Tag Archives: ukraine

Effects of Russian Intervention in Ukraine

As everyone knows, Russia recently intervened in the Crimean province of Ukraine in order to protect the Russian ethnic majority there from the new pro-western Prime Minister.  Politically, this has created a big crisis due to Russia violating Ukrainian sovereignty.  The US and EU have been forced to toe the line between all out confrontation with Russia and supporting Ukraine through any means possible.  While the political landscape is a complete mess, the economic repercussions aren’t any better.  The Ukraine hryvnia was down .5% against the dollar today while the Russian stock market has been down 22.7% and the Ruble is down 9.9%, the second weakest currency against the dollar of the 24 emerging market currencies.  Citigroup analysts have dropped Russia’s 2014 growth forecast for GDP from 2.9% to 1%.  The effects of the Ukrainian/Russian crisis has been felt in other emerging markets and developed markets as well.  Airlines have cut earnings by 5% due to raising oil prices and a slow down in emerging markets due to the Ukrainian Crisis.  The movement of Russian troops into the Crimean peninsula has also caused the price of Natural gas in Europe to increases.  Russia’s control over the price of natural gas in Europe has the potential to harm the economic comeback.  Right now, the EU is dependent on Russia for over a quarter of their natural gas.  If Russia cut off gas flowing through Ukraine, it would effect 14% of European gas consumption.  The potential energy problem is further exacerbated by Germany’s shift to green energy.  Germany recently issued a moratorium on new drilling which will make it even more reliant on Russian gas.  Poland, which has a strong fracking industry, relies on Russia for 2/3’s of Poland’s gas.  The Polish Prime Minister recently stated that Poland plans on diversifying their energy to make it more difficult for Russia to influence Europe.  Unfortunately, I don’t see Europe being able to diversify their energy quickly enough.  Russia will have a stranglehold on Europe until they are able to become less reliant on Russian gas.

The EU is not completely helpless against Russia though.  The EU has a three-stage plan in the works to penalize Russia.  The first is to suspend trade and visa liberalization.  I believe that this is the best course of action over military action because 4 out of 5 of their import and export partners are either in the EU or the US.  If the EU and US apply sanctions to Russia, then it would be logical that their allies like Japan would apply sanctions as well.  At the end of the day, I don’t see the EU apply sanctions or Russia cutting off Ukraine and EU oil supply because it would throw both of their economies into crisis.  After the sovereign debt crisis, I don’t see EU risking a rise in interest rates due to a drop in trade with Russia.  If the global economy wasn’t still recovering and the US could supplement Europe’s need for natural gas, I could see the EU and US favoring a tough stance, but now, I don’t see anything changing.

Ukraine’s Fight Isn’t Over

It has been all over the news and has been going on for months. Finally, last week Ukrainian opposition protesters achieved what they were fighting for: the removal of President Viktor Yanukovych. Protests began late last year, when the Ukrainian government rejected a trade agreement with Europe- favoring closer ties with Russia. Among discontent with corruption and social oppression, protesters manifested against the eery relations with Russia, which they felt was dominating their government. Essentially, they want to establish effective relations with the EU as soon as possible. Though protests were relatively uneventful in previous months, they turned very violent last week. At least 88 people died from the clashes last week; most were protesters, but some police officers are also among the deceased. Ex-President Yanukovych now faces an arrest warrant for the scale of violence used to suppress protesters. His whereabouts are unknown, seeing as he fled Kiev soon after the rally.

But the Ukraine now faces a very difficult financial situation. First of all, this political outcome is clearly unfavorable for Russia- which hoped to maintain its control over the formerly-Soviet state. And in reaction to the outcome, Russia has halted its $15 billion bailout package. However, this is quite the predictable reaction from the Kremlin, and I suspect opposition leaders took this into account or where at least aware of this implication. But will this effect be significant? Well, Ukraine’s $176 billion economy is in turmoil following months of protests and last week’s clashes. $15 billion is a considerable proportion of the country’s economy.

Now opposition leaders must find a supplement for this aid, in order to effectively pay back debt and essentially keep the economy running. That is where Western Europe and the United States come in. Sunday, the Obama administration worked with the European Union in order to draw up a bail-out plan for Ukraine. Ukrainians seek $35 billion in assistance – in order to avoid default. Its Finance Ministry said it will first seek a loan from the United States and Poland within the next two weeks, and later hopes to raise it to around $35 billion by the end of 2015. Though specifics on other European’s assistance are not clear at this point, it’s very likely that countries like Germany and France will also be interested in providing aid.

The interesting part of this assistance-package is that the United States invited Russia to participate. Maybe it’s just how I see it- as a slap in the face for Russia- but it does make sense for Russia to be interested in doing so. Putting aside politics (in which the Russians have mainly lost here) it is still in Russia’s best interest to have a sustained Ukrainian economy. Essentially, nobody will benefit from seeing Ukraine bankrupt, and there is enough incentive to keep this from happening. Though it will not be easy for Ukraine after this victory, also considering that some of the Eastern part of the country still supports Russian ties, there is much reason to predict that complete economic turmoil can be avoided.

