Wednesday, 18 December 2013

Ukraine December 2013

I have just returned from a few days in the Ukraine, with my wife who was a Ukrainian Citizen, we travelled to see her family in the city of Nikolaev.

I have been to the Ukraine many times before, my wife actually owns property there. It is a very interesting country and certainly very different to Western Europe and also Eastern Europe, both of which i have travelled to extensively. The last time that i was in Ukraine was in 2004 during the Orange Revolution this was a period of great hope for the future. I was actually living in the country at the time.

This hope was wasted, the major political players behind the Orange Revolution preferred to line there own pockets rather than genuinely try and reform and move the whole country forward, it was a great opportunity that was squandered. One of the very major problems that i observed first hand during the election process that gave birth to the Orange revolution was the monstrous divide between the pro European west of the country and the eastern pro Russian part of the country. In the West Viktor Yuschenko the leader of the Orange revolution was polling 80% to 95% of the vote. However in the east of the country Viktor Yanokovich was also polling 80% to 95% of the vote. My immediate thought is that with such political polarisation this was going to be a very difficult country to manage.

During my time living in the Ukraine in 2004 the other things that struck me was the appalling state of nearly all the infrastructure. The centres of the large cities are ok, but travel a few metres away from the centres and it rapidly falls apart. It was obvious that the Ukraine had a desperate struggle against time to turn its economy around so that it could fix its ailing infrastructure.

Natural gas in the west has always been seen as a valuable resource, our infrastructure and homes are built around this obvious fact. A legacy of the old Soviet Union is that Gas was regarded as a virtually free resource, this was true of all energy in general. So homes were not designed to be in any way energy efficient, add this to a failing communist economy and it means a terrible standard of home construction, in particular apartments where the vast majority of the population actually reside.

These homes are very energy inefficient, the country has a cold winter climate and therefore a voracious appetite for gas. The problem is that with the collapse of the Soviet Union gas is no longer free it is very expensive. The European free market wholesale rate today is $1096 per Thousand Cubic Metres. The Ukraine has been paying a "Special" rate of $410 per Thousand Cubic Metres. The state owned gas company Naftogas then charges the Ukrainian people a rate of just over $120 per Thousand Cubic Metres used. The massive losses are simply added to the Naftogas balance sheet, it currently has a $21 billion debt and growing rapidly on a daily basis. This is inevitable when you only charge the end user 29% of the actual wholesale price that Naftogas is being charged, and only 11% of the true free market price.

This problem was compounded for many years, by weak collection of gas bills due, and an acceptance and understanding by the population that Gas and energy were still basically free. This has somewhat changed as collection policies are far more aggressive and the population because of the cost pressures economise.

However they are trying to do this against a legacy of poorly designed, poorly built, ageing, and fuel inefficient homes. This means that the Gas price is a major political problem for any politician, which is why the ongoing gas problems of the Ukraine refuse to go away.

The other major problem in my opinion is that the majority of eastern European countries were desperate to throw off the yoke of the Soviets and Communism. They genuinely wanted there own independent and European future, which is why they so quickly embraced NATO and the EU.

Russia did not see itself and with a lot of justification as another economically small European country, they see themselves as being DIFFERENT and a counterweight to the EU, and China and the USA. To add gravitas to this belief they are trying to form a new kind of Soviet Union, which will include amongst others the Ukraine. However at this point we run straight back into the problem of the Russian east of the Ukraine being for this, and the Nationalist west of the country being very much against this.

The problem with Russia being DIFFERENT is that this difference does not really translate into a viable economic reality. Outside of the two major cities Moscow and St Petersburg where the wealth of the country has been concentrated, the infrastructure problems are acute and similar to the Ukraine. The other major problem is that the wealth that is so concentrated in Moscow and St Petersburg is largely from resource extraction, this valuable natural gift is being squandered with very few benefits for the majority of the ordinary Russians.

I am very doubtful that with the current Russian/Ukrainian way of managing economic and business affairs, both countries will be incapable of solving there acute infrastructure problems, and also moving the general standard of living for there people forward, and not just a small minority who live in Moscow, St Petersburg or Kiev. I just do not see this happening, for the average person i see at best stagnation and in reality a worsening of an already dire situation.

This situation is compounded as the people in positions of power. Politics, Economics, Education, Business are of an age and a generation that grew up under communism.They think and act like the old communist bosses. It really is a situation for the future of the Ukraine, of the blind leading the blind. So much of the culture is also still ideologically aligned against capitalist success and the modern interconnected world that the Ukraine now lives in. You feel that they really want to do it all there way, but there way cannot and never could actually work. To paraphrase Obama it really is time for change, different thought patterns, and an understanding and acceptance of reality, and new younger blood not tainted with a communist past.

It also seems that the USA has lost interest in the Ukraine as has the EU and the IMF. This is largely because of so many broken promises, and a general failure to meaningfully move forward. Because the Ukraine's economic, infrastructure and political problems are so large, it looks to me as if they are now taking the viewpoint over to you Vladimir Putin?

Today it looks as if Yanokovich and Ukraine have signed a "deal" with Putin and Russia. The reality is that he had no choice, time had run out for the Ukraine. Gas bills and Debt payments need to be paid, and the country is desperately short of foreign currency to actually pay these bills, so the time was now.What will be very interesting to watch will be the reaction of western Ukraine to this "deal" if the protests fizzle out over the coming months, then Ukraine will be integrated further into Russia.  

Do i feel that Ukraine would have been better served with an EU solution?. For the average Ukrainian YES. The EU is an organisation that has plenty of its own problems, but at least it has the basis for a more just, honest and prosperous society for the Ukraine, IT PROVIDES THE BASIC TEMPLATE.

I simply feel that the natural Russian and Ukrainian way of doing business and understanding of economics is very limited, somewhat crude and simply does not work very well, so much of the culture is still based in the communist past. This is why considering both countries large size and large and diversified natural resource bases, they always seem to languish in the international business and economic league tables. They are serial under performers, in particular the Ukraine.

Looking at the GNI or Gross National Income per Capita on a purchasing parity basis, we see

USA            $50,610
EU Average $34,519
Russia          $22,720
Poland         $22,162
Ukraine        $7,300

Or actual size of economy's by GDP ( GDP is not a good statistic, please see my previous blog, but in this instance it is a relative statistic)

USA         $15,684  Billion
EU            $16,690  Billion
Russia       $2,022    Billion
Poland       $489      Billion
Ukraine     $176      Billion

I use Poland as an example because it has many similarities with the Ukraine geography,climate,culture and recent communist history. Its size is 304,000 Square Kilometres and it has a population of 38 Million People. Ukraine is 603,700 Square Kilometres and has a population of 45 million.

However using the EU template as opposed to the Russian template it has dramatically outperformed the Ukraine, and despite not having Russia's vast size and resource's has a standard of living for the average Polish person, nearly identical to the average Russian. I would also suggest that in Poland the wealth is also far better spread across the greater population, rather than some billionaire oligarchs, and concentrated wealth in Moscow and St Petersburg and near poverty elsewhere.

To conclude, i am not very hopeful for the future of the Ukraine to many opportunities over the last 20 years have been squandered. The West has largely given up on the Ukraine, which only leaves Russia, but i just do not see Russia providing a viable solution and workable template that will move the Ukraine forward.  

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