Is Ukraine the world’s next financial crisis?

Here are some simple numbers:

To grow, Ukraine’s $176 billion economy needs gas imports from Russia to be cheap and its steel exports to be expensive.

The opposite is now the case. The government ends up taking the strain because it subsidizes most of the cost of gas sold to households across the country of 46 million that borders Russia to the northeast and four new EU states to the west.

Yanukovich walked away from the trade deal because it lacked a hoped-for stand-by loan of as much as $15 billion from the International Monetary Fund.  The global lender was not prepared to lend new money without gas-price reforms.

Russian President Vladimir Putin has meanwhile made a gas discount conditional on Ukraine joining a Russia-led customs bloc that includes Kazakhstan and Belarus. He has not, however, ruled out possible further funding.

Jacob Nell, a Moscow-based economist at Morgan Stanley, estimates that Ukraine will have to raise external financing of $18 billion for Yanukovich to make it to the 2015 election.

The yield on the June 2014 bond is now closing in on 20 percent.  The full story is here.


If only Ukraine could join the EU, then there would be no more financial crises. After all, expanding the European Union to Greece, Spain, and Ireland has been a force for financial stability.

Oh, wait ...

Maybe Greece and Cyprus would be better off in the Russian bloc. After all, they're both Orthodox.

Oh, stop it. Ukrainians want into the EU for the same reason the Baltics did. They had their fill of misrule by the Russians a long time ago. Not to mention anything the EU can do to bolster the weak local institutions will be greatly appreciated (as will making it easier to work and study in Western Europe).

As far as I know, no country whose peoples have any real say in the matter has had much interest in joining Putin's attempt to rebuild Comecon. Or do the people of a nation only get a say in their future when they agree that what their country really needs is the socialism of fools for the locals and deportation en masse for outsiders (especially if their faults, real or imagined, ever got on Taki's nerves)?

The sooner Yanukovich runs out of money to pay the police, the sooner he'll step aside. This time, at least, the bond markets are using their powers for good :) Faster, please.

The UK is also a member of the EU. You can join the EU without adopting the currency.

Not any more you can't. EU accession is now conditional on accepting the Euro (although you don't have to join the Euro immediately).

The EU is already a bigger trading partner than Russia.

it subsidizes most of the cost of gas sold to households across the country of 46 million

Oh good, they've spotted the problem.

Seriously. Subsidizing fuel is a giveaway only oil exporters can really afford, and even they usually have better uses for the money (they mostly do it to keep the rabble quiet---Iran and Venezuela are just two examples of nations who buy people's loyalty with their own oil). In a fossil fuel importing economy it's suicidal.

One of the pillars of the Bolivian anti-hyperinflation plan in 1985 was an end to government subsidies of fuel, paid for with printed money, because the Bolivian government had long since lost its ability to borrow in capital markets. Ukraine's in the same boat. Charge realistic prices for fuel or return to the bad old days of hyperinflation.

Why would it be any easier for an exporter to subsidize fuel than an importer? Is the cost to ship fuel really that high?

Well, even the idea of a producer 'subsidizing' fuel is relying quite interesting. The Saudis can do with their own oil - with a production cost that is easily a tenth of the price of a barrel on world markets - as they wish. It is only the people wishing to buy that oil that consider the fact that the Saudis are using it themselves, at a price that the Saudis consider reasonable for their own purposes, to be a 'subsidy.'

Which is a truly bizarre use of the term 'subsidy.' Unless one wishes to talk about how wasteful countries that actually produce oil can be when deciding to burn their own oil, without accepting the fiction of a market price they are supposed to be subject to.

See Russia's use of energy to control several former parts of the Soviet Union - the value of using energy to ensure that those countries remain aligned with Russia is considerably more valuable to Russia policy makers than whatever money that energy could bring on world markets.

This isn't about my desire to lower the price of fossil fuels. I live in an oil exporting country.

Our government is not immune to giveaways to the middle class. Subsidizing gasoline isn't on the list, though.

What we do subsidize is electric power, an industry that is dominated by governments. Most Canadians pay a price for hydro well below the rate charged by the utilities to power companies in the United States (to whom they export a fair chunk of it), which costs a small fortune and encourages about as much waste as you'd expect.

The true cost of Saudi Arabia gifting oil is higher than the production cost; by foregoing the opportunity to sell in the market, Saudi Arabia is in fact losing ~$90/barrel for each barrel subsidized (or whatever the going rate is).

It's no easier for Saudi Arabia to subsidize oil than it would be the US (except that, presumably, Americans use more oil than do Saudis, per capita, presumably).

Only if they are pumping the max allowed under OPEC.

Why would it be any easier for an exporter to subsidize fuel than an importer? Is the cost to ship fuel really that high?

