Ukrainian Crisis is Economic As Much As It Is Political

The ongoing crisis in Ukraine constitutes one of the most difficult crises for the international community in recent times. Policy dialogue continues, and will prevail, as to whether Russia was justified in its actions to promote the referendum vote in the Crimean peninsula.

At times, this policy dialogue becomes rather charged, and focused on whether Ukraine should side with “the West” or with Russia. However, little focus is heeded to the actions Ukraine may be forced to take as a result of its economic situation. This article highlights the economic challenges that Ukraine faces, and urges readers to keep all perspectives in mind when analyzing the crisis.

Introducing some key indicators is the first task of this article, and then the analysis puts them into perspective of the current crisis. All indicators are from the World Bank’s World Development Indicators. Since 2009, unemployment levels have declined, but continue to remain high. While in 2009 the unemployment rate was at 8.8 percent, it dropped only by 1.3 percent through 2012 to 7.5 percent.

While job creation remains a key challenge for Ukraine, issues related to GDP growth are also noteworthy. Data from previous years is not available to show a trend. Regardless, in 2012, external debt constituted 23.7 percent of Ukraine’s Gross National Income (GNI). High levels of external debt inhibit growth in Gross Domestic Product (GDP).

Ukraine suffered from a severe recession in 2009, with annual GDP growth at -14.8 percent. It emerged from this recession in 2010 and 2011 with annual GDP growth of 4.2 and 5.2 percent, respectively. However, as of 2011, annual GDP growth dropped again to 0.2 percent. On top of declining economic growth, inflation remains high at upwards of 13 percent between 2009 and 2011, with a slight drop to almost 8 percent in 2012.

This crash course in macroeconomics paints an important picture for Ukraine: unless it can find a way to re-finance its external debt, the domestic economy will suffer. Thus, it may be possible to view former President Victor Yanukovych’s effort to strengthen the relationship between Kiev and Moscow in a different light.

At the beginning of the crisis in early December, few loan-guarantees came from Washington or Brussels. The dialogue instead focused on ensuring that the government respected political freedoms among demonstrators. During the same time frame, Moscow offered Kiev loan guarantees, along with guarantees for cheaper gas.

This article does not seek to downplay the violations of political freedoms that have occurred during the Ukrainian crisis. Rather, it seeks to highlight the multi-dimensional policy challenges that face Ukraine. Only after Russia invaded the Crimean peninsula did the United States and European Union begin to offer loan guarantees to cash-poor Ukraine. While ensuring political freedoms are respected remains a principal priority, protecting the economic well-being of Ukraine must also occur.

Moving forward, Ukrainian relief packages must include elements of loan guarantees. If sources of the loan guarantees seek increased political freedoms, they can make their economic guarantees contingent upon guaranteeing a certain level of political freedom. Still, this choice will come at a cost, as the Ukrainian crisis represents not only a political challenge, but an economic one as well.

Photo Credit: REUTERS / Maxim Shemetov