Economy
4:56 am
Fri March 7, 2014

Ukraine's Economy Was In Trouble Before Its Crisis With Russia

Originally published on Fri March 7, 2014 11:39 am

Transcript

DAVID GREENE, HOST:

On a Friday, this is MORNING EDITION, from NPR News. I'm David Greene.

LINDA WERTHEIMER, HOST:

And I'm Linda Wertheimer.

President Obama and Russian President Putin have had another long telephone conversation about how to end the crisis in Ukraine. The White House says President Obama stressed that a diplomatic solution is possible, but Russian soldiers have to leave their current positions in Crimea and return to their base in the region.

GREENE: The Kremlin released a statement saying that Russia is answering calls for help from Crimea. The Kremlin says the new officials who took over after President Viktor Yanukovich was ousted are illegitimate. Now, that fragile new government in Kiev had asked the Organization for Security and Cooperation in Europe to send unarmed military observers into Crimea to get their take on the situation. According to Poland's defense minister, the delegation yesterday was blocked by unidentified men in military fatigues.

WERTHEIMER: Western efforts are continuing to help stabilize Ukraine. The European Union says it's ready to give $15 billion in loans and grants. Even before the current crisis over Russia, Ukraine was facing massive debt and a stagnant economy.

NPR's Jim Zarroli looks at how Ukraine got into so much trouble.

JIM ZARROLI, BYLINE: After the collapse of the Soviet Union, a lot of people had high hopes for Ukraine. It had a solid manufacturing base, and its agriculture sector was so strong, Ukraine was sometimes called the breadbasket of the Soviet Union. Today, it's more likely to be called an economic basket case.

Steven Pifer is a former U.S. ambassador to Ukraine.

STEVEN PIFER: In 1990, 1991, if you looked at gross domestic product per capita in Poland and Ukraine, they were about even. If anything, Ukraine was a little bit ahead. Today, gross domestic product per capita in Poland is three times what it is in Ukraine.

ZARROLI: Pifer says several things have gone wrong in Ukraine.

PIFER: One is huge corruption. The estimate is that former President Yanukovich and the group around him stole billions of dollars. It just disappeared from the state budget.

ZARROLI: In addition, Ukraine never quite recovered from the global financial crisis. It used to sell a lot of steel and agricultural products, then commodity prices fell. Ukraine today is deep in debt, and investors are rushing for the exits. Its currency is falling, and interest rates on its debt have soared.

RAJAN MENON: There's only one country that's performed worse, and that's Venezuela. That tells you something.

ZARROLI: Rajan Menon is with the Powell School of Government at New York City College. He says Ukraine's government responded to the downturn by borrowing heavily. Now it can't pay back what it owes.

MENON: So, bottom line, they owe more than they have, and Turchynov, the new interim president, has said they need $35 billion in two years, and that they're hovering on the brink of default.

ZARROLI: In December, Moscow promised to lend Ukraine's pro-Russian government $15 billion. Now that the old government has been replaced by a less-friendly one, Russia isn't likely to be as generous, says Alex Brideau of the Eurasia Group.

ALEX BRIDEAU: The political crisis in Ukraine has made it unlikely that that Russian support will continue. So now we're at the point where a new government is reaching out to the IMF and to Western governments to get the kind of financial support that they need.

ZARROLI: But the crisis leaves the West in something of a quandary. It's anxious to help Ukraine's new leadership survive. And a full-blown economic crisis could push the tottering government over.

BRIDEAU: You have a government that has barely sunk roots yet, and it's facing revolt and rebellion and a Russian incursion, shall we say. And at the same time, if it's called upon to take tough economic austerity measures, it's really caught in, if not a perfect storm, then certainly something of a storm.

ZARROLI: IMF officials have been pressing Ukraine for years to make economic reforms, like cutting the generous energy subsidies it gives its citizens. And Ukraine has a rather poor record of following through on its promises. IMF managing director, Christine Lagarde.

CHRISTINE LAGARDE: It's obviously it's an economy that has to reform, that has to adjust. And where, as authorities have said, hard decisions need to be made and implemented.

ZARROLI: To former Ukraine ambassador Steven Pifer, the new government is making all the right noises about reform.

PIFER: The expectation is that if they do that, within a year or two, they can actually get the economy in a much better place where they can begin to realize some of the huge economic potential there is there.

ZARROLI: A bailout would allow Ukraine to pay back some of its creditors. Ironically, that includes Russia, which is owed a lot of money for natural gas it shipped to Ukraine.

In the current standoff with Russia, the U.S. and its allies may have little choice but to funnel aid to Ukraine, even though some of the money may end up getting passed on to Russia itself.

Jim Zarroli, NPR News. Transcript provided by NPR, Copyright NPR.