Everyone Loses: The Ukraine Crisis and the Ruinous Contest for Post-Soviet Eurasia

For the country as a whole, the economic burden of the conflict and the revolution that preceded it has been extremely heavy. The World Bank reports that GDP contracted by 7% in 2014, only to fall by 10% in 2015. The Bank forecasted that the economy could grow by 1% in 2016 in a best-case scenario involving peace and progress on reform, but even that is merely the result of what economists call base effects, that is, an economy can only go up after hitting rock bottom. Ukrainians have been pummelled by inflation, with consumer prices rising 25% in 2014 and a whopping 43% in 2015. Industrial output dropped by 20% in 2014 and 13% in 2015. The currency has lost more than 60% of its value against the dollar since 2014. As the conflict in the east drags on, the economic domino effects can only get worse. As Ukraine’s heartland for mining and metallurgy, the Donbas accounted for 16% of the country’s GDP, 25% of industrial output and 27% of exports in 2013, the year before the conflict. Predictably, the nationwide macroeconomic downturn has seriously complicated the lives of ordinary people. Household expenditures were down by 20% in 2015, reflecting cutbacks in spending on food and other necessities; the calorific content of food consumed fell by 18% on average.[13] A Gallup poll in late 2015 reported that 79% of Ukrainians viewed the country’s economic situation as ‘poor’, while only 9% reported that they were thriving, compared with around 56% who said they were struggling and 36% who were suffering.[14]

One formidable source of economic distress has been the rupturing of commercial ties with Ukraine’s giant neighbour, Russia. Thus far, the contraction of Ukraine’s GDP, and particularly the collapse of energy-intensive industries in the east, has dampened demand for Russian gas. If and when its economy recovers, Ukraine will have little alternative to re-establishing the gas relationship with Russia. ‘Reverse flow’ of Russian gas from Europe has helped Ukraine get through the past few years, but all possible pipelines operating at full capacity can currently provide Ukraine with no more than 12bn cubic metres (bcm) a year; in 2013, Ukraine imported 27bcm of Russian gas.[15] In the past, the gas relationship with Russia was a key source of fiscal stability. In 2013 Gazprom poured US$3.1bn in transit fees into Ukrainian coffers, a sizeable percentage of gross state revenue. With alternative pipelines from Russia to Europe that bypass Ukraine via the Black and Baltic seas coming online in the next few years, the future of Kyiv’s gas-transit income is in doubt.

Ukraine’s structural dependency on Russia is not confined to gas imports and transit. One-third of its total exports went to Russia in pre-crisis 2013, or about the same as to the EU. By the Ukrainian government’s own estimates, it lost US$98bn in trade in 2014 and 2015 from sanctions imposed by Russia.[16] The net effect is significantly greater because of the composition of Ukraine’s exports. It mostly sells metal ore, ferrous metals, and grain and other agricultural goods to Europe. To Russia, by contrast, it has exported machinery, transport services and industrial products – that is, value-added goods and services that tend to provide more and higher-paying jobs.[17] Several huge enterprises, mainly in the defence and aerospace industry, had only Russian clients before the crisis. Kept afloat for now by subsidies and pre-existing contracts, they will soon either go bankrupt or have to be retooled. The Yuzhmash plant in Dnipro (formerly Dnipropetrovsk), which has subsisted since 1991 mostly by producing and servicing missiles for Russia, now works only one day a week and owes millions of dollars in back wages to its workers; the Antonov firm in Kyiv, which had produced large cargo planes jointly with a Russian partner, suspended production in March 2016.

While undergoing economic and conflict-related pain, Ukrainians have seen only modest improvements in governance since the Maidan Revolution. Several significant reforms have been enacted, but day-to-day realities in Ukraine have changed little, despite the soaring rhetoric often used by Ukrainian officials and their Western backers. National polls conducted in late 2015 found that nearly 80% of Ukrainians believed that the level of corruption was the same as or worse than before the revolution. Only 8% of Ukrainians had confidence in the national government, just 19% said the country was headed in the right direction, and Petro Poroshenko’s presidential approval rating fell to an abysmal 17%, ten points lower than Viktor Yanukovych’s on the eve of his overthrow.[18]