Ukraine: December 2014 at a glance

Vadym Khomakha "DAU"

December 2014 became for Ukraine a logical conclusion to one of the hardest years since gaining independence in 1991.

The situation in the economy was almost catastrophic. The decline in industrial production at the end of the year was 6.5%, the official unemployment rate was about 10%. Because of  war, the number of temporary migrants from the Eastern Ukraine is approaching 900 thousand.

The situation in the energy sector is also close to the critical level, power outages became widespread. Power shortage reached 5.5 GW due to the termination of coal supply from Donbass mines controlled by DNR and LNR militants. Blackouts for up to six hours or even more created problems not only for people but also for industry. Pro-Russian lobby pushed through the purchase of coal and electricity from Russia in exchange for uninterrupted power supply to Crimea. At the same time, Ukraine continues to export electricity.

Truce policy promoted by President Poroshenko led to the temporary suspension of active hostilities, but positions of the Ukrainian army were under fire and attack along the front line on the daily basis. In particular, sharp clashes were in the areas of the Donetsk airport and village Peski, where the fight did not stop even for a day, as well as in the area of Debaltseve, in the village of Lugansk and on the "Bahmutka" road in the Luhansk region. Ukrainian army lose several people killed and wounded daily.

The EU, seeing the unwillingness of President Poroshenko to carry out a full-scale war, insists on pacifying the aggressor and pushes Kiev to continue talks in Minsk format between Ukraine and Russia under the patronage of the OSCE, and with the participation of representatives from terrorist Donetsk and Luhansk "republics". Despite the constant delays caused by the militants, the latest round of negotiations finally took place but the results were not reported.  However, in the aftermath, the sides carried out partial prisoner exchanges. The OSCE has announced a consultation between representatives of General Staffs of Russian and Ukrainian armies to be held in Donetsk and Lugansk, which caused suspicion in Ukrainian society that separate deals might exist with Russian aggressors.

During the "truce" Russia has significantly increased its military presence in Donbass by using regular "humanitarian" convoys that cross the border through the areas controlled by militants. Russian qualified contractors and trained mercenaries (a total of up to 15 thousand people) partially replaced uncontrolled Russian fighters and "Cossacks." Large amounts of fuel, ammunition and weapons were imported to Donbass, including up to five hundred tanks and combat vehicles, hundreds of cannons, rocket launchers and self-propelled units. The  Russian Federation army has deployed air defense, communication intelligence and jamming, fire correction and battlefield control systems in the areas of the conflict. Russia also deployed field hospitals along the front line, which is indicative of its full readiness to continue the aggression. Sabotage groups are acting all over the Ukraine. The SBU reports daily on their liquidation, but the threat of terrorism is growing and terrorist attacks occur in different regions of the country.

Russian economy is in stagnation and is experiencing serious problems in large part due to the pressure from Western sanctions. Companies operating in Crimea fall under Western sanctions, but that did not stop Putin from an escalation of tensions in Europe creating a dangerous situation that gradually turns into a cold war. The full-scale Russian military group including nuclear weapons launching systems has been deployed in Crimea. Russian and NATO combat aircrafts approach each other in the airspace over Europe on a daily basis. Both Russia and NATO hold military exercises in the vicinity of their borders.

The Ukrainian industry is gradually establishing the production of military equipment. The National Security Council announced the need to continue mobilization and rotating units in the war zone. Prime Minister Yatsenyuk announced that Ukraine spends 100 million USD on defense needs monthly. The first non-lethal military aid was received from the United States and Canada. One of the US senators explained that Ukraine will not be able to use NATO weapons due to the differences in standards, so it is worth buying it in the Eastern Europe.

The increase in defense spending and a reduction in budget revenues push the country into default, though the government says that it is able to meet its financial obligations. According to IMF estimates, the total volume of external debt by the end of the year exceeds 100% of GDP. The situation in 2015 is expected to be even more complicated as large repayments of external debt are due this year. The balance of payments also continued to deteriorate after Europe pressured Ukrainian authorities to sign an agreement to repay gas debt to Russia and prepay  "Gazprom" for gas supplies for the winter heating season.

The National Bank policies were not effective in calming down the currency market. Hryvnia exchange rate continued to decline achieving new historical lows amid the ongoing opaque refinancing of banks, with some of the refinancing aid immediately available on the foreign exchange market. The cash currency trading almost completely faded, with shadow exchange rates to be significantly different from the official bank rates. Restrictions on the purchase of no more than 150 euro finally drove away ukrainians from buying the currency at banks and exchange offices.

The country's foreign currency reserves fell to the lowest amount in decade of less than $10 billion. The agency Standard & Poor's downgraded the foreign currency debt of Ukraine to near default SSS rating with a negative future outlook.

The future of the country largely depends on loans from international financial organizations. Europeans and Americans understand that without external borrowings Ukraine can not survive a war with Russia, however the Ukraine must be repaying debt with accumulated interest. To achieve this, the Ukrainian economy needs to start working and gain a momentum, which requires fast introduction of real reforms and ruthless uprooting of wide-spread corruption.

