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

European and American media may be celebrating the triumph of the Ukraine “people’s revolution,” but the real question is who is going to pay for the $29 billion a year bailout to keep the country from going bankrupt. 

United States Secretary of State John Kerry recognized the rebel government and pledged $1 billion of support. 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 with the EU economy shrinking by a ½% over the last five years and many member nations needing financial assistance, the bulk of the cash for a Ukrainian bailout would have to come from the U.S. Given America’s foreign economic assistance budget is only $31.2 billion, are Americans willing or able to pay $29 billion a year to keep the Ukraine afloat?

The U.S. is the world's largest “bilateral” donor nation. American annual foreign aid budget is $54.5 billion, with $31.2 billion in economic assistance and $23.3 billion in military assistance. American economic assistance went to 183 countries. Afghanistan was the largest recipient at $3.3 billion; Brunei was the lowest recipient at $3,950. 

Foreign aid is not popular with the American people, and there are misconceptions 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 also failed to sell off their bonds last week in a $2 billion offering. 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.

Ukraine received the first $3 billion tranche of a $20 billion Russian bailout in December that included $15 billion in bond purchases and a 30% discount on natural gas imports. But that support was suspended during January riots and canceled after revolution. Russia was willing to fund the Ukraine because it is the front door to invade Russia.

The Ukraine name translates into English as “borderland.” Western Ukrainians fought for Germany and eastern Ukrainians fought for Russia in World War I and in 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 at The Battle of Kursk in Ukraine, just 280 miles southwest of Moscow. The Red Army was victorious after being willing to suffer 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 “Fatherland.”

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 with Ukraine. They activated over 150,000 army, navy, air force, and rocket forces personnel and put select combat units from the Moscow region on high alert. Russian fighter jets began screaming along the border as commanders were ordered to “verify operational readiness” and prepare for deployment in the event of a real military conflict. 

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 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. 

The willingness for Americans to financially bailout a basket-case like the Ukraine comes at a very difficult time as the budget sequestration is hacking away at federal spending across-the-board. Even the once untouchable Department of Defense announced plans on February 24th to shrink the Army from the post- 9/11 high of 570,000 to a pre-World War II size of 440,000. Paying for economic and military costs in the Ukraine would force steeper cuts at home. 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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