Monday, 3 November 2014

Europe pays price for Ukraine's lousy governance

Getting others to pay for one's own sins has long and commonly been part of human nature but succeeding in palming off the sinful bill at national level is much more difficult and rarer. The latest example of a successful master stroke in financial chutzpah is the Ukraine's long-running refusal to pay Russia for gas that goes back over 18 months. It now owes Russia about $3 billion for unpaid gas that it says it has no money to pay owing to the money spent on the war against secessionists in the south-east. It may not have the money but the country owed $1.5 billion up to March this year before any hostilities broke out and so one must look for the real reasons for such insouciance. As explained in my blog, How to Contain Crimea's logistics threats, the Ukraine's economy is an unholy mess deeply mired in corruption and largely in the thrall of plutocratic oligarchs.That is the real reason for non payment and unless the Ukraine takes good governance to heart at all levels the canker within its society will continue to fester.

Russia, to its credit, has offered a new gas deal by cutting the gas price by $100 per thousand cubic metres to $378 by the end of this year and $365 in the first quarter of 2015, provided the $3 billion has been paid off first and that there should be an element of future payments in advance. The $100 price cut is according to a formula contained in the gas supply agreement dating back several years. The Ukraine reportedly said that at first it could not pay and would, if necessary, steal the gas from the pipeline that runs through its territory on its way to Europe. The Russian response, understandably, was a threat to cut off all supplies. Given that such action would seriously affect European consumers of Russian gas, sending prices soaring at a time when Europe is flirting with deflation, the EU felt over a barrel and so has now agreed to pay for the Ukraine's financial delinquency with some help from the IMF. The crisis has been averted, the Ukrainians will no longer risk death from the cold and in the circumstances Russia's deal has been generous and shown much forbearance towards a serious debt welcher.

But what are the bail out figures and implications for the rest of the EU struggling with sputtering economies burdened with dangerously high youth unemployment and a banking system under great strain? The EU will act as guarantor for Ukraine's gas purchases and helping to meet outstanding debts. The total package is worth $4.6 billion, with money coming from both the EU and the IMF. "Unprecedented levels of EU aid will be disbursed in a timely manner and the IMF has reassured the Ukraine that it can use all their financial means at its disposal to pay for gas," the European Commission said. The EU is also considering a further loan of 2 billion Euro. Doubtless much more will be needed to pay for the huge war damage costs.

The trouble with blackmail is that the blackmailer often comes back for more but if the victim (Europe) can reverse the role by resorting to its own threats then the unpleasantness is likely to come to an abrupt end. The EU should now impose its own conditions by pledging not to allow any moves to advance the Ukraine's interests in closer union with Europe until after the Ukraine has drastically overhauled its economy primarily through dint of good governance in politics and economics, and paid off any debts it may owe.

Much of the tragic trouble the Ukraine now faces in its south-eastern provinces, where there has been an overwhelming vote in favour of independence at local referendums in May, could have been avoided if there had been good governance in politics and economics that benefited all. It is to be hoped that the Ukraine will remain one united country rather than lose a region said to be worth one third of the country's GDP. Together they would be stronger and more prosperous. The Ukraine should also seek to improve trade relations with Russia. Trade, after all, is the handmaiden of prosperity and prosperity is the surest guarantor of peace.    

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