Ukraine is on the verge of a default even with an IMF bailout, Forbes reports. In fact, Moody's recently stated that they are now at the point of no return.
But even if the situation in Eastern Ukraine doesn’t entirely spin out of control, the country’s economy has already unraveled to the point that a substantial default is now essentially unavoidable. Moody's MCO +1.72% recently downgraded Ukraine‘s sovereign debt from ”extremely speculative” to “default imminent with little prospect for recovery.” Moody’s based its decision not just on the escalating political crisis, but on Ukraine’s rapidly dwindling foreign currency reserves, its exploding level of debt (from 40% of GDP at the end of 2013 to a projected level of 60% at the end of 2014), and full-year 2014 economic growth that is optimistically forecast to be somewhere between -3 and -4%. Although the new government in Kiev isn’t to blame for the economic carnage now transpiring, the fact that Yanukovych and his cronies were responsible doesn’t do anything to change the reality of the situation: whether we like it or not, Ukraine is in economic free fall.
Given everything that’s going wrong with Ukraine’s economy, there’s very little chance that the IMF bailout will prove large enough to allow the country to pay all of its bills. And while it’s fair to say that Ukraine didn’t have any other options on the table, the new government obviously wasn’t going to accept Russia’s aid package, as Alec Luhn notes at The Nation the IMF conditions for Ukraine won’t include any debt relief and won’t impose any haircuts on the country’s creditors. Even with substantial international assistance, Ukraine is going to owe a lot of money to a lot of different people and it isn’t going to have the means necessary to pay this money back.
So while Ukraine is forced to impose drastic austerity measures, they get nothing in return. The one way that Ukraine can get put back on their feet is through a Marshall Plan similar to what we did in Europe. But nobody cares enough about the Ukrainian people to even push for such a plan.
And on the other end, Putin has been making economic threats against Ukraine, saying that Russia can't afford to sustain them forever.
“The situation is - to put it kindly, strange. It’s known our partners in Europe have recognized the legitimacy of the government in Kiev, yet have done nothing to support Ukraine – not even one dollar or one euro,” Putin said at a meeting with government officials at his residence outside of Moscow.
“The Russian Federation doesn’t recognize the legitimacy of the authorities in Kiev, but it keeps providing economic support and subsidizing the economy of Ukraine with hundreds of millions and billions of dollars. This situation can’t last indefinitely,” Putin said.
And as the article notes, Ukraine hasn't actually physically gotten the $18 billion they were promised by the IMF. The details are still being worked out.
n the meantime, the West hasn’t yet effectively provided any money to Ukraine. The International Monetary Fund has agreed to provide Ukraine a bailout package of up to $18 billion, but the details are still being worked out. The US has also promised $1 billion in loan guarantees to help the collapsing Ukraine economy.
And the more the IMF and the West drag their feet on aiding Ukraine, the more they will play into Putin's hand. Former Georgia President Saakashvili said in an interview
that Putin once told him:
I met Vladimir Putin dozens of times and I remember at one of our last meetings he told me, “Your friends in the West promised you lots of nice things, but they never deliver. Well, I don’t. I don’t promise you nice things at all, but I always deliver.” And that’s his thinking that, you know, West is about talking and small talk and actually we are all about, he’s all about being strong.
This explains why many workers in East Ukraine want to be part of Russia -- they have a functioning government, there is demand for Ukrainian goods, and their welfare system is much stronger than Ukraine's.
Standing outside Donetsk's coal mine, Igor Yefremov mused over the future of Ukraine's heavy industry. "If we join the European Union our mines and factories will shut down," he said. "Already the orders from Russia are drying up. Russia doesn't want us because of the chaos in Kiev."
This is why Russia's idea of a federated state makes sense -- the East would still be able to do business with Russia while the West would be able to do business with the EU. And if Ukraine acts as a neutral nation, they will serve as a buffer between the West and Russia. But given the draconian austerity measures imposed by the IMF, this will only exacerbate the unrest in the east and encourage more people to push for annexation by Russia since the welfare gap between Ukraine and Russia will widen. This is similar with our situation with Mexico, where millions of Mexicans want to emigrate to the US because we have a substantially higher standard of living than Mexico.
This means that standoffs like the one in Dontesk will be more common. The deadline there is now down to 24 hours, and clashes between locals trying to stop Ukrainian military equipment and the military are occurring.
An eyewitness confirmed the information about military forces arriving in the city in an interview with RT.
“At about 2pm we received information that military hardware had arrived at our local train station. We went there and saw APCs, military vehicles and troops. The whole town gathered nearby. The soldiers tried to start moving, and the people tried to stop the vehicles,” Lyudmila said.
She also noted the harsh response from the military when the locals attempted to stop them.
“The soldiers twisted the arms of pensioners, there were two men standing there and [the soldiers] drove over their feet [in tanks]. I was pulled back by local coalminers while I tried to stop the vehicles. They didn’t even look at who was in front of them. The men started shouting for them to stop, saying there were girls and women in front of them, but they didn’t care.”
And this explains why the
City of Donetsk is actively funding the separatist movement there.
The Donetsk city budget, which is controlled by the local authorities, has served as a source of funding for separatists and even pro-Russian organizations for a long time.
Donetsk Mayor Alexander Lukyanchenko, for example, issued order No. 224 on March 17 which allocated Hr 40,000 to the Donetsk regional organization called the Society of Ukrainian Defense Assistance.
In response to the crisis, the
US is publicly saying that they may deploy troops to NATO countries which feel threatened by Russian interference in Ukraine. But in line with Putin's nasty remark to Saakashvili that the West promises allies all these nice things but never delivers, Obama has expressed solidarity with Ukraine. Yet the
US refuses to share invasion intel with Ukraine even though they have publicly accused Russia of massing troops for an invasion, fearing that it will fall into the hands of Moscow. And the $1 billion in loans that they already approved is a drop in the water. This means that the US already sees Ukraine as a lost cause and sees its best course of action as shoring up its NATO allies against any future Russian aggression.