Ukraine 2017 – The Road to Deadlock

1. Analysts voiced fairly optimistic forecasts in the beginning of the year, primarily about the forthcoming “great bargain” between the United States and Russia. It was assumed that the developments in the Middle East were more important for the Americans than the Ukrainian problems. These hopes were buttressed by Donald Trump’s election rhetoric that was interpreted as a shift toward isolationism but with the intention of “making things right” with Russia.

It became clear by the end of the year that Trump will not be allowed to “make things right” with Russia and there will be no “great bargain.” The bipartisan consensus of the Senate and Congress on anti-Russia sanctions demonstrated the return of a Cold War in relations with Russia; one that would not leave any chance for compromise or that would consider Russia’s interests anywhere, especially in Ukraine. At the end of this year this conclusion was fully confirmed by talks between Sergei Lavrov and Rex Tillerson, and contacts on the level of Vladislav Surkov and Kurt Volker. Moreover, the confrontation between the United States and Russia is likely to worsen.

2. Donbass

In the meantime, armed confrontation in Donbass continues, and even though the intensity of armed clashes is fairly low, the sides do not abide by periodically announced “truces.” This format for carrying out combat fully meets the tactical interests of the Ukrainian authorities, helping them to justify their economic and social failures, and is the least burdensome for society. The war against Russia (as Kiev calls the events in Donbass) is becoming exclusively the cause of those who want to be in the army; primarily contracted soldiers join the fight – while at the same time the economic situation is compelling many people to join the army. The risk is not too great in this lukewarm war. As for everyone else, the situation is certainly wretched, but life must go on. After all, there is a simple explanation why it is impossible to make both ends meet and who is to blame. This is, of course, Putin. And the bottom line is that bad does not mean intolerable.

This is exactly why there are no antiwar protests in the country and none are likely to take place due to the character of this war. It allows the powers to regularly invent different “victories’ for the masses, each presented as such when any tough anti-Russian actions are carried out – the blockade of Donbass, declaration of Russia as “the aggressor,” a ban on St. George’s ribbons, prohibition of social media, the ousting of the Russian language and bans on cultural exchanges that remain without an adequate response from Russia. Under these circumstances there are no grounds for the Ukrainian leaders to fulfil their part of the Minsk agreements, especially considering that the West will always justify Kiev’s actions and denounce Moscow.

3. No radical changes have taken place in Ukraine’s domestic policy. The public support for the activities of the government continues to decline. The parliament is functioning relatively well in the absence of a parliamentary majority. The elections to the local councils in the autumn showed that the authorities are able to win by skillfully putting to use their administrative resources even without tangible public support.

Radical nationalists have become one of the key factors in the domestic political struggle for resources. The power clans are actively using them to reach their political and economic goals by illegal means. The opposition remains fractured and it would seem Bankovaya Street may stay calm. However, the awkward actions of the Presidential Administration created “the phenomenon of Mikheil Saakashvili” that is becoming increasingly dangerous for Petro Poroshenko, primarily because of US support.

Next year political struggle will focus on two points (at least till next autumn):

 – First, these are the activities of anti-corruption agencies that are not controlled by Bankovaya. It is vital for Poroshenko to try and neutralize this lever of US pressure on the domestic political situation and prevent the institutional undermining of his power.

– Second, protests launched by Saakashvili will hardly subside even after his extradition or expulsion (albeit either is unlikely). The obvious goal of Saakashvili’s efforts is to legitimize the issue of presidential impeachment in the public’s mind, even though impeachment is practically impossible due to legally insurmountable obstacles, but can do serious damage to Poroshenko’s image both at home, and even more importantly, abroad.

4. Reforms

Ukraine does not take part in the elaboration of its reform goals and tasks (this is done by international institutions, for instance, the IMF). Kiev can only influence the speed and format of their implementation. The authorities will try to alleviate the negative social consequences of these reforms, especially on the eve of future elections, but they will not be able to change the situation in any meaningful way. In the process they will do everything to block reform and changes that will affect the interests of big business in Ukraine. This primarily applies to land reforms and “large-scale privatization” (as long as the oligarchs close to power remain doubtful that they can overtake their foreign rivals, privatization will be obviously blocked).

Implementation of reforms is bound to escalate social tensions, which open good prospects for right-wing populists of all hues (I am referring to right-wing populists because the left-wing movement in Ukraine has been destroyed).

5. Civil rights

This year has been characterized by a large-scale onslaught on civil rights in Ukraine, including linguistic rights and rights to the freedom of speech and freedom of expression. The situation is only prevented from sliding toward total ideological dictatorship by the fear of an international reaction.

This will hardly change next year. Since day one the current regime has placed its bets on a very narrow right-wing agenda and largely links its future with it. Therefore, the more threats to remaining in power this regime sees, the more resolutely it will try to establish a “consensus of opinion” that will allow only nationalists and their soul-mates to determine the country’s agenda.

Results of 2017 – stagflation of the Ukrainian economy

In 2017 economic indicators of almost all industries continued to further decrease to the accompaniment of accelerated inflation.

GDP. In 2017 Ukraine’s GDP “grew” at incredibly low rates of -0.3 percent in the first quarter, +0.6 percent in the second quarter, +0.2 percent in the third quarter (compared to the previous quarter with the account of the seasonal factor). Such figures are within the limits of statistical error. Furthermore, many independent experts believe that this year Ukraine’s GDP did not grow at all because production declined both in industry and the agro-industrial sector.

Industry. Industrial production continued to decrease (in January-October of this year it amounted to 99.8 percent of the same period in 2016). The country continues to undergo deindustrialization. Hundreds of plants are being shut down. Thousands of plants have been closed in the past three and a half years alone. The advanced industries have been the hardest hit by the systemic crisis. Thus, in 2017 machine building dropped to 6.7 percent of the total sales of industrial output. The main reason for the reduction in industrial production in 2017 is the trade blockade imposed by the government on Donbass in the beginning of the year.

Agricultural production. This year agricultural production also went down (97.7 percent in January-October of 2017 versus the same period in 2016), primarily because the yield of Ukraine’s main crops was poorer than in 2016. Livestock breeding also continued to decline, just as it has been steadily going down for years due to lack of government support and general economic decline.

Construction. This is the only industry that still retains general positive dynamics and only because Ukraine allocates unprecedented funds from its budget for road construction. Housing construction declined in the second half of 2017.

Inflation. The annual consumer inflation rate reached 12.5 percent. Prices on food products grew faster, adding 16 percent. Wholesale prices of Ukraine’s enterprises went up by 14.6 percent this year.

The higher growth of wholesale prices is forming the so-called “monetary overhang” – the economic basis for the further increase in consumer prices.

General conclusions:

  • The Ukrainian economy is undergoing a systemic crisis;

  • High inflation without economic growth is stagflation, the main feature of the Ukrainian economy in 2017;

  • Current negative trends in the Ukrainian economy are pervasive and therefore, there are no grounds to expect improvement in its economic situation in 2018.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.