FORECAST FOR THE NEW CRIMEA AND JAN TOMBINSKI GOVERNMENT AND PARLIAMENT THE DONBAS IN 2015 ON REFORMS FOR UKRAINE № 16 (82) DECEMBER 2014 WWW.UKRAINIANWEEK.COM Featuring selected content from The Economist FOR FREE DISTRIBUTION |CONTENTS POLITICS CRIMEA Post-Revolution Hangover: The Shattered Showcase of the Russian World: Who will win the war Russian occupation spells decline of Crimea’s real economy, of each against all impoverishment and unemployment in Ukrainian politics? 27 The Unfree Peninsula: 4 The prospects DiversificationP ains: External factors will keep pushing of Crimea in 2015 Ukraine’s economy to overcome dependence on unreliable export-oriented industries and markets 30 8 The Nerve of Annexation: Fueling Energy Independence: Russia’s Psychological portrait energy war and devaluation of the of Crimeans during the Maidan hryvnia will change the way Ukrainians and before the annexation use gas and electricity 32 10 Crimea's Multitude of Nations: On Another Front: Ethnic diversity of the peninsula Ukraine needs energy reform to fix the economy and weaken Russia’s grip 35 Crimean Anchor: The rationale behind transferring 11 the peninsula to the Ukrainian EU Ambassador to Ukraine SSR in 1954 Jan Tombinski on vital reforms for the country 38 12 NEIGHBOURS Ex-President of Latvia Vaira Vike-Freiberga: SECURITY “The most important element for Andriy Levus, ex-Deputy Chief the future of Ukraine is what Ukrainians of the SBU, on post-Maidan do themselves” transformations in Ukraine’s security service, Russian agents 42 and Ukrainian guerillas Lev Gudkov, Director ofL evada Center, in the Donbas on essential components of Russian society and the 14 tools with which the government DONBAS controls it Is Donbas Really so Hopeless? It is the Kyiv government, not the 44 people of the region who should Leonidas Donskis be blamed for its current turmoil on Ukraine’s historical 18 and political time zone A War in the Luhansk People’s Republic: 47 Who controls the self-proclaimed quasi-state Yuriy Sergeyev, Permanent Representative of Ukraine to the UN: 20 “Ukraine wants The Union of Donetsk and the to create a coalition for the protection Kremlin: The initiators of the of the interests of our region – Europe” anti-Ukrainian putsch in Donetsk 48 22 Anti-Crisis Communication: Donetsk and the Phantoms Musician and art gallery curator of Capitalism: Olena Stiazhkina Pavlo Gudimov on public and private on businessmen in the Donbas collaboration to save culture 24 50 E-mail [email protected] www.ukrainianweek.com Tel. (044) 351-13-87 The Ukrainian Week № 16 (82) December 2014 Editors address 37 Mashynobudivna str., Kyiv, 03067, Ukraine Founder ECEM Media GmbH. Publisher ECEM Media GmbH Print run 15 000. Free distribution Address Austria, Am Gestade,1, 1010 Vienna Our partner State registration certificate КВ № 19823-9623ПР 19.03.2013 Chief Editor Alla Lazareva Editors Anna Korbut, Natalia Romaneс, Shaun Williams № 16 (82) DECEMBER 2014|THE UKRAINIAN WEEK|3 POLITICS|GOVERNMENT billion hryvnias, despite a signifi- cant rise in gas prices for household consumers in the first half of the Post-Revolution year. The fighting in the Donbas and permanent threat of Russian invasion triggered capital flight and a decline in foreign exchange earn- ings. This intensified problems that had been brewing for years and left Hangover the country without a safety net. The devaluation of the hryvnia, whose rate has been impossible to Who will win the war of each against stabilize at 11.5, then 12.95, then 15- all in Ukrainian politics? 16 to the dollar, naturally did not stop and will not stop. The official he next year (or even its be- Author: ko’s Cabinet after the crisis of 2008- rate is already at least 10-15% lower ginning) promises to pose Oleksandr 2009, nor Azarov’s in 2010-2014. than the prices of currency on the very difficult challenges for Kramar On the contrary, each government black market, though it is really only TUkraine’s social and political tried to hand off the responsibility available there at 17-17,5 hryvnias/ stability. The expected confluence of of addressing these problems to its USD (the price grows constantly). several negative factors suggests successors: public debt increased Most experts and international that the country is more than ever at rapidly in order to maintain an agencies predicted further eco- risk of plunging into total chaos, the overvalued exchange rate for the nomic decline of at least 3-5% next consequences of which are cur- hryvnia, and the populist holiday year, along with rising unemploy- rently unpredictable, and the forces continued amidst growing deficits ment and inflation, reduced real in- that might overcome it, uncertain. for the budget, the Pension Fund comes for citizens and the state The country is rapidly ap- and Naftogaz, the state-owned mo- budget. It’s already no secret: in or- proaching a financial, economic and nopolist gas supplier in Ukraine. der to truly stabilize the situation in sociopolitical abyss, modern ana- Ultimately, the margin of safety the monetary and financial sectors, logues of which may be found in the was crossed. Beginning in April the budget deficit must be reduced, case of Argentina during the default Puppeteers. 