Sunday, July 13, 2014

Meanwhile, back in Kiev, (and elsewhere in Ukraine) - Economics

by NoBC4U for No Bread And Circuses For You 

original link:
Reports from various sources along with "man on the street" observations.

Sadly, in the last few weeks, there has been numerous stories about death and destruction in the east of Ukraine by the Ukrainian Army. Let's face it, death and destruction are compelling narratives. It has often been said about mainstream media, “If it bleeds, it leads".

In the face of the much more compelling narratives, there are other stories occurring behind the scenes. While these are certainly not nearly as compelling, this slow trickle of behind the scenes stories may in the long run be the decisive factor in the future of Ukraine.

So, let's take a look at some of these hidden stories.

Economic stories.


The highly touted rising gas prices I was supposed to take effect on May 1, did not occur on May 1. It instead happened on June 1. No surprise there. May 1 was before the presidential election. June 1 was after. You always hold off bad news until after an election. But the price hike was not the 50% that was often touted in the media. Instead, the price between May and June went up almost 63%. Being summertime, this only covers natural gas used in cooking. So for most people, this is not a big hit. But just wait till October when charges for heating start to appear on the bills. Of course, I’m certain that the junta hopes that the six-month period when no heat appears on the bills will not be noticed in October when the charge for heat returns. By then, I would not be surprised if the increase is even greater than 63%.

So then, why was the increase 63% instead of the 50% mentioned previously? Well, a 50% increase was based on an exchange rate of approximately 8.5 grivnas per dollar. Since the grivna has lost value, with our new exchange rate of 11.52 a dollar, this led to an even higher increase than stated. This is because gas is bought on the international market and must go through currency conversions. I guess the big question would be since Ukraine is not paying their gas bills, why do we have to pay anything? Oh yeah, that's right, there’s this little genocidal war going on.

The cold water rates have just risen, and man, is it a biggie. That’s up 133%! Electric is up too, but only 10%… so far. Bigger users of electricity might find their increase to be even larger.


There have been some reports now that if you deposit money in a bank, you can expect to pay the Kiev authorities 15% up front, unless you can prove that the deposit did not come from under the table employment, or that taxes had already been paid. Somehow, I believe this will backfire and people who stash their cash in a mattress or a safe. I do remember in the past, when transferring money into the country for a purchase, that I had to declare that it did not come from employment. Now, they just take the money. Presumably there’s a way to get that money back if you’ve already paid your taxes.

Corporate Restructures…

In addition, certain companies are "restructuring" their operations here in Kiev. I have only come across a few examples so far, but that likely means that for every example I found, there were four or five or 20 others that I am not aware of.

First up is the company 4A Games. They recently announced they are moving their headquarters from Kiev to Cyprus. They did go out of their way to mention that programming and development teams will remain in Kiev. Yet, moving one's headquarters is not a sign of confidence in the local economy. And they stated the move was to be in closer proximity to their EU client base. I assume they’re not speaking about physical proximity, though.

EPAM systems are choosing to expand operations in Poland to mitigate the risks associated with Ukraine. And Luxoft holdings plans to move 500 programming staff out of both Ukraine and Russia because of the ongoing conflicts.

And GlobalLogic is setting up operations in Kosice Slovakia, 50 miles (80 km) from the Ukraine border. Close enough to numerous locations in Ukraine for a visit home once a month. An ideal location for a homesick Ukrainian programmer.

These companies are all software related. Programming and development positions represent some of the best paying positions for talented college graduates in all of Ukraine. Their immediate loss of some jobs and the loss of future jobs that might have been Ukraine-based will be a big hit for the future of the Ukraine economy. These current and future jobs are gone and will not be returning for a long time. Consequently, some of the best and the brightest, the future of Ukraine, will leave the country for opportunities elsewhere.

I guess it's actually justice in a way. Some companies that outsource IT work to Ukraine are PepsiCo, IBM, Ford, Chrysler, and Dell. While the US government will certainly not sanction the Nazi government here in Ukraine (preferring to sanction Russia instead), these major corporate outsourcers would prefer stability, and that is unlikely to return to Ukraine for very long time. So in effect, these companies are implementing the sanctions that the US government should, but will never do.

