Sunday, March 1, 2009 2 comments ++[ CLICK TO COMMENT ]++

Ukraine on the verge of collapse

Despositors line up outside a bank in Ukraine
(Photo by Joseph Sywenkyj for The New York Times)


Steel and chemical factories, once the muscle of Ukraine’s economy, are dismissing thousands of workers. Cities have had days without heat or water because they cannot pay their bills, and Kiev’s subway service is being threatened. Lines are sprouting at banks, the currency is wilting and even a government default seems possible.

...


At a branch of the Rodovid Bank across town, a tense crowd gathered Friday morning. The bank, close to failing, was allowing withdrawals of only $35 a day. And so people, some of them pensioners fearful for their life savings, have been trooping each day, ever more aggravated, to try to get what they can.

“Every day we come here — it’s insulting — in the cold and line up,” said Alevtina A. Antonyuk, 58, an engineer. “They are nothing at this bank but a bunch of thieves.”

Who is to blame, she was asked. Before she could answer, Dmitri I. Havrilkiv, 78, a retired crane operator, interrupted.

“The government has to be replaced,” he shouted. “They just can’t handle it!”


(source: Ukraine Teeters as Citizens Blame Banks and Government, by CLIFFORD J. LEVY. The New York Times. Published March 1, 2009)



I do not think it is an exaggeration to say that America and Europe have lost their influence over Ukraine. The current government looks like it has little chance of surviving for long. And it is likely that Ukraine will under the influence of Russia pretty soon, especially if the pro-Russian opponent, Viktor F. Yanukovich, gets elected next year (or sooner.)

As is obvious by now, Eastern Europe is the 1990's version of East Asia. The problems and their cause are quite different but the end result will probably be similar, with a lot of suffering, governments being kicked out, and capitalism being blamed yet again. If the script were to follow the 1990's then some speculators will be blamed as well. Back then it was George Soros and all those currency traders, now I'm not sure.

Similar to the problems faced by the Asian Tigers in the late 90's, a serious mistake seems to have been made in borrowings of a foreign currency. I'm not sure how bad the foreign-denominated debt situation is in Ukraine but it is clearly causing problems elsewhere (such as Latvia, Romania, and Hungary.) Similar to the late 90's in Asia, the debt really hits one hard when the local currency collapses. The New York Times article details the plight of indebted truck drivers: "On the city’s outskirts, more than 200 tractor-trailer rigs were parked Thursday, their drivers threatening to block roads if the government did not help them with their debts, which they said were caused in part by the drop in the value of Ukraine’s currency, the hryvnia."

I don't know about trucking in Ukraine but I suspect the truckers are entrepreneurs who purchase trucks on debt. Even if the debt wasn't foreign, deflationary forces will crush debtors if the revenue from their business declines.

The positive from all this is that Eastern Europe will likely be much better off in the future, once they get through the crisis. East Asia sufferred terribly in the late 90's but their governments, as well as businesses, operate much better these days. I suspect debtors in East Asia try to limit their foreign borrowings these days.

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2 Response to Ukraine on the verge of collapse

contrariandutch
March 2, 2009 at 3:32 PM

East Asia back in 1997 could export it's way out of trouble in a strongly growing world economy. No such luck for central and easterne europe (CEE) now. Also, East Asia was politically more stable then CEE now. This reuires fixing pronto before the political fallout becomes uncontrollable. Meanwhile the ECB and EU leadership prove themselves completely clueless and the short euro position is looking ever more attractive.

Sivaram
March 2, 2009 at 10:33 PM

I don't know if the EU has hte resources to bail out those Eastern European countries. Many of the past crises, including the Asian Financial Flu, involved the IMF or World Bank providing funding.s Right now it seems that only Germany and maybe France have money. Even then, it's questionable, given how some German banks seem to be in trouble and might need govt help.

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