On January 11 something called the Global Intelligence Update
(I have no idea who or what they are) published a red alert claiming that
this year (or next) Ukraine will make front page news as economic necessity
forces it to join Russia and Belarus in recreating the "virtual planet"
that was the USSR. While they are probably wrong, a number of their arguments
are disturbing and valid. The country really is an economic basket case
with no way to pay off its debts, but joining Russia would be like getting
a blood transfusion from an AIDS patient. It might solve the immediate
problem, but with fatal consequences later on.
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.






