UKRAINE: Four reasons why it’s going to end in tears

putukraineThe Ukraine is a country where angels fear to tread…..but not the EU.

As I posted yesterday, the EU is way out of its depth in Ukraine. It hasn’t so much bitten off more than it can chew as popped a red-hot potato into its omnivorous mouth.

‘You have removed this cancer from our country’, former Prime Minister Tymoshenko claimed in front of a euphoric crowd in Kiev yesterday. But there are two problems with her analysis: President Victor Yanukovych is refusing to resign; and he has every right so to do, having been elected by democratic vote four years ago, as a result of an election described at the time by international monitors as “impeccably fair and free from intimidation”.

Yanukovych was of course voted in with the overwhelming support of the Russian speakers in the South, and he has behaved like a voracious barbarian. But he wasn’t imposed on anyone: Ukraine is Ukraine until one partitions it.

But the chief factor that’s going to smack the West right between the eyes is the country’s hopeless debt position: to be more precise, a situation that is hopeless without Russian help…and a situation that is urgent in the Greek sense of the word.

The country’s debt to GDP ratio is under 40% and thus nowhere near to the ClubMed levels: but a whopping 25% of the entire debt is in short term bonds that must be repaid by mid 2015. Long before the Kiev demos got going, the country’s leaders knew that  bankruptcy and sovereign default were inevitable, because the economy is in bad shape, – and no way capable of generating the cash to pay off the pressing bond maturities.

The only way that bond yields have been kept within reason so far is that Moscow has been buying vast amounts of Ukrainian debt at heavily discounted levels. But once things began to look dodgy for Yanukovych, Russia deliberately pulled back. Not only has it no plans to buy further debt, the Kremlin is politely (so far) asking for the Ukrainians to pay their energy bills.

In that context, you’d have to be an idiot to leave Putin out of the truce talks. But then, the EU is run by idiots…as indeed is the US. John Kerry is talking this morning about bazookas and packages being available to help: but this is one occasion when talking a good Geithner game isn’t going to cut it.

Ukrainian securities suffered the worst sell-off on record last week. Any Bourse or bond trader now betting to get the yields down simply isn’t well-informed: whether we like it or not, victory for the demonstrators means inevitable fiscal disaster for their country.

The knock-on effect of a Ukrainian default would not be pretty….and it’s not as if Brussels didn’t know this beforehand: the S&P’s sovereign survey of October 2013 confirmed the inherent danger the Ukraine presents to the global economy:

ukraineno2debtAlthough the Russian Federation owns a lot of the debt, observers calling default “a massive blow” to Moscow haven’t done their homework: for the time being at least, Russia’s reserves are in good shape – and Ukrainian debt still only about 10% of it. As ever in 2014, the fear is for the emerging economies, and the high likelihood of Ukrainian collapse pushing up their yields.

Finally, a fourth factor has reared its ugly head – as it tends to do in Eastern Europe whenever things are going wrong. Ukrainian Rabbi Moshe Reuven Azmanhas urged Kiev’s Jews to leave the city and even the state, amid talk – as he put it – of “constant warnings concerning intentions to attack Jewish institutions. Edward Dolinsky (another senior Ukrainian Jew) has asked Foreign Minister Avigdor Lieberman to “secure the [Jewish] community.”

In Eastern Europe, I’m afraid, there are only very rarely good and bad guys.

70 thoughts on “UKRAINE: Four reasons why it’s going to end in tears

  1. What about the Russian Black Sea Fleet based in Sevastopol Ukraine plus their 30% discount on gas imports from Russia? This agreement with Russia will enable Kiev to save nearly US$40 billion over the period from 2011 throughout 2020 in exchange for extending the Russian Black Sea fleet’s lease in Sevastopol until 2042. Russia has also given a 30% discount on Ukraine’s gas imports. The rebate will apply for 40 billion cubic meters annually from 2011 to 2019, according to Gazprom, at the same time the Ukraine also agreed to increase its gas imports by 10% from 33.75 to 36.5 billion cubic meters.
    I have also read that the Russian fleet in Sevastopol is almost obsolete and not combat ready, and the only reason Russia keeps its Black Sea fleet in Sevastopol is because it expects economic benefits from Ukraine and it blocks Ukraine’s accession to NATO. Interesting times ahead I think.


