Why do Ukrainian authorities curtail reforms? Financial analysis gives clear answer

Author : Oleksiy Kushch

Source :

Now we see an ideal period for searching for a special Ukrainian way, when arrogant Europeans will be declared ungrateful people who did not appreciate the role of the Ukrainian elite in protecting the European comfort zone from the eastern hordes
22:45, 18 December 2017

112 Agency

A recent attack, synchronously conducted against the NABU by the prosecutor's office and two coalition factions, was unfolding against the background of another political deja vu: the Christmas tree, the Maidan, the tent camp, the arrest of a famous politician, thousands of people on the streets. It seemed that the national elite started another competition for the sport we loved in our country: making mistakes in front of all honest people. Especially if the political situation requires this, which we see in Ukraine.

So, the leaders of the two factions, the "People’s Front" and the Petro Poroshenko’s Bloc, submitted a bill on the possibility of removing the head of the NABU from the position without the withdrawal of auditors, whom Verkhovna Rada still cannot determine. This legislative attack was accompanied, as always, by a brilliant speech by the Prosecutor General before the deputies, in which he called the detectives "to return to Sorrento", which in Ukraine is treated as a return to the "legislative field". According to the Prosecutor General, the investigators have "played too active". In translation from the Aesopian language to the folk language, it should be interpreted like this: guys, you went into someone else's place, who are you, you were not expected here. Also Prosecutor was dissatisfied with the NABU head’s complaint to Washington.

The Delegation of the European Union to Ukraine stated that the key element in the EU-Ukraine relations is not the health care and pension system reforms, which scalps hang in the premier's office, but a banal fight against corruption. Reforms of the economy, social sphere, defense, public administration are the first, second, third and fourth elements of Ukraine's future prosperity. But the fight against corruption is, so to speak, the most important, the fifth element. By the way, who does not know about the importance of the "fifth element"?

The attack on the NABU in the EU was interpreted as undermining public confidence in an effective system of fighting corruption. The work of such institutions should be supported in every way, and not "undermined" by night legislative attacks.

Americans reacted quickly. In its official statement, the US State Department said that the disruption of the anti-corruption program, which had just begun to be implemented in Ukraine, could "undermine" not only the newly created institutions, but also international support for Ukraine at key levels, including the most important for the current Ukrainian government - financial: I think our establishment could well manage without the moral support of the West. As they say, do not teach us how to live, just help financially.

As a slap in the face, Americans did not fail to reiterate the US Secretary of State Tillerson: "There is no sense for Ukraine to fight for its body in Donbas if it loses its soul because of corruption." It seems that this statement turns into a "common place" of American rhetoric towards our country, such a "Ukrainian mantra of an overseas visitor".

But the most painful blow was inflicted, as might be expected, from the "artificial kidney apparatus" for Ukraine, that is, from the IMF. Christine Lagarde, the head of the Fund, said that "we are deeply concerned about the recent events in Ukraine ... Fighting corruption is a key requirement of Ukrainian society, it is crucial for ensuring stronger and fair growth and is part of the government's commitment to the program with the IMF."

In simple words, if you do not stop your hooliganizm, you will not see a new credit tranche of the IMF, as a "European shaft" on the eastern border. As you know, this year Ukraine received from the Fund only one tranche of $ 1 billion, while the amount of debts paid by Ukraine in favor of the IMF amounted to 1.3 billion dollars. With such a balance of cooperation, you will not go far.

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All this leapfrog with statements could cause one reasonable question: why? After all, constantly asking for help in dozens of European capitals in the form of all sorts of grants and tranches, calculated not even by millions, but by tens of thousands of euros, and at the same time claiming an independent domestic policy - this is not so smart.

Politics is the quintessence of the economy. So said the classic of political economy. Therefore, any sources of this or that political decision should be sought precisely in the economic sphere. One law enforcer once said that most of cases he solved, analyzing the cash orders of banks.

Let's look at the money flows of our state to understand the reasons for the permanent love of the political elite to the West and the same permanent impulses to find its own particular Ukrainian way.

Some answers can be given by such indicator as the ratio of the NBU's gold and currency reserves to the volume of imports of goods. The classical theory of the minimum sufficiency of international reserves of the central bank suggests that they should cover a three-month import. But we will not consider the days of coverage; we will analyze simply the ratio of gold reserves to the annual amount of commodity imports. It turns out that in December 2013, that is, during the "late Yanukovych" period, this figure was 25%, while reserves exceeded the current level by several billion, but imports were 1.6 times higher than in the current year.