 

(Revised) Ukraine: The Economic Benefits to EU Integration

Since November 12th of 2013, Ukrainians have been taking to the streets in droves to protest the authoritarian government led by President Yanukovych. As with other similar episodes of civil unrest, such as the Arab Spring, Ukranian protesters have utilized social media, hash tagging “Euromaidan”, which has become the unofficial name of the movement. As the AP explains in “Ukraine’s Euromaiden: What’s in a name?” the name refers both to the physical location of the protests, which have centered around Maidan Nezalezhnosti or Independence Square in Kiev, the capital of Ukraine, and also to the demonstrators’ demand for the country to integrate more closely with Europe.

Euromaiden has become even more relevant over the last week as protesters have clashed violently with police and at least two deaths have occurred according to the Wall Street Journal. While the protests still remain relatively small, the escalation to violence does bring about the potential for Ukraine to collapse into all out revolt. As the Economist points out, “Opponents of the government believe the new laws introduce Russian-style authoritarianism, and see them as part of a plan by Vladimir Putin, Russia’s president, to lock Ukraine into Russia’s orbit.” Essentially the conflict has been framed on two sides: the pro-European demonstrators and the pro-Russian institution. Many believe that a pivot towards Europe is the only way to bring democracy and rule of law to Ukraine, and indeed there is likely a great deal of truth to this. From purely a civil rights perspective, there is much to be gained from European integration.

From an economic perspective, however, the case for European integration is slightly more ambiguous. Ukraine is a former Soviet state and has retained very close ties with Russia after gaining independence. The country has been faced with a dilemma in modern times – whether to retain ties with the Russian Customs Union – an economic alliance between former Soviet states, led by Russia – or join with the EU in a free trade agreement. According to the Kyiv Post, maintaining ties with Russia over the EU, have several significant negative impacts on the Ukranian economy:

  1. The Customs Union is seen by many as a way for Russia to exert an inordinate amount of control over former Soviet states and the agreements typically force members countries to become reliant on Russia.
  2. Corruption and bribery is wide-spread across the Customs Union states and this limits the attractiveness of foreign direct investment in Ukraine.
  3. Ukraine’s trade with Russia has been steadily decreasing, while trade with the EU has been rising.

However, as the Economist explains, there is one clear cut advantage to remaining with Russia in that the country provides Ukraine’s single largest export market. Russian alignment also comes with the promise of cheaper gas and debt relief. And from a political perspective, the Russians would not demand better human rights, an issue which the current regime has made clear they have no respect for as they have cracked down on protesters in recent weeks.

While Russia provides clear near term benefits, Europe provides both economic and political benefits to Ukraine over the long term and the spread of the pro-European protests shows that citizens want these benefits. While the conflict has been framed as a civil rights fight up to this point, the economic impact could be huge if Ukraine were to ultimately enter an agreement with the EU. This could modernize their domestic industry as they would have a huge trading partner next door and help boost national income, which according to the World Bank is relatively poor compared to Europe and Central Asia as shown in the chart below.

Ukraine GNI

For now, Ukraine’s hesitation to pivot towards closer EU integration rests solely with the country’s leaders. They have too much to gain personally from remaining aligned with Russia. The people are the ones demanding the economic growth and freedom that European integration could bring and they are showing it to the world by taking to the streets in mass to protest their government’s actions. It remains to be seen whether the protesters will see their demands met, if the country will be thrown into an all out revolution, or if the current regime will stamp out the revolt but it is something to see people, in our modern time, fighting for their liberty.

(Revised) Cold War politics in 2014?

Ukraine has recently become the new battleground in the ongoing Russia vs the West influence war.  Ukraine is has been facing economic troubles since the latter end of 2013 which saw the Government of President Viktor Yanukovych reject an EU association agreement that would see Ukrainian exports head to the EU and accept a Russian deal that offered Ukraine $15 billion bailout that would tie Ukraine economically and politically to Russia.  The Ukrainian government’s approval of the Russian deal, which forces Ukraine to import a set amount of natural gas from Russia, is what led to the ongoing political unrest and protests that have plagued Kiev.  In response to the protests, the Ukrainian President dissolved his cabinet, which consisted of many pro-Russian politicians, in hopes of stemming the unrest.  Unfortunately, Russia this past week decided to withhold the rest of the bailout money due to Yanukovych removing the pro-Russian Prime Minister.  The US and EU have come forward with a new plan that would require Ukraine to enact political and economic reforms.  The economic reforms that Ukraine would have to face are a devaluing of its currency, and rising natural gas prices and signing the association pact with the EU that would open up the EU to Ukrainian exports.

