Ukraine Is Ripe for the Shock Doctrine

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Ukraine Is Ripe for the Shock Doctrine

Like many states in crisis before it, Ukraine serves as a perfect opportunity for neoliberal transformation.

Ukraine President Petro Poroshenko sitting with IMF Chief Christine Lagarde at the World Economic Forum earlier this year at Davos. (Photo: Reuters)

While a crisis of faith, of sorts, has resounded in western discourse on the economic effectiveness of austerity, this scepticism, rather ironically, dissipates when you cross over into the remnants of the Iron Curtain.

Neoliberalism’s flagellants reside east of the Elbe. There, ideological purity remains, if not redoubled. Former patients of shock therapy are now its most devoted converts. This was not only demonstrated by Estonian, Latvian, Lithuanian, Slovak, and Polish officials’ unyielding support for ‘tough reforms’ in Greece, but the general lack of sympathy among their populations for the Greek people. Past shock therapies have left them numb, docile, and inured to the calamities of neoliberal logics.

The neoliberal faith is expanding further eastward as well. The Ukrainian leadership have shown their unbridled readiness to exchange one master, Russia, for another: western finance and corporate capital. Even in light of the Troika’s ‘fiscal waterboarding’ of Greece and the utter failure of austerity as economic policy, the Ukrainian government is willing, even enthusiastic, to implement reforms prescribed by the IMF not only with the blind faith that they will stimulate economic recovery, but also in the name of ‘European values’, which are now subject to much scrutiny.

'The ungrateful Greeks'

Still, the Greek crisis has given neoliberal converts in Ukraine the opportunity to declare their devotion by admonishing the Greeks for their lack of faith.

In the Financial Times, Prime Minister Arseny Yatsenyuk groaned about the attention which the ungrateful Greeks were getting, while Ukraine ‘is not on radars’. He added that the whole Greek debacle was a ‘political disaster,’ not for the Greeks mind you, but because it ‘disincentivises other governments in terms of making tough reforms.’

Similarly, in an interview with CNBC, Yatsenyuk cautioned against comparisons between Ukraine and Greece because, unlike the Greeks, ‘we do not blackmail anyone.’

Yatsenyuk’s ministerial colleagues followed suit. ‘There is a big difference between us and Greece,’ Dmitryo Shymkiv, Poroshenko’s top staffer on economic and political reforms, told BuzzFeed. ‘Greece has been “persuaded” into reforms recently, [over the last] few days, while Ukraine has a plan. And we’re going after the plan.’

Unlike the Greeks, ‘we [Ukraine] do not blackmail anyone.’

Ukraine’s boosters chimed in as well. In the Washington Post, Jackson Diehl pleaded, ‘Unlike Greece, [Ukraine] has taken every painful austerity step required by the International Monetary Fund, even while fighting a war. Yet the European Union, which has committed $222 billion to bailing out Greece, has offered Ukraine $5.5 billion.’

Ievgen Vorobiov echoed in Foreign Policy: ‘In studied contrast to the current government in Athens, Kiev is bending over backwards to emphasize its desire to reform its way back to financial health.’ Ukraine’s booster-in-chief, Anders Aslund repeated the mantra: ‘Ukraine's first serious, able government in years has quickly adopted vital reforms the West had called for… Kiev is doing exactly what it's supposed to do, but what is the EU doing? It has committed merely €5 billion in loans to Ukraine, compared with €200 billion for Greece. This makes no sense.’

True, much of the Ukrainian government’s dedication to ‘staying the course’ has been rewarded with little more than rhetorical fanfare in Washington. After meeting with Yatsenyuk, President Obama and Vice President Biden praised Ukraine’s ‘strong stand against populist measures that could undermine Ukraine’s financial stability.’ U.S. Commerce Secretary Penny Pritzker added: ‘these are hard choices. The prime minister feels the pressure. But as long as they’re moving forward, they’re not alone.’

Yet, when you really think about it, it all makes sense. Ukraine has little choice but to ‘move forward’ because it has no power to do otherwise. Returning to Russia’s embrace would be nothing less than suicide.

Much of Ukraine’s economic calamity, after all, is the direct result of Russia’s war in the east. The embrace of the neoliberal faith is as much an expression of true belief, as it is an act of geopolitical survival.

Neoliberal transformation

Like many crisis states before it, Ukraine serves as a perfect opportunity for neo-liberal transformation. Milton Friedman once wrote that: “Only a crisis – actual or perceived – produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable.’

