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Ukraine: a permanent winter
The IMF has announced a new bailout package for Ukraine. It will disburse up to $17.5bn over the next three years, subject to all the usual conditions for fiscal austerity and neoliberal reforms conducted by the Ukraine government – see my previous post, https://thenextrecession.wordpress.com/2014/08/31/ukraine-a-grim-winter-ahead/

The bailout package is a joke. As a former IMF economist put it, “The odds of this program surviving intact for four years, or even through the end of 2015, are not much higher than for the original 2014 program,” said Robert Kahn, a senior fellow at the Council on Foreign Relations.
One of the biggest risks is that the bailout is based on a fragile cease-fire holding between Kiev and the militants. A re-escalation would scupper the ability of the government to meet its obligations to the fund. The fund’s approval of the program despite the “exceptional risks”, and the clear breaking of basic rules on debt sustainability, shows the package is a really political decision by the West to shore up a pro-European government in its strategic battle against Russia.

The IMF has had to revise down its growth forecast for the country again. It now assumes a 5.5% contraction this year and a rebound to growth next year at 2%. “Private forecasters predict a deeper recession, as much as a 10 percent decline this year and a further fall next year,” said Kahn. Even the IMF staff had to admit in their 173 pages of program documentation that “the uncertainty around these projections remains exceptionally high”.

Part of the package includes the expectation that private creditors (the Russians and American hedge funds) will agree to a ‘haircut’ on the $15 billion in Ukraine bonds that they hold. Again the IMF had to admit that this may turn out to be wishful thinking. “Creditors may balk at the terms being offered in the debt operation and holdouts may try to free ride,” the IMF said. The process could turn “disorderly,” a fund euphemism for default.

The IMF said debt negotiations must be completed by June with a high creditor participation rate to trigger the next tranche of emergency cash.
Of course, all this assumes that the Kiev government will operate efficiently and without corrupt practices – some hope. Most likely, if the fighting in the east restarts and debt restructuring negotiations collapse, the economy will continue into free fall and the public debt ratio will double, pushing Ukraine into total default.

Ukraine’s recently appointed Finance Minister Natalie Jaresko is a US national who adopted Ukrainian citizenship to take up her post. The 49-year-old former banker, who only got her Ukrainian citizenship the day she was appointed minister in December, reckons that the war has consumed about 20% of the economy, taking out a region rich in industry and commodities. Corruption is endemic throughout Ukraine. The IMF estimates that Ukraine’s underground—and non-tax-paying—economy is as much as 50% of GDP. The hryvnia currency has fallen 70% since last year.



Inflation is officially 28.5% but, according to Johns Hopkins professor Steve Hanke, it’s really more like 272%. FX reserves have now fallen to just one month’s worth of imports. The economy is now smaller than it was when it gained independence from the Soviet Union in 1991.

It is in this environment that the IMF is providing funds, but just like Greece, not to help the people of Ukraine, but to meet the demands of its foreign creditors (European banks, Russian banks and American hedge funds). And this ‘bailout’ is to be administered along with all the austerity measures by an American banker with brand new Ukrainian citizenship.

In the meantime, Ukrainians are literally starving. President Poroshenko ordered the opening of food warehouses. The director of the Ukrainian State Reserve Vladimir Zhukov went to the store houses and found them empty! Why, because all the reserves had been sent to the frontline to feed and water the troops in the east. And last year’s entire harvest was sold abroad, while the acreage for the new sowing season was reduced by 30%. Having learned of the empty shelves not only in the stores but also in the State Reserve, Poroshenko reportedly went into shock.

The winter weather may nearly be over – but it’s going to be a permanent winter for Ukraine’s people right through the summer.

So many things have been going right for capital in the last five years or so, communists wish that we lived in the era of socialist coups and popular movements instead of fascist reaction and American-backed coups. Capitalism has even figured out how to make fascist coups appear like popular movements at the drop of a hat. And yet capitalism is such a dysfunctional system that at the absolute peak of its power, in which a former breadbasket of the Soviet Union is now an American neo-fascist puppet regime 25 years later, capitalism can do nothing but accelerate the collapse of this regime as it is utterly helpless to control its own immanent logic. Being a communist is pretty sweet.