While I do believe that the Russian bailout pact restricts Ukraine’s sovereignty, the US and EU plan may be too painful to implement with such low political stability.  The further devaluation of the hryvnia, Ukraine’s currency, would harm the Ukrainian public and reduce their ability to consume.  Though top US officials believe that the Ukrainian public’s problem with devaluation may not be as large as believed.  Due to recent Fed tapering and the flight of investors out of emerging markets, the Ukrainian hryvnia has already become substantially devalued.  This would mean that it would be less of a shock to the Ukrainian public if the devaluation continued a little bit longer.  The raising gas prices are also a sticking point when it comes to public sentiment.  As the weather begins to heat up in the spring though, the falling demand for gas would allow the Ukrainian government to increase the price of natural gas without causing the public to feel the pain of the increase.  Unfortunately for Ukraine, while the US and EU plan is the best in the long run, because it has Ukraine’s long run economic benefits in mind, the plan hinges on political reforms that are too difficult to implement.

With the recent crisis in Ukraine, I thought it would be a good time to revisit Ukraine.  Since Ukraine ousted the pro-Russian prime minister for a pro-Western prime minister, Russia has intervened in the Crimean province of Ukraine.  The Crimean province is predominantly Russian ethnicity but was gifted to Ukraine back in 1994.  The Russian presence in Crimea has caused ripples around the EU and world markets.  NATO members and EU member states worry about how to respond to Russia’s show of force.  The United States is in a tight position because they need to show NATO and EU that they can protect the other members.  The crisis in Ukraine has caused EU stock prices to drop because investors believe the crisis will go on for a long time.  Russia has used its Gazprom ties to apply pressure on Ukraine by stating that they may shut off their energy due to unpaid bills.  To combat Russia’s mounting pressure,

the EU plans to provide an 11 billion-euro ($15.3 billion) aid package and is prepared to drop tariffs on about 85 percent of the bloc’s imports of Ukrainian goods, according to EU Trade Commissioner Karel De Gucht. Ukraine wants as much as $15 billion from the International Monetary Fund.

I believe Ukraine needs this package otherwise they face a repeat of 2009 when Russia shut off energy and caused the world economy to stutter.  It looks as of now, the only thing the US can do without causing direct conflict, is to support Ukraine through economic and monetary funds.  The US doesn’t want to directly confront Russia but they are pushing for the IMF to agree on a bailout package.  The next few weeks will be crucial to see what happens in this resurrection of Cold War politics.

 

Ukraine: The Economic Benefit to EU Integration

Since November 12th of 2013, Ukrainians have been taking to the streets in droves to protest the authoritarian government led by President Yanukovych. As with other similar episodes of civil unrest, such as the Arab Spring, Ukranian protesters have utilized social media, hash tagging “Euromaidan”, which has become the unofficial name of the movement. As the AP explains in “Ukraine’s Euromaiden: What’s in a name?” the name refers both to the physical location of the protests, which have centered around Maidan Nezalezhnosti or Independence Square in Kiev, the capital of Ukraine, and also to the demonstrators’ demand for the country to integrate more closely with Europe.

Euromaiden has become even more relevant over the last week as protesters have clashed violently with police and at least two deaths have occurred according to the Wall Street Journal. While the protests still remain relatively small, the escalation to violence does bring about the potential for Ukraine to collapse into all out revolt. As the Economist points out, “Opponents of the government believe the new laws introduce Russian-style authoritarianism, and see them as part of a plan by Vladimir Putin, Russia’s president, to lock Ukraine into Russia’s orbit.” Essentially the conflict has been framed on two sides: the pro-European demonstrators and the pro-Russian institution. Many believe that a pivot towards Europe is the only way to bring democracy and rule of law to Ukraine, and indeed there is likely a great deal of truth to this. From purely a civil rights perspective, there is much to be gained from European integration.

From an economic perspective, however, the case for European integration is slightly more ambiguous. Ukraine is a former Soviet state and has retained very close ties with Russia after gaining independence. The country has been faced with a dilemma in modern times – whether to retain ties with the Russian Customs Union – an economic alliance between former Soviet states, led by Russia – or join with the EU in a free trade agreement. According to the Kyiv Post, maintaining ties with Russia over the EU, have several significant negative impacts on the Ukranian economy:

  1. The Customs Union is seen by many as a way for Russia to exert an inordinate amount of control over former Soviet states and the agreements typically force members countries to become reliant on Russia.
  2. Corruption and bribery is wide-spread across the Customs Union states and this limits the attractiveness of foreign direct investment in Ukraine.
  3. Ukraine’s trade with Russia has been steadily decreasing, while trade with the EU has been rising.

Europe provides both economic and political benefits to Ukraine and the spread of the pro-European protests shows that citizens want these benefits. While the conflict has been framed as a civil rights fight up to this point, the economic impact could be huge if Ukraine were to ultimately enter an agreement with the EU. This could modernize their domestic industry as they would have a huge trading partner next door and help boost national income, which according to the World Bank is relatively poor compared to Europe and Central Asia as shown in the chart below.

Ukraine GNI

It remains to be seen whether the protestors will see their demands met, if the country will be thrown into an all out revolution, or if the current regime will stamp out the revolt but it is something to see people, in our modern time, fighting for their liberty.