The course events took last week is another proof of what was stated this spring: the financial crisis gripping Ukraine is, in fact, a crisis of confidence.
In April 1998, a team of German consultants invited by the Cabinet prepared a memorandum, noting, among other things, that the reason for the crisis (starting in October 1997) was not what was happening in Asia or the stabilization policy underway over the past several years, but the “cessation of structural reforms and the attendant loss of confidence by domestic and foreign investors in the nation’s currency’s stability and favorable prospects in terms of economic policy.” Somewhat later, the Ministry of the Economy categorized these findings, proposing the only logical way out of the deadlock: “Overcoming the crisis in individual spheres – the fiscal, monetary, or corporate sector – is becoming impossible; urgent institutional transformations are needed.” The President promptly responded with his series of “summer edicts” supposed revive confidence, but to all appearances the response was too late and now is in doubt.
The Cabinet’s official stand boils down to blaming Russia for Ukraine’s troubles. In reality, this means resuscitating last year’s formulas when the stock market avalanche was attributed to the Asian crisis. At the time the National Bank managed to suppress the panic, but no one can be sure that the same will happen this fall. Last week’s battle for people’s confidence, if it continues to rely on the wrong premises, is not likely to end in the government winning. Why? Because the measures underlying the Cabinet’s anti-crisis program are local and short-term; because dubious investors await a serious analysis of the crisis, rather than complaints about low national self-concept; because the currently Cabinet is accused of condoning the crisis due to its incompetence; and finally because today’s political system prevents the making of decisions capable of counteracting the crisis. Put together, this makes one wonder about the government trying to gild the rose, simply because they are totally confused in understanding what has happened or what to do about an economy slipping out of their control. Here the question arises: why not just tell the truth? And let the people, especially those with money, decide whether or not the authorities know a way out of the crisis. For truth of this scope can never be concealed for long. And people would be more likely to help their country if they knew that they were not being lied to.
So what is the Cabinet doing or going to do in the next few days? To begin with, it dawned on the executive only last Saturday that, in addition to overripe internal problems, they will have to cope with those imported from Russia. Several days later the Anti-Crisis Program appeared, a document subject to permanent updates. A final version might be published later, but for the time being the general public has to be content with rumors and statements made by the bureaucrats.
Deputy Premier Serhiy Tyhypko says that the guidelines of the program (developed by the Cabinet-NBU work group) include rationalization of the budget, specifically measures to increase budget revenues, reduce expenditures, and improve budget administration. It is further planned to take a series of measures relating to export-import transactions and meant to protect Ukraine against financial crises in neighboring countries. Among other things, barter restrictions may be lifted, the list of indicative prices shortened, and customs bureaucratic export barriers removed. At the same time, certain import barriers will be put in place: canceling import tariff exemptions, reducing the list of critical import goods, imposing more tariffs, increasing the excise tax (including a 3% Russian import markup, in retaliation for the Russia’s moves), etc.
One gratifying aspect about the program is that its authors apparently realize that the economic situation cannot be brought back to normal without easing the tax burden on primary producers, and that this is the underlying condition for reviving the economy. For the time being no one knows how this facilitation will be made up for, because the problem is not likely to be solved by simply altering the tax rate. Another positive aspect is that the authorities intend to cancel payment priorities and Card Index No. 2, while simplifying the procedures for sale of commodity supplies. Talking of top priority anti-crisis measures, absolutely every decision made by the National Bank over the past three weeks deserves special note. They have resulted in lowering dollar demand and raising the national currency’s value. There is also a steady trend of forming several currency exchange rates, due to the fact that dollars cannot be purchased on the official market. On the black market this rate ranges Hr 3-3.80 to the dollar.
Talking of rumors, the talk of the town is the forthcoming institution of price controls on goods of basic necessity, food and gasoline, indexing wages, salaries, and pensions, and a new monetary emission to cover unforeseen contingencies, along with partial introduction of dollar transactions in daily turnover. However, the latter scenario is pure hearsay. NBU remains silent on the subject. Also, people are actively discussing last week’s intensified supply shortage of dollars. There is a very likely possibility that the forgotten fear of losing savings will prompt the populace to take steps most unwelcome to the authorities. Costly imported goods that are above competition today may well be in more demand tomorrow. Evidence of this is the outflow of funds from deposit accounts starting August 27. Unless growing deposit rates stop this process, the hryvnia supply will bypass the closed foreign currency exchange booths and pour out onto the commodity market.
In other words, we are back to where we started: believe it or not. It’s up to you.






