Should U.S. Pay for Ukraine's Bankruptcy?

March 3, 2014

Should U.S. Pay for Ukraine's Bankruptcy?

By Chriss Street

President Obama and leaders of the European Union (EU) celebrated the triumph of Ukraine’s“people’s revolution” and then snarled as Russian President Putin’s military rolled in and annexed the Crimea in southern Ukraine.  But the real question for Americans should be who is going to pay the $29 billion a year bailout to keep the country from going bankrupt.  U.S. Secretary of State John Kerry recognized the rebel government and pledged $1 billion of support; while the 28 nation European Union (EU) offered to join with the International Monetary Fund (IMF) in an aid package worth as much as $27 billion over seven years.  But EU economies shrank a ½% over the last five years and many of their members need financial assistance.  Are Americans willing or able to confront Russia’s military and pay $29 billion a year to keep Ukraine afloat?

The annual cost of bailing-out the Ukraine would be more than the average $26 billion the Bush Administration spent per year for the War in Afghanistan.The U.S. is the world's largest “bilateral” donor nation, but our annual foreign aid budget is only $31.2 billion in economic assistance and $23.3 billion in military assistance.Economic assistance went to 183 countries; with Afghanistan the largest recipient at $3.3 billion and Brunei the lowest smallest recipient at $3,950.

Foreign aid is not popular with the American people and there are misperceptions about the size and effectiveness of the spending.  According to a Kaiser Foundation poll, “Americans think 28% of the federal budget is spent on foreign aid, when it is about 1 percent. Further, four in ten think a major part of U.S. foreign aid is given directly to developing countries to use as they see fit.”  Only 22% of Americans believe that promoting democracy in other countries should be a top federal priority.

Three months of political upheaval exacerbated Ukraine’s weak economy and drained its foreign currency reserves. Their monthly import bill for Russian natural gas runs $1 billion and debt service is $1.1 billion.  Plus the National Bank of Ukraine was forced to spend $1.7 billion to stabilize the currency after a 15% fall. Ukraine also has $17 billion due in minimum debt repayments in 2014.  They failed to sell any bonds last week and Ukraine's foreign currency reserves dropped from $20.4 billion to $17.8 billion in January. The nation only has enough cash to pay for imports through April and rumors are swirling government salaries and pensions won’t be paid in March.

Ukraine received the first $3 billion tranche of a $20 billion Russian bailout in December that included a 30% discount on natural gas imports.  But that support was suspended during the January riots and canceled after the revolution.  Russia was willing to fund the Ukraine, because it is front door to invade Russia. 

“Ukraine” translates into English as “borderland.” Western Ukrainians fought for Germany and eastern Ukrainians fought for Russia in World War I and World War II.  During July and August of 1943, one million Germans and two million Russians fought the largest tank battle in the history of the world in the Ukraine at the Battle of Kursk, just 280 miles southwest of Moscow. The Red Army was victorious after suffering 1,600,000 casualties compared to the German Army’s 366,000 casualties.  Kursk was the Nazi’s greatest military defeat and led to the invasion of the German “Fatherland.”  If Germany had won, panzer tanks would have rolled into Moscow in a week.

America is the largest contributor to the IMF with a 17% voting share.  Together with EU members they have over 40% control.  The IMF and EU conditioned their financial assistance offer on the Ukraine signing an agreement to enact a slew of painful financial, fiscal, and labor austerity reforms to bring the country's post-Soviet economy up to Western standards.  These reforms would entail the quality of life in the Ukraine falling for five to ten years, including lower purchasing power and surging energy costs. Yanukovich chose a Russian bailout to avoid the violent riots he expected if Ukraine signed an IMF bailout.  This caused a violent revolution, forcing him to flee to Russia.

The new government in Kiev that toppled Yanukovich faces the same constraints as their predecessor. Stratfor Global Intelligence suggests: “the only card Kiev can play for the moment is to emphasize the destabilizing effects a default would have. The economic disruption caused by a default could reignite protests in Ukraine and shatter the fragile compromise brokered by Western powers -- an option the West would find unacceptable.” But a joint EU-IMF bailout of Ukraine without painful economic reforms would be politically indefensible to many European countries that have been battling their own economic crisis and have been subject to five years of stringent austerity.

Russia announced on February 26th “surprise military drills” along their borders and activated 150,000 army, navy, air force, and rocket forces personnel.  The next day the 76th Russian Shock Troops invaded the Crimea as Russian fighter jets screamed overhead.

The U.S. has engaged in bilateral military programs with Ukraine since the collapse of the Soviet Union in 1992.  Combined U.S.-Ukraine military operations have taken place in in Bosnia, Kosovo, and Iraq. Ukrainians have proven their ability to be a reliable and capable peacekeeping force, but this is far from being able to challenge the Russians. 

President Obama said that “the United States will stand with the international community in affirming that there will be costs for any military intervention in Ukraine.” Americans willingness to financially bail out a basket-case like the Ukraine comes at a time the budget sequestration is hacking away at federal spending.  Even the Department of Defense just announced plans to slash the Army from 570,000 to a pre-World War II size of 440,000. It may be enjoyable for Americans to root against the Russians, but why should the U.S. pay for Ukraine’s bankruptcy?

The author welcomes feedback and can be contacted at chriss@chrissstreetandcompany.com
Chriss Street is teaching microeconomic at University of California, Irvine this spring. ECON X419.34 (3 units): March 31 – June 8, 2014 Where: ONLINE Fee: $630 Reg #: 00026 (Spring 2014) Call Student Services at (949) 824-5414 or visit http://unex.uci.edu/courses to enroll!