The system of functioning of power elites is built in Ukraine in such a way that the financial flow is formed in two spheres: internal and external. External is a corruption tax on the export earnings of private and state-owned enterprises, that is, it is the currency that did not reach the country. Internal sphere is a corruption tax on the financial turnover inside the country, which, naturally, is formed in hryvnia. All financial flows are concentrated in several key collection points: gas, electricity, budget programs, etc., and then distributed among several "families" that are in power. To withdraw the domestic financial flow, dollars are needed, about $ 5 billion a year. The need for currency decreases with the growth of power structures in the the economy. In the first few years after coming to power, new elites simply massively withdraw capital, "fast" hryvnia turns into "fast" dollars. The capital outflow is suspended: there are objects where you can "invest", and not just take the capital abroad.

During the period when the reserves of the NBU were small, when there were not enough supplies for the needs of elites, all sorts of megaprojects are born, like integration with the EU or the Customs Union, and both ideas can fit safely in the head of one president. The question is who will give more.

Such a reference point for power elites, subconsciously of course, is a mark of 20-25% (the ratio of NBU reserves to imports). When the country approaches this mark, the elites begin to offer either their loyalty to the Russian Federation or the West to reform. On the contrary, it is impossible, because Russia needs our reforms just as the West needs loyalty of local elites.

By signing a package of agreements with the Russian Federation in December 2013, Yanukovych submitted replenishment of the NBU's reserves for $ 15 billion received in the form of a loan from Russians (in fact, only three came): that is, the figure we analyzed had to increase to 43%. The ratio of NBU reserves to imports in the amount of 40% and above is the second benchmark showing that all external partners can simply be withdrawn. After all, with such parameters, external partners are no longer needed.

At the end of 2014, our indicator dropped to 13%, and the elites realized that it was time for "systemic reforms". It was this "candy" necessary to sell to the West.

In 2015, the indicator of financial "independence" increased to 34% - it's time to press the brakes a little and use the dimension and solidity in such an important process of reforming the country.

In 2016-2017, the indicator almost reached the desired level for the elites - 37-38%. Reforms are still being talked about, and even under the guise of them, MPs are trying to present, for example, the reform of the pension system and health care. But somewhere in the depths of the soul, the elites already understand that the time of the long-awaited "independence" from the boring curators with their constant moralizing and teaching is closer than ever.

In 2018, the indicator should rise to 42%. Yanukovych almost made similar in 2013 ... It's time to announce to the electorate that we will not be "slaves" of Moscow, and also Warsaw's "garbage". An ideal period to start looking for a special Ukrainian way, when arrogant Europeans will be declared ungrateful people who did not appreciate the role of the Ukrainian elite in protecting the European comfort zone from the eastern hordes.

Important information is provided by the ratio of the currency volumes bought on interbank market and the commodity imports. In 2015, $ 68.8 billion was purchased on the interbank market, while imports of goods according to NBU data amounted to $ 38.9 billion. The difference was almost $ 30 billion: the elites fled and withdrew their money. In 2016, the interbank market fell to $ 60 billion, while imports of goods rose to $ 40 billion, the balance of non-traded capital outflows amounted to almost $ 20 billion. In 2017 (January-October) we observed a unique situation: commodity imports exceeded the interbank market by 6 billion dollars: the elites are here, the channels for the withdrawal of cash are optimized. Yes, and  more: the domestic market is more or less balanced, external supervisors are no longer needed, just like the announced reforms.

The problem is that all this "our own path" and reliance on internal forces will last exactly a year, until the next election. And then a new collapse, the need to repay external debts, the fall of the indicators, the withdrawal of capital. And new promises to Western donors to carry out all the necessary reforms, but already in a new political cycle. More precisely, during the first 2-3 years. And then again, start of "our own way," and saying no to foreign organizations...

The reason for this recycling is quite simple: no one will ever be able to reach the rental economy system of our elites and collecting "taxes" in favor of several families throughout the country. Therefore, all our reforms are doomed to stop at an invisible red line. What can the West do in these conditions? Only two things: support the civil society inside the country and tight financial monitoring for our elites beyond its borders.

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