ECR forum: What the future holds for Ukraine

By:
Jeremy Weltman
Published on:

With civil unrest on the streets of Ukraine showing few signs of stopping, we ask four ECR experts if a solution can be found to the divided country’s problems.

Constantin Gurdgiev, adjunct professor at Trinity College University, Dublin, Ireland

The latest political crisis in Ukraine is a manifestation of the decades-long failure of Ukrainian leadership and society at large to put aside the conflicts between western Ukrainian and eastern Ukrainian histories, identities and national aspirations. Left unresolved, this failure will inevitably lead to a violent dissolution of the state. This is likely to have deep political, economic and social ramifications across eastern and central Europe.

The only economically and politically feasible solution to the Ukrainian dilemma is the creation of a functional co-shared leadership platform resting atop a much looser federal structure, with significant autonomy granted to western, north-central and eastern regions. Unfortunately, such a platform will not be sufficient to satisfy the demand of the increasingly militant and structurally unstable western Ukrainian opposition.

It is therefore imperative for all external parties interested in a Ukrainian crisis resolution (including Russia, the EU and US) to compel and incentivize Ukrainian leaders on both sides of the barricades to deliver a shared power arrangement. It is equally imperative for the said external parties to continue to monitor and enforce such resolution mechanisms over the medium term, while internal build up of institutional capabilities is ongoing.

The core aspects of such compulsion and incentives should include, but not limited to: multilateral trade and investment facilitation agreements to bridge Ukraine’s economy with its western and eastern partners; access to multilateral investment funds, structured similarly to the Marshall Plan, but funded and supervised by the three overseeing parties; and a robust set of potential penalties and sanctions that can be enacted in the case of Ukraine’s noncompliance with its long-term commitments.

Barring a concerted external effort to drive Ukraine toward a power sharing agreement and looser federal structures, Ukraine will continue stagnating socially, politically and economically.

Arjen van Dijkhuizen, senior economist at ABN Amro

After [president Viktor] Yanukovich turned away from the EU and towards Russia, protests became more aggressive in January, turning into violence between more radical elements and the security forces after the announcement of controversial safety laws and with three protestors killed on January 22. The government has made dramatic concessions, including the resignation of [prime minster Mykola] Azarov and his entire cabinet, but the opposition still insist on the president's resignation and early presidential elections.

How the political dynamics will unfold remains unclear. All this could give rise to a new, pro-EU government, which could endanger the support from Russia that already put on hold the buying of Ukrainian bonds. Meanwhile, the US and the EU are working on an emergency aid package as part of an effort to resolve the crisis and to tie the country more closely to the west. The western package should be seen as bridge finance to help a new government through a difficult transition period, enabling it to make the necessary reforms to secure an IMF package.

The heightened uncertainty regarding Ukraine's political and economic future is also illustrated by S&P's recent move to downgrade the country from B- to CCC+. Ukraine's CDS premium has widened sharply in recent weeks, after coming down immediately after Russia announced its support package in late December. All in all, the political and economic future of Ukraine remains challenging and uncertain.

Vasily Astrov, senior economist at the Vienna Institute for International Economic Studies, Vienna, Austria

Right now, president Viktor Yanukovich does not control the situation in Ukraine. He cannot launch a crackdown on the protestors because he is unlikely to be supported by the army/security forces – certainly not in the western (nationalistic-minded) provinces of the country. If he nevertheless resorts to using force, a split-up of Ukraine will be more than likely. But this is not the most probable scenario at the moment.

The most probable scenario is that Yanukovich will continue compromising – and ultimately will have to step down himself, since the recent sacrifice of prime minister Azarov will probably not be enough to satisfy the protestors. The impact on the economy will crucially depend on who comes to power to replace Yanukovich. The victory of the opposition is relatively likely: according to the polls, for instance, Vitaly Klichko, the head of the opposition party UDAR (which is pro-western but also populist), would beat Yanukovich by a comfortable margin. This might entail a suspension of the Russian financial package (credits and the price discount on the imported gas), and the downward pressure on the hryvnia will intensify markedly. Over the past few years, hryvnia has been clearly overvalued, and the current (still moderate) depreciation should prove beneficial for the economy by way of boosting exports. However, a sharp depreciation may trigger a bank run, with potentially disastrous economic consequences.

Still, in the longer run, any future sober-minded Ukrainian government will have little choice but to continue manoeuvring between the EU and Russia – at least until the relations between the latter two improve substantially, depriving Ukraine of the painful dilemma with respect to the choice of its foreign policy vector.

Iikka Korhonen, head of Bank of Finland Institute for Economies in Transition (BOFIT), Helsinki, Finland

Economists' track record in predicting turning points of business cycles is far from perfect. Trying to predict the outcome of Ukraine's current political quagmire is probably significantly harder. Yet, some observations can be made regarding the political situation, and some features of the economic situation are relatively clear.

First, the current political stand-off could last for weeks or even months, but eventually some sort of agreement needs to be reached between parties. The easiest way forward would be preliminary elections, which would facilitate a more or less peaceful change of government.

Second, the Ukrainian economy cannot return to the situation that prevailed last November. Even if Russia would stick to their earlier agreement with president Yanukovich and lend $15 billion to Ukraine, the country would run out of money before the end of 2014. And the longer the political situation remains tense, the larger will be the negative effect on the economy. All this means that Ukraine will need additional financing, or it needs to implement drastic austerity measures soon, or a combination of the two. According to the IMF, Ukraine's total public sector deficit in 2013 was close to 8% of GDP, when one takes into account the subsidies in the gas sector as well. The longer the political situation drags on, the larger will be the needed economic adjustment. And it is already very large. 

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