Ukraine’s interim Prime Minister, Arseniy Yatsenuk, called on the nation’s parliament to enact sweeping economic reforms yesterday. His speech coincided with an IMF statement announcing $27 billion in international support for Ukraine.
Yatsenyuk detailed Ukraine’s numerous financial problems and he offered the members of parliament a choice: accept the international assistance with economic reform or the alternative, debt default and its catastrophic consequences to the economy.
Introducing a set of proposed legislation, Yatsenyuk said:
|“The Government considers it necessary to actually tax the rich.”
|Therefore, these 1.7% of Ukrainians, the rich, should pay taxes for the other 98%, as a matter of social justice for the future.|
Yatsenyuk proposed eliminating the flat-income tax currently in effect, and replacing it with a progressive scale of marginal rates like most Western countries use. Under the current system, which favors the rich, Ukraine’s nine billionaires pay the same 15% income tax as an average worker who makes only $5,000 to $8,000 a year.
The IMF was offering $27 billion over the next two years, an amount equal to the shortfall of 289 billion Ukrainian hryvnia Yatsenyuk detailed in his speech. The IMF would cover $14-18 billion of the assistance program, with the remainder to come from the broader international community.
The magnitude of fiscal mismanagement, fraud, corruption and misappropriation as reported by Yatsenyuk is remarkable. The former government had stolen the country’s future, Yatsenyuk said. More than $6 billion in public funds had been transferred out of the country.
The Wall Street Journal reported that Switzerland was addressing the matter..
|Switzerland has already halted negotiations on a free trade agreement with Russia, as well as the former Soviet republics of Belarus and Kazakhstan, because of the crisis in Ukraine. Switzerland also froze assets held by Mr. Yanukovych and roughly 30 members of his entourage that are held in the country.|
|Moscow said on Friday Switzerland had imposed restrictions on military exports to Russia over events in Ukraine which were counterproductive and not in line with the country's policy of neutrality. The restrictions imposed by Bern on a number of spheres of cooperation are unjustified and counterproductive. the Russian Foreign Ministry said in a statement.|
A week ago, Naftogaz’s Chairman, Yevhen Bakulin, was arrested in connection with an investigation of major corruption schemes in the gas industry. An appeals court refused to release him today, and Interior Minister Arsen Avakov confirmed that bail would be maintained at $135 million.
Yatsenyuk’s reform proposals include the elimination of Ukraine’s natural gas subsidies. Under the program, the state was paying $400 per 1000 cubic meters of natural gas imported from Russia and selling it to households for $90 per 1000 cu meters. In the last three years, Ukraine bought $50 billion worth of natural gas from Russia. Half of it was delivered to consumers for household use resulting in a $19 billion loss which is carried by the state. The losses were baked into the budget deficit and they are now part of the public debt. In effect, the natural gas subsidy program isn't really a subsidy at all. It’s just a mechanism that defers payment until the public debt’s maturity (or due) date.
What makes the scheme even more ridiculous is that benefits are applied evenly to the public, like the flat tax, so that the wealthy elite who use the most gas to heat their extravagant homes, get the largest subsidies. Yatsenyuk proposed a new program that would benefit citizens according to financial need. Those who are quick to criticize will label the gas subsidy’s elimination as austerity without knowing the details.Eliminating a program that functions as ‘welfare for the rich’ isn't austerity.
In Yatsenyuk’s proposals, the austerity measures that could put Ukrainians in jeopardy are:
- 10% of the 249,000 government employees will see their jobs eliminated.
- The minimum wage will be frozen for one year.
- Government spending will be reduced by 1.6%. For context, when austerity was implemented in Greece, government spending was reduced by 3.9% in 2010, 6.1% in 2011, 7.1% in 2012, and 5.3% in 2013.
Does it make sense to compare Ukraine with Greece? Is austerity the right way to describe the reforms Ukraine needs? I don't think so but I'll compare them anyway to show how the situations of the two countries are totally dissimilar.
I’ve already written about the anger and frustration of voters in France who soundly rejected neo-liberal economics at the polls in 2012, only to find the European Commission insisting on its one-size-fits-all austerity measures, anyway.
What’s at stake is the strong social safety net that has become a fundamental part of French identity. Spending cuts have a tangible effect on citizens and they fight back to retain their standard of living.
In Greece, austerity hit public sector workers. In 2010, there were 835,000 people in government jobs, a high number for a country of 11 million. With four times as many people, Ukraine has only 249,000 government employees. Government spending was reduced in Greece by eliminating 150,000 jobs. The effect rippled out into the general population. Today, the unemployment rate is still around 25%.
Greece proves the failure of austerity. But Ukraine isn't Greece and the comparison isn't meaningful.
The chart shows that Ukraine hasn't enjoyed prosperity for 20 years. Average income increased 48%. In Greece, the average income is much higher and increased 71%, even after austerity.
The chart's upper portion shows the relative size of Greece's debt compared to Ukraine's. The lower portion shows how Ukraine's deficit ballooned in the last year.
It wasn’t until November 2011 that FATF removed Ukraine from the list of problematic jurisdictions. A lot of money can be laundered in 10 years. Greece had its share of corruption too, but it was never a FATF-designated country left wide-open for money laundering. This is indicative of the nature of organized crime in Ukraine.
The vast sums of money spent by Ukraine's government for two decades didn't benefit the public in any meaningful way. It was embezzled, misappropriated. If the public had enjoyed some benefit from it and was asked now to do without, it would be austerity for them. But the public has been doing without all along. If Ukraine's interim government is able to begin a process of genuine reform, it will be austerity for oligarchs and thieves. Ukraine could use a story with a happy ending.