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March 15 will show whether Ukraine can avoid default

14 March, 00:00

In different countries the Cabinet usually sums up its performance on the 100th day in office. With Viktor Yushchenko an exception from the rule will perhaps be the case, not so much due to the hundredth day being difficult to define (for it is unclear which date should be considered the benchmark, that of the appointment of the first or last cabinet member) as because the fateful date, March 15, comes much quicker. Those that do not remember ought to be reminded that March 15 will mark either a tragic or remarkable, unprecedented event, for on this date we will know whether Ukraine can avoid default on its international liabilities.

Although it is generally considered that a country unable to pay its debts is not declared bankrupt, unlike any business under the circumstances, the creditors, nevertheless, have means of making the borrower pay. First, it is the threat of political confrontation with creditor countries that may result in the confiscation of the borrower’s assets. Second is the prospect of stopping bilateral trade, along with an embargo on key commodity supplies and private credit. Third is a halt to international aid. Naturally, such confrontation measures can produce a rather limited effect, so the Cabinet has reason to expect good news come March 15. Of course, if IMF’s refusal to lend Ukraine money is not interpreted by the creditor countries as a SOS.

And the signals that have been coming from IMF of late are precisely of this nature, otherwise it is hard to understand the persistence with which IMF missions have been applying the sinking tactic of cooperation with Ukraine.

The list of measures the Ukrainian government must carry out to resume the three year EFF program numbers 79 clauses, of which 42 should have been implemented by March 1.

It is a heady mix of trifles and big problems which many experts explain simply: both the Cabinet and IMF would benefit by showing head-spinning plans, so the former could carry out and the latter agree to only that which served their respective political interests.

Among the said clauses are liquidation of all exclusive economic and special development areas; a resolution invalidating all discriminatory tax exemptions; cancellation of the presidential decree attaching priority to the key industries in Donetsk and Dnipropetrovsk oblasts; appointment by NBU of an interim board of the Bank Ukraine, counter to the stockholders’ interests, so as to start liquidation proceedings if the bank fails to meet current quotas. Even a person totally in the dark about the subtleties of public property allocation procedures can see that no one at the Cabinet or Presidential Administration will volunteer to deny the victors of last year’s war for privileges their “deserved” reward.

Thus from the standpoint of the objective — improvement of the economic situation — the measures the government is required to take could bring certain positive results. Yet from the standpoint of not hypothetical but real results, the forecasts are apparently unfavorable. Primarily because of the mismatch of IMF’s and the “reformist” Cabinet’s transition priorities.

As an unofficial member of the Ukrainian Cabinet, the IMF has changed its Ukrainian tactic substantially some year and a half ago (without any prior notice, of course). In the first three of its operation in this country one could still discern the idea of economic reform relying on economic regulation levers — i.e., using monetary, budget, and adjustment policies. True, all such projects would be ended ahead of schedule or with minimum effect. Yet the latest EFF program came as an experiment of sorts. The thing is that the abundant list of measures, made up of clauses, subclauses, supplements, and reservations, is no longer focused on modeling economic space. Now the target is different: indirect influence on the Ukrainian economy by programming political processes.

There is a wealth of evidence supporting this hypothesis. It was not without IMF interference that former Premier Pustovoitenko failed to regain his post, just as IMF sired Yushchenko’s appointment. Now IMF “recommends” that the Bank Ukrayina management be replaced and the Ukrainian oil and gas oligarchs be denied their original weight. The Cabinet is explained what decisions to make and how, with a “present” being the reward for obedience.

But perhaps IMF’s stand toward Ukraine is such because there is no alternative? Indeed, on the one hand IMF Charter says it cannot interfere in politics; on the other hand, world experience shows that successful reform is directly dependent on a favorable (primarily uncorrupted) environment. This discrepancy, it should be noted, has been present in Cabinet-IMF cooperation from the outset of the so-called market reform in Ukraine.

Assessment of the socioeconomic situation in Ukraine by Oleksandr Paskhaver, President of the Economic Development Center, is additional testimony that Ukrainian realities require a nonstandard approach. In his opinion, bureaucratic capitalism is being formed in Ukraine, with the bureaucracy calling the tune, setting proportions and judging the quality of production and reproduction of private capital. With the economy in the red, the attendant “gnawing away” at capital as a form of management has turned out to be a lucrative business for bureaucrats at all levels as they proceeded to privatize the state authority in regulating and controlling business (taxes, law enforcement, allocation of plots, sanitary control, regulation of prices, Cabinet guarantees, etc.). Violence or the threat of violence secures the underworld similar power. Yet the bureaucracy is actually in a position to transform the economic system into a system of state administration to supply their interests.

For this reason bureaucratic capitalism makes Ukraine’s financial partners discard the standard creditor-borrower pattern of cooperation. What is offered instead? Political pressure and the crowding and phasing out “rented” power — measures that are outwardly adequate to bureaucratic capitalism. In other words, Ukraine’s international partners, faced with our domestic lack of acceptance of the logic of reform universally accepted in the market economy part of the world, borrow the national coloration of transformation, but in doing so they overlook the fact that such national coloration cannot replace the implementation of real market reform.

But let us return to where we started. On March 15 the Cabinet will take an exam which, if it passes it, may turn out fatal (and if it bungles it the outcome will be all the more fatal). Regrettably, Viktor Yushchenko’s government seems to have forgotten one specific aspect of its mission. After taking office to carry out reforms, these people obviously forgot that market reform cannot be reduced to a set of organizational projects and procedural approaches. Such reform must be oriented toward self-enhancement — i.e., formation of social forces and political vehicles making it possible to give content to the spirit of reform. Otherwise such market reform only enhances and stabilizes the dominance of bureaucracy over private capital.

Viktor Yushchenko, as a banker, learned only too well what signals to send the financial community. Yet, as Premier, he did not seem to take into account the fact that now his audience was totally different. Now he is denied bureaucratic support after reducing their rentier revenues; he is denied producers’ support by failing to justify their expectations of economic freedom and protection from the government racket; he is denied IMF support after failing to convince the fund that he is not like his predecessors. Too bad.

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