Economists Michael Hudson and Jeffrey Sommers discuss how provisions in an IMF deal like cuts to gas subsidies and pensions will hurt the average Ukrainian citizens and benefit kleptocrats
JESSICA DESVARIEUX, TRNN PRODUCER: Welcome to The Real News Network. I’m Jessica Desvarieux in Baltimore.
While much of the reporting on Ukraine has focused on the political battles between the U.S., the E.U., and Russia, there’s little coverage on the economic consequences of such battles for the debt-ridden nation, especially what this means for ordinary Ukrainians. The interim government in Ukraine is currently negotiating a $15 billion IMF bailout package, with talks set to conclude on March 21.
Also since the referendum and annexation of Crimea by Russia, the U.S. and E.U. have imposed sanctions on several Russian and Ukrainian politicians. That means visa bans and asset freezes for the elite. And there could be more coming down the pipeline, according to U.S. Vice President Joe Biden.
Joining us now to discuss the economic aspect of the situation in Ukraine are our two guests.
Jeffrey Sommers is an associate professor and senior fellow of the Institute of World Affairs at the University of Wisconsin-Milwaukee.
Also joining us is Michael Hudson. He is a distinguished research professor of economics at the University of Missouri-Kansas City.
Thank you both for joining us.
So I’m going to first start off with you, Jeffrey. My first question is related to the conditions for a possible IMF deal. They include cuts to gas subsidies, pensions, public sector employment, as well as privatization of government assets, a deal that really sounds like it’s going to hurt ordinary Ukrainians. So my first question is: what actually is behind them potentially accepting a deal like this? And why would they risk losing their political power?
JEFFREY SOMMERS, INSTITUTE OF WORLD AFFAIRS, UWM: Well, you know, I don’t think they’re going to risk losing their political power. Now, you’re absolutely right. This is going to be terribly painful for the people of Ukraine. But what they’re going to be able to do is just to deflect and to put the blame on the Russians for this and somehow suggest that this is all necessary and that there is a light at the end of the tunnel. So just as with the, frankly, Soviet rulers in the past, in terms of how they always promised a golden age off in the distance, Ukraine’s rulers will do the same, and this will be echoed by remarks coming from the IMF.
Now, I would also say that they’re also going to be pointing to Poland and the Baltic states. And they are going to say that, look, these are two places that went through the same kinds of conditions that we’re going to be imposing upon you, and you are going to come out like them. Now, for people in Ukraine, Poland in particular will appear to be quite appealing, because the per capita purchasing power of people in Poland is literally twice that of Ukraine.
But we have to remember a few things. One is that literally one-third of Poland used to be Germany, so there was a massive quantity of German investment into Poland with its independence with the fall of the Warsaw Pact. But also, because they were the first country that hinted that they might exit the euro–rather, the Warsaw Pact, they got a much better deal from the IMF and from the West. They got lots of grants, not loans. So an entirely different set of aid that we’ll see in Ukraine, with an entirely different set of conditions.
DESVARIEUX: Alright. Michael, I want to ask you who aims to benefit from this IMF deal.
MICHEAL HUDSON, PROF. ECONOMICS, UMKC: Well, there are a number of–all of the money that has been given by the IMF and the West in the past has been given to the kleptocrats that run Ukraine. The UN and the World Bank have Ukraine right next to Nigeria for the GINI coefficient of concentrated income. So, basically, the Europeans have told the kleptocrats, the ten or 12 billionaires that run the country, we will make you very, very rich if you join us. We will give you a lot of IMF money, you can transfer it into your banks and your bank accounts, you can then send it abroad to your offshore banking centers, and the Ukrainian people will owe it. So you can do the Ukraine what the Irish government did to the Irish: you can take the public money, you can give it all to the private bankers, and then you can tax your people and make them pay.
But as soon as the IMF gives the loan to the Ukraine–Russia announced on Monday–and you can read this on the Johnson’s Russia List that has a summary of all of the Russian official reports–Russia says that Ukraine owes $20 billion, dating back to the Soviet Union era in exchange for, in addition, to about $5 billion or $6 billion for the oil subsidies that it’s been given. Russia said it is going to charge Ukraine the normal oil price, not the subsidized price. So all the money that the IMF and the U.S. gives Russia says is immediately owed to it itself.
