While the world is trying to blame Putin with all possible sins, somewhere hidden in the backyard remain the important problems of Ukraine. That is on the way of becoming a country dissolved due to bankruptcy.
But let’s start with the Crimea. This peninsula is strategically important from military point of view. It gives its owner better position over controlling the Black sea. But as an economy and population, Crimea is a small part of Ukraine. It has just 2 million people (less than 4% of all Ukraine). So for Crimea the Russian occupation is welcome. Putin has prepares some billions of dollars for higher pensions, new bridges and new power plants. In less than a year Crimea will equal the average Russian living standard that is 2-3 times higher than the Ukrainian. 2-3 times higher than the pre-crisis level of Ukraine. The difference with current and with coming in next months new living standard will be even wider. So in short – Crimea has decided its economic problems.
But out of Crimea remain over 40 million other Ukrainians and almost ruined economy. Really ruined – after years of unsuccessful reforms and brutal robbery from the oligarchs.
President Yanukovitch rejected the economic treaty with EU, just because it would crush the Ukrainian economy. Now the interim prime minister Yatsenuk also denies the economic treaty although just weeks before he was one of the opponents of Yanukovitch exactly on the same issue.
Before being withdrawn from power Yanukovitch negotiated an emergency aid from Russia of $14-15 billion. $2,5 billion of them were already paid. But with the coup d`etat that happened, Russia stopped the money. With the very tense relations between Kiev and Moscow now, there is no chance of this aid to come. In addition Russia is starting to impose economic sanctions on Ukrainian export that will harm the economy, deeply dependent on Russian markets. And in another hit, Gazprom – Russian monopoly supplier of gas, announced that the discount of the price guaranteed to Ukraine has expired. So ahead are the market European prices that are about 30% higher.
So with Putin declared the “bad guy” and looking only over Crimea, the rest of Ukraine remains for the West. The country will need at least $20 billion immediately, and potentially another $10-15 billion due to penalties of old gas-contracts and Russian held Ukrainian government debt. EU has no this money after serious austerity in the crisis and still enormous budget deficits and debts. USA does not even think about this. So the only available source remains IMF. But IMF usually stipulates so hard conditions on loans that for the poor and already exhausted Ukraine will mean an overall and total crash. With IMF Ukraine will formally no go to default. But instead the living standard will have to be lowered 2-3 times – either by currency devaluation or by an extreme austerity. And we must mention that even now Ukrainian standard is relatively low. It is about GDP of $3800 per capita nominal and about $7400, calculated via PPP. This simply means that lowering the standard 2 or 3 times will throw Ukraine in the group of some African countries.
But this will happen with or without IMF. The fund just follows universal rules and is ready to credit only countries that are to be stabilized soon so they can repay the loans. And to be stabilized and balanced, Ukraine has to spend much less than it is spending now.
In fact, from the economic point of view the Putin’s offer of financial aid, plus eventual continuation of the gas-price discount was the only working solution for Ukraine. This would be easy money, given under political motives and not under real economic logic. While being in opposition for Klitchko and Yatsenyuk it was easy to say that Yanukovithc has sold Ukraine to Russia. But now in power, they face the fact that no one else is willing to buy Ukraine. And the bad news is even the only buyer has gone…
So with all this happening the simple fact is that Putin does not need to do anything else. He can just stay aside and look. He does not need to send troops and occupy Eastern Ukraine. He must just sit down and look. The “hot potato” is now in the moneyless West that itself insists on Russia not interfering.
Crimea is a small but very important shop window for Putin. There he can demonstrate what happens with the territories that join Russia. But there he will have to do this only with 2 million people. The West receives the rest 40 million to demonstrate its abilities to help. So in very short time people, especially Russian minority in Ukraine will make their choice.
If we want to be honest there is no way of salvation of such bankrupted country. Theoretically it is possible if united under some reliable leader and clear national cause. But both lack in Ukraine. So the outcome is easily predictable. The West is preparing the next gift for Putin.
March 26th 2014