President Obama and leaders of the European Union (EU) celebrated the triumph of Ukraine’s“people’s revolution” and then snarled as Russian President Putin’s military rolled in and annexed the Crimea in southern Ukraine.  But the real question for Americans should be who is going to pay the $29 billion a year bailout to keep the country from going bankrupt.  U.S. Secretary of State John Kerry recognized the rebel government and pledged $1 billion of support; while the 28 nation European Union (EU) offered to join with the International Monetary Fund (IMF) in an aid package worth as much as $27 billion over seven years.  But EU economies shrank a ½% over the last five years and many of their members need financial assistance.  Are Americans willing or able to confront Russia’s military and pay $29 billion a year to keep Ukraine afloat?

The annual cost of bailing-out the Ukraine would be more than the average $26 billion the Bush Administration spent per year for the War in Afghanistan.The U.S. is the world's largest “bilateral” donor nation, but our annual foreign aid budget is only $31.2 billion in economic assistance and $23.3 billion in military assistance.Economic assistance went to 183 countries; with Afghanistan the largest recipient at $3.3 billion and Brunei the lowest smallest recipient at $3,950.

Foreign aid is not popular with the American people and there are misperceptions about the size and effectiveness of the spending.  According to a Kaiser Foundation poll, “Americans think 28% of the federal budget is spent on foreign aid, when it is about 1 percent. Further, four in ten think a major part of U.S. foreign aid is given directly to developing countries to use as they see fit.”  Only 22% of Americans believe that promoting democracy in other countries should be a top federal priority.

Three months of political upheaval exacerbated Ukraine’s weak economy and drained its foreign currency reserves. Their monthly import bill for Russian natural gas runs $1 billion and debt service is $1.1 billion.  Plus the National Bank of Ukraine was forced to spend $1.7 billion to stabilize the currency after a 15% fall. Ukraine also has $17 billion due in minimum debt repayments in 2014.  They failed to sell any bonds last week and Ukraine's foreign currency reserves dropped from $20.4 billion to $17.8 billion in January. The nation only has enough cash to pay for imports through April and rumors are swirling government salaries and pensions won’t be paid in March.

Ukraine received the first $3 billion tranche of a $20 billion Russian bailout in December that included a 30% discount on natural gas imports.  But that support was suspended during the January riots and canceled after the revolution.  Russia was willing to fund the Ukraine, because it is front door to invade Russia. 

“Ukraine” translates into English as “borderland.” Western Ukrainians fought for Germany and eastern Ukrainians fought for Russia in World War I and World War II.  During July and August of 1943, one million Germans and two million Russians fought the largest tank battle in the history of the world in the Ukraine at the Battle of Kursk, just 280 miles southwest of Moscow. The Red Army was victorious after suffering 1,600,000 casualties compared to the German Army’s 366,000 casualties.  Kursk was the Nazi’s greatest military defeat and led to the invasion of the German “Fatherland.”  If Germany had won, panzer tanks would have rolled into Moscow in a week.

America is the largest contributor to the IMF with a 17% voting share.  Together with EU members they have over 40% control.  The IMF and EU conditioned their financial assistance offer on the Ukraine signing an agreement to enact a slew of painful financial, fiscal, and labor austerity reforms to bring the country's post-Soviet economy up to Western standards.  These reforms would entail the quality of life in the Ukraine falling for five to ten years, including lower purchasing power and surging energy costs. Yanukovich chose a Russian bailout to avoid the violent riots he expected if Ukraine signed an IMF bailout.  This caused a violent revolution, forcing him to flee to Russia.

The new government in Kiev that toppled Yanukovich faces the same constraints as their predecessor. Stratfor Global Intelligence suggests: “the only card Kiev can play for the moment is to emphasize the destabilizing effects a default would have. The economic disruption caused by a default could reignite protests in Ukraine and shatter the fragile compromise brokered by Western powers -- an option the West would find unacceptable.” But a joint EU-IMF bailout of Ukraine without painful economic reforms would be politically indefensible to many European countries that have been battling their own economic crisis and have been subject to five years of stringent austerity.

Russia announced on February 26th “surprise military drills” along their borders and activated 150,000 army, navy, air force, and rocket forces personnel.  The next day the 76th Russian Shock Troops invaded the Crimea as Russian fighter jets screamed overhead.

The U.S. has engaged in bilateral military programs with Ukraine since the collapse of the Soviet Union in 1992.  Combined U.S.-Ukraine military operations have taken place in in Bosnia, Kosovo, and Iraq. Ukrainians have proven their ability to be a reliable and capable peacekeeping force, but this is far from being able to challenge the Russians. 

President Obama said that “the United States will stand with the international community in affirming that there will be costs for any military intervention in Ukraine.” Americans willingness to financially bail out a basket-case like the Ukraine comes at a time the budget sequestration is hacking away at federal spending.  Even the Department of Defense just announced plans to slash the Army from 570,000 to a pre-World War II size of 440,000. It may be enjoyable for Americans to root against the Russians, but why should the U.S. pay for Ukraine’s bankruptcy?

The author welcomes feedback and can be contacted at chriss@chrissstreetandcompany.com
Chriss Street is teaching microeconomic at University of California, Irvine this spring. ECON X419.34 (3 units): March 31 – June 8, 2014 Where: ONLINE Fee: $630 Reg #: 00026 (Spring 2014) Call Student Services at (949) 824-5414 or visit http://unex.uci.edu/courses to enroll!

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