Economic consequences of Maidan

The events of last week not only brought Ukraine to the brink of civil war, but also paralyzed the economy. Even if the parties manage to reach a compromise, an economic crisis is engulfing the country. If Kyiv is left without external support, social problems will again worsen.

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Kyiv, February 20

Photo: Kommersant / Vasily Shaposhnikov / buy photo

Kyiv, February 19

Photo: Kommersant / Roman Pilipey

Kyiv, February 19

Photo: Kommersant / Alexander Yalova

Alexander Gabuev

The events in Kyiv last week, which claimed dozens of lives, have one ominous pattern. As soon as the parties to the conflict manage to agree on something, some unexpected event occurs, which again explodes the situation and leads to an escalation of the confrontation. This happened in November after Viktor Yanukovych refused to sign an association agreement with the EU, when Berkut fighters suddenly began to violently disperse the student Euromaidan - the protest, which had begun to fizzle out, flared up with renewed vigor. This happened after the sudden adoption of laws limiting rallies - the people of Kiev, who had gone home for the New Year holidays, again rushed to the Maidan, and the seizure of government buildings in the regions began. This happened during the mysterious abductions of opposition activists. This was the case with the murders of oppositionists on January 22, which have not yet been properly investigated.

And each time such events, which most often looked like ridiculous mistakes on the part of Viktor Yanukovych’s team, led to a sharp increase in the number of protesters in the weekend following the event (see chart). “Periodically, there is a feeling that someone is deliberately starting to rock the situation as soon as everything stabilizes. Some kind of either internal or external force, completely invisible, with unclear intentions,” he shared with Vlast on the sidelines of the Munich conference on security senior Ukrainian official. Ukrainian oppositionists also complained about the actions of “unclear forces” in Munich.

The last week, which became the bloodiest in the entire post-Soviet history of Ukraine, was replete with similar events: what began as peaceful “marches” of the opposition immediately turned into pogroms and murders, and the retaliatory actions of the forces of law and order ended in an illogical storming of the Maidan and casualties among the civilian population. The same thing happened on Thursday, February 20, when at night the opposition leaders reached a truce with President Viktor Yanukovych, and in the morning one of the leaders of the Right Sector, Dmitry Yarosh, wrote on Facebook that his supporters would not recognize any truce. Soon the radicals set out to storm the Verkhovna Rada, the Berkut began shooting to kill with live ammunition, and snipers began working in the city center.

Kyiv, February 19
Photo: Roman Pilipey, Kommersant

The political aggravation in Ukraine, in addition to the unprecedented number of killed and wounded, led to another extremely important consequence - economic. The current crisis largely began with economic issues. For Viktor Yanukovych’s team, the signing of an association agreement with the EU and a free trade area (FTA) was not so much a choice of geopolitical orientation and not only a means of election propaganda, but rather a condition for receiving an IMF loan and, as Kyiv hoped, funds from the European Union to smooth out the negative consequences of creation of an FTA. Money was urgently needed. The social orientation of the Ukrainian budget, the reluctance in the 2014 election year to carry out reforms that were painful for the population and increase tariffs, as well as the desire to maintain the exchange rate of the hryvnia brought Kyiv to the brink of default. Yanukovych was going to plug the hole with a loan from the IMF, but a few days before the signing of the agreement in Vilnius, the fund refused.

Then Kyiv made a sharp U-turn: Prime Minister Mykola Azarov announced a rapprochement with Russia. According to Vlast’s interlocutor in the Ukrainian government, the negotiating group hoped until the very end that the agreement could be signed in Vilnius or soon after - if Europe gave money. But EU countries, and especially Germany, took a tough position. As payments on the foreign debt approached, it became increasingly difficult to delay the payment of the debt for Russian gas. Kyiv needed money more and more, and soon Moscow promised a loan of $15 billion, and then bought the first Ukrainian bonds with a rate of 5% per annum for $2 billion. In parallel, a political crisis began, which developed in a spiral from the peaceful protest of the middle class and students to the civil war in center of Kyiv.

Three months of civil confrontation, which took on increasingly harsh forms, could not but affect the economy and business climate. Vlast's Russian interlocutors, who do business in Ukraine, said that they began transporting families back to Russia back in December. Their Ukrainian business partners also, whenever possible, tried to take families out of the country, or at least from the capital, which was already overrun by “titushki” and radicals from the Right Sector. According to Vlast's sources, many foreign managers did not return from their December Christmas holidays: many asked companies to transfer to other countries. In January, foreigners appeared who were ready to leave even at the cost of terminating their contracts and giving up their annual bonus.

