WASHINGTON, DC – Ukraine’s economy may no longer
be in free fall, but it remains in dire straits. The country’s GDP contracted
by 6.8% last year, and is forecast to shrink by another 9% this year – a total
loss of roughly 16% over two years. While things seem, to some extent, to be
stabilizing – depreciation of the hryvnia has eliminated the country’s
current-account deficit, and a massive fiscal adjustment brought Ukraine’s
budget into cash balance in the second quarter of this year – the situation
remains precarious.
Ukraine’s primary economic challenges are not
homegrown; they are the result of Russian aggression. The country’s belligerent
eastern neighbor has annexed Crimea, sponsored rebels in eastern Ukraine,
pursued a trade war, intermittently cut off its supply of natural gas, and is
threatening financial attack. So far, Ukraine has miraculously managed to
withstand these assaults with little international support – but it is in
desperate need of assistance.
Russia’s annexation of Crimea in March 2014
seized 4% of Ukraine’s GDP. Since then, Russian-supported armed forces have
occupied territories in eastern Ukraine that accounted for 10% of the country’s
GDP in 2013. With the Donbas region’s production having plummeted by 70% in the
months since, this has cost Ukraine some 7% of its 2013 GDP.
Since 2013, Russian trade sanctions have slashed
Ukraine’s exports to the country by 70% – accounting for a drop of 18% in
Ukraine’s total exports. Last year alone, Ukraine’s exports to Russia – which
included machinery, steel, agricultural goods, and chemicals – fell by half.
Logistical issues, the lack of commercial links, and the specialization of some
products meant that the goods could not be redirected in the short term. I
estimate that the loss is likely to correspond to a 6% decline in Ukraine’s
GDP.
Businessmen everywhere are aware of Russia’s
assault on Ukraine, and, unsurprisingly, few want to invest in a war zone. As a
consequence, Ukraine’s net foreign-direct investment, which was slightly over
3% of GDP before the start of hostilities, has evaporated. This amounts to a
corresponding reduction of 3% of GDP. In addition to this, Ukraine has faced an
intermittent gas war. A financial assault may be yet to come.
Leaving Crimea aside, we can attempt conservatively
to sum up Ukraine’s economic losses from Russia’s aggression. Roughly 7% from
lost production in occupied eastern Ukraine, 6% losses from trade sanctions,
plus 3% from lost foreign direct investment amounts to 16% of GDP – that is,
the total amount Ukraine is estimated to have lost from the beginning of 2014
to the end of this year.
Russia’s apparent but undeclared aim is to make
sure that democratic Ukraine fails, without looking entirely guilty of having
caused that failure. This leads to an important conclusion: Ukraine is not the
culprit but the victim, and it should be treated accordingly. One does not
counter military aggression only with stabilization credits, but also with
military support.
European countries should note that, given the
Kremlin’s saber-rattling in the Baltic and the Balkans, there is little reason
to believe that the Russian threat is limited to Ukraine. Delivering arms to
Ukraine before Russia attacks, openly or covertly, should be a priority.
On July 1, Russia opened a new front in the
economic war on Ukraine when the energy giant Gazprom, which is majority-owned
by the Russian state and slavishly pursues Russian foreign-policy objectives,
decided unilaterally to cut off the country’s gas supply. Given the global gas
surplus, Europe is in a position to tell Russia in no uncertain terms that its
corrupt practices are no longer acceptable. In particular, the European
Commission should insist that Ukraine be able to continue to import gas from
Gazprom in order to augment European supplies.
Furthermore, the economic war is making it
almost impossible for Ukraine to deal with the humanitarian emergency that
Russian aggression has caused: more than 6,000 citizens killed, tens of
thousands injured, and 1.3 million people internally displaced. The
international community, again with the EU in the lead, must provide
substantial humanitarian assistance.
Ukraine’s stabilization program with the
International Monetary Fund is sound but underfunded. An additional credit of
roughly $10 billion is needed to raise Ukraine’s international reserves and
stabilize its currency so that controls can be lifted. This money should come
from the EU and the United States. Meanwhile, the EU should make Russia’s trade
war with Ukraine the focal point of any trade negotiations with the Kremlin.
And it should abolish its remaining strict import quotas for Ukrainian goods.
Finally, every legal avenue to holding Russia to
account must be pursued. Sanctions against Russian President Vladimir Putin’s
cronies should not only be continued, but also deepened. And the US should
follow on its success in tackling FIFA by exposing criminals in former
Ukrainian President Viktor Yanukovych’s regime and Putin’s entourage. Given
that many of them have international bank accounts in US dollars, they are
liable to American prosecution. Ukraine should not be left to face Russia on
its own.
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