Saturday, August 23, 2014

The economic disaster in E. Ukraine

One of the unfortunate legacies of the USA Keynesians is that they demonstrated that it was indeed quite possible to fight a major war with resource shortages and still have a high-performance economy.  The real economy of USA was amazingly larger and more sophisticated coming out of WW II than it was going in.  Add to that the incredible advances in basic research and the WW II economic stimulus lasted well into the late 1960s.

Unfortunately, war has historically been a colossal economic loser.  It is said that Germany required 150 years to recover from the damage of the Thirty Years War.  Historically, war as an economic winner has been mostly confined to the Keynesians.  Their example is rare indeed.

In these two articles, we get a glimpse of the economic damage the battles over eastern Ukraine have already cost.  One is a basic toting up of the damages to the part of Ukraine that IMF was counting on as collateral for their loans.  The other is about those cheapskates in Brussels who are tossing 125 million Euros at the 10 billion Euro calamity that EU agriculture is suffering—right at harvest time—from the loss of their Russian markets.  The Eurocrats do NOT give a shit—after all, it's mostly peasants who are suffering and who ever cared about that class of people?

Of course, none of this calculates the obvious economic losses from the destruction of valuable elements of the real economy, from the destruction of homes, to the medical costs of war wounds, to the long-term psychological trauma of having thousands of lives violently upended.  Even (especially?) for the small agricultural producers, watching your crops rot because of the arrogance and stupidity of some geopolitical chess players will leave long-lasting emotional trauma.

The neocons who dreamed up this mess in Ukraine have a LOT to answer for.  Unfortunately, those sorts of people never do.

War in east Ukraine to leave economy in ashes. Who will pay for recovery?

RT August 21, 2014

The turmoil in eastern Ukraine has devastated the economy, putting the International Monetary Fund (IMF) and other Western backers under pressure to save the sinking financial wreck.

“If the conflict lingers for another few months in its current form the cost to the Ukrainian economy would be huge,” Vitaly Vavryshchuk, an analyst at Kiev-based SP Advisors, told the Financial Times.

The MF has delayed Ukraine’s second $1.4 billion aid installment, and now Kiev is asking to combine the third and fourth tranche into a $2.2 billion package, according to Ukraine’s Finance Minister Oleksandr Shlapak.

In order for the loans to be disbursed, the IMF has to confirm the multi-billion dollar debt restructuring plan is sustainable, which it may not be at present.

Gabriel Sterne of Oxford Economics predicts that Ukraine’s GDP-to-debt ratio is on the rise, and by 2018 could hit 87 percent.

“We think the Ukraine economy and the IMF program face such difficulties that a default is likely, possibly imminent,” Sterne wrote in an August report.

“It could take the form of a ’precautionary’ default in which debt falling due over the next three years is forcibly rolled over. If there is a full-blown Russian invasion then deeper haircuts may be required,”Sterne wrote.

The IMF approved a two-year $17 billion loan package in April, and the first disbursement of $3.2 billion was delivered in May.

If the IMF program falls apart, the country faces default, which would further discredit the lending institution after its failed efforts in Greece and other debt-ridden economies.

Before, the IMF money was a sure thing; now many analysts predicted Ukraine could default by the end of the year.

Another looming financial burden hanging over Kiev is the $3 billion in Eurobonds issued from Russia inDecember 2013. Moscow can demand repayment before the bonds are due in 2015 if Ukraine’s debt-to-GDP surpasses 60 percent, which at present, seems likely.

Other Western aid includes a $1 billion loan guarantee from the US, up to $3 billion from the World Bank, €600 million from the EU, and $100 million from Japan.

Kiev losing control

Ukraine’s eastern industrial base is a large chunk of the country’s GDP, about 16 percent according to Investment Capital Ukraine. Lugansk and Donetsk regions account for 25 percent of industrial goods and services.

“But the situation is dramatic. The country is fighting for survival. Unfortunately so far there is not much change,” Dmitry Sologoub, Director of Research at Raiffeisen Aval Bank in Kiev, told FT.

Shlapak estimates the total damage from the armed conflict in Eastern Ukraine will exceed $600 million.

Much of the fighting has been centered around key infrastructure and industry - airports, highways, utility lines, and gas pipes. The country spent over $6 billion to upgrade infrastructure in Kiev, Lvov, Kharkov, and Donetsk for the 2012 Euro Cup, which it hosted with Poland.

Another big economic blow to Ukraine was the loss of Crimea to Russia in March after the peninsula voted to rejoin Russia. Kiev-based Dragon Capital says the loss of Crimea will result in an automatic 3.7 percent GDP contraction.

