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A Must Read Article on the Ukraine Economic Abyss

A glimpse into financial realities of Ukraine and its empoverished population gives an impression of a country on the brink of something very, very bad

  • Finance minister Yaresko is preparing the population for a default...
  • ...which many papers and some politicans have been calling for a while
  • A monthly pension is $43
  • Minimum wage is $48
  • Just 9% of the population still classifies as "middle class"
  • Political events draw attendees by distributing free groceries
  • Desperate pensioners have actually killed themselves after receiving utility bills with new prices
  • Meanwhile the top state managers like Yaresko and Poroshenko are at least multi-millionaires

This article originally appeared in The New York Observer

Natalie Jaresko has the face of a sad magician whose voodoo spells stopped working long time ago. Ukraine’s Minister for Finance, Ms. Jaresko nowadays is a common figure on Ukrainian TV.

Before becoming the Minister for Finance of Ukraine, this dual Ukrainian-American citizen worked for the U.S. State Department. In the 1990s, she was the first Chief of the Economic Section of the U.S. Embassy in Ukraine, then she made her millions as the CEO of a number of investment companies working in Ukraine.

Using all her newly acquired Ukrainian vocabulary, she is explaining vehemently to her fellow Ukrainians that they should stop worrying about their country’s precarious financial position. On television, she preaches that ‘default’ is not necessarily a bad word after which hunger and cold automatically loom, that there is a silver lining in everything.

If it does happen (she admits it’s possible), it will be a “technical” default that won’t cause the national banking system’s collapse. Nobody, not the banks nor their clients, will ever suffer.

She can sing like a siren for Odysseus (uh oh, you are reminded about Greece again), charming those who want to be cheaply charmed—and here is her song: “Yes, this is a technical default. But—one shouldn’t be afraid of this word. In no way this will have an influence on our bank system because our banks do not hold this international debt. This doesn’t influence liquidity, has no influence on deposits of our citizens. This is not Greece, this is different situation.”

If—or ‘when’ by the pessimists—the dollar hits 30 hryvnia, the middle class of the country will be eliminated. And of course, according to her, the default won’t have any effect on the rate of the national currency, the hryvnia, which before the latest revolution one-and-a-half years ago was 7-8 to a dollar and now approaches 25 among the street vendors.

“In my opinion, according to the economic arithmetic, there should not be any negative impact on the hryvnia. Just arithmetically speaking, money—the currency to be used for payments—would come out of the country, and in case of the suspension of payments, it remains in the country. Arithmetic is better for the hryvnia,” she says.

According to Ms. Jaresko, Ukrainians should even feel proud about their government’s possible intention to default on its $27 billion debt because she does not exclude the possibility that part of that debt, the part that was accumulated from 2007 to 2012, belongs to the ‘dark forces’.

Of course, $3 billion of it was given by Russia, the enemy that wants to destroy Ukraine both militarily and through financial pressure. But there is another reason for staying positive, which is more nuanced and intricate. Ms. Jaresko does not exclude the fact that it has been held by another foe—former President Yanukovich’s “family”. When asked by a reporter if it was “possible” that 90 percent of the Ukrainian bonds were bought by the hated former president and his cronies, she shrewdly answered, “Everything is possible, because bonds can be bought and sold. They are sold on the Irish stock exchange. I can’t know who is a beneficiary owner of the bonds.”

So defaulting is not only possible, but also would be a just and positive thing to do. This position makes Ms. Jaresko a moderate. There are others, like leader of the Radical Party Oleh Lyashko, who call on the government for an explicit default on all international debt. He said, “As we can see by the example of Greece, the only way to make creditors agree [to Ukraine’s conditions of a 40 per cent haircut on principal, lowering the interest rate and maturity extension] is to declare a default. I call on the [Ukraine Prime-Minister] Yatsenyuk’s government to do just this—it’s not going to be any worse [than it is now].”

Much of the Ukrainian press supports the idea in widely published articles with headlines such as ‘Default Is a Blessing For People’ and ‘Why One Shouldn’t Be Afraid Of Default’.

Mr. Lyashko is right that the situation is bad. Ukraine’s external debt, both state and commercial, totaled $125.97 billion, or 110.5% of country’s GDP as of April 1, 2015, the National Bank of Ukraine reported. A quarter-century ago, when Ukraine became a sovereign nation, it was $0.

Government loan payments coming due in the course of 12 months are $6.6 billion. Payments on obligations totaled $5.4 billion, including $3 billion owed to Russia—plus interest.

Every Ukrainian today—excluding children and the senior citizens—owes international creditors $3,200. To pay the amount Ukraine owes to the creditors just this year would mean that every Ukrainian has to contribut’ at least $350, which is two-six months’ salary.

According to the State Statistics Committee, the average monthly salary in Ukraine is around $140 (for simplicity, wages and costs will be in U.S. dollars at the street vendors’ rate of 25 hryvnias per dollar).

