It’s not just Russia: Currency crisis in the Commonwealth of independent states
Highlights • The currency crisis that started in Russia and Ukraine during 2014 has spread to neighbouring countries in the Commonwealth of Independent States (CIS). The collapse of the Russian ruble, expected recession in Russia, the stronger US dollar and lower commodity prices have negatively affected the entire region, with the consequence that the European Union's entire eastern neighbourhood faces serious economic, social and political challenges because of weaker currencies, higher inflation, decreasing export revenues and labour remittances, net capital outflows and stagnating or declining GDP. • The crisis requires a proper policy response from CIS governments, the International Monetary Fund and the EU. The Russian-Ukrainian conflict in Donbass requires rapid resolution, as the first step to return Russia to the mainstream of global economic and political cooperation. Beyond that, both Russia and Ukraine need deep structural and institutional reforms. The EU should deepen economic ties with those CIS countries that are interested in a closer relationship with Europe. The IMF should provide additional assistance to those CIS countries that have become victims of a new regional contagion, while preparing for the possibility of more emerging-market crises arising from slower growth, the stronger dollar and lower commodity prices.
Ukraine: Can Meaningful Reform Come out of Conflict?
Apart from threats to its national security and territorial integrity, Ukraine faces serious economic challenges. These result from the slow pace of economic and institutional reform in the previous two decades, the populist policies of the Yanukovych era and the consequences of the conflict with Russia.The new Ukrainian authorities have made pro-reform declarations, but these do not seem to be supported sufficiently by concrete policy measures, especially in the critical areas of fiscal, balance-of-payment and structural adjustment. Also, the international financial aid package granted to Ukraine has not been accompanied by sufficiently strong policy conditionality.Ukraine urgently needs a complex programme of far-reaching economic and institutional reform, which will include both short-term fiscal and macroeconomic adjustment measures and medium- to long-term structural and institutional changes.Energy subsidies and the low retirement age are the two critical policy areas that require adjustment to avoid sovereign default and a balance-of-payments crisis.IntroductionSince the end of 2013 Ukraine has faced a series of dramatic geopolitical, domestic political and economic challenges. First, there was mass protest in Kyiv’s central square against former president Viktor Yanukovych after he declined to sign an association agreement with the European Union. After collapse of Yanukovych’s regime, the internal Ukrainian conflict became internationalised with the illegal annexation of Crimea by Russia, and Russia’s active role in a ‘proxy’ war in the Donetsk and Lukhansk regions.For this reason, international attention is concentrated on geopolitical threats and the violation of Ukraine’s territorial integrity. The geopolitical and security challenges are also at the top of the agenda for the new president and government of Ukraine. As result, the economic situation and economic reform are less prioritised, domestically and internationally. However, pressing economic questions must also be addressed. The unsatisfactory results of previous reform rounds were very much responsible for the recent political crisis and the fragility of the Ukrainian state. Most importantly, successful economic and institutional reforms are critical for attempts to consolidate both state and society and to prevent any new authoritarian drift.The new Ukrainian authorities have made general pro-reform declarations, but these do not seem to be supported sufficiently by concrete policy measures, especially in the critical areas of fiscal, balance-of-payment and structural adjustment. The same must be said about the international financial aid package granted to Ukraine in April and May 2014, which has not been accompanied by sufficiently strong policy conditionality.History of half-hearted reformThe recent developments in Ukraine are not the first time since independence in 1991 that the country has found itself at a critical juncture. In 1991-92, under Leonid Kravchuk’s presidency and on a wave of independence enthusiasm, Ukraine had the chance to build new democratic and market institutions as was done, for example, by the Baltic countries. Unfortunately, all the political energy went to giving old Soviet institutions ‘new’ Ukrainian names. The macroeconomic and social populism of that period led to hyperinflation at the end of 1993.After Leonid Kuchma’s victory in the 1994 presidential election, some market reforms were finally enacted - most prices were liberalised, the exchange rate system was unified, subsidies and the fiscal deficit were reduced (but not eliminated), the issuing of money was brought under control and, finally, a new currency, the hryvna (UAH), was introduced in September 1996. This half-hearted reform process was stalled by a coalition of emerging oligarchs – the early winners from partial liberalisation and the macroeconomic disequilibria of early the 1990s, and the beneficiaries of various rents created by them – and old-style ‘red’ directors in industry and agriculture.The next reform push came after the financial crisis of 1998-99 and Kuchma’s re-election in 1999 alongside Prime Minister Viktor Yushchenko, the former governor of the National Bank of Ukraine. There was some fiscal adjustment, reform of the management of public finance and attempts were made to restructure the loss-making and heavily corrupted energy sector. However, the political life of Yushchenko’s government was short (17 months) and it was soon replaced by a government that was again dominated by ‘red’ industrialists and oligarchs.After the Orange Revolution at the end of 2004 and Yushchenko’s election as the third president of Ukraine, there was a political window of opportunity to start serious political, institutional and economic reform. Unfortunately, this was prevented by a political split inside the ‘Orange’ camp, in particular, the permanent political infighting between Yushchenko and twice Prime Minister Yulia Tymoshenko (2005 and 2007-10).
The Use of Qualitative Information in Macro-Economic Policy Analysis
The majority of macro-economic policy models takes for granted that conflicts among objectives can be assessed by means of a tradeoff analysis. Such tradeoffs imply that sacrifices and benefits of various impacts of decisions can be measured on a cardinal scale, so that a conventional macro-economic utility or welfare analysis can be applied.