Last week’s inauguration of Viktor Yanukovich as the President of the Ukraine marked an important shift in the country’s political alignment. Yanukovich’s victory, a close ally of Russian Prime Minister Vladimir Putin, reverses the country’s Orange Revolution—when Ukrainians embraced Viktor Yushchenko and the West in 2005. Like an elastic band, the Ukraine tried to pull itself as close as it could to the West. Traditionally, the eastern boundary of Europe was the River Don. This would encompass all of the Ukraine. However, the country is more culturally aligned with Russia than any other state. Indeed, the Rus originated in the fertile plains outside Kiev and, along with Swedes and other tribes, migrated east to colonize the Eurasian steppes. The Ukraine was always seen as Russia’s soft underbelly, which was fully demonstrated by Operation Barbarossa in 1941. Hence, it was for this reason that Moscow never took well to the idea of the Ukraine joining NATO or becoming a member of the European Union. Hence, Moscow made life miserable for Kiev, with moves such as blocking all natural gas supplies in the thick of a brutal winter. After the 2008 debacle in Georgia, where it was left to fend for itself against the Russian bear, the Ukraine realized that it was a minor pawn for the West. Leading politicians, such as Prime Minister Yulia Tymoshenko, began making overtures to Moscow—slowly leaving Viktor Yushchenko as an isolated figure. Now, the elastic band snapped in the opposite direction, and the Ukraine is firmly ensconced within the Russian orbit. Although Yanukovich won the presidency by a narrow margin, the Ukraine would have still swung to the east regardless of who won—given that his rival, Prime Minister Yulia Tymoshenko, was also in the Russian camp. The electoral results in the Ukraine, along with the declining popularity of Georgian President Mikheil Saakashvili, are allowing Russia to reassert its influence over its traditional domain. It is also a reaffirmation of the dwindling influence of the U.S. and Europe.
However, the realignment of the Ukraine into the Russian camp will not be without any strings attached. The Ukrainian economy was one of the most adversely affected economies in the world by the global credit crunch, contracting by more than 15% y/y in 2009. GDP dropped 15.9% y/y in the third quarter of last year, and 7% during the fourth quarter. Industrial production plunged 23.4% y/y in 2009, bottoming out at almost 27% in July. The collapse in steel production and the implosion of commodity prices were powerful blows. The global credit crisis and the decline in bank lending further added to the country’s economic woes. This was the reason why the IMF was called in to provide the country with a $16.5 billion bailout. Fortunately, many of the country’s credit indicators stabilized. For example, the Ukraine’s fiscal deficit stands at 3.6% of GDP. The government’s debt to GDP ratio is 17%. Consolidating the state-owned companies raises it to 23% of GDP—which is still very low by European standards. Nevertheless, Kiev realizes that it must maintain warm relations with the West in order to preserve access to the international capital markets and multilateral lending agencies. This was the reason why Brussels was the first destination for a state visit by the newly-elected President Yanukovich. Moreover, there are concerns that Europe will try to diversify its energy sources away from Ukrainian-transited gas, which would be a terrible blow for the economy. Therefore, Moscow needs to be careful. It secured the return of Kiev into its orbit, but it has the potential of being a very expensive ward if the rails again come off the global economy.
Fortunately, the Ukraine seems to be on the mend. As was the case across much of the developing world, the Ukrainian economy surged in 2010. The reactivation of global demand, higher commodity prices and a cold snap in Europe, which drove gas prices higher, were the main factor for the Ukrainian economic recovery. Still, the country’s situation is tenuous. The central bank recently labelled the recovery as unsustainable—mainly due to external factors and one-time events. The strength of the expansion was exacerbated by the low base, which exaggerated the increase. The central bank said that the country needs to implement a thorough fiscal reform, reduce political infighting and adopt pragmatic monetary and credit policies in order to place it on a more sustainable path. Otherwise, the Ukraine could end up being a very expensive trophy for Moscow.