Beggar thy Ally: The Sad Results of Ukraine’s Economic Relationship with the West

Before the Russian invasion of Ukraine began, I got into a debate with a friend about what Putin was up to and the reasons for it. I thought I had good reasons to be skeptical that he was actually going to invade, which are outlined here but my friend proved right on that score. But I remember at one point he told me, “The Ukrainians want to be part of the EU and Putin wants to stop that.” As always, I think it can be difficult to tell for sure what any people wants, especially those with a long history of being divided by religion, culture, language, region and politics, like the Ukrainians. But there’s no doubt enough Ukrainians desired closer economic ties to Europe to spark the 2014 Euromaidan protests, in response to President Viktor Yanukovych’s decision to back away from an agreement with the EU, which later contributed to his downfall.

But the truth is, even at that point, Ukraine already had an extensive record of economic relations with the EU and the United States, dating back to the time it declared its independence from the Soviet Union in 1991. Andrea Peters of the World Socialist Website has recently done an in depth, 2-part study of this history, which you can read in its entirety here. The following article will summarize Peter’s findings.

As measured by GDP per capita, Ukraine, with 44.13 million inhabitants, is the poorest or second poorest country in Europe, after Moldova with about 2.6 million people. The bottom 50 percent of Ukraine’s population gets just 22.6 percent of all the country’s income and 5.7 percent of its wealth. The top 10 percent own nearly 60 percent of Ukraine’s net personal assets, according to the World Inequality Database, which has been put together by Thomas Piketty and other experts on global inequality. In 2018, Ukrainian households’ average net savings stood at minus $245. Median household income in Ukraine is around $4,400 a year, about on par with that of Iran, whose economy has been operating under crushing sanctions for years.

According to Peters, Ukraine’s own Institute of Sociology reports that the typical family spends 47 percent of its total income on food and another 32 percent on utility bills. In 2016, nearly 60 percent of people were poor according to government standards, including 60 percent of kids. That poverty rate dropped to “only” 37.8 percent in 2019. The UN Food and Agricultural Organization found that in 2020 15.9 percent of Ukrainian children under 5 were malnourished, and in 2019 17.7 percent of women of reproductive age were anemic, a condition caused by lack of iron in the diet. That number has been steadily rising since 2004. Twenty-four percent of the population is obese.

Peters tells us that all this and more, “is a direct outcome of economic policies imposed on the country by the very states that today parade around declaring their love for Ukraine.” From the time of independence, well into the 2000s and 2010s, Ukraine received 10 loans from the International Monetary Fund (IMF) and the World Bank. The terms of these loans centered around a 1994 “Memorandum on Questions of Economic Policy and Strategy” signed by Ukraine and the IMF that, according to economist Yuliya Yurchenko, author of the 2018 book, Ukraine and the Empire of Capital, “effectively limited Ukraine’s government decision-making power.”

Lenders demanded that the government in Kiev end policies that created obstacles for foreign trade, eliminate price regulations, reduce the state budget deficit, cut subsidies to “unproductive” industries, make manufacturing outlets more competitive by modernizing their plants and laying off workers, privatize more state-owned property, cut budgetary expenditures by targeting social programs and pensions, and impose value-added taxes such that the collection of money from sales would fall more heavily on consumers as opposed to business.

Peters explains:

While these processes have accelerated and/or slowed down at times depending on whether the administration in Kiev has been more US- or more Russian-allied, every Ukrainian government has been a partner in implementing the demands of global capital. Having emerged out of the ashes of the great barbeque that was the breakup of the Soviet Union, the ruling class of Ukraine is a comprador class in the most complete sense of the term.

In 1998, for instance, Ukraine’s parliament granted President Leonid Kuchma the authority to impose a 30 percent reduction in government expenditures. This was done because the IMF told the country to do so. “In addition to meeting fiscal and monetary targets, the government must pass legislation on privatization, tax reform, energy and agricultural sector restructuring, and flushing out its massive ‘shadow economy,’” observed an August 1998 article in the Financial Times. Ukraine’s debt continued to balloon over the course of the coming years, increasing from $10 billion in the period from 1997–2002 to $100 billion in 2008–2009, the equivalent of more than 56 percent of the country’s GDP and more than double the total value of all its exports at that time. While it has fluctuated in recent years, it is basically at the same level today as it was a decade ago.

Yurchenko noted, “[O]mnipresent lawlessness were damaging for foreign relations, political and trade. Western investors from the USA, the EU and particularly Germany (Ukraine’s strongest EU-ization backers) became ‘disenchanted with the country.” Still, they salivated at the prospect of getting access to tens of millions of consumers and wage-labor that was cheap and skilled. According to Yurchenko, “In a personal interview with the Corporate Europe Observatory think-tank, the former Secretary General of European Roundtable (ERT), Keith Richardson, said that the demise of the USSR was as if they ‘have discovered a new South-East Asia on the [EU] doorstep.”

Concerned not just about the loss of potential investment opportunities in Ukraine but also the geopolitical future of the country, the United States and Europe responded. First, a whole number of business associations and advisory groups — American Chamber of Commerce (ACC), Centre for US-Ukraine Relations (CUSUR), US-Ukraine Business Council (USUBC), the European Business Association (EBA), and the Centre for International Private Enterprise (CIPE) — were either created or mobilized for the purposes of, in the words of the EBA, “discussion and resolution of problems facing the private sector in Ukraine.”

Over time, the lobbying groups and advisory councils, according to Yurchenko, collectively got their hands into all of the following areas of Ukrainian governance; the “reduction of state control over economic activity and marketisation alike”; the “simplification of import and export procedures, harmonization of regulations with the EU in IT and electronics sector, revoking of medication advertising ban, creation of State Land Cadastre in preparation for land privatization, simplification of market entry for pharmaceutical and insurance companies from the EU”; and “market reform; fiscal and tax policy; banking and non-banking financial institutions and capital market.”

Furthermore, being housed in government agencies, these groups did not just make suggestions as to how Ukraine ought to transform its economy, they were involved in the drafting of law and strategy documents laying out state policy. As Peters notes, “In short, there is not even one degree of separation between Ukrainian governance and Western corporations, financial interests, and state power.”

As part of the process of making Ukraine’s economy “more competitive,” the IMF and the EU have demanded the raising of the retirement age, the ending of fuel subsidies that enable households to afford to heat their homes and cook their meals, and the selling-off of the country’s highly profitable timber and agricultural lands. The latter in particular has been long sought, as Ukraine has 25 percent of the world’s “black earth,” some of the most naturally fertile soil in the world.

Just like when such “neoliberal” policies are forced on other areas of Europe, like Greece or even in the United States, they are extremely unpopular with ordinary people. Polls have found that 70 percent of Ukrainians were upset about the growth of inequality, 58 percent about job loss, and 54 percent about “interference of western countries in the governance of Ukraine.”

In the current environment, it’s easy for Western media to dismiss all of this history as nothing but “Russian disinformation” and why wouldn’t the Russians use it for their own purposes? But none of this makes it any less truthful.

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