Edited by babyhueypnewton (Feb. 8, 2016 17:43:39)

http://www.counterpunch.org/2015/12/18/the-imf-changes-its-rules-to-isolate-china-and-russia/ posted:

The IMF staff started contemplating a rule change in the spring of 2013 because nontraditional creditors, such as China, had started providing developing countries with large loans. One issue was that these loans were issued on conditions out of line with IMF practice. China wasn’t a member of the Paris Club, where loan restructuring is usually discussed, so it was time to update the rules.

The IMF intended to adopt a new policy in the spring of 2016, but the dispute over Russia’s $3 billion loan to Ukraine has accelerated an otherwise slow decision-making process.

The Wall Street Journal concurred that the underlying motivation for changing the IMF’s rules was the threat that Chinese lending would provide an alternative to IMF loans and its demands for austerity. “IMF-watchers said the fund was originally thinking of ensuring China wouldn’t be able to foil IMF lending to member countries seeking bailouts as Beijing ramped up loans to developing economies around the world.” In short, U.S. strategists have designed a policy to block trade and financial agreements organized outside of U.S. control and that of the IMF and World Bank in which it holds unique veto power.

The plan is simple enough. Trade follows finance, and the creditor usually calls the tune. That is how the United States has used the Dollar Standard to steer Third World trade and investment since World War II along lines benefiting the U.S. economy.

The cement of trade credit and bank lending is the ability of creditors to collect on the international debts being negotiated. That is why the United States and other creditor nations have used the IMF as an intermediary to act as “honest broker” for loan consortia. (“Honest broker” means in practice being subject to U.S. veto power.) To enforce its financial leverage, the IMF has long followed the rule that it will not sponsor any loan agreement or refinancing for governments that are in default of debts owed to other governments. However, as the afore-mentioned Aslund explains, the IMF could easily change its practice of not lending into (countries in official) arrears … because it is not incorporated into the IMF Articles of Agreement, that is, the IMF statutes. The IMF Executive Board can decide to change this policy with a simple board majority. The IMF has lent to Afghanistan, Georgia, and Iraq in the midst of war, and Russia has no veto right, holding only 2.39 percent of the votes in the IMF. When the IMF has lent to Georgia and Ukraine, the other members of its Executive Board have overruled Russia.

After the rules change, Aslund later noted, “the IMF can continue to give Ukraine loans regardless of what Ukraine does about its credit from Russia, which falls due on December 20.

Inasmuch as Ukraine’s official debt to Russia’s sovereign debt fund was not to the U.S. Government, the IMF announced its rules change as a “clarification.” Its rule that no country can borrow if it is in default to (or not seriously negotiating with) a foreign government was created in the post-1945 world, and has governed the past seventy years in which the United States Government, Treasury officials and/or U.S. bank consortia have been party to nearly every international bailout or major loan agreement. What the IMF rule really meant was that it would not provide credit to countries in arrears specifically to the U.S. Government, not those of Russia or China.

Mikhail Delyagin, Director of the Institute of Globalization Problems, understood the IMF’s double standard clearly enough: “The Fund will give Kiev a new loan tranche on one condition that Ukraine should not pay Russia a dollar under its $3 billion debt. Legally, everything will be formalized correctly but they will oblige Ukraine to pay only to western creditors for political reasons.” It remains up to the IMF board – and in the end, its managing director – whether or not to deem a country creditworthy. The U.S. representative naturally has always blocked any leaders not beholden to the United States.

McCain suggested that the Obama administration is giving special treatment to a Russian rocket manufacturer that due to a recent restructuring fell under control of Russia’s federal space agency, Roscosmos. The United States currently purchases Russian RD-180 rocket engines from the manufacturer, known as NPO Energomash, to use during national security space launches.

“I write to express my concern with the appearance of selective enforcement of sanctions imposed in response to the invasion of Crimea by the Russian Federation,” McCain wrote. “I am particularly troubled that, today, the Administration is allowing for the procurement of rocket engines for military space launches that result in the payment of money to a Russian state-owned corporation controlled by officers and directors who have been individually sanctioned in connection with the invasion.”