Mirage Economy Ready to Change Landmarks

The Premier was not retired last Tuesday as expected, marking a certain transitional phase in this game of political intrigue which had arrested public interest for several previous weeks. Now the time seems ripe to digress from the quickly changing political situation and discuss the hidden motive forces, primarily the economic reasons behind all these developments.

In essence, the outcome of this political confrontation was supposed to answer two principal questions: Will the financial crisis reach the point of financial collapse? Which political groupings will proceed to “organize” economic growth and on what terms? Both questions are obviously interconnected as there is no coincidence in the synchronous peaks of the financial and political crises.

At present, it is perfectly clear that there will be no collapse, not yet, meaning that the possibility cannot be ruled out, of course. Still, its being postponed is quite significant. Why? Because (a) destroying the whole financial system would automatically result in the bankruptcy of most “political holding companies” (well-heeled and powerful administrative industrial groups), something all of them, not only those in power, would find most disagreeable, and (b) because politically “organizing” economic growth is much easier without ruin, regardless of who is among the “organizers,” which is quite important for most economic players.

By and large, the financial fiasco considered nationwide is a matter of choosing the easier or harder way to the orbit of economic growth, nothing else. Recall the discussion about monetarism and the fact it was misunderstood (above all by the various Cabinets): differences accumulated between the financial and real sectors cannot be solved using only financial tools. Ukraine has actually reached a point where the problem of reviving production is no longer purely economic. It is simply that the authorities have exhausted their resources allowing it to somehow maintain the illusion that the state is fulfilling its obligations. This is precisely why the production of added value in the real sector proves now the only manner in which state power can exist as such. Which model of economic growth is the most probable under the circumstances?

To translate their pressing economic problems into political terms, the Russians came up with a “mobilization model” of development. Briefly, it boils down to the following: “mobilization” procedures are aimed at building centralized vehicles for the conversion of the savings of enterprises, the state, and the populace into strategic investments. Hence, the quantity of the resources thus accumulated constitutes the material base for these procedures and the direction in which these resources are looked for, the managerial tactic. After that priorities are determined, not the usual strategic sectors of which one and all are sick and tired, but a choice of structures (“political holding companies”) that will openly control such centralized resources and reallocate them for someone’s benefit. Ukraine already has such “holding” vehicles, and these are not so much separate organizations or individuals as a system of vehicles capable of quickly transforming Ukraine’s quasimarket economy. This may happen in a not so distant future, because, given the currently prevalent “conventional ownership” patterns and system of management, any business entity, juridical or physical person alike, automatically becomes a lawbreaker and is indebted to the state from the outset. In other words, by using accelerated bankruptcy and tax arrears procedures all such “conventional” property can be nationalized.

Over the past year and a half serious efforts have been made in Ukraine to develop vehicles precisely corresponding to this model of economic growth. They are not yet articulated or ideologically perceived. However, the fact that the Premier remains in office and finds allies from among parties previously in opposition may mean that disorganized and controversial efforts toward a rigidly monopolized economic regime, after receiving support from the parliamentary majority, will become a consistent tendency.

In view of all this, economic decisions motivated by the crisis become especially important. Even now centralizing the stock and currency markets and erecting import barriers (administrative as well as financial) insurmountable to small businesses call for large industrial-financial structures prepared to take over major export-import transactions. Politicians are still fighting over who will top this list, but even now it is clear that there will not be many. A similar situation is developing in the banking sector. The Cabinet’s original decision to restructure its liabilities placed a number of banks in a difficult situation. Will the National Bank be able to help them all? No, it won’t, nor will it want to. Incidentally, the leaders are already selected (albeit perhaps tentatively), as evidenced by the designation of a group of Ukraine’s largest banks whose liquidity will be monitored by NBU on a daily basis. It is possible that precisely these banks will eventually be delegated the right to translate centralized capital investments. This possibility can be inferred from what the Premier and Speaker have had to say, as well as from the attitude of investment consumers (Ukrainian Association of Businessmen and Industrialists, agricultural holdings, etc.). Which raises a very important question: Where will they get the money for these capital investments? First, there is the reserve of uncollected tax payments, provided the tasks assigned the fiscal police are formulated differently (which will not be an obstacle in lowering tax rates somewhat, rather to the contrary). Secondly, the need to pay taxes may become the condition on which a “holding” will be included in the “chosen” group. Thirdly, centralizing amortization and off-budget funds. Fourthly, bank savings deposited by enterprises and citizens. All these sources do not suffice for the economy as a whole, but would be enough for isolated islands of economic growth for the favored few.

It should be noted that there has been sufficient cause (i.e., crises considered as such causes) to begin this growth over the past years. Thus, why it never was started remains an open question. Perhaps because the government was not prepared to accept a definite model. The liberal economic one did not work for political reasons (the allegedly red Parliament, pink Cabinet, Left mentality, etc.). The monopoly market economy was nonviable due to the absence of “holdings” and “mechanisms.” Now all these prerequisites seem on hand, although there are still reasons for delay: debt payments will have to be made a year from now, meaning that anything could happen by then.