Frequent stories of Russia's economic and social desolation are un-informed fantasies, but a place like that really exists - it's the pro-European Ukraine
This article originally appeared in Business New Europe
Writing and thinking about Russia can often have a rather surreal quality to it. Something about the place seems to short-circuit peoples’ critical thinking skills. Serious pundits write things (“Russia life expectancy is collapsing!”) that are flatly contradicted by recent academic research and that don’t withstand even the most cursory use of Google. Lots of things that “everyone knows” about Russia – that its alcohol epidemic continues unabated, that its population is in rapid decline, that it is suffering enormous population loss through emigration to the West – are simply not true.
The general expectation among the Washington elite, which tends to be marginally, but not extremely, more negative on Russia’s long-term prospects than its European analogues, is that Russia will collapse sometime in the medium term. There are differences in the precise way that this collapse is expected to happen – despite being the plotline of a second-rate Tom Clancy novel, “China invading and annexing Siberia” is a surprisingly common answer – but that it will happen is not seriously in doubt.
Meanwhile, Russia’s next-door neighbour Ukraine, is the darling of the moment. Barely a day goes by without a stirring press release about the country’s “European choice”. At least in public (there are indications that in private many Ukraine boosters are rather more skeptical than they’d like to let on), high-ranking Western diplomats seem to be having a competition among themselves about who can offer the most outlandish praise. The official narrative is a strikingly optimistic one of progress, reform and rejuvenation.
When you look at the actual numbers, though, the narratives start to make less and less sense.
Grass not greener
By virtually any standard you can think of Ukraine is not only underperforming Russia at the moment, it is projected to continue to do so for at least the next several years. This is true in terms of GDP growth, inflation, international reserves and the strength of the currency.
Russia's economy is, of course, not doing terribly well at the moment. The 2015 GDP growth forecasts are all over the map, a great deal depends on whether the recent rebound in the price of oil continues or reverses course, but somewhere between -2% and -5% growth seems reasonable. That is, of course, bad. Negative growth is always bad. But Russia actually managed to eke out 0.6% growth in 2014, so it’s not as if the economy is in a tailspin. As of writing, Russia wasn’t even in a recession (at least yet). As 2008-09’s experience demonstrated, it has recent experience with stumbling and bumbling its way through an even more serious crisis.
In Ukraine the economic situation is much, much bleaker. The economy shrank by 7.5% in 2014, with the slump actually accelerating at the very end of the year (the growth rate hit an annualized -15.2% in the fourth quarter). The Ukrainian statistics service hasn't yet published it's fourth-quarter 2014 data, so the numbers cited are the International Monetary Fund's (IMF) estimates, which are probably as good as anyone else's right now. It’s also a little hard to collect accurate data when a sizable chunk of the country is an active war zone and it’s anyone’s guess as to how, or if, economic activity in Donetsk and Lugansk is being tabulated*. Even optimistic government forecasts, which initially called for a return to growth this year and have been repeatedly revised downwards, expect that the economy will shrink another 5.5% this year.
That is to say that according to forecasts, Ukraine will perform worse than Russia in 2015 in absolute terms despite already being in a nasty recession. Cumulatively, Ukraine will probably suffer a 12.5% decline in total output, or a recession that is more than twice as bad as the worst estimates for Russia.
Another one of Russia’s Achilles’ heels is inflation. In Russia, inflation throughout 2014 was about 11.5%. By February, year-over-year inflation reached as high as 16.7%. Neither of those figures is particularly good, and they represent a worrying loss of the central bank's hard-won progress in achieving price stability. Russian consumers are going to suffer and they’re probably going to suffer quite a lot.
But the situation in Ukraine is, as with the overall economy, much, much worse. 2014 inflation in Ukraine was 24.9%, or more than twice as bad as in Russia. And it has accelerated more rapidly through the first few months of 2015. Inflation got all the way up to an annual rate of 34.5% in February and considering what happened to the hryvnia it’s likely to go even higher.
Whatever problems Russia is going to suffer as a result of heightened inflation (and there will be a number of them!) they will be that much worse in Ukraine. That is to say if you think the Russian economy is on the brink of turning into Weimar, the exact same thing will happen in Ukraine, only it will happen more quickly and to a country with a much smaller pile of international reserves (most of which aren't really "reserves" as they are loans from the IMF).
Taking a step back we can see that Ukraine is facing all of the same problems as Russia – a weakened currency, rising inflation, weak banks, a shrinking economy,and declining foreign reserves – only it is suffering these problems much more acutely and doing so without a giant cash-generating natural resource sector. Indeed, the only thing that has prevented Ukraine’s economy from completely imploding, aside from some hasty capital controls instituted by the central bank, is the package of assistance from the IMF. But those, of course, are loans. They aren’t money earned from selling things to foreigners, like Russia’s oil and gas exports; it is money that needs to be paid back with interest. And since Ukraine already cannot meet its debt obligations, it’s not clear how it is going to do so at least on any kind of reasonable timeframe.
There is one way out of this situation that is as simple as it is politically impossible: the West could just give Ukraine a bunch of money. That won’t happen – German taxpayers would riot in the streets if they found out their government was just gifting Kyiv billions of euros – but it could. Absent that kind of deus ex machina situation, however, Ukraine is on the highway to economic ruin and collapse. Russia isn’t exactly in the fast lane to prosperity, either, but it seems likely to make it through the next couple of years. The same cannot be said for Kyiv.
*the Ukrainian statistics service stipulates that the only areas that it is (temporarily) excluding are Crimea and Sevastopol. From a methodological standpoint the Donbass is still considered a full part of Ukraine