It is still too early to tell the effects this will have on my wife's business. She supplies medical services that, while provided by the government for free, are much more appealing and convenient for those who have the means. But it's likely that quite a few that have the means today will not have the means a couple of months from now. The business really slow down in the months of April and May, but have recently picked back up again, probably because enough people believe the election of a new president means a return to normalcy. But normalcy is a relative thing these days…

Refugees from the East.

I have heard several reports about refugees arriving in Kiev from the East. Some are no doubt professionals, competing for positions in an already depressed job market. Numerous others are at the lower end of the scale, looking for jobs as drivers and household help. Those who know some English will likely be better off; those that don't likely to end up very disappointed and unemployed for the long term. And government austerity is likely to hit those that are not employed immensely.

Weather related economic hits…

With cooler and wetter than normal weather in the central region this summer, a number of crops are likely to take major hits, even if the weather quickly returns to normal. A long-term area resident (70 years) doesn’t remember any summer quite like this one. Potatoes, one of the major staple foods, is likely to show a major decline. It’s important to remember that even with the loss of Crimea, Ukraine remains larger than the state of Texas, so in normal years this could be overcome. But with war out east, agricultural output in the east is down too.

Agricultural output in Crimea took a hit too because Ukraine cut off a major water supply route to Crimea. And it’s also likely that agricultural output of Crimea that in the past would have benefitted Ukraine will be used for Crimean and Russian needs first, including the 500,000 estimated refugees from the war in east Ukraine now living in Russia. Ukraine should probably not expect too much help on that front.

Other economic activity depressed.

During the so-called "revolution,” the overall economy if Ukraine didn't seem to be hit all that badly. But the month of April showed numerous large decreases in numerous sections of the economy. In the month of April alone, certain sectors showed drops in the range of 10 to 25% in one month! So it looks like Ukraine is going down, and it's going down hard.

Timothy Ash, writing in the Kyiv Post, says this about economic activity in Ukraine so far in 2014.

  • "Herein, the overall production index dropped by 6.2 percent year-on-year in April, from the 3.4 percent drop in March, and within this chemical production dropped by 23.3 percent, engineering by 18.9 percent and metallurgy by 12.8 percent.
  • This fits in with anecdotal reports of strikes/disruptions to various production facilities in Donetsk and Luhansk and also to transport services, particularly rail transport.
  • Plants across Ukraine may now be struggling to receive parts from operations in Luhansk, Donetsk and even Crimea. A Kyiv Post report yesterday suggested significant problems emerging in the auto sector.
  • All the above would tend to suggest a more precipitous fall in economic activity is under way – perhaps more in line with recent European Bank of Reconstruction and Development/Moody’s forecasts for a 7-7.4 percent real GDP decline this year.
  • The latter, if delivered, would make adherence to IMF targets that much more difficult, and “recalibration” of the IMF programme that much more likely later this year."
Kiev Post Article

Needless to say, this is an enormous economic hit to the economy of Ukraine. And it is not one that Ukraine will soon recover from.

Stores closing.

So far, there have been a number of store closings on Khreschatyk, the main street of Kiev, and indeed, all of Ukraine. I’ve counted around 20 so far, but I have not visited a number of the side streets. First, a good portion of Khreschatyk is still closed to vehicular traffic and remains a tent city, mixed with a large dollop of circus freak show and hawkers of souvenirs weird and strange. So it's quite possible that it's no longer profitable to have a store on "Main Street". My guess is that retailers who have leases coming up for renewal are not renewing at this time and as time goes by, more retailers will join the act, either because of lack of faith in the economy or the hope that in a year or two or three, they may be able to return to a much lower lease and a much better economy. But most of these retailers have other locations throughout Kiev, so it’s not a mad dash for the exits yet. But the continued presence of the Maidan does not help; the Globus Mall, built under Independence Square had foot traffic, a few days ago, 70% less then I’ve ever seen it before, plus a number of empty storefronts, something I’ve never seen at this location.


While the price of a whole lot of items have increased, largely because of currency devaluation, most items are still available, at a price. Remember that currency devaluation mostly impacts imported goods. The major exception is a number of Russian made items, some because of trade sanctions, and some because the demand just isn’t there anymore. Others are a bit more worrying.

