Ukrainian people will bear brunt of IMF deal with tough austerity
Patrick L Young is CEO of niche crowdfunding platform HanzaTrade and an advisor to fund managers throughout the world. Born in Ireland, he is an active investor in the “New Europe” amongst other emerging markets and is an active Co Founder of grassroots startup group "Mission ToRun." Home Page: http://patricklyoung.net Twitter: @FrontierFinance
He also warned that unless economic and political stability is
quickly restored, investors will be put off from investing in
Ukraine, thereby creating further problems.
RT:Could you explain the situation to us from an economic standpoint there? Would an IMF loan actually save the situation in Ukraine? What’s your take?
Patrick Young: The IMF loan is something which has been in discussion for four or five years. Ultimately, $15 billion will go a long way towards stabilizing the Ukrainian economy. At least, all other things being equal, that was in the old days when there was actually a plausible democratically elected government. The problem you’ve got though, with this loan, is whether it can actually be achieved in the first place from the IMF. And then what can be done in the very, very charged and confusing political situation.
RT:The IMF will also come up with its own demands for Ukraine and the reforms that the country will have to implement. Will that affect the situation in the country?
PY: Here we run back to the same catastrophe that we had when we were first talking about the Maidan demonstrators months ago, who have now exceeded to some sort of office. The problem is that for their $15 billion, the IMF has a very standard type of prescription template. And that means that the government has to behave in a very fiscally sound fashion. “Fiscally sound” does often not mean terribly sympathetic towards the average everyday pensioners or the citizens of Ukraine. And that’s exactly the situation we have here; Ukrainians are used to receiving their gas from Russia and then the government giving them an absolute enormous subsidy on top. That will have to go under the IMF plans. That’s why Mr. Yanukovich walked away from it some years ago. Equally, the government runs a $6.5 billion deficit every year. In other words, it spends more than it brings in, in taxes. The problem with that is, the IMF are going to demand they get their house in order. They’re going to have to bring in austerity. They’re going to be grinding measures to make sure the government actually operates in a logical, reasonable, trustworthy, and non-corrupt fashion. That’s not going to appeal to a lot of oligarchs, and its certainly not going to appeal to ordinary people who are going to see their real standard of living collapse. And that leaves us exactly at the point where, four months on, we’re no better off in terms of the Ukrainian situation because there’s no easy way out – which was why Mr. Yanukovich refused to sign up to the IMF package.
RT:Of course we know that it’s the people, it’s the locals, who bear the brunt of all the austerity measures. Speaking about the domestic situation in Ukraine, and specifically about household and gas tariffs – other previous governments refused to increase gas in homes. Why would the new one adopt such unpopular measures?
PY: It’s very simple. The IMF will refuse to provide the money unless the Ukrainian government, for want of a better term, signs up to these measures. So therefore it’s impossible, unless you comply. The IMF will essentially not give you $15 billion up front. It will give you a few hundred million next month, and keep on going over the course of the loan time. There will be a drip-feed of this money. If you don’t basically pass your homework, then ultimately their invigilators are going to turn around and say “Aha, no more money for you,” and that’s going to be the problem. There is a critical political crisis in Ukraine and nobody wants to talk maturely about the economy, and that is very worrying.
RT:Finally, the last couple of months of unrest in Ukraine have dealt a huge blow to the country’s economy. Could you briefly assess the situation for us? How bad is it?
PY: I think actually in some ways the economy hasn’t been quite as badly affected as it might have been. The difficulty is the incredible uncertainty. If you end up in a situation with an EU trade zone agreement, then there’s going to be a huge catastrophic problem for the east of the country because the industrial heartlands there are suddenly going to find themselves unable to export their goods to Russia and further east where they prove popular at the moment. So thus, there has essentially been an investor strike. People are terrified about putting their money forward in order to manage to build new businesses, create jobs, and so on. And that’s a problem because foreign direct investors, they’re giving Ukraine a wide berth, because who wants to go into a country that’s essentially bankrupt and politically chaotic. This looks more like a European version of Rwanda from an investor's standpoint, say 10 or 15 years ago. And that’s an absolutely ghastly situation to have. Moreover, the situation at the moment as it is, is very challenging because you’ve got the G7 who are essentially turning around and saying all sorts of weird and wonderful statements, while at the same time theoretically claiming that they’re going to offer biscuit crumbs to prop up the economy. That all leads to uncertainty and investors don’t like uncertainty.
The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.