’s National Bank has allowed it to bounce back to the 22 UAH to the $ level, but its position is precarious.
To further compound the situation, Ukraine’s foreign currency reserves have fallen to under $6 Billion, a crisis level that means Ukraine is only able to cover one month's worth of import activities. On top of that, because of the fighting in its industrial heartland, Ukraine’s industrial output shrank more than 10% in 2014 and will continue with a further steep decline in 2015.
To deal with the economic crisis, the government has been forced to take a number of unpalatable though necessary moves to avoid complete economic collapse. One of these has been to place stringent controls on foreign currency transactions. Secondly, they have upped the key bank interest rate to 30%, a level that seems almost incomprehensible to us in the West.
Although these moves have temporarily plugged some dire fiscal holes, they have created their own set of new problems and challenges, the foremost being bringing new economic activity to a virtual halt and significantly eroding consumer confidence. This has been exacerbated by the bankruptcy of some 40 Ukrainian banks in the past year, followed by a drop in bank deposits of some 126 Billion UAH, as ordinary folk withdraw their funds and either convert them into assets less susceptible to inflation, deposit them in the “mattress” bank, or revert to the underground economy.
Underlying this is the ever-present bogeyman of corruption. Despite a lot of talk and some preliminary legislative activity aimed at finally addressing this corrosive issue, corruption for the time being is continuing unabated. The oligarchic abuses may have been brought under some control, but the graft and corruption that pervades all levels of the Ukrainian government seem to have been little affected. Prime Minister Yatseniuk recently estimated that this costs the Ukrainian government some $10 billion dollars a year.
To be fair to the Ukrainian authorities, combatting corruption is a massive task that will require it to completely overhaul not only the civil service, but also the police and the whole of the prosecutorial and judicial system as well. Doing this during a time of war, is obviously no easy task.
It is obvious that Ukraine will need a lot of financial help over the next several years while it rebuilds its economy and government virtually from scratch. The IMF, the European Union, the U.S. Canada and other countries have committed to providing somewhere between $20 Billion to $40 Billion in the coming years. However this is somewhat conditional on Ukraine being able to implement drastic reforms as well as engineer an end to the current conflict with the Russians. Both of these are huge challenges.
President Poroshenko and Prime Minister Yatseniuk are faced with an almost impossible task in keeping Ukraine afloat, yet despite growing murmurs of discontent, they still have the support and confidence of most Ukrainians. Let us hope that they are able to show sufficient progress in the coming months to keep that support and start building some momentum towards a better future.
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