The winter holidays passed without much celebration in Kyiv. The usually boisterous Ukrainians didn’t even set off New Year’s fireworks, leaving Ukraine’s capital unusually dark and quiet, while a German-style holiday market on the square opposite the St. Sofiya cathedral was a pleasant exception. The government decided against putting up Christmas lights, and many private citizens followed suit. Amid a surge of unity and patriotism, many Ukrainians felt they had no right to celebrate during wartime. An intense foreboding about the future means that many were genuinely not looking forward to 2015. Although there seems to be no remaining capacity or desire for a “third Maidan,” nationwide polls capture the disaffection and radicalization of the population. One third of Ukrainians see capital punishment as the proper answer to corruption.
The West seems unenthusiastic about the prospect of having to bail out Ukraine once again. Default has never looked so real. The new $15 billion package the IMF says is needed to prevent default, however, is coming together rather slowly. The United States recently guaranteed Kyiv $2 billion in additional loan guarantees (contingent on reforms), the EU has pledged $2.1 billion (contingent on approval from EU governments), and Germany has offered $500 million (to be delivered only after planned expenditures are approved by Berlin).
The loudest advocate for an even bigger bailout is George Soros, who suggested that as much as $50 billion might be necessary to “save” Ukraine. He called for using untapped EU resources that had been earmarked for CEE member states during the 2008/2009 crisis. Regardless of the merits of individual elements of Soros’s suggestion, the enormity of this figure betrays the fact that Ukraine’s economy is spiraling out of control faster than expected. According to the governor of the Central Bank, economic output could already have fallen by as much as 10 percent, and the Financial Times estimates that Ukraine’s debt-to-GDP ratio could approach 90 percent in 2015. This is more than double the 2013 ratio, and is likely unsustainable. At a minimum, some form of debt re-structuring will be necessary.
Soros’s argument would be much stronger if the Ukrainian government had implemented a stellar reform program. Instead, Kyiv to date has mostly only muddled through. More of the same half-measures is beginning to look like the most realistic scenario for the future. Though further IMF support might help stave off bankruptcy, it will also represent another illustration of moral hazard. If the West prevents Ukraine from enduring the shock of serious reform, how confident can we be that the country will actually pursue a fresh start? Muddling through certainly will not be enough to raise confidence in the government or create the political impetus for serious structural reforms. If anything, it may only prolong the political and social agony.
The current Western approach to the crisis is in step with Kyiv’s reform dance: one step forward, one step back. Ukraine’s new budget, adopted after an 18-hour marathon session in parliament at the end of December, is a case in point. It was rubber-stamped through parliament in order to put Kyiv back in the good graces of the IMF. Yet as a fresh scandal has revealed, someone secretly added a billion hryvnia to the budget at the last minute. Although the budget includes various positive elements, it unfortunately further increases the role of the state. Once again, it is clear that the political elite wants to maintain their monopoly on money and power, while expecting ordinary people (and foreigners!) to pick up the tab. All this comes at a time when poor households are reportedly unaware of how to apply for new social benefits aimed at providing cushioning from the impact of various reforms. There is a reason why we now see the government devoting more energy to public relations than actual reforms: the former is easier under the current conditions.
It should come as no surprise that the most significant inhibitor of reforms is the development of “monopolies” of power, which investigative journalist-turned-lawmaker Serhiy Leshchenko has described in great detail. President Poroshenko, Prime Minister Arseniy Yatsenyuk, and Dnipropetrovsk Governor Ihor Kolomoiskiy (the biggest oligarch beneficiary of the Maidan) are emerging as a powerful triumvirate, though their personal animosity and feuding may ultimately derail policymaking. There is already a tactical alliance forming between Yatsenuk and Kolomoiskiy against President Poroshenko, who has managed to increase his grip on power beyond the gates of the presidential administration building. The newly created Anti-Corruption Bureau is likely to include a foreigner, which should further strengthen Poroshenko’s leverage vis-a-vis the two other centers of power.
The question is how long the current status quo—teetering on the edge of default while receiving delayed infusions of Western support—can continue. The lack of social cohesion may worsen as will the threat of low-level terrorism or conflicts among competing oligarchic clans and security officials.
If no bail out is forecoming, the risk of a resumption of (limited) war in Donbas is greater. The People’s Republic of Donetsk (DNR)—whose population keeps dropping—is fighting for its own survival and needs a bailout from Moscow just as much as Kyiv needs one from the West. The renewed fighting at the Donetsk airport is likely another manifestation of Russia’s pressure campaign against Ukraine, although it is hard (by Western logic) to imagine what Moscow hopes to gain ahead of the debate on whether to extend EU sanctions due to expire on March 31. By most accounts, the EU is divided over Russia. But Moscow seems as committed to a long conflict as the West is focused on quick fixes. One of the answers may lie with local factors: there are simply too many weapons and too little central control in Donbas. The Donetsk airport has become a symbol of Ukrainian heroism and could prove to be a test of President Poroshenko’s capabilities as a commander in chief. Throw in Russia’s deepening economic problems and growing nationalism, and the recent announcement of new rounds of mobilization in Ukraine, and it is clear that we are witnessing developments likely to fuel the creation of a new black hole in Europe.
