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Where there is no law, but every man does what is right in his own eyes, there is the least of real liberty
Henry M. Robert

Failure to Foresee the Crisis is Reason Enough to Retire the Whole Leadership

13 November, 2012 - 00:00
Photo by Valery Miloserdov,The Day: YEVHEN MARCHUK

Russia’s financial crisis is a very serious lesson and serious test for Ukraine’s political leadership, namely the President and government. In essence, this lesson boils down to the fact that nothing can be kept secret in the economy, just as nothing in nature can remain unknown forever. Some Russian politicians believe an inherent part of the crisis was the staggering sum spent in the previous presidential campaign. I think that this is a grave warning to all those planning to use the government machine (particularly its financial resources) in the 1999 presidential marathon. No matter how hard they will try to mask this, everything will become clear.

Artificially supporting the hryvnia is a temporary measure that will inevitably lead to a serious breakdown, and the Russian experience shows that it may well result in a political crisis. Ukraine, however, does not seem to be taking Russian events seriously enough.

In addition, going through the motions of reforms will sooner or later show them for what they really are, a sham. At a certain stage we will have to assess politically the performance of our leaders who are bringing this country to the verge of such cataclysms. In fact, that time has come. We have heard so much about our being truly independent and that this independence is political and, to some extent, economic. The Russian crisis shows that our independence is in many respects illusory. On the other hand, attempts are being made to attribute our problems to the Russian financial crisis, because this is so very politically convenient. It is clear, however, that quite a number of problems existing in Russia are also apparent in Ukraine. Take the domestic government bonds pyramid. Of course, banks can be convinced to convert these bonds into other securities with longer periods of maturity, but anybody who knows anything realizes that this is just another way to freeze the funds the banks entrusted to the government when they bought the bonds. Another word for this is confiscation. Of course, this can never stimulate the banking system. Once again the business world saw that gambling on domestic bonds was too risky. Restoring confidence in this type of loan and in the Ukrainian currency in general will take quite some time.

It is possible that our financial crisis does not as yet have such disastrous consequences as in Russia, especially in the political sphere, but it is as harsh on the Ukrainian economy and especially on a man in the street. Considering that the prices of basic necessities have grown by 20-30% over the past three weeks, this has to be considered as a political factor. Public confidence in the President and government who failed to protect them against another decline in living standards has fallen substantially. Messrs. Yushchenko, Tkachenko, and, naturally, the Presidential Administration are trying to convince us that this crisis could not have been possibly foreseen. Mr. Yushchenko even said that it was as unpredictable as death. I would agree if this crisis had started in Ukraine and then swept across the world. Well, we are not in Indonesia. Such explanations are meant for the naive. We witnessed the devastating crisis in Southeast Asia, and everybody realized that it would affect Russia. Yet in Russia this crisis remained dormant for over six months. The Ukrainian government proved unable to foresee the elements of this crisis that would hurt the Ukrainian financial system and this is reason enough to retire the government.

People claiming that a crisis 70% caused by internal reasons was impossible to foresee are even more hypocritical. How could it be that no one at the NBU, Presidential Administration or Cabinet saw the approaching devaluation of the national currency? Wasn’t it perfectly clear that the domestic government bonds pyramid could topple any moment? Didn’t the President say at a Cabinet meeting that he would “deal with that pyramid personally”? Was this a factor brought in from Russia or Indonesia?

The ongoing crisis makes people lose confidence in the political system as a whole. They no longer distinguish between the branches of power. Many associate all their troubles with the President. Now trying to present economic edicts as acts of heroism is also hypocritical. It is like trying to play on people’s heartstrings.

Now we all can see how awkward and sluggish our economic and political systems are. When Russia turned into a volcano Ukraine’s entire system kept silent or fed us soothing tales. We celebrated personal and official jubilees, watched parades and fireworks. Of course, panic had to be avoided at all cost. But then the new Parliament raised the issue at its opening session, saying the situation had to be analyzed and steps taken to avert the crisis. The government should have taken urgent steps within 48 hours after the volcano erupted in Russia. Instead, the discussions lasted a whole week. The anti-crisis package was submitted to Parliament only on September 7. Ninety-nine percent of the measures were within the Cabinet’s, NBU’s, and President’s competence. In other words, all these proposals could have been made, submitted, and approved two weeks ago, better still on Independence Day, and they would have had much greater positive effect. When faced with such a crisis, hours count, not days.

The consequences of Ukraine’s internal crisis are all ahead. One can only hope that the worst forecasts will never come true, but negative processes are underway and gaining momentum. The keenest criterion of the financial situation was the way people responded. The government did not index incomes. Today’s prices are up while wages and pensions remain the same. The Cabinet declared the need to carry out such indexation but made no move to do so.

Now that Parliament has had its say, the government can take all the required steps independently. However, unless the legislature finds out what was actually behind this crisis we may be faced with another far more destructive crisis, the more so if the government continues to use palliatives rather than radical therapy. The thing is that all the anti-crisis measures are not reformist but fiscal and confiscatory.

Needless to say, the Ukrainian and Russian crises will strain bilateral economic relationships. Ukraine is to pay Russia under a number of liabilities this October, and the Russians are not likely to agree to any restructuring. Russia has imposed a 3% import duty on some Ukrainian goods. Serhiy Tyhypko says we should reciprocate. In other words, Russia’s and Ukraine’s interests will be mutually exclusive as each country will want to reduce imports and increase exports to a maximum. Now I am not so sure that the Presidents will meet in Kharkiv as planned.

Under the circumstances I would like to draw the reader’s attention to the campaign of blaming everything on Russia. First, this is not true; secondly, this helps disguise the true reasons behind the Ukrainian crisis; thirdly, this will lead astray all those trying to find a way to change the situation drastically; and, fourthly, this will certainly not foster improvement of the Ukrainian-Russian relationship.

On the other hand, the Russian crisis has in a very serious way posed the question of the prospects of the CIS, of integration centers in Eastern Europe, European and regional stability balance, and Ukraine’s role in the new situation. But this will be a separate article.

 

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