  2. Big Brave Willy Hague steps in to sort it all out…
    ‘Britain’s Foreign Secretary William Hague has been on the BBC this morning and been quite forthright in warning Russia against interfering in Ukraine.
    “If there’s an economic package, it will be important that Russia doesn’t do anything to undermine that economic package and is working in cooperation and support of it,” he said.
    So what’s Willy Vague going to do if Russia does intervene? Throw a hissy fit?


  3. Pingback: John Ward – Ukraine: Four Reasons Why It’s Going To End In Tears – 23 February 2014 | Lucas 2012 Infos

  4. If Russia has been buying “vast amounts” of Ukrainian debt It sure looks like Russia, no matter what, will suffer a hair-cut. Yes, that is sure going to provoke some tears in Moscow.


  5. There must be something I’m missing here why should the EU or America be interested in what is surely a Russian problem? Russia has the most skin in the game and a leader that nobody in the west can face down. This is geo-politics at its’ very worst and most cynical. Whose interests would it serve to have the country portioned? I am baffled by the whole situation.


  6. If I may quote the inestimable Mr. Ishmael :

    ” … we are ruling nothing in and ruling nothing out. It is not right to describe protesters as terrorists, although it is exactly how we describe strikers and poor people back in the UK. And disabled people. You may say that ay great many of them are simply seeking ay better future for their country but in fact, mr tiny speaker, what they are doing is seeking to subvert the efforts of ay democratically unelected govament, consisting of talentless, criminal hypocrites such as my right honourable and determinedly heterosexual self …”


  7. I’m also mystified by America’s interest in all this, unless it’s to distract from their own problems. Cold war all over again?


  8. So far the yankee international paramilitary policeman has had no grief in his own backyard, Could be this might change if he keeps poking the bear and who knows, the dragon might want to come to the party as well. A bit of scrying suggests only the corporations will come out winners from this deteriorating situation.j


  9. I reckon Big Bad Vlad has pulled a blinder here. Much like the Napoleonic battle the Russians have decided to pull back and let the enemy ‘absorb’ ground. Feign interest, ‘give-up’; then welcome them back later when the enemys hand is played.

    Or to be more succinct, throw that cancerous hot-potato to the Euroloons and let them deal with it. The realities of life in the EUSSR will soon drive em back to Vlads loving arms.

    ‘Blueberry Hill’… anyone!?


  10. ‘You have removed this cancer from our country’, former Prime Minister Tymoshenko claimed in front of a euphoric crowd in Kiev yesterday. But there are two problems with her analysis: President Victor Yanukovych is refusing to resign; and he has every right so to do, having been elected by democratic vote four years ago, as a result of an election described at the time by international monitors as “impeccably fair and free from intimidation”.

    The EU supports the removal of an elected President and Government by mobs, who if they were in the majority, would have the chance to overthrow the government by the use of the ballot box.

    What would HM Government reaction to a similar situation within the UK, or any other EU government, or indeed the US for that matter.

    Could the above be the tip of the Iceberg?


  11. @bill40.

    Greece was the “bad sovereign bank” for a time but that only resolved a small part (if any) of the problem.So like creating a bad bank then putting all the bad debts in there so nobody notices. Well it looks like Ukraine is going to be the next bad sovereign bank where a population suffers to keep the illusion of economic properity going.


  12. Let us try for one moment to put ourselves into the mind of Mr Putin and his Government. Here is a hypothetical analogy for you.

    Supposing it was obvious by this Spring that the Scottish Referendum would be a NO vote, but the EU felt that ‘Scottish’ Oil and Gas would be a strategic loss if/when the UK left the EU. Now suppose that the EU offered the Scots instant EU membership if they left the UK at once, took up the Euro and cut as many ties as possible with England.

