WASHINGTON, DC – Ukraine has suddenly arrived at a democratic breakthrough. After former President Viktor Yanukovych incited major bloodshed, many of his MPs defected to the opposition, creating a large majority. In order to consolidate its authority, whatever new government emerges will need to act fast and resolutely – and receive considerable international support – to overhaul the country’s crisis-ridden economy.
Ukraine suffers from three large economic problems. First, its foreign payments are unsustainable. Its current-account deficit last year was an estimated 8.3% of GDP, and its foreign-currency reserves are quickly being depleted, covering just over two months of imports. Second, public finances are also unsustainable, with the budget deficit reaching almost 8% of GDP and government-bond yields skyrocketing. Third, the economy has been in recession for five quarters since mid-2012.
These problems reflect Yanukovych’s economic policy, which had one aim: enriching him, his family, and a few of his cronies. During the last four years, Ukraine has experienced unprecedented embezzlement by its rulers, with estimates putting the Yanukovych family’s wealth at $12 billion. Here, too, the new government will need international assistance if it is to recover at least some of this loot.
With Yanukovych out of the way, official extortion of Ukrainian business should end, enabling the economy to recover. In fact, Ukraine’s GDP actually grew by 3.3% in the last quarter of 2013, because his cronyism was stifled by the protests. Yet much can and must be done very quickly, because Ukraine is running out of money.