Preventing Economic Disaster In Ukraine: Frenzied Measures To Address Old, Suddenly Crucial Problems

  on March 08 2014 4:23 PM
Kiev
Ukraine’s newly appointed economy minister, Pavlo Sheremeta, outlines his plans for saving the country's economy. Avedis Hadjian

KIEV, Ukraine -- Pavlo Sheremeta, the country's newly appointed economy minister, projects an eerie calm, like a doctor who knows he is at risk of losing his patient. “We need to do this very fast,” Sheremeta told a crowd gathered to hear his pronouncements during a break in his frenetic schedule this week. “The faster we do this, the lesser the pain ahead.”

Sheremeta has unenviable task of saving an economy that has been deteriorating for two decades and which now faces the possibility of being dragged under by war. Corruption, systemic inefficiencies, onerous subsidies that the less privileged end up underwriting, and energy dependence on Russia have long encumbered the Ukrainian economy – all of which are more critical as the country faces new economic shocks associated with the showdown with Russia.

Kiev is a city of late starters, of city dwellers and workers who wake up late in the morning, with most businesses still closed by 9:00 AM, when the sun is already ruling the skies of early spring. The crisis now gripping Ukraine, too, is a late awakening from its Soviet past, with an economy anchored in heavy industry linking it to the Communist era, and its master of yore: Russia.

While most people in the Ukrainian capital are astonished by the escalation of the Crimean conflict by Russian President Vladimir Putin, the Ukrainian interim administration appears remarkably composed as it faces the task of arresting the country’s economic free-fall, all while its territorial integrity is under threat. For one thing, Sheremeta and his colleagues in the government have studiously avoided making inflammatory statements. The Maidan protesters appear to be following suit: In contrast to the fierce demonstrations that toppled Ukrainian President Viktor Yanukovych, the public reaction to Russian actions at the center of the Ukrainian revolution has been muted. Yanukovych has largely disappeared from the public discourse, with all eyes focused on Crimea.

“We are not looking at decoupling from Russia. I wouldn’t call it decoupling,” Sheremeta told IBTimes. “But we need to sign the association agreement with the European Union very soon. As soon as the partnership is signed, the Ukrainian government, the Ukrainian companies will have to adopt EU standards and that’s going to re-launch our economy.”

Whatever is done will happen under the shadow of Russia. “We want normal relations with the Russians, we want normal trade with them and everyone,” he said. “I would call it globalizing, that’s what it takes to become a player in the 21st century.”

With the country under Russian military threat, the interim government that emerged from the revolution is trying to react in accordance with the gravity of the rapidly developing situation. But that is not an easy task. As one Orthodox clergyman who declined to be identified (and who did not support the Maidan uprising) put it: “Nobody knows what’s going on. It’s a war that is not a war and an occupation that is not an occupation.”

Despite its calm posture, the interim government has been unable to dispel a sense of confusion and lack of direction. When acting foreign minister Andrii Deshchytsia was asked how his administration would react to a cut-off of Russian natural-gas supplies -- energy colossus Gazprom has threatened to stop the gas flow because it has not received any payment from Ukraine in May, he answered that the Ukrainian people are resourceful. “Look what the people did in the Maidan,” he said, with a half smile and a hesitation belying defiant words. “They have been warming up with wood, so if Russia cuts off the gas, we will warm ourselves up with wood or we will have to grind our teeth, but we will not surrender.”

Kiev Henadiy Balashov, an entrepreneur from Dnepropetrovsk, speaks with people in Maidan Square.  Avedis Hadjian

Self-made millionaires and political leaders are jostling to step into the growing economic void. Henadiy Balashov, an entrepreneur from Dnepropetrovsk, in southeast Ukraine, was at Maidan Square, surrounded by a growing crowd of people, many of whom addressed questions to him on everything from pensions to the Crimea. Balashov, a big man with a steely smile, offered only one solution: his 5/10 tax plan, according to which all taxes would be abolished except a 5 percent on sales and a 10 percent social tax on income.

His audience were people from the provinces who have come to support the revolution. The contrast between the magnate and the Maidan protesters surrounding him was poignant: An aged man in an old, black overcoat with a few missing teeth shouted a question to Balashov, asking him how he would deal with the corrupt and the wealthy. Balashov smiled behind his sunglasses. “Lots of oligarchs are making money out of poor people, and oligarchs, politicians and their friends are not paying taxes,” he said. “They don’t pay taxes, but taxes are very high for everybody else.”

Someone else asked Balashov if he were not himself an oligarch, which prompted laughter among the mostly elderly people who ringed him.

“I’m just a millionaire, I made my money with my own efforts and by the book,” he responded, adding, somewhat enigmatically, “Everybody is telling lies but nobody is telling the truth.” He faulted the interim administration for indecision: “They lack direction, they don’t know what to do.”

What would he do should he become the country’s leader? “Cut taxes,” he responded so predictably that the crowd again laughed.

And, again, was he not an oligarch? He smiled and said, “I’m a millionaire.” 

Balashov’s Reagan-era bromides and the long historical backdrop of Crimea hint at another aspect of Ukraine’s crisis: The current political upheaval is itself a delayed effect of the collapse of the Soviet Union, and Ukraine’s economy anchored is in heavy industry and oligarchy that has reinforced strong ties to Russia that date back to the Communist era. The tumbling of Lenin’s statues is an apt metaphor of Ukraine’s slow-motion attempt at disentangling from the Soviet Union. Meanwhile, energy inefficiency has made the country ever more dependent on Russia, which supplies 90 percent of its natural gas. 

Acting economy minister Sheremeta wants to jumpstart the economy and, like many of the Maidan protesters, propel the country forward. Upon taking office, he said he was surprised by what he called “medieval” procedures at the ministry. “We had to fill out our curriculum vitae in handwriting -- they would even provide ink for us to do it,” he said with what seemed genuine astonishment. “We just need to leap from the 16th century to the 21st century, to the e-government … and with the paper we save we will help rescue the Carpathian forests.”

Given the circumstances, deforestation would seem to be the least of Ukraine’s concerns. And in fact, in Ukraine at the moment, trees may serve a more critical, immediate purpose. The breeze of this sunny, chilly afternoon in Maidan Square carried the sweet smell of campfire: At a tent near where Balashov, the tycoon, was addressing his impoverished audience about the challenges the nation faces, one of the Maidan guards in military fatigues was chopping wood and stacking it up on the other side of tire barricades, while a comrade fed a furnace. Though spring was in the air, it looked like Ukraine was settling in for a long winter. 

Kiev A Maidan Square guard splits firewood outside a tent.  Avedis Hadjian

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