    Now lets say that a large crowd (mixture of nationalists + far left and right) gathered and set up tents in The Royal Mile and convinced the Scottish Parliament to vote to send anyone packing who was involved in the English administration of Scotland (Revenue, Oil Companies, Banks etc) and to declare Scotland independent without the need for any referendum or constitutional niceties…..are you starting to follow me ?

    Now supposing the English took a dim view of loosing their oil pipelines and having their seaborne nuclear deterrent held hostage by an obviously unfriendly power. Would England not apply the most stringent economic sanctions to Scotland? If or when that failed to work, would London not use whatever military force was necessary to regain it’s oil, financial and military assets, if all other options failed …….and no matter what the EU or UN had to say about it ?

    When Khrushchev ‘gave’ the Crimea to the Ukraine in 1954, the USSR was at the height of its powers and it was simply a friendly administrative gesture to a vassal state. The idea that the area might come under another political influence would have been utterly inconceivable. The average Russian considers Ukraine to be as much a part of its ‘country’ as an Englishman might consider Scotland to be right now. Mr Putin cannot ever be seen to loose any part of Ukraine, on his watch. I cannot see any way that he will not do everything necessary to retain his influence over the country and its Russian assets.


  13. JW – I do like the list of numbers. What’s the probability of Japan defaulting though. They must be up there with the likes of Argentina where the economic system came off the rails years ago yet were able to continue because the global economy could allow it.

    As other nations n ow have had to tighten pursestrings since 2008 it exposed the real situation in many nations and with little to no growth globally one hell of a problem trying to pretend it is all normal anymore.


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  15. Crucially, if Ukraine defaults do you think Vlad will think for more than 20 nanoseconds before he declares it a credit event and claims on his credit default swaps??

    He will not hang back and procrastinate like the EU did with Greece, giving them extensions and other procrastinating measures so as not to upset the apple cart.

    Putin will happily light the blue touch paper and retire to a safe distance, he has very little to lose, if there is a haircut then he loses the money anyway, so why not let the chips fall where they may.


  16. Pers very true but history teaches us that unpaid debt today has mean’t invasion hundreds of years later on the pretext or vindication of unpaid debt,only if Russia excepts a hair cut does it have any political or financial importance in the future


  17. Perhaps some countries have not been democracies long enough to understand how the system works. When a government is elected with a mandate from the people, it doesn’t matter whether the promises they made before getting into power are fulfilled or not. In fact, they can do just what they like, it seems to me. Unless there is a robust opposition and the government in power is afraid to lose next time round, they can safely ignore public opinion. Newer democracies find this unacceptable and consider the contract broken if their elected government behaves more like a dictatorship.


  18. For Russia to help defend Syria the only way to do so without ignoring even going to war with NATO Turkey is over the Ukraine ,the distance involved will seriously effect flying even from Russian soil in the black sea airports,including strategy defending the straits of Bosphorus for naval reasons all apply pressure on Syria knowing that there defender is under great pressure particularly if Russia wants to service Syria if any sanctions are imposed on it .they would find it hard to use Iran because of Iraq so in-effect cutting Syria from any sanction busting other than those of the west,to wear Assad down & effect victory for the al Qaeda backed rebels


  19. I know some readers might tsk tsk me for this, but try some of the free articles here

    There have 2 or 3 articles that might help answer your question, “Syria, America and Putins Bluff” and “New Dimensions of U.S. Foreign Policy Toward Russia”.
    This article appears to be no longer available, “A Little Cold War: Russia, Europe and the United States”, which is a shame because I don’t actually remember reading it and the title sounds very juicy…Good Luck!



    You might enjoy that interview above with Stephen Cohen, American Professor Emeritus of Soviet — US relations. But I think it is mostly hot air. ‘Democracy Now’ is almost without a doubt a US government operation, btw. (John le Carre hinted as much to their face during an interview they had with him.)

    With all due respect to Andrei below: that citation from the New York Review of Books is 1) terrible history, 2) just the sort of terrible history one would design to keep the semi-educated literate elite of the US East coast on board with Ms. Nuland et al.