Whatever happens, either the Russian government will get the IMF money for gas and imports or the kleptocrats will. None of the money–and I think Jeff agrees–none of this money’s going to go to the Ukrainian economy any more than the IMF money went to the Irish economy or the Greek economy or the other economies that are there. IMF money doesn’t go to the country and it doesn’t go to the people. It goes to the billionaires who run them to take the money and immediately send it back to the West so it’s a circular flow, and it goes in and out of Ukraine in about 20 minutes.
DESVARIEUX: Michael, I’m glad that you brought up those countries as examples, ’cause I think it’s important for us to get some historical context about the role of the IMF in the post-Soviet nations of Eastern Europe. You both have written about the IMF bailouts in Latvia. So, Michael, I’m going to ask you first: can you talk about the consequences for the economy, particularly the working class people, whether they’re likely to see the same in Ukraine happen to them?
HUDSON: The objective of IMF loans is to deindustrialize the economy. It is to force the economy–meaning the government when you say the economy–the government has to pay the IMF loan by privatizing whatever remains in the public domain. The Westerners want to buy the Ukrainian farmland. They want to buy the public utilities. They want to buy the roads. They want to buy the ports. And all of this is going to be sold at a very low price to the Westerners, and the price that the Westerners pay will be turned over to the Ukrainian government, that then will turn it back to the Ukraine. So whatever the West gives Ukraine will immediately be taken back.
But not only will the money be taken back, but the Ukrainian factories, roads, infrastructure, bridges, farmland, and property will also pass into foreign ownership, just like it did in Russia, just like it did in Latvia, just like it does in all of the other post-Soviet countries. And then this is going to lead to lower wage payments. Many Ukrainians say they haven’t been paid for two months. In Russia in 1994, during the Yeltsin selloff, labor went ten or 12 months without being paid. You can’t pay labor and at the same time pay the IMF and pay the kleptocrats. Something has to give, and what gives is going to be living standards and labor.
So the result will be what it was in Latvia, Greece, and Ireland, where 20 percent of the population emigrated. Just like 20 years ago you had an influx of Polish plumbers into London, you’re now going to have millions of Ukrainian plumbers pouring into Western Europe, saying, we want jobs at anything; there are no jobs at home.
DESVARIEUX: Jeff, you’re actually in Latvia right now. Can you speak to some of what Michael raised, those issues?
SOMMERS: Well, I’m not in Latvia at present, although I spend quite a bit of time there.
But much of what Michael says is correct. And just as I indicated, what the differences were with Poland and the kind of deal that Ukraine is going to get, we also have to remember that a country like Latvia will also be presented as an example of what the Ukrainians can aspire to. And we have to remember that they’re just entirely different economies. So even if one took the position that Latvia has somehow been successful, even though its people have just suffered massively over the past few years under the conditions of austerity, with huge numbers of people exiting, some 10 percent of the population since 2000, and, as Michael says, some, you know, almost 20 percent since independence in 1991, you know, these are very different economies that are based largely on offshore banking. They’re very small. They can fulfill this kind of niche role that a big country like Ukraine just absolutely can’t.
I mean, Ukraine’s future is in grain production. And, as Michael says, you’re going to see foreign companies coming in, hoping to assert control over that prime grain-producing land.
Now, also as Michael says, there’s going to be a continuation of an already existing trend with Ukraine, and that is to, again, emigration. Now, the problem with this idea that somehow by joining the E.U. everything is going to be good for the people of Ukraine is that what Ukrainians are essentially seeing are the echoes of a social democratic past which is being euthanized in the European Union. So this whole idea of a social market, of a social Europe is one which they still can experience when they go abroad, but what they don’t really understand is that structurally it’s being destroyed. And so this is not the future, unfortunately, that they’re going to inhabit if they join the E.U. It’s more likely, again, to be just one of, unfortunately, some misery, especially for the working and the middle classes, as the subsidies for gas and for education and for the other necessities for reproducing a middle-class standard of living are taken away.