Neither the president nor the government of Ukraine are zealous in this process, so the West has repeatedly made it clear that the money are to be provided in exchange for reforms. The situation came to a diplomatic scandal when the European Parliament has canceled the invitation to President Poroshenko to attend one of the Parliament sessions.  As a result, the two political rivals - President and Prime Minister decided to demonstrate that they are united more than ever and ready to implement fast changes into the economic and political foundations of the state. President Poroshenko even agreed on strengthening the role of the National Security Council, and on appointing the former parliament speaker Turchinov, who is the second person in the rival party, as its Secretary.

MPs finally reached a coalition agreement and formed a government after US Vice President Biden visited Kyiv and made it clear that no one is to joke with Ukraine. Foreign creditors, dissatisfied with the quality of candidates for the government jobs, recommended Ukrainian authorities to recruit foreigners in the Cabinet, which was done. Foreign citizen has also been appointed as the Business Ombudsman. The President Poroshenko granted Ukrainian citizenship to several candidates to the ministers positions and their first deputies in the violation of the Constitution. Based on the coalition agreement, Prime Minister as well as Foreign, Interior and Justice Ministers have retained their positions in the new government.  The rest of the ministerial posts were distributed among the coalition partners. The "Fatherland" party rejected its quota. The Verkhovna Rada approved the composition and the program of the Cabinet of Ministers, including the clause on the immunity from dismissal for a year.

The government delayed presentation of the state Budget and the supporting legislation to Parliament until very close to the end of the year deadline, thus putting pressure on the deputies to approve the whole package within a few days. Despite clearly raw legislation, inconsistent budget numbers, violations of the Verkhovna Rada protocol, and even unavailability of the full text of laws to MPs for examination before voting, the President, Prime Minister and Speaker of the Parliament have made every effort to ensure that all the laws be approved during the day.  Thus, the deputies adopted laws and the State Budget "blindly", with the government making some changes to the budget after its approval. President Poroshenko signed all approved laws and the budget for 2015, which, according to the Prime Minister, will be reviewed already in early February.

Despite the fact that the budget for 2015 has been adopted, these measures may be insufficient for positive decision to allocate next tranches of the stabilization loan by the IMF mission, which is to resume its work in Ukraine on January 8.  The election of the Head of Anti-Corruption Bureau with extraordinary powers scheduled for mid-January 2015 may potentially improve the situation.

Conclusion:

1. Ukrainian politicians continue to follow the political blueprint remaining from the previous years without taking into consideration the fact that the country is effectively at war. The reluctance to call fighting in Donbass as a war led to a situation in which Russia is not formally named the aggressor and can not be recognized as aggressor by the world community.
2. The president and the government pursue policies of agreements with the aggressor, developing economic and trade relations with Russia and the occupied territories, thus increasing the country's dependence on its eastern neighbor. Through controlled media and sociological services the government bodies are preparing the society to the idea that the return of Crimea and Donbass to Ukraine will not happen in the foreseeable future.
3. Corruption in all areas of power is destroying the country's economy, and both the direct and the indirect plundering of the budget may lead to the defeat in the war.
4. Yatsenyuk Government has not offered any radical solutions to correct the dire situation in the economy and, instead, focused on increasing the tax burden on ukrainian citizens, small and medium businesses, without affecting the interests of the oligarchs. As a result, the conditions for growing business activities and increasing the cash flow into the economy were not created.
5. Ukraine will not be able to cope with the crisis without the help from IMF and other financial institutions. The country will not receive investments during the war, rampant and widespread corruption in the economy, security agencies and the judicial system.
6. The West is well aware of the situation in Ukraine and exerting pressure on the leaders of the country, demanding to carry out real reforms as a pre-condition for the next tranche of the stabilization loan.
7. The lack of the progress in reforming the law enforcement agencies and the judicial system has led to almost complete loss of trust in the government. The ukrainians are ready to bear the difficulties of transition, however, they do not see real prospects in improving the situation in the country. This could result in complete failure of any innovations in the government tax policy, transitioning of the real economy into shade, mass protests and the fall of the current government, all of which is beneficial to Putin's regime.
8. The need for civilian control over the government and the president is gaining traction in the society. However, there is currently no political figure capable of unification of the society in Ukraine. Authorities provide nothing to ease the tensions in the society. On the contrary, they exercise the policy of delaying implementation of solutions to urgent problems and continue slowing down resonance investigations.
9. The army in the absence of active combat, "truce" and stall in the active return of the occupied territories gradually loses the spirit.
10. In general, the situation reached a bifurcation point, a delicate balance that could collapse at any time due to various circumstances. Ukraine expects a tough year ahead. The full-scale war with Russia is almost inevitable, and there are no resources for its conduct. Hopes for positive developments are inspired by continuous US support and the desire and willingness on the significant part of society to change and to act.