Ukraine’s reformers know this dictum well. As Aivaras Abromavičius, investment banker, austerity devotee, and now Ukraine’s Minister of Economy and Trade, put it: ‘We shouldn't waste this crisis. It's a unique chance for reforms.’

‘We shouldn't waste this crisis. It's a unique chance for reforms.’

Ukraine is ripe for the shock doctrine. The population is economically disoriented and anaesthetised by patriotism. The Russian threat, however real, serves as a means to harden the population for sustained economic sacrifice.

Since 2012, Ukraine’s GDP has contracted 23%. The IMF predicts it will shrink an additional 9% in 2015. The government has instituted capital controls to stabilise the hryvnia.

Ukraine’s debt to GDP ratio has inflated to 158 %. Unofficial estimates of unemployment range from 15 to 18%. Under employment proliferates as do wage arrears. Employers owe workers in Dnipropetrovsk 131 million hryvnia, 136 million in Kiev, and 142 million in Kharkiv. Inflation is at 57%, and, according to April figures, prices for sugar are up 39%, dairy products – 32%, bread – 21%. Poverty hovers around 33%. But poverty by the UN’s measurement is even worse: 80% of Ukrainians live on less than $5 a day, and below $150 a month.

While support for Poroshenko and Yatsenyuk’s government has dropped in the polls, signs of popular resistance to austerity are few. The anti-austerity left is feeble and right-wing populist attempts at rollback verge on mendacity.

All the while, the erosion of daily economic security persists. As Yulia Burda, the head of a non-profit for children in need of speech therapy, told the BBC: ‘We can't afford medicines that we need because if we buy medicine, then for a period of time we can't buy food. Whenever you go into a store or to the market, you can't believe your eyes. Because what you paid for sausage or cheese for one kilogram before, now buys 100 grams.’

The IMF

In an effort to stop the economic bloodletting, the IMF has cobbled together a $40 billion bailout, with $17.5 billion a direct IMF loan, distributed over four years.

The largest portion, $10 billion, will be given throughout 2015. Moreover, the IMF has backed Ukraine’s efforts to restructure $23 billion debt owed to four principle investment and hedge funds. The hope is Ukraine’s creditors will agree to a 40% haircut.

So far, the creditors have proved intransigent, arguing a haircut ‘sends the wrong signal to global capital markets when Ukraine can least afford to be shunned.’ On 24 July, Ukraine made a $120m interest payment on its $70 billion debt pile in order to stave off default. Despite the roadblocks to debt restructuring, the IMF has agreed to release the next tranche of $1.7 billion at the end of July, giving Ukraine another much needed fiscal hit.

Yet, the IMF’s approach to Ukraine’s economic catastrophe is a replay of austerity in exchange for bailouts—a Ukrainian version of the EU’s ‘extend and pretend’ solution for Greece.

It is amazing, really, that such a bankrupt policy would be applied again. Yet here it is. The reforms, among others, demand the freezing of minimum wage, cuts in pension payments, the monetarisation of all social benefits, transforming medical care to a financing for services model, the reduction of institutions of higher education from 802 to 317. 

In addition, the IMF reforms call for ‘significant fiscal consolidation’, amounting to cuts in budget deficits by 6.3% of GDP. Comparable measures were tried in the PIGS countries with 5-7% contractions in 2011-2013, and for the worst years of the Greek crisis, 8-9% of GDP—all to no avail. 

The only saving grace is that unlike the EU’s periphery, Ukraine can devalue its currency. Nevertheless, these measures, argues Yuriy Gorodnichenko, a professor of economics at UC Berkeley, ‘in weak economic conditions could be a kiss of death.’

It is amazing, really, that such a bankrupt policy would be applied again. 

Over the last few weeks, pundits and politicians have repeatedly stressed that Ukraine is not another Greece.

And, true, it’s not. The economic situation isn’t wholly comparable, despite some convergences. Nor is there any Ukrainian version of Syriza, which, though it ultimately capitulated, at least resisted. 

No, like most converts, those countries in the post-communist space are in the vanguard of the neoliberal faith. Unfortunately for Ukraine, its crisis is not so much a problem as an opportunity for increasing the flock.

Sean Guillory

Sean Guillory is a UCIS/REES postdoctoral fellow at the University of Pittsburgh. He hosts the podcast New Books in Russian and Eurasian Studies and received his PhD in History at UCLA. Follow him on Twitter @seansrussiablog

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