Now, to get to the issue of maybe what should be done, of course, what we need is an entire reassessment of the development model that we’ve seen in both the former Warsaw Pact nations and the former constituent parts of the Soviet Union. We need to look more at local production and at creating and satisfying more of their demands internally, you know, rather than thinking that just by being integrated into the European Union, that somehow there’s going to be a market for their goods. There’s not. The experience that we’ve seen in the past is that when these fragile economies get opened up even more so to those of West Europe, that their domestic industry really gets suffocated, and the only thing that they get in return are cheap consumer products. So I don’t see much good coming out of this deal with the European Union or the IMF.
DESVARIEUX: Okay. Let’s switch gears a little bit and talk about the recent annexation of Crimea. Is there a serious economic loss here for Ukraine, or even a substantial economic gain for Russia, Jeff, in your opinion?
SOMMERS: Well, it’s really too early to tell at this point, but there is one prospect that’s on the horizon that could suggest that there is a loss for Ukraine and a gain for Russia, and that is that there are offshore gas fields just offshore of Crimea. Exxon put a rather substantial bid in for those. They’re going to lose that. It’s going to go to Gazprom. And this could be fairly significant in terms of a gain for the Russian economy and a loss for the Ukrainians. So that’s the only major area of gain for Russia.
Another potential loss for Ukraine is that the Crimea is a tourist destination, so it does receive some tourist revenue. But on balance, at present, I don’t see any immediate harm being done to the Ukrainian economy but, again, with that medium- to long-term prospect of losing some gas revenues.
DESVARIEUX: Michael, let’s turn to you. I want to talk about the effects of these sanctions and what sort of effect they’ll have on the Russian economy. What are we likely to see play out in terms of Russia’s relationship with the G7, and in particular the G8 summit that’s planned to take place in Sochi in June?
HUDSON: Nothing has happened at the last G8 summit or the summit before that or the summit before that. These are sort of, like, just get-togethers for public relations. There’s already been a separation of interest.
I want to say one thing about what Jeff pointed out, quite correctly, about the oil and gas. The kleptocrats in the Ukraine were about to sell the oil and gas rights to American gas companies. This is precisely what led Putin in Russia to finally move against Khodorkovsky when he was going to sell the Yukos oil to Exxon, which would have given America control of Russia’s oil to sell to itself at $0.02 on the gallon and keep everything above it for itself. This–Russia is now going to claim that these are Crimean rights. Crimea is going to sell these rights to Gazprom, basically, to the Russian companies, to keep them out of the Western control. So Russia is going to basically say, well, look, we’ve been providing you, the West, with oil.
The Ukrainians’ right-wing party that the Americans are supporting yesterday announced that if they were not allowed to go and just begin killing the Russians, they were going to blow up all the pipelines. Russia announced that if the pipelines and gas lines are blown up, fine–Europe won’t get any gas. And without gas, its industry is going to slow down.
Russia has just completed the pipeline to the Pacific Ocean and is shifting its trade very rapidly towards China and towards the other Shanghai Cooperation Organisation group. So there’s going to be a shift.
Regarding the economics of the Crimea for Russia, one of the reasons that Yeltsin [inaud.] [Soviet] Union countries was Russia was losing money on them on the balance sheet. The Ukraine costs much more than it returns economically.
Obviously, the reason Russia moved in to Sevastopol wasn’t because of economic reasons. It was for military reasons. It couldn’t let NATO put hydrogen bombs 20 miles from Russia, because then somebody in the neocons would have said, hey, we’ll never have a better chance to blow up Russia and the world than we have right now; let’s do it. So Russia’s decisions here are cultural and military. It’s not an economic decision to take the crimea. It’s a basic military, national security decision that it’s done.
But economically, I think Russia sees that Western Europe is pretty much what Donald Rumsfeld said: old Europe. Western Europe is so neoliberal, I think, that it’s doing to its own populations in France, Greece, Spain, Italy exactly what Jeff was pointing out that it’s so far only done to Latvia and the Eastern European countries. Latvia was a dress rehearsal for Western Europe. So Western Europe is drying up. So of course Russia’s going to turn towards an economy that’s not destroying itself. It’s going to turn towards China and other Asian economies. And we’re seeing a vast shift. That’s the effect of the neocon plan that Obama has embraced in pushing the coup d’état.