2011, more than USD 30bn out of from the state to Naftogaz and the The oligarchs of the early 2000s, or Greece in re- are trying to USD 38bn in foreign reserves was Pension Fund. cent years. These crises arose out of exploit the spent to support the illusion of sta- To reduce the budget deficit to problems that began at least in the population’s bility (according to estimates in De- at least 3.7% of GDP, the Finance last decade. Previous administra- spirit of protest cember they will fall to USD 7.2- Ministry has required all ministries tions have done nothing to remedy to further their 7.6bn). The Naftogaz deficit ex- to cut spending by 25%. This inevi- the situation—neither Tymoshen- own interests ceeded the astronomical sum of 100 tably means layoffs, reduced social фото сайта: www.pinchukfund.org сайта: фото 4|THE UKRAINIAN WEEK|№ 16 (82) DECEMBER 2014 GOVERNMENT|POLITICS benefits or long unpaid leaves. And dominate the most profitable sec- Party of Regions MPs, and the Com- this time the government is unlikely tors of the economy. The country munist Party would not be suitable to avoid austerity measures. Indeed, has lately seen countless scandals conduits for revolution as they have the IMF will not continue lending to stirred by bribes in return for this or lost any respect or authority in the a country that does nothing to even that lucrative government position, country, and Svoboda party has come close to spending less than it on which, of course, the candidates been trying to take advantage of earns. In January, without the plan to earn a good yield. popular discontent but has discred- IMF’s support, the level of reserves The long talks by senior officials ited and marginalized itself not only may fall to a critical USD 5.6bn and in the present government and the at the national level, but also among be completely exhausted by March Tax Service regarding the hundreds its regional “base”, where it long or April, so a default surely awaits. of billions in damage caused to the controlled the local government but Among other things, this will state by corruption under the Yanu- did not live up to expectations. mean the inability to draw loans to kovych regime have not translated Under these circumstances, it finance even the aforementioned into savings for Ukraine. What’s would be simple for a variety of deficit of 3.7% of GDP. Hence even more, to the naked eye, even with- players to exploit the high potential greater restrictions will be placed on out any noticeable calculations, it is for explosive protests among a dis- actual spending. These restrictions clear that the share of state reve- appointed population that is even will either be nominal or through nues that “vanished” has not only more aggressive toward the new the large-scale printing of money by remained, but has even increased. government than it was toward the the NBU in order to cover the defi- For example, the hryvnia-denomi- old. Those who might try to lead cit, causing hyperinflation in a man- nated budget revenues are virtually these uprisings are not likely to be ner reminiscent of the early 1990s. the same as last year, but after the able to control them for long. And devaluation of the national currency they themselves will risk becoming UNFAIR BELT TIGHTENING by more than half, the volume of victims of the movement as the The decline of living standards is al- imports (which provides a signifi- populist spiral unravels. The latest ready very significant. The 21.8% cant portion of revenues to the trea- rally in Vinnytsia offers a good ex- year on year inflation rate recorded sury), exports and the production of ample (on December 6, protesters by the Ukrainian State Statistics goods and services have increased stormed the Oblast Council prem- Service in November is just the tip significantly, even considering the ises trying to prevent it from hold- of the iceberg. losses incurred in the Donbas. ing the session and holding a vote Most vulnerable social groups can expect a targeted support pack- THE PHANTOM THE PARLIAMENT WILL LACK age, which will at least partly allevi- OF TOTAL CHAOS ate the impact of austerity for them. Amid the impoverishment of the A SOLID RULING COALITION. But the majority of citizens whose majority of Ukraine’s population, DECISIONS WILL BE PASSED average incomes are higher than the including those who recently joined long-inadequate living wage (1,176 the ranks of the middle class, at- BY SITUATIONAL ALLIANCES hryvnia or around USD 70 at the tempts to further tighten the noose current official exchange rate) are on their necks objectively spells so- to dismiss the head of the oblast destined for further rapid deteriora- cial instability.