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2017: The Ukrainian economy’s dismal year

Ukrainian economy continued to weaken as inflation rose and living standards fell

Alexander Mercouris

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In an article which I wrote about Ukraine on 13th December 2017 and in which I spoke of Ukraine’s continuing downward spiral I speculated that the situation might be even worse than it appeared since conditions in Ukraine meant that Ukraine’s already dismal statistics could no longer be relied upon.

This is of course always assuming that the statistics are being collected and collated properly, which in countries such as Russia was in the 1990s and such as Ukraine is now they never are.

That Ukraine’s statistics are not reliable has in fact been confirmed by studies of its population statistics, which show massive distortions intended to conceal how bad the country’s demographic situation has become.  There is no reason to suppose that the same distortions do not affect the economic data.

This speculation has now been given weight by an article carried by the official Russian news agency TASS, which all but says that Ukraine’s already terrible inflation statistics are unreliable and are being manipulated

The year 2017 saw two basic tendencies in Ukraine, namely an economic slowdown (to two percent from 2.3% in 2016) and growing inflation. Thus, inflation stood at 14.4%, whereas the state budget had a figure of 8.1%

However, actual inflation, according to economics expert Viktor Skrashevsky, was likely to be still higher. “Most likely, it was 17-18%,” he said, adding that official statistics underreported inflation rates “by means of manipulating calculation methods” as they had been updated exactly in 2017.

According to Skrashevsky, the government is deliberately deceiving people by saying that living standards will be raised in 2018 as the state budget for 2018 provides for no indexation of pension allowances while price growth seems to be inevitable. “Social standards are showing no upward tendencies while inflation is skyrocketing. The government is not taking proper measures,” he added.

Another gap between the government’s statements and reality is situation with the living wage, said Yuri Gavrilechko, an expert from the Public Security Foundation. Whereas nominal living wage from January 1 is 3,723 hryvnias (132 US dollars under the current exchange rate), minus taxes people will actually have not more than 3,000 hryvnias (106.4 US dollars). “Inflation will be some 18%, however it is not ruled out that the government may underreport these figures through manipulation,” he said.
The claimed growth rate of 2% for an economy like Ukraine’s which experienced such a savage contraction in 2014-2015 is already extremely disappointing.
For those who doubt this bleak picture, I would point out that one of Ukraine’s staunchest supporters, the Swedish economist Anders Aslund in a recent article published by the Atlantic Council has said essentially the same thing
A year ago, I expressed my hope that “2017 should be the year when Ukraine’s economy takes off.” It should have been, but it was not. In the last quarter of 2016, Ukraine’s GDP grew by 4.8 percent. Alas, in each of the ensuing four quarters, the growth rate declined and GDP grew by only 2 percent in 2017, slightly less than the cautious official projections. Ukraine is actually growing more slowly than the EU economy, and certainly slower than the global economy. Therefore, it is difficult to be optimistic about Ukraine’s economic growth in 2018.
After a combined GDP fall of 17 percent in 2014-15, which was caused by Russian aggression, a swift recovery to 6-7 percent growth should have been natural. Instead, Ukraine is competing with Moldova for the title of Europe’s poorest country. In 2007, Ukraine’s GDP per capita in current US dollars was 160 percent larger than Moldova’s. Now it is only 8 percent larger according to IMF statistics, and Moldova is growing by 4 percent a year.
If what the article by TASS says is correct and the rate of inflation in Ukraine is actually 17-18% not 14.4% then it is doubtful that Ukraine has even achieved the 2% GDP growth in 2017 which it is claiming.
The IMF describes GDP as “the measure of the monetary value of final goods and services – that is, those that are bought by the final user – produced in a country in a given period of time”.
Obtaining an accurate measure of prices and of price growth is therefore essential if GDP and GDP growth are to be measured properly.  If the inflation figures are badly wrong then the GDP figures will be also.
That in turn begs the question of whether there was actually any GDP growth at all in Ukraine last year.
As to that, with the reliability of the statistics now being questioned, I am in no position to say.
As for the reasons for Ukraine’s economic failure, here again is what Anders Aslund has to say
The worst part is that Ukraine’s economic shortcomings in 2017 were preventable. The two dominant factors that aggravated Ukraine’s economic performance in 2017 were the trade blockade and botched judicial reform. Last February, leading politicians in Samopomich (Self-Reliance) instigated a blockade against trade with the occupied territories in the Donbas, which disrupted heavy industry leading to stagnation of industrial production. This act alone probably cost Ukraine 2 percent of its GDP in the first half of the year.

At the same time, exports, investment, and consumption rose nicely, but then gross investment slumped from a healthy ratio of 24 percent of GDP in the second quarter to a miserable 16 percent of GDP in the third quarter. Domestic and foreign investors lost their rising confidence in Ukraine. Investors began to realize that the complex judicial reform that was underway would not cleanse the judicial system and thus reliable property rights would not materialize.

These tendencies only got worse later in