    They will pat themselves on the back for being so enlightened to have been informed by the NYRBooks, which has in this case decided to utterly ignore (were they ever cognizant) everything people like John Erickson and later David Glantz have contributed to our knowledge of the Eastern Front of WWII. Really turns my stomach. Especially to think it will be believed due to the ‘prestige’ of the ‘Review.’

    My inclination is more to thank Andrei for bringing to attention than anything else. But it is bollocks to a very large degree. Simpering, lying bollocks.


  21. Looks like another CIA black-op going disastrously wrong.
    The blow back will be civil war.

    Why are the Taliban so well trained?
    The CIA trained them to fight the Russians (whoops!).


  22. Ukraine is a third world basket case. It’s simply no big deal of it does default. They do it all the time. It’s the geopolitics that is interesting. Since 1820 the US has had the Monroe Doctrine: the Americas are out bailiwick and no foreign powers are allowed in. Remember the Cuban missile crisis. Russia claims its near abroad even if the EU and the US don’t formally recognise it. Victoria Nuland claims the US has $5 billion invested supporting the Ukrainian opposition, as in Syria. They still seem determined to contain Russia by ringing it with NATO missile bases. That has to be Vlad’s red line.

    Ergo the new Cold War comes a little further out the closet. A second front is being attempted in Asia encircling China and TTP is designed to exclude them. Difficult to know what it signifies in the longer term. Probably depends on whether Crash 2 does eventually happen or whether we just muddle along.


  23. ClubOrlov seems like an excellent account of the situation on the ground. Prof. Timothy Snyder also describes the complicated geopoliticking behind the scene:-

    If it’s true that Putin is determined to create his Eurasian Union (to be implemented in 2015), and that he views the Ukraine as an integral part of it, he clearly sees Russia and his own position as arch rivals to the EU and will be averse to letting Ukraine slip out of his grasp. The EU in its unquenchable thirst to add another star to his accursed flag has precipitated this crisis with (as usual) little concern for the consequences to the ordinary people involved. It’s another tug-of-war for power. The US, though continuously meddling in European affairs, to the tune of backing the EU from the start for its own political reasons, is now looking at a revival of the cold war with the creation of the Eurasian Union, which will be a threat to the Trilateral Commission who have long had an eastern wing to their organisation. Which raises the question : is this an opportunity certain sectors of the administration have been seeking and actually welcome?


  24. Good analysis CT. I see there’s been a bit of trouble with the Shiite minority in Saudi, recently. Not a good idea of Prince Bandar to wind up Vlad when he’s getting friendly signing trade deals with the Iranians.


  25. Ukraine has just descended into neo-Nazi fascism. They have just exchanged a democratically elected President for a parliament-appointed, non-elected puppet of the EU. Do these “protesters” believe for a minute that Ukraine will not be subjected to the same EU/IMF austerity measures of Cypress, Spain, Ireland, et al? In 3 years, Ukraine will resemble Bulgaria – a once thriving industrial economy now an agrarian plantation and raw materials slum. The tears will come sooner than later.


  26. Russia may get a financial ‘hair-cut’ but it won’t ‘suffer’. These are simply numbers in a ledger. It will be the Ukrainians who will actually suffer as the EU will demand they take a ‘hair-cut’ of physical infrastructure in order to repay debts. As in Greece, Spain, et al, the EU will demand the shutting of power plants, schools, hospitals, water systems so that interest on these illegitimate and un-payable debts may be serviced. This is now the future of an EU-centric Ukraine.


  27. Good link. Suspect Ukraine has been ‘occupied’ by Russia for several days at least, covertly, as we speak. Next week or so it will be a fait accompli for all to contemplate. This was very easy to foresee, in fact it was broadcasted in the Russian press over 18 months ago.


  28. Pingback: Ukraine | Ordoliberalism

  29. Is it just a coincidence that there is political instability in so many countries in recent years? You know, like the coincidence that the Netherlands, Belgium, Spain, Canada, South Africa, Norway, Sweden, Portugal, Iceland, Argentina, Denmark, Uruguay,New Zealand, France & the UK all legalise gay marriage in the same decade after centuries of it being illegal?


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