Because an exporter can use the profit from the exports to fund the subsidies, whereas an importer would have to find the money from other source, i.e. direct taxes. It's politically far easier to tax one big and profitable industry, namely the oil industry, and give the dividends to the local populace in the form of fuel subsidies than it is to raise taxes in general to subsidize oil imports.

US gov't already spends over $6T annually.

US populace spends only $500B on gasoline.

Government could come up with that money if it wanted.

I didn't say it was impossible for importers to provide subsidies, I said it was politically easier for an exporter to fund subsidies.

The WORLD'S next financial crisis? Without business media coverage how would we know?

Are gas prices rising? Thought gas was becoming cheaper everywhere.....

Depends if you are located where a pipeline runs. Otherwise it gets costly.

Unless they're producing an advanced steel, they're going to be at the mercy of the Chinese economy no matter what gas prices are. If it comes down to mercantile/protectionist policies, you'd rather have the Russians on your side than the EU.

As for social issues, it's hard to gauge. A lot of the protests one sees in Russia are funded by Western front groups. I suspect the average Ukranian probably favors Putin's embrace of the Orthodox Church, and Ukraine also has a similar anti-gay propaganda bill in the works. Russia doesn't really have to work hard to pull Ukraine into its orbit.

Wow. A Russian propagandist right on our very own thread. Who'd a thunk it. Can I borrow your umbrella? I need to take care of someone. Ha. Ha.

Automation is redistributing production once again. A Japanese auto company just agreed to US steel. Keep hope alive, Ukraine.

Yanukovic is after Russian money, not a shared religion. Wake up.

'I suspect the average Ukranian probably favors Putin’s embrace of the Orthodox Church'

The 'average' Ukrainian is atheist or does not belong to any chuch, at 62.5% of the population - according to a 2005 poll.

The average Ukrainian is also not a native Russian speaker, nor uses Russian spelling/grammar (according to a Russian co-worker) -

'According to the constitution, the state language of Ukraine is Ukrainian.[205] Russian is widely spoken, especially in eastern and southern Ukraine.[205] According to the 2001 census, 67.5 percent of the population declared Ukrainian as their native language and 29.6 percent declared Russian.[206] Most native Ukrainian speakers know Russian as a second language.[205] Russian was the de facto official language of the Soviet Union but both Russian and Ukrainian were official languages in the Soviet Union[207] and in the schools of the Ukrainian SSR learning Ukrainian was mandatory.[205] Effective in August 2012, a new law on regional languages entitles any local language spoken by at least a 10% minority be declared official within that area.[208] Russian was within weeks declared as a regional language in several southern and eastern oblasts (provinces) and cities.[209] Russian can now be used in these cities/Oblasts administrative office work and documents.[210][211]'

So, when the Ukraine can't pay its gas bill (mainly to Gazprom) - which has been case for more than a decade - this will be a financial crisis because?

The Ukrainians used to steal gas actually, until monitoring equipment was installed on the pipelines between the (mainly Gazprom) gas fields and the (essentially EU) end customers.

This was somewhat big news years ago - no surprise it is now discovered here.

I know Russia hasn't exactly become a beacon of free market capitalism, but I didn't know it was still "Putin sets the price of gas" bad.

Newman: Uh, I can't think! It's all this noise...
Kramer: Or is it because I've built a stronghold around Greenland, I've driven you out of Western Europe, and I've left you teetering on the brink of complete annihilation?
Newman: I'm not beaten yet! I still have armies in the Ukraine.
Kramer: (chuckling) The Ukraine? You know what the Ukraine is, it's a sitting duck. A road apple, Newman. The Ukraine is weak. It's feeble. I think it's time to put the hurt on the Ukraine...
Ukrainian passenger: I come from Ukraine; you not say Ukraine weak!
Kramer: Yeah, well, we're playing a game here, pal.
Ukrainian passenger: Ukraine is game to you?! How 'bout I take your little board and smash it?! (slams fist on board, sending game tokens flying and terrifying Newman)

It was an EU Association Agreement. It was a civilization choice.Then, brutal violence against peaceful demonstrators at 4 am Saturday morning made this about freedom and human dignity, which is what that same EU agreement symbolizes to Ukrainians. Moreover, what the government did in Vilnius last week was to make this an arithmetic equation and demanded money. the actual choice is one of values, culture, liberties, human dignity. The choice is Western European rules, the primacy of the rule of law, or Eastern authoritarianism and continued rampant corruption. Western Ukraine was part of the Austro -Hungarian Empire, and many close ties to the diaspora, east of the Dnipro the Ukrainian population was wiped out by the Holodomor (artificial famine), replaced by Russians under Stalin. A more likely scenario is a civil war .

The choice is Western European rules, the primacy of the rule of law, or Eastern authoritarianism and continued rampant corruption ... and cheap natural gas.

Let's see... Ukraine has been misruled by western/progressive Poland, Germany and Austria and by eastern backwards Russia. Now, let's see who did what there.

20% for a 6-month bill? That's way past trouble.

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