Salt (except for sea salt) basically disappeared from store shelves in Kiev for a few weeks. The reason? At least some of the salt in this part of the world comes from Slavyansk, until recently under control of the anti-fascist forces. And even more comes from Crimea.

Some medicines, especially those that are imported, can be in short supply. I’ve told my wife to always have at least a month’s supply of important medicines, which might have not been enough, since one of her medicines disappeared from shelves for a few weeks. It is now back, and we currently have a 3 month supply. But medicines, especially imported ones, will likely be in short supply because of the logistics of shipping into a dysfunctional country, along with price increases putting these medicines out of the reach of a good number of people.


Yet with all this, I'm still surprised at how little has changed. So far. Grass is still being cut, (some) road maintenance is still being done, the water fountains are dancing merrily as if it was still 2013. So, what might be the reason for this?

Since I'm reporting from a decent enough neighborhood, I first attributed it to city leadership keeping up a façade so that they could extract higher taxes later. But, it actually seems a bit more basic than this. And also a bit more obvious. It's so basic and so obvious I'm surprised it took me so long to see it, and am surprised it's taking other commentators so long to see it. Here's how I see it playing out.

First let's take a quick look at what the IMF actually does. What it does is it works with a government and together they declare war on the people of the target country. In simple terms, that's really what the IMF does. When the IMF rolls into a country, whether South Korea, Argentina, Russia, or any number of others, it sets up targets for economic reform that are most likely going to be difficult or impossible to achieve. Once compliance does not happen, they rape and pillage the economy, in line with the negotiated terms. Their stolen loot is then given away at a fire sale to those who can "better manage it". It's "steal from the 99%" and "give to the one percent". It's a class war where the 1% comes out on top, as they normally do.

Now in most IMF interventions, the IMF is the primary intervener., many times the only one. While there may be other social and political goals, the economic goals of the IMF reigns supreme. But is this the case in Ukraine? Looking more closely, it's clear that there are several other major players involved in the Ukraine fiasco. And these players have goals of their own. In the case of Ukraine, the primary intervener is not the IMF. That "honor" goes to the State Department and the CIA. From what we have seen so far in 2014, the goals of the State Department and the CIA will take priority over the goals of the IMF. So then, exactly what does this mean going forward for Ukraine?

The goals of the State Department and the CIA so far all clearly pointing to trying to provoke Russia to invade Ukraine. So far, they have not had a lot of success meeting this goal. But should they be able to provoke Russia to protect Russian people in the east of Ukraine, it will provoke a larger war, Russia on one hand, versus Ukraine and NATO on the other hand. A war of country versus country and its allies. Now, remember back a few paragraphs where we discussed the modus operandi of the IMF. With IMF's help, a government declares war on its people. The State Department and the CIA are attempting to provoke an international hot war involving Ukraine and Russia. Now, while it might be possible for a government to have both a war with a neighboring country and with its own people at the same time, I really don't believe you're going to see that here. The war that will be given priority will be the war with Russia, should that occur. Consequently, when support for the international war, the war with Russia, you will see programs implemented to build support for that war. Austerity will lead to a major lack of support for said international war, and will therefore be against the goals of the State Department and the CIA. So, will the IMF be left out in the cold, with the bill to be paid by NATO, EU, and USA tax payers? The IMF will no doubt still push through what it can, but if some action leads to major pushback by the citizenry, the IMF may possibly let Ukraine slide on a few. I say possibly because the government still has their means of enforcement, Right Sector.

So for Ukraine, it's the ultimate lose-lose situation. Should the state Department and CIA get their way, Ukraine will be ground zero for a major land war. If Russia should manage to tie their hands, and war is prevented, Ukraine will be socked by a major IMF austerity plan, made worse by the loss of Crimea and possibly other areas of Ukraine, and made even worse by the debts incurred trying to provoke said war, which will be thrown on the backs of those Ukrainians who stick around for the punishment.

Am I being a bit too optimistic here? Possible, but only time will tell. My guess is that the State Department and CIA goals will get first priority and if that means suspending some IMF goals to garner public support, that will happen. Anyway, that’s the way I see it now.