The deteriorating economic dynamics are even more clearly visible in macro indicators. In December 2013, an outflow of funds from the banking system was recorded for the first time. Individual depositors took 0.9% of deposits, companies - 4.9%. Both the hryvnia exchange rate and the capitalization of the stock market are falling. The real economy is also falling. Steel production (the main item of Ukrainian export) decreased by 8% in January.

At the peak of the confrontation, citizens began panic buying gasoline, food and essential products

The debt market is giving even more alarming signals. Thus, on February 19, during the outbreak of clashes in Kyiv, the yield on Ukrainian government bonds jumped to 34.27%, and the cost of credit default swaps on Ukrainian bonds rose to a historic high since July 2009. The market rates risks higher only in Argentina and Venezuela. Rating agencies S&P, Moody's and Fitch have downgraded Ukraine's rating to CCC+, Caa2 and CCC, respectively, all three with a negative outlook. The country's reserves are melting: in January they decreased by 13%, to $17.8 billion. According to Morgan Stanley calculations, this is enough to cover imports for two months.

On February 6, the National Bank of Ukraine began erecting barriers to the free movement of capital; so far no one is going to lift the restrictions. Analysts predicted that the worsening political situation could lead to a liquidity crisis, and then to a full-scale banking crisis. The forecast was accurate: on Thursday, people in Kyiv and regions of the country rushed to exchange offices, and when they ran out of currency, to ATMs (some bank networks ran out of cash). At the peak of the confrontation, citizens began panic buying gasoline, food and essential products.

The current situation will only worsen the already negative state of the economy. Most analysts agree that without external borrowing, Ukraine is unlikely to make it through 2014 without default or uncontrolled devaluation. Meanwhile, Russia has already begun to hesitate regarding further purchases of Ukrainian bonds, or insists that the proceeds go to pay debts to Gazprom, which does not improve the situation of Viktor Yanukovych. Until Ukraine gains at least a semblance of a stable government, global investors are unlikely to begin to value Ukrainian debt much higher than Argentine and Venezuelan debt. A loan from the IMF or the EU is impossible while the situation with the authorities is unclear - for political reasons.

The financial and economic impasse in which Ukraine finds itself did not begin in November and is caused by long years of fiscal populism, not protests. Nevertheless, in the current crisis situation, political unrest will provoke financial ones. And economic problems, in turn, will push more and more angry and dissatisfied people onto the streets, where more than just cobblestones, batons and bottles of Molotov cocktails are available to express their despair.

How events developed in Ukraine

date
EventNumber of share participants
protest (person) According to
oppositionAccording to the Ministry of Internal Affairs

11/21/2013	Stopping preparation association agreements with EU, first rallies	2000	2000
11/24/2013	People's meeting, mass procession and rally on Maidan	100,000	50,000
11/30/2013	Dispersal of Euromaidan, rally on Mikhailovskaya Square	15,000	2500
01.12.2013	Capture of the Kyiv City Council and Dom trade unions	800,000	40,000
08.12.2013	Demolition of the Lenin monument in Kyiv	1,000,000	100,000
12/18/2013	Signing Russian-Ukrainian agreement about investments	30,000
12/22/2013	People's Assembly, creation people's association Maidan	200,000	20,000
01/12/2014	People's Assembly	50,000	8000
01/16/2014	Adoption by the Verkhovna Rada of the series tougher laws	5000	2500
01/19/2014	The beginning of unrest in the center Kyiv, an attempt to break through to Rada	500,000	100,000
01/22/2014	The first victims among protesters	100,000	50,000
01/23/2014	Kidnapping of activists Automaidan, capture administrative buildings in regions	5000
01/28/2014	Resignation of Prime Minister Nicholas Azarova	5000	2500
01/31/2014	Cancel all accepted 16 January laws	10,000	2500
02/06/2014	Rally for a return to 2004 constitution	4000
02/09/2014	People's Assembly	50,000	20,000
02/16/2014	Liberation by protesters buildings of the Kyiv city administration	100,000	20,000
18-19.02.2014	Clashes in Kyiv, capture regional administrations in regions, death of 26 people	200,000	-
02/20/2014	New clashes in Kyiv, death toll rises to 70 Human	10,000	-

With a proudly outstretched hand