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Opinion
February 1, 2019 www.intellinews.com I Page 25
wards value added products, which now account for 43% of exports to the EU.”
The growing trade with the EU is all very well,
but more important is the accompanying grow- ing trade deficit; prior to the crisis Ukraine was regularly running a €10bn deficit in trade with the EU. And Ukraine also needs to replace the lost circa $9bn of exports to Russia. Currently, in trade terms, Ukraine is running at a loss and that will likely get worse.
Recently China has started to step into the breach. Sino-Ukraine trade is growing by 20% a year and China may replace Russia as a trading partner as soon as 2020. In the first eleven months of 2018 Ukraine exported $8.82bn worth of goods to the Middle Kingdom, up more than a billion dollars from a year earlier, which has filled a lot of the hole left by Russia’s departure. Shut out of the best part of the EU market, Kyiv has also been actively seeking new markets in the Middle East and North Africa.
More trade with the EU is welcome and part of the country’s new direction, but the trade deficit with the EU is a burden as it has to be paid for. Moreo- ver, the existing trade is not being followed by foreign direct investment (FDI) that usually comes in behind growing trade relations. The rule of thumb is every $8 of trade between two countries generates about $1 of FDI. The current level of trade suggest European companies should be in- vesting some $1.5bn in Ukraine a year, but in 2018 the entire FDI into the country was $1.9bn – from which the biggest investor was Russia, accounting for around $400mn.
Drop the trade quota
If the west really wants to help Ukraine it should drop the quotas on imports from the Ukraine – or at least greatly expand them. Business would boom and investment should flow behind very quickly.
The EU is keen to help Ukraine transform and face down Russia, but its solution has been to
turn to the International Monetary Fund (IMF) and other international donors, who are providing loans to bail the government out.
These are debts and need to be paid back. And the burden of paying back these debts ultimately falls on the shoulders of the Ukrainians themselves. Ukraine’s external debt jumped again in Decem- ber last year to $78.3bn after the government re- ceived the latest tranche under the new stand by agreement (SBA) signed that month. The money was desperately needed – to pay off debt.
“The surge in December state debt was prompted by Ukraine receiving a $1.38bn loan tranche under the 14-month IMF stand-by arrangement. In turn, that enabled the World Bank to provide a $750mn financial guarantee for the loans Ukraine is in- tending to attract in 2019 from Western financial institutions,” Evgeniya Akhtyrko of Concorde Capi- tal said in a note.
At the end of 2018 Ukraine’s external debt amounted to about 62% of GDP, up from around 35% prior to the crisis, which is not crushing but it is already over the upper limit recommended by the Maastricht treaty that set conditions for join- ing the EU.
Ukraine’s debt redemptions are about to rise as a debt restructuring deal signed five years is up this year: Ukraine needs to pay off some $17bn of debt in the next two years but has a total of $20bn in currency reserves at the moment.
This debt-based system has another big disad- vantage as it distorts democracy. The multilateral lender has been attaching strings to its loans that forces the government to make painful reforms, but in doing so the IMF takes over the agenda.
The politicians have to serve two masters: the IMF and the voters. It is notable that two of the leading candidates in the March 2019 presidential race, op- position leader, former prime minister and head of Batkivshchyna (Fatherland) party Yulia Tymoshenko and head of the Opposition Bloc Yuriy Boyko (aka Boiko), are both running on anti-IMF platforms.