Is Russia likely to work with the West to rescue Ukraine?

Russia is unlikely to work with Western governments to resolve Ukraine’s economic problems. What is the alternative?

Professor Stefan Hedlund:

This is a very big problem. There actually is no alternative. Any working solution to the crisis in Ukraine has to have Russia as part of the solution, not as part of the problem.

Russia is a very large trading partner, it supplies the bulk of energy to Ukraine, and Russia holds the bulk of Ukraine’s debt, which is going to default anytime now.

And if the West believes that this is something they can solve whilst having Russia on the sidelines, then they’re very, very seriously mistaken. And this is why Western policy has been so ill-considered – Western political leaders have though that ‘we can push Russia out of the picture and then pick up the pieces of Ukraine and deal with it on our own’. That is quite obviously not possible.

Even being passive, Russia will be a very major part of the problem. And if we keep antagonising Russia and threatening with sanctions and insulting Mr Putin, then they may not be passive, they may be doing active damage to the process. So the West really has created a mess here, that is on our table, not on the Russian table.

What happens if Ukraine’s economy fails?

Professor Stefan Hedlund:

Well, a sovereign default is nothing to take very light-heartedly. When a private business goes into bankruptcy it means the business disappears. It may disappear for good, or it may be reconstructed, and once the old debt has been wiped off a new company may rise out of the ashes. Those are the rules of the game in the private marketplace.

Now, for states and governments it’s a very different ball game, because here you have entire populations at risk. And if the Ukrainian state goes into bankruptcy that means banks will fail, the government will run out of money, foreign trade will not be possible because you can’t have credit, it means wages and pensions will not be paid on time or paid at all, and the economy will go into a real tailspin. So this is not something to be taken lightly.

And its quite obvious that all parties concerned here, all those who have claims on the Ukrainian economy will be reluctant to trigger a default. But according to all the rating agencies now, the markets expect that given another few months of accumulating crisis default will no longer be possible to avoid. So Ukraine is standing into really serious dangerous here, and it seems that this hasn’t really dawned on Western political leaders.

It seems that Russia has got the West in a catch-22 situation over Ukraine’s failing economy. Can the West help Ukraine without pumping money into Russia’s economy?

Professor Stefan Hedlund:

No. And this is exactly why Western policy on Ukraine and on Russia has been so ill advised. The West has now ended up in a situation where Russia has larger claims on Ukraine than Ukraine has reserves, so Russia can technically call a default on Ukraine at any time it wants.

Russian Prime Minister Medvedev claims that Russia has claims on Ukraine of about US$16.5 or US$16.6 billion. Ukraine has US$12billion in reserves and US$9billion in debt, so you can do the math, it means that at any point in time Russia can just trigger default in Ukraine.

Now, for the West this implies that if we’re going to keep the Ukrainian economy alive we have to pump money into that economy. But now Russia demands that every dollar pumped into the economy should go to pay gas debts to Russia.

Ukraine now refuses to pay accumulated gas debts to Russia, and Russia has – according to the contract that Ukraine has signed – a contractual right to say that ‘if you don’t pay your debts, we will demand advanced payment from June 2nd, otherwise we will shut of the supply’.

So on June 2nd 2014 Ukraine may be without gas unless they pay their bills.

And the European Union is adamant now that Ukraine has to pay its accumulated debts, then we can talk about the price. But until yesterday (Tuesday 27th, 2014), as far as I’ve seen Ukraine still hasn’t paid the debt.

So what is happening now is that the IMF is under pressure from Russia to force the government in Kiev to make sure that all incoming credit is diverted to the coffers in Moscow, in order to pay for accumulated gas debt.

And Russia is ratcheting up the debt, meaning that for a few weeks, maybe a couple of months the IMF will have to sit by and watch how credits pumped into the Ukrainian economy are passed onto the Russian budget.

Meaning that we are strengthening Russia, whist debt owed to Russia will instead be owed to the IMF and the European Union, and none of this money goes towards supporting the Ukrainian economy.

So it really is a game without any prospect for Ukraine to pull out of this, unless there is a deal struck between Russia and the West that we all need to come together and rescue Ukraine. But given the political situation today I don’t see any reasonable chances for a deal anytime soon between Russia and the West.

And if there is no such deal then default is inevitable, with all the consequences that come along with that. It is all very, very disturbing.

(photo credit:dpa)