Virtual Realities

Last June Clifford Gaddy and Barry Ickes at the Brookings Institution described Russia's "Virtual Economy," which pretends that the economy is bigger than it really is, allowing for more government than Russia can really afford and allowing manufacturers who actually destroy value to pretend they are adding it. Ukraine's economy is thoroughly infected with the Russian disease, and neither is going anywhere anytime soon. Outside aid merely props up a system that is nonviable in principle. The Brookings experts conclude that the best thing would be to cut off aid to an economy addicted to borrowing and let the Russians (or Ukrainians) realize the cost of the model they seem to have chosen. "Denying Russia a bailout is not without risks," they wrote, "But bailing out the Virtual Economy is sure to increase those risks for the future." That goes double for Ukraine.

Ukraine indeed could fall back into the "fraternal" embrace of Mother Russia. No one will deny the strength of that temptation. However, it simply cannot work. The virtual economy model adopted by most post-Soviet republics is inherently and perpetually hemorrhaging value. Such an economy cannot help but constantly contract, making people progressively poorer. Until local decision makers wake up to the fact, things cannot even start to get better.