Another Chance for Ukraine


Ukraine is beset by troubles. The Russian annexation of Crimea is the dramatic headline, but the economic struggles the country and Ukrainian workers face may prove just as dire.

On March 25, an International Monetary Fund mission to Ukraine announced a draft loan agreement. Initial signs indicate the IMF package will require austerity measures that risk destabilizing Ukraine's fragile economy and further increasing already extreme inequality. Reform of the economy is critical, but major first steps by the new administration such as a cut to home utility subsidies will adversely impact the vulnerable poor. Ukraine is a country where a dozen oligarchs control well more than half of the nation's wealth and dominate all politics -- exercising power beyond elected leaders. A democratic transition must mean more than belt-tightening for average people who did not create the current crisis.

Despite their ominous start, the Ukrainian government, IMF and community of donors still have important implementation choices ahead. If issues such as decent work, social protections and wealth inequality are central to the implementation of reforms in Ukraine, the process may avoid a repeat of past austerity failures. To err here, to lose popular support for reform, will be to send the country and its 46 million inhabitants down a very dark road.

To understand exactly how fragile the situation is, we need only look at the improbability of this historical moment in Ukraine. Four months ago, then-Prime Minister Mykola Azarov announced the government had rejected an Association Agreement with the European Union and refused a parallel conditional IMF aid package. According to Azarov, IMF austerity demands were the "last straw." Instead of a celebration of EU diplomacy, the Eastern Partnership Summit held a few days later launched a winter of crisis.

In November, students, trade union members and civil-society groups -- and finally opposition political parties -- took to the streets, their anger sparked by the last-minute decision on the EU agreement. They did not focus on finance, the IMF or aid; it was the symbolism that mattered. On the street, the agreement represented sending Ukraine on the road to an idealized vision of European social democracy. While the government of Ukraine sold Russian authoritarianism as the alternate to austerity, the street rejected both. Although no pathway to EU membership was on offer, blue and yellow ribbons and signs combining the EU and Ukrainian flag were the dominant image during the first month of the growing movement, which quickly became known as Euromaidan.

In dismissing the IMF deal, Azarov singled out harsh austerity demands to freeze public-sector wages and reduce utility subsidies. Concern for average Ukrainians was not a priority for the notoriously corrupt government of President Viktor Yanukovych, but the framing played well. It was especially potent in Yanukovych's home region, the industrial Donets Basin, the Donbas, of Eastern Ukraine. When Russia finally stepped in to offer financial assistance in December, the claimed absence of conditionalities was touted in eastern cities. Austerity was a convenient screen, and one the Russian government continues to use to impugn the motives of the West. In statements throughout the autumn, IMF and EU leaders emphasized the same austerity demands. Mentions of social justice, the poor (or the "less affluent," per one IMF press release), even corruption, came meekly behind discussion of energy-sector tariffs and exchange-rate flexibility. Pro-Yanukovych media warned of job losses, wage and pension freezes, while the international community and the IMF never clearly rejected this formulation.

The idea, implicit in the IMF austerity demands, that grandmother's $160-a-month pension is the cause of Ukraine's fiscal shortfall, is absurd. The interim Ukrainian government estimates Yanukovych's inner circle moved as much as $70 billion overseas in three years -- far more than Ukraine now needs from the IMF to keep the economy afloat. Average Ukrainians are well aware that despite a change in government, the oligarchs enriched through scam privatization deals and access to government coffers are still close to many politicians now in power. People in Ukraine are prepared to accept some shared suffering to help fix the economy, but the financial community must show it will not negotiate with the thieves to tax the victims.

Austerity may push many Ukrainian workers into a false choice between East and West, a return to foreign domination or deepening impoverishment. In the Donbas, a Russian-speaking coal-mining region, one source of support for the new government is the independent miners' trade union. The miners' president, Mikhailo Volynets, is a member of the Euromaidan Coordinating Council. In November, he said, "I have 270,000 members, most of them in the east. How can I agree they will have to pay more for their heating, right before winter, and their wages will be frozen? The fact is we support the EU deal because we know that Ukraine needs democracy, and integration with Europe is our best hope. But the IMF needs to work with us on reforms that do not target average working Ukrainians."

The new Ukrainian government has a small window of time to make critical economic choices. The path it chooses could support development of a more just society, protect the poor and reinforce the local and authentic optimism of the protest movement that toppled Yanukovych.

The current administration has already announced that consumer utility prices will increase by 50 percent May 1. It says it will provide some unspecified protections to vulnerable citizens, but much clearer action is needed to show people they will not be expected to pay for decades of corruption from their already meager resources.

The timing is ideal for the IMF, EU and United States to clarify that average working families are not the cause of Ukraine's economic disaster and must not bear a disproportionate burden for the recovery. A strong focus on resolving severe wealth inequality would create support for sustained democratic and economic reform. With Ukraine now in desperate need of support, it will clearly be up to the IMF and EU politicians who can most influence aid conditionalities and implementation to support a new course. If reforms worsen the standard of living of average Ukrainians, especially the core of Ukraine's formal economy, the industrial workers of the east, this opportunity may pass. The optimism of the street may go the way it did after 2004, when many of the same politicians now in office came to power during the Orange Revolution and promptly lost the historical moment to infighting and corruption. Ukraine has another chance, but reforms that worsen inequality will risk the moment of democratic possibility and hope for a brighter future.