Russia also has pointed out that there’s something called the Budapest Memorandum of 1994 that bans all foreign countries from interfering in the domestic politics of the Ukraine. And it’s–Russia pointed out that it was the West that had violated the Budapest memorandum in blocking the terrorism and the coup d’état. And what they said was literally (and I’m quoting from the Russian website): how should we qualify the U.S. and E.U. statements that they are–no longer regard the legally elected head of state as a legitimate partner, unlike the new leaders appointed in the square, in a breach of all the constitutional procedures?
So Russia is going to say, a debt is a debt, you owe us the $20 billion you owe us from before, you owe us the money for the gas. If you don’t pay us, you don’t get the gas, and if you don’t pay us for the gas, the gas can’t get to Europe. So Europe is going to be facing a very, very cold summer. Its cost structure will go way up, much for the benefit of the United States.
So from the U.S. point of view, you have to look at the U.S. and Europe and Russia together when you ask about Russia’s economy. This is just a deadly blow to Europe, much helping the United States, which has much lower energy costs if it wishes. And Europe has been suckered into supporting a plan that it’s being sacrificed for.
Russia is going to be able to survive by turning to the east.
DESVARIEUX: Alright. Jeff, I want to get your take. What is America going to be facing with these sort of sanctions that are placed on Russia, as well as just the tension that is developing between the two countries?
SOMMERS: Well, kind of complementing Michael’s remarks, and then I’ll specifically address the issue with the United States. I mean, Michael was absolutely right. Russia has the potential to begin selling more oil and gas to the east. They’re already doing so. So the United States in effect had zero leverage over Russia in this situation.
Also, this is not about economic gain for Russia, or even for Ukraine, for that matter. I mean, it’s about, again, that NATO issue. That NATO isse is crucial. I wrote a short piece in The New York Times about a month ago on this specific matter. And it goes back, of course, to the dissolution of the Warsaw Pact and the Soviet Union. The Soviets felt that they were given assurances from the United States that NATO would not encroach upon the Warsaw Pact or the former Warsaw Pact nations. And lo and behold, what does the United States do over the past two decades? They take in the Warsaw Pact, and then they move even into the former Soviet Republics themselves, the Baltic states, moving towards Georgia, and now tentatively towards Ukraine. Fortunately, Ukraine has been saying that they’re not interested in NATO, but I think it’s very, very clear that the pattern has been established. And that’s what led the Russians to act in the way that they did.
With regards to the United States, the United States actually has the potential to see both great losses to itself and great benefits to its energy industry if the crisis continues in the fashion that it has. So we see several U.S. politicians, both in the Democratic and in the Republican parties, advocating for the construction of terminals to liquify the United States’s natural gas reserves, export them to East Europe, thus diminishing the power of Russia in the region, not just in East Europe, but selling it to West Europe as well.
Now, in principle this might all sound good that it’s extra business for the United States, it weakens the hand of Russia in Europe. But we have to understand that it’s not so simple. If we begin liquifying these reserves, because natural gas is not global as a market in the way that oil is, because one has to liquify it in order to ship it across vast quantities if there are no pipeline routes, it means that there are very different price structures in place in terms of a market for it. What this will mean is that the American consumer is going to pay much higher prices for gas. So, in other words, heating bills will go up. And of even more consequence, to my mind, is the fact that it will reduce the competitiveness of American manufacturing. So American industry will have to pay more for natural gas, thus reducing some of the newfound competitiveness that it has been getting with this surplus of gas that we have identified and found here. And the next is it will actually increase pressures for even more fracking. And, of course, we know that that comes with some environmental consequences that are not necessarily beneficial for the environment, and, you know, especially for our water tables.
So I think that we have a lot of foolish proposals that are being bandied about that really will not help the average American or the U.S. economy, frankly. And that’s my great concern. I just do not think we should be exporting this gas. I think we should be using it domestically to keep our gas prices down for the American consumer and for helping to build up our industry.
DESVARIEUX: Alright, Jeffrey Sommers and Michael Hudson. Thank you both for joining us.
And thank you for joining us on The Real News Network.
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