Tuesday, December 24, 2013

Father Frost is coming to Kiev

Bringing gifts to the Ukrainean gangsters ruling the country. Charles Wyplosz says, Not nice;
As the price to deter a westward move of Ukraine, Russia has made an offer that the Ukrainian president has found impossible to turn down, if he ever contemplated seriously tying his country to the EU. This is generally hailed as a master coup by President Putin and a great relief for President Yanukovych. In fact, this coup is likely to end in tears for both countries.
Sorta like an indulgent parent giving his wayward child an allowance, with no behavioral changes required;
It is not known what economic conditions Russia has requested but a safe bet is that there is none, only political conditions. Thus Russia has acted as a highly politicised IMF, in effect getting the IMF out of the picture and allowing Ukraine to carry on with its disastrous economic policies. To say the least, it is surprising that one of the Fund’s main shareholders, with its own seat on the Executive Board, so callously undermines the institution. Just imagine what would happen if other governments would offer loans without conditions to countries that are deeply mismanaged and refuse to change their ways as requested by the IMF. 
Just putting off the day of reckoning;
Deficit spending, heavy government interventions, graft and more will continue. This will further deteriorate the Ukrainian economy. Sooner or later, Ukraine will need more money. Russia will either have to provide another, possibly bigger loan, or let the shoe drop. If another loan is forthcoming, on account of Ukrainian compliance with the political conditions, yet another one will be needed further down the path, again and again. When Russia gets tired of this process, Ukraine will have no choice but to default on the Russian loans. This will be a blow to the Ukrainian economy and to Russia. There can be no happy end when one country helps another one defy basic economic management principles. 
It will end up without even a lump of coal.

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