A BLOW TO UKRAINE’S FINANCIAL HEART
13 November, 00:00
Without exaggeration, last week’s events climaxed in Vadym Hetman’s assassination, a shocking and sobering experience. Shocking because most of us had grown accustomed to looking on and analyzing at length and depth, reclining in our chairs, just how criminal our rich and the famous were getting to be. Sobering because we were suddenly jerked out of this reverie by the harsh reality of criminal forces showing their hand. Unless we really do something about it - and we could do something only by combining efforts - we will never part with this fear of being vulnerable, totally exposed, even knowing those paying for such contract killings.Precisely four months ago, on December 27, 1997, The Day carried Hetman’s article in which he wrote: “Ukraine needs economic, social, and political stability now as never before. It is, however, easy to predict that today’s harbingers of financial-monetary stability, which could eventually bring about economic stability, will be destroyed.... after the elections, in the course of the uncompromising battle of polarized political forces.” Of course, Mr. Hetman could not have imagined at the time how prophetic his assumption would turn out, but he must have been aware of the shaky balance thus achieved, and that it could be destroyed with just so little effort.
Previously we never bothered to grasp that financial relationships above all mean human relationships. Usually, reading yet another newspaper analysis of the economic and financial situation, when experts came up with their forecasts regarding foreign exchange rate fluctuations or credit rate dynamics, the main thing was left “off screen” - some people won or lost, depending on whether the exchange rate rose or dropped, or on what yield could be expected from government bonds. Of course, financial risk could be reduced and there are quite a few international mechanisms working to this end. But they all have one major flaw: they are totally unfit for our unstable corrupt economy.
For quite some time the official propaganda machine tried to portray Ukraine as country in which the financial market is being regulated exclusively by the law. Actually, it did succeed, inasmuch as keeping the nation’s fiscal system stable. But as soon as the first signs of the oncoming crisis appeared, we all saw only too clearly that all the legitimate levers supposed to keep the situation under control had gone kaput. In other words, the situation was no longer manageable using the laws of economic expediency. All deals could be bargained, and not only those involving tax exemptions and licenses, but also the very principles of the economic policy (including deals made at all official levels but on the other side of the law). In fact, last week’s assassination shattered the greatest illusion of our time - that “choosing strategic priorities,” “prognosticating inflation rate” or “setting the boundaries of the hard currency corridor” really depended on feasibility studies and could be adjusted using accurate economic calculations.
This author does not intend to try to figure out who was actually interested in getting the situation on the financial market to fit a scenario other than the one worked out by Vadym Hetman. Instead, suppose we try to figure out exactly what Mr. Hetman was after.
Until very recently a multitude of ways to overcome the financial crisis remained the subject of theoretical discussions. Politicians and economists publicly debated the price to be paid for budget, taxation, and sector adjustment reforms, as the central government looked on. They just sat and watched, ignoring numerous appeals from worried financiers and economists, making no substantial changes in their economic policy. Vadym Hetman wrote at the time: “It is true that finance and banks being the core of any economy, can operate effectively only in a stable and predictable environment. No other country or international financial company will cooperate with a state offering unpredictable financial risks. Ukraine now does not have enough national assets to develop single-handedly. So how can we expect to raise our economy from ruin relying on our own resources?” At the end of last year the key aspects of the Ukrainian crisis were identified: (a) the absence of adjustment reform, (b) increasing tax burden on enterprises, (c) excessive and ineffective budget spending, and (d) corruption.
Last Tuesday at a Cabinet meeting Premier Pustovoitenko seemed genuinely amazed to realize how much what his highest executive body did differed from what it should have done in a crisis of this magnitude. Later, some of those present suggested that his reaction was caused by a document prepared by a team of German consultants. No one knows what the document was actually about, but there is every reason to assume that it offered little of what the Ukrainian Premier did not know himself. Back in December 1997, then Minister of the Economy Viktor Suslov sent a letter to President Kuchma, warning that “the situation on the financial market of Ukraine, as well as on world financial markets, combined with the political situation in Ukraine, testifies to the fallacy of such plans [i.e., financing government spending using emissions made under debt commitments - Ed.]. In view of this, it is necessary to reconsider financial policy, otherwise the state budget will suffer a final fiasco, because repaying foreign and domestic debts using tax returns will deny the government the possibility to finance the budget and social spheres, which will, in turn, destabilize Ukraine’s socioeconomic situation to the point where a political crisis will become imminent.”
Further evidence of the government being fully aware of the situation is Mr. Hetman’s interview with Interfax-Ukraine on December 9, 1997, in which he referred to a regular “closed sitting of the Cabinet and consultations, including those held with the President, concerning comprehensive measures to localize the financial crisis.” Most likely, the reason was the Cabinet’s inactivity spurring the crisis and caused by circumstances resulting from a lack of on-line information. It is also possible that the Cabinet knows enough and refuses to heed NBU President Viktor Yushchenko who has to turn to the media to voice ideas addressed to the country’s highest leaders. What is happening to government finances? All national budget returns made available to the Cabinet must be used to repay outstanding foreign and domestic debts. Miserable allocations for the social sphere are supposed to keep the populace from walking out on strikes of protest. Still, the authorities seem unable to discard their traditional practice of feathering the nests of all those “clans” securing political cover for the existing regime.
The relatively long period of financial stability in Ukraine, long symbolized by Vadym Hetman and Viktor Yushchenko, has not only its reliable adherents. The strong hryvnia has reduced speculative income to a minimum, but it cannot as yet guarantee stable incomes from production. Financial stability has served only to provide the prerequisites for economic growth, while Cabinet-sponsored adjustment reform was supposed to make this growth a reality. Now considering that the government did not seem to have a clear idea about what such structural reforms were until last Tuesday, how could it have possibly carried them out? And what was it supposed to do under the circumstances? The answer is obvious: devaluate the hryvnia, thus triggering off “salutary inflation,” replenishing the national budget and circulating assets of the “essential” enterprises. After that one could fill the gaps by appropriating budget funds or doing all kinds of operations using them, the more so that there would be enough such “funds” and to spare...
Fortunately, the above scenario remains a possibility. However, one must consider that Mr. Hetman’s death has weakened the ranks of those opposing destabilization and strengthened the position of its exponents. We are in for trying times. Retiring from the NBU presidency five years ago, Vadym Hetman warned of approaching financial catastrophe, the hyperinflation of 1993-94. His life having been cut short so ruthlessly is yet another such warning, the full implication of which few can understand at the moment.
Author
Iryna KlymenkoSection
Economy