Kiev has cut economic ties with Russia over the political crisis- first by signing the European Trade Association Agreement and second by signing a law that allows sanctions against Russia, which will affect European gas deliveries.

“I think that the West understands: If Russia boycotted the country economically, Ukraine has no chance,” Fyodor Lukyanov, a leading Russian foreign policy expert, said in an interview with Der Spiegel.

Ukraine plans to ratify the EU trade agreement in September, President Petro Poroshenko has said.

Gas, growth, and hryvnia woes

Gaping holes in Ukraine’s state budget and foreign reserves, and instability in financial markets have brought havoc to Ukraine’s macroeconomic situation.

Ukraine’s Economy Minister Pavel Sheremeta resigned on Thursday frustrated with the slow pace of economic reform. Sheremeta, who was appointed soon after the ousting of President Viktor Yanukovich in February, said on his Facebook page that he no longer wanted to “fight against yesterday’s system.”

Fitch Ratings predicts the economy will contract by 5 percent in 2014, a pretty conservative estimate compared to other analysis, which predict a 6.5 percent drop (IMF) or even 8 percent (Oxford Economics). In 2013, GDP growth was zero.

The national currency, the hryvnia, has weakened to 13.35 against the dollar, making it the world’s second-worst performing currency. In January 2014, before protests turned violent, the hryvnia was pegged at 8.235 to the US dollar.

Depleting natural gas reserves also pose a direct threat to Ukraine’s economy and general well-being.

Naftogaz, the state-owned oil and gas company, owes over $5 billion to Russia’s Gazprom for unpaid bills.

“The gas needs to be addressed in all its breadth: the debts of Ukraine, the price of gas, the question of transit,” Lukyanov said.

Amassing debt prompted Gazprom to cut off gas supplies to Ukraine, leaving the country in a difficult energy pinch before the winter. Ukraine’s energy minister reports the country has 16-17 billion cubic meters in reserve, which on its own isn’t enough to heat the country through the winter months. The government has already ordered a 30 percent cut in gas consumption to save up for winter. more

EU farmers complain €125mn compensation is just drop in the ocean

RT August 20, 2014

The €125 million in emergency EU support to its food producers may not be enough to cover the damage, as some estimates have it more than a hundred times higher.

On Monday, the European Commission announced €125 million in emergency funding for European farmers hit by the Russian trade ban

Economists at ING estimate the embargo could cost the European Union €6.7 billion ($9 billion) during a year of lost production. The report also sees 130,000 jobs at risk in the trade row between Russia and the West over Ukraine.

The European statistics office, Eurostat, said the ban - which bars meat, dairy, cheese, fruit and vegetables from all 28 EU member states, affects €12 billion ($16 billion) worth of EU exports, or 10 percent of the total.

Hit hardest will be Poland and Norway, both of which export over $1 billion in sanctioned foods to Russia, followed by the Netherlands and Spain, both which have strong trade ties with Russia.

Spain already estimates it will miss out on €337 million in food and agriculture sales due to blocked access to the Russian market. The value of sanctioned food exports to Russia is $792 million, according to Russian Federal Customs data.

In Zaragoza, Spain, fruit growers took to the streets dumping out excess produce and torched an EU flag.

“This price compensation is not enough. Let’s say 20 jobs in our company will be lost. Our salaries will also be affected- then, we will just disappear,” a Spanish fruit farmer told RT.

Exporters may have to further slash prices, which have already fallen 80 percent in the fruit industry, or even throw away perfectly fresh produce that can’t be sent to Russia.

In Greece, farmers feel sanctions are putting their livelihood at stake- being shut out of the Russian market is bad for business. Producers estimate losses over fruit alone will exceed €178 million in the next 12 months.

“Right now we have no other market to send out produce to, other than the Russian one,” Fotis Kyriazis, President of the Irmini Agricultural Cooperative, told RT.

“I don’t think anyone will compensate us for our losses. Neither Greece nor the EU has the money to compensate us,” Kyriazis said.

The worst-hit countries have already tried to bypass the restrictions by sending goods via Belarus, but were stopped by Russia’s consumer watchdog.

Poland, which before the ban exported 50 percent of its apples to Russia, is feeling the sanctions biting back and is hoping to launch a complaint with the European Commission and World Trade Organization.

“The ban has caused horror among Polish producers of fruits and vegetables. We have to tighten our belts and get production costs back at the very least,” Jacek Izyucki, Trade Branch President of the Agrostar Company in Poland, told RT.

“Obviously some unintelligent political decisions were made and brought harm for all,” Izyucki said. more

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