The most vulnerable are retirees with their monthly pension of $43. The desperate situation of these people is often used by the political parties to organize “performances” in their support. The new UKROP party, for example, financed by the oligarch Ihor Kolomoisky, recently organized in the town of Chernigov a rally in its support. To mobilize the senior citizens, free food was promised—one package of flour, one package of noodles and two cans of fish per person. While pushing forward for handouts, the big crowd of desperate retirees burst into a fist-fight.

(Once, the word ‘Ukrop’ or ‘dill’ was used as a pejorative term for “Ukrainian”; today it has been widely accepted with pride by the most politically advanced parts of Ukrainian society as the self-ethnonym in their defiance to the “Moskals” (Russians).)

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Leader of the Radical Party, parliamentarian Oleh Lyashko in ‘vyshyvanka’

If one believes the Ukrainian newspaper Vesti, which reported the story, in Kharkov region in July two senior citizens—Sergei Roganin and Vladimir Maryushchenko—committed suicide by hanging themselves after having received the utility bills with new prices. Sergei Roganin did it in a very unusual way. First, he put on the national dress–a ‘vyshyvanka’, a shirt with traditional colorful ornament embroidered around the neck and cuffs–then he shouted the modern-day Ukrainian political and military battle cry of Ukrainian patriots, ‘Glory to Ukraine!’ as he jumped into a noose.

The vyshyvanka is another modern-day symbol of patriotism. Vyshyvanka Day is a new national holiday, on May 21, when every Ukrainian from the president is expected to wear one—unless, of course, he wants to be suspected of hidden sympathies to ‘Moskals’. The U.S. Ambassador to Ukraine, Geoffrey Pyatt, also wears the vyshyvanka from time to time in order to show his country’s support and affection for everything Ukrainian.

Ukrainian Minister of Finance Jaresko is not your ‘Mom, God and apple pie’ lady anymore. She loves her vyshyvanka above everything. On her Facebook page, she called it “the prayer without words, the symbol of unification with the souls of our forebears”.

In the meantime, the monthly minimum wage in Ukraine, which is $48, needs an additional $4 to cover the most basic food basket, leaving aside transport expenses, clothes and the rest. In May 2010, the food basket was 55% of the monthly minimum wage; in May 2015, it was 108 percent. According to the Ukrainian State Statistics Office, within the last 12 months, sunflower oil has risen 200%, fruits 197%, eggs 181%, bread 175%, pasta 171%, fish 171%.

But this is not what worries Ukrainian folks the most. First and foremost, they think about their new utility bills. The price for natural gas has risen 553% since last summer; for electricity 133%; for water 176%. Government reformers promised that it was just the beginning.

The definition of middle class in Kiev starts with a $400 monthly income; in all other places outside the capital $200 will do the trick. The percentage of middle class in Ukrainian society is the lowest in years, about nine per cent, according to TNS company. If—or “when” by the pessimists—the dollar hits 30 hryvnias, the middle class of the country will be eliminated.

The income level of the so-called, well-to-do class in Ukraine can be demonstrated by the salary of the Deputy General Prosecutor of Ukraine, Mr. Vitaly Kasko. He makes $720 a month; the district prosecutors who work under his command make up to $400.

Even US Ambassador to Ukraine Geoffrey Pyatt gets in on the ‘vyshyvanka’ from time to time

The level of unemployment during the post-revolution period has crawled up from 7.7% to 9.6%, but it looks to be heading higher because reformers’ policies include energy parsimony and getting rid of unpromising industries, which are plenty. The reformers’ course of de-industrialization as part of getting rid of country’s “energy dependence” will mean a hard landing for the residents of five Ukrainian cities whose population exceed one million, including Kiev with its three million inhabitants.

Ukraine, swimming through the ocean of reforms, is in uncharted waters. In other countries that went through painful periods of reforms, the level of urbanization was definitely lower. In Poland, for example, which has about the same number of people as Ukraine, there is only one city with the population over one million–Warsaw, with its 1.7 million inhabitants.

Just two years ago, under the previous “corrupt regime”, the average salary in Ukraine was $500 a month, the average social security check was $200 a month. Prices for goods were less than half what they are today.

The sarcastic new governor of Odessa region, Mikheil Saakashvili, remarked that Ukrainians would have to toil hard for the next 20 years if they want to get back the living standards they enjoyed under the “corrupt regime”. The national currency has fallen into the abyss, from 7-8 hryvnias per dollar to an official 22-23 hryvnias per dollar. The only reason it doesn’t fall even deeper for now is the Ukrainian government’s liabilities for unpaid meager wages has reached the unprecedented sum of $72 million, the unpaid wages in private companies cannot be definitely calculated but the number must be humongous.

Some Ukrainians, of course, do not care about the money. Mr. Saakashvili openly declares that his lavish lifestyle and the ones of his team (in which some are his fellow-Georgians and there is even a young daughter of a former reformist Russian Prime Minister) doesn’t cost Ukraine’s budget a hryvnia—all is paid for by American taxpayers.

Minister for Finance of Ukraine, Natalie Jaresko, the one who often goes on TV, says that she sends her kids to the private International School in Kiev on the money she made before in private sector as a head of Horizon Capital Investment Company. (Out of respect to her less fortunate co-citizens, one might advise her to stop wearing half-pound weights of gold on her wrists, neck, fingers and ears while on television.)

