Ukraine Starts Its March to Free-Market Capitalism

Ukraine Starts Its March to Free-Market Capitalism

Ukraine watchers, to say nothing of Ukrainians, had better fasten their seatbelts. The passage of a former Soviet republic to free-market capitalism is about to begin. 

None of the players involved in this transition — the Poroshenko government in Kiev, the Western democracies, the International Monetary Fund, NATO — are short of ambition. But this may prove the problem. If we take “radical” to mean political and social reform at the root, emerging plans to transform Ukraine are the most radical attempted since Germans took down the Berlin Wall a quarter century ago. 

Related: Russia’s Lavrov Says Easing of Tensions “Long Way Off” 

There are numerous causes to worry: 

  • Severing a nation from a socialist past this swiftly and decisively could prove simply impractical.  
  • Ukraine’s Western backers are already reluctant to pay for their political enthusiasms.  
  • The IMF has failed to come up with sufficient money to underwrite the extended bailout required.
  • The Kiev government, to date as corrupt as the one it replaced, may never earn the outside world’s trust.
  • The early reform measures, let alone those to come, could prove politically explosive in a population accustomed to the extensive subsidies typical of the old East-bloc nations. 

All of these are mountains, not foothills. Among them, the last is the most troubling: Taking Western Europe as a guide (if only Poroshenko’s cabinet would) too far, too fast, and too persistently could prompt a political free-for-all. Ukrainians demonstrated a year ago this month they do not take their politics passively. 

Related: Lack of Coal May Bring Ukraine to Its Knees this Winter 

It’s hard to see where the give is. Poroshenko’s treasury just dipped into savings to pay Gazprom, the Russian gas supplier, an installment on its outstanding debt and a forward payment for supplies this winter. This brought foreign reserves down to $9 billion at end-November; they are forecast to drop to $7 billion by year-end, enough for a month’s imports. 

Inflation is 22 percent, and the currency has halved in value this year. GDP contraction is gaining momentum: in 3Q it was 5.3 percent, after a 4.7 percent result in 2Q and 1.1 percent in the first three months of the year. 

Prime Minister Arseniy Yatsenyuk replied to these circumstances in a speech to parliament a few days ago, the themes being “decentralization, deregulation, and de-bureaucratization.” Here’s the program, to be implemented over the next two years, in outline: 

  • Public expenditure will be cut by 10 percent in 2015 alone—more to come in 2016, presumably. This follows a cut of 10 percent in the year now ending.
  • As to key subsidies, Yatsenyuk said it plainly enough. “We will raise all energy prices and tariffs to the market level.” The prime minister did add that Kiev will “offer benefits and subsidies to those who should receive them, that is, all poor people in Ukraine,” but this remains a big, big step.
  • All state enterprises will get internationally supervised audits. Of the 1,500 now on the books, 1,200 are to be privatized and the remainder sold off according to market appetites.
  • Transparency and anticorruption measures were major themes. For example, a new public registry will require all property and businesses to be listed with owners and beneficiaries named.
  • The labor market is to be liberalized, and since we detest euphemisms here, this means hire ’em-fire ’em will be the new rule.   
  • In the social category, a health-insurance system of unspecified structure will be introduced and public spending on education will be determined on the basis of merit.
  • Military expenditure is to double, to 50 billion hyrvnias ($3.2 billion), or 5 percent of GDP, and a conscription system in force since last spring will bring 40,000 new recruits into the army.

Related: IMF Visits Ukraine for Bailout Talks 

Let’s put this plainly. If you are the technocrat Yatsenyuk is, this sounds perfectly rational. If you are a legislator with political exposure, or a housewife, a student, or a steamfitter, this might just as rationally sound like somebody’s idea of hell. 

Consider Ukraine against the West European backdrop. A new round of instability in Greece, widespread protests in Italy, and the Hollande government’s confrontations with (1) Brussels over its budget deficit and (2) French workers fed up with austerity as it is, never mind more. Somebody ought to buy Yatsenyuk, who can’t afford it himself, an excursion ticket to Athens, Rome, and Paris.    

Equally, parts of Kiev’s program sound too spongy. What kind of health insurance system? The American kind? Some kind of Nordic variant? If it’s the former it is unlikely to go down well.   

If Ukraine’s poor are to be exempted from cuts in energy subsidies, who will be left to de-subsidize, given the state of the economy? Unemployment is now about 8.6 percent. There are worse figures elsewhere, but this rate will almost certainly deteriorate as job security is eliminated. 

It’s not clear if anyone can adequately address what is the worst corruption culture in all of the post-Soviet states—and far beyond what any West European could imagine. It’s well to recall that the parliament elected earlier this year refused to sign a not-very-toothy anti-corruption bill President Poroshenko had drafted.  

Related: Ukraine Needs Expanded IMF Program 

We have examples of how bad it is even in the stories of how it’s going to be fixed. NATO recently announced it has five trust funds to finance reform in Ukraine’s military and make it a “special partner,” even though corruption is so bad, soldiers don’t have uniforms or tinned dinners. Trust funds? NATO members, it turns out, are so wary of the Ukrainian command that they refuse to provide money directly. 

Can Yatsenyuk’s cabinet navigate through the transformation to come? It’s another question. 

There are no fewer than three foreigners in it, most notably Natalie Jaresko, the finance minister and a former State Department official. It might be easy for the U.S., the IMF, or the Europeans to talk to an American technocrat, but is she in Kiev to represent Ukrainians to the West or the West to Ukrainians? The very real danger here is an overplayed hand. 

The IMF, meantime, just announced that its $17 billion bailout, in operation only since April, is $15 billion short of what is needed. With Ukraine “within weeks” of collapse, it’s chicken-and-egg for Poroshenko and Yatsenynuk, and you have to feel their pain at least a little. The U.S. and the Europeans refuse to spend more until Kiev cleans up the act, and it can’t get that done without more money. 

Ironies make great endings, and it’s a columnist’s Christmas: Before a meeting of E.U. ministers last week, Wolfgang Schäuble, the German finance minister, telephoned Anton Siluanov, his Russian counterpart, to ask Moscow to extend the term on a $3 billion loan it made to the pre-Poroshenko government last year. George Osborne, Britain’s Tory chancellor of the exchequer, did the translation work here: Help us out, please, while we continue to press punitive sanctions upon you.

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