Quite some news! Oligarch Ihor Kolomoiskiy said in an interview for the Financial Times that Ukraine should follow Greece’s suit, quit the IMF’s austerity policy and default on its external debt at least. The statement triggered an outcry in Ukraine and beyond. No matter how you analyse it, there is little good in it for Ukraine.
Start with Greece. It decided not to cover its debt to the Troika of the IMF, ECB and the European Commission. The decision was put on a referendum on July 5, 2014. Greece was in the following economic position: the permanent economic crisis had eaten 26.5% of its real GDP between 2008 and 2013, unemployment had grown from 7.3% in 2008 to 27.8% in the summer of 2013, emigration sped up and more. In fact, the deep crisis lasted six years and profoundly changed the country and the mood of its population.
Economic growth recovered in 2014, albeit remained slow. The country was exhausted by the lengthy belt-tightening. When the next debt payments were due and Troika offered another dose of bitter austerity pills, the government decided to avoid responsibility by placing it on the shoulders of the people and running another referendum. The outcome of the vote surprised no one. The results included a new wave of capital flight, five more quarters of economic decline (and -0.6% of real GDP and two lost years), and debt restructuring which will be followed by the inevitable payments on the debts. The first time the economy returned to permanent growth was in mid-2017, and the population is still shrinking.
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Greece’s default lessons are quite simple. Firstly, a refusal to pay your debt does not mean that the debt vanishes. You will have to pay sooner or later. Secondly, default means the loss of trust. It can be lost in a minute and take decades to restore. Short-term benefits of default are questionable and long-term side effects are catastrophic. Thirdly, capital flight from Greece would have been far quicker and ruinous for the economy, had it not gone through a six-year crisis before. Ukraine is not Greece. It has well recovered from the 2014-2015 crisis. Ukraine can pay its debt back and it has many things to lose.
Another country Kolomoiskiy points to is Argentina which has declared default many times and is still ok, so Ukraine has arguably nothing to fear. Is this really so? Who in their sane mind can dream of a path of one of the most developed countries in the early 20th century that has tumbled to ranking 64th in terms of GDP per capita today? Ukraine has been degrading for over 25 years, and this is harsh enough.
Argentina is by far not the only South American country that has defaulted several times in the past decades. The results are obvious: this undermines the trust of investors for years, leads to internal chaos in governance and more. Argentina’s economy has been in recession six times in the 21stcentury alone, including the current one. So Ukraine has much to fear and low to fall, even if it has experienced two deep crises in the past ten years. A sclerotic economy that learns no lessons from its failures has yet to make at least one country in the world powerful and happy.
Default on official debt, including to the IMF, is very dangerous. Cooperation with the IMF is just one aspect in the geopolitical support of Ukraine from the West. Other lenders look watch it, including the World Bank, the European Investment Bank, the EBRD and others. Quitting cooperation with the IMF will push them away too. If Ukraine fails to meet its obligations, it will lose other elements of the Western geopolitical support which includes military cooperation – and the transition of the Ukrainian military to NATO standards, – economic cooperation, including the Association Agreement with the EU, and more. Who will want to deal with an unreliable partner?
South American countries that have declared defaults were not in war with a much stronger enemy and did not need geopolitical support as much as Ukraine does. Does Kolomoisky have anything to offer as an alternative? If he means the support of Israel where he lived until recently, this country can provide serious military support. But it it does not have options, such as sanctions against Russia, switching off SWIFT for it, consolidation of the EU to support Ukraine’s interests. So this is a sad alternative, if it replaces the West rather than contributes to its actions.
Finally, the factor of Ukrainians. Kolomoiskiy said that they have elected Zelenskiy because they did not want the cooperation with the IMF they had under Poroshenko. But where would Ukraine’s economy be without the help of the IMF and other donors in the past five years? The choice of Ukrainians signals that they do want to live better than they lived under Poroshenko, that they want new opportunities. But default and the economic crisis it triggers guarantee something very different: the loss of Ukraine’s moderate accomplishments of the past years. Ukrainians did not vote for that.
Announcing default would have more side effects. Kolomoiskiy presents it as a more sovereign choice, implying that Ukraine should act as befits it. The experience of South American countries proves otherwise: unless controlled by lenders or investors, they face huge problems with self-control, resulting in a surge of corruption and nepotism. Some conditions of the IMF program for Ukraine were indeed tough. But they have taught Ukrainian politicians to be more disciplined, to steal less and to be more pragmatic in the way they use budget funds. Without external control, corruption will thrive in Ukraine once again and the people will hardly benefit from that. So the entire crew of corruptioners who have been pushed away from milking Ukraine in the past five years is applauding to Kolomoisky and looking forward to new “accomplishments”. The problem is that a corrupt country can never defend itself properly in war.
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Ukraine would lose in a default. Why is Kolomoiskiy promoting it then? His logic is simple. Undoing nationalization of PrivatBank means termination of cooperation with the IMF. If Kolomoiskiy wants to return the bank, he and Zelenskiy would have to explain to Ukrainians why they have become poorer because of the ensuing economic chaos. Declaring default and blaming everything on it, while getting rid of the IMF, is a perfect option. The problem is that Kolomoiskiy appeals to patriotism in this. This is utter cynicism.
Kolomoiskiy is apparently preparing the information field for denationalization of PrivatBank. This once again proves that an oligarch in him defeats patriotism, even though many in Ukraine tend to perceive him as a patriot. If Volodymyr Zelenskiy were to accept his long-time partner’s proposal, the country would face a disaster.
Translated by Anna Korbut