Ukrainian President Petro Poroshenko … well, he’s a billionaire.

The Ukrainian Government blames the situation on the war in the east of the country and on corruption of the previous—the word “criminal” is always used— regime. There is a big part of truth in this claim, but also political slyness. Yes, the war takes a heavy toll on Ukraine’s economy, but six million people who barely survive in the regions under the control of anti-Kiev insurgents haven’t gotten anything from the Kiev government money-wise for more than a year and a half—no salaries, no retirement money, no social security, no benefits of any kind, effectively being cut off from Ukraine’s budget as unnecessary ballast.

As far as the “previous corrupt regime” mantra is concerned, the word “previous” holds only a bit of water. Today’s President of Ukraine, oligarch Petro Poroshenko, for one, started his political career in 1998, winning his seat in the Verkhovna (Supreme) Rada. He became Secretary for Security and Defense in 2004 (dismissed in 2005 after allegations of corruption), was appointed Chairman of the Parliamentary Committee on Finance and Banking in 2006, and became head of the Council of the Ukraine National Bank in 2007.

In 2012, the previous, “corrupt” President Yanukovich appointed Mr. Poroshenko as Economic Development and Trade Minister of Ukraine. Prime Minister Arseny Yatsenyuk (“our guy Yatz”, according to U.S. Assistant Secretary of State Victoria Nuland) was appointed the Minister of Economy of Ukraine in 2005 and a Chairman of the Parliament in 2007.

So one has to agree with Mrs. Nuland, who said in an interview on Ukrainian television’s popular ‘Shuster-Live’ program on July, 17, “I don’t have to tell you this—that pretty much every set of leaders since independence has, in one way or another, either directly ripped off the people of Ukraine or allowed it to happen.”

The sad fact is that Ukraine is broke—the National Bank has only a little more than $10.264 billion in its coffers. Kiev does not have enough money to prepare for the heating season, which means that most likely people will freeze again this winter. To solve that problem, Ukraine is negotiating with international partners to obtain credit–$1 billion to buy natural gas and $300 million for coal. Righteously shutting the door and throwing away the key from the Russian market for its industries’ products, post-revolution Kiev deliberately closed its eyes to the fact that it has almost nothing to offer to the rest of the world.

Europe’s [higher] quality standards cannot be matched by Ukrainian industry any time soon. Even Ukrainian white salt is used in Europe only to put on the roads during the winter or in the chemical industry as additive. Ukraine’s natural salt is considered ‘dirty’ for having too many minerals in it.

So, how to come out of the mess the country is in? So far, nobody of the ruling elite has an answer, unless one seriously considers the program of Oleksandr Turchynov, the Secretary of the Council for National Security and Defense of Ukraine and former acting President of Ukraine. . Like everything with a touch of a genius, his idea on how to improve Ukraine’s disappearing economy very simple—Ukraine must sue Russia for the “annexation of Crimea,” which, by Mr. Turchinov’s reckoning, is worth $100 billion.

Of course, as a patriot, Mr. Turchinov doesn’t want to sell Crimea to Russia; he wants Ukraine to receive both the coveted peninsula and the coveted cash. “We don’t sell territories,” he explained to Interfax-Ukraina news agency. “This is how we will both return Crimea and will get $100 billion—through the court.”

Prime Minister Yatsenyuk gives Mr. Turchinov’s idea thumbs up and orders his subordinates to sue Russia for hundreds of billions of dollars in all kind of international courts—so far, not a single dollar out of the ocean of greenbacks that would help Ukraine prosper has been received.

Meanwhile, the word ‘Greece’ makes him mad. “We were promised $25 billion over the next 4 years while we have to fight with Russia, having lost 20% of our economy. And our friends from Greece whose population is four times smaller than Ukraine’s have already received $300 billion and claim that they need another $60-80 [billion]?”

Life is not fair to Mr. Yatsenyuk. Running out of ideas on how to deliver the promised European living standards to his fellow Ukrainians must be disheartening. His depressive—Freud might even say moribund—mood can be perceived in Mr. Yatsenyuk’s constant use of the word “kamikaze” with regard to himself. After having met Mr. Obama in the White House some days ago, Ukraine’s Prime Minister was quoted by The New York Times as having said that he had no choice but to “hang together” with President Poroshenko, the alternative being, according to Mr. Yatsenyuk via Benjamin Franklin, to “hang separately”.”

Yes, there were a lot of promises made. But never before has the truth been told more plainly than in Victoria Nuland’s interview on Ukrainian television some days ago when she explained to those still clinging to illusions left, “There are no miracles … this stuff [reforms] is painful. And when you have a painful place, and you have a band-Aid over it, for example, and you have to change the bandage, it’s always worse if you pull that bandage off slowly. It’s much better to pull it off as quickly as you can, live through that pain, and then start to heal.”

Being a politician, Mrs. Nuland omitted one thing – how many years the healing process is going to take. And no, she was not wearing a vyshyvanka.

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