Economic change is happening in Ukraine, but not as planned by Christine Legarde or Ukraine’s Washingtonian government. 

By Gary Scarrabelotti 

My old friend Greg Sheridan once penned a piece for The Australian entitled “The lies they teach our children.”

It was a ripper article about the intellectual corruption of the school curriculum and was notorious at the time.

By a perhaps slightly odd association, Christine Legarde’s recent visit to Kyiv called to mind the infamous header to Sheridan’s article. 

Less imaginatively, but more appositely, memory also recalled Churchill’s much misrepresented remark to Stalin at the Teheran Conference, 

“In wartime, truth is so precious that she should always be attended by a bodyguard of lies.” 

Well, Ukraine is at war and Churchill’s corrupted obiter dicta rules.  Christine Lagarde, Managing Director of the IMF, understands this and she came in right on queue and on note. At a joint press conference on September 6 with President Poroshenko, his praises she did sing:

“To achieve what you have achieved in such a short period of time is just nothing but astonishing …  

“The fiscal position is getting stronger, the foreign exchange market has stabilized and the banking sector is being repaired so that banks are sounder and can start providing credit again.” [1]

Yes, we are all astonished. No more astonished, I must say, than myself. 

An incident

You see, I was innocently standing there on a dusty Ukrainian street, waiting for my wife, outside a supermarket.   Then up comes a couple of coves desperately short of the prized Hryvnia, the national currency here. One of them sheepishly proffered me a handful of euros.  

Now I’m the sort of chap who likes to oblige and I could see these fellas were in a fix. For a fleeting moment, I was tempted to enter the trade.  

I could easily have obliged.  My eyes are always peeled for new business openings.  A capitalist has to be flexible. What’s more, in certain times and places, like right here and now, the black market trader is offering an honoured service. 

Then, I thought, “Nah. Not wise to start out trading on another bloke’s patch” – I’d seen him working this part of the street every second day – so I dropped the idea in a flash.

With an amused grin, I waved those abashed coves off with a phrase for which I had desperately to search: “Nyet hryvnia.” By which I meant: “Mate, you’ve got the wrong man.”

I think it was the leather ‘man bag’ that did it. I was carrying one on my shoulder at the time. They’re generally de rigueur for genuine operatives in the field. 

New old Black 

It’s in poor taste to quote oneself. However … only the day before yesterday I posted this about Ukraine:   

“Anyone who can, is taking their money out of the banking system, or has done so already. Employees, whose wages are paid by EFT, head straight to the bank on payday to withdraw all they can. Black market money traders operate openly with an insouciance not seen since Soviet days. No-one trusts the banking system. The mattress and US dollars are highly esteemed.”

I won’t go again into the reasons why people are pulling money out of Ukraine’s banks.  But a reckless policy of mass bank liquidations is the essence of the matter. You can find out more here, here and here.

Be assured, meantime, that money has poured out of the banks in a torrent. 

According to the IMF, which has taken a big punt on Ukraine, 24.3 percent of all household deposits were withdrawn during 2014.[2]  On just one day earlier this year – February 23 — Ukrainians withdrew 2.2 Billion Hryvnia (UAH) from their bank accounts.[3]

According to a report in The Economist, the IMF has estimated that 50 per cent of Ukraine’s economy is black.[4]  In fact, whole sections of the economy operate entirely under the deepest shadow.  It’s getting to the point where the ‘real’ economy and the ‘black’ can no longer be distinguished.

Property for cash 

Take the property market. You can’t buy a house or an apartment except in US dollars and for cash. The rare bird that will accept payment by EFT has an offshore bank account. You can safely bet your new house on that: transaction, of course, only in the almighty dollar.   

Bear in mind that can’t bring enough US dollars into the country to pay for your house or apartment in a timely manner. I won’t trouble you with the perfectly rational hurdles you need to jump through in order to repatriate foreign earnings and then reconvert them to dollars to make that payment. Take my word for it: there are only two ways you can gather enough dollars to execute efficiently your much desired real estate purchase.

One way is to smuggle in the dollars, one moonless night, over some unguarded stretch of river along Ukraine’s many-countried borders. Or, the other way is to go to the ‘man bag’ men.

Let’s be fair to President Poroshenko and his crazy brave Prime Minister, Arseniy Yatsenyuk, mastermind of Ukraine’s bank-smashing programme. The RE market is an inherited problem. But the savings-destroying bank liquidations heedlessly prosecuted on Poroshenko’s watch, with the effusive public blessing of the IMF, have entrenched the black property market and made it a happier hunting ground for those sterling servants of economic freedom, the bag men and the smugglers.  

Economic change is happening in Ukraine, but not the way planned by Christine Legarde or Ukraine’s Washingtonian government.  Events here call forth another memory – that of the disastrous “shock therapy” reforms launched upon the hapless Russian people by Prime Minister Yegor Gaidar in 1992.

It is surely no coincidence, then, that Gaidar’s Harvard-educated daughter, Maria, recently abandoned Mother Russia, accepted Ukrainian citizenship, and was appointed Deputy Governor of Odessa province under another nationalised foreigner and Americanist economic liberal, Mikheil Saakashvili.

Plus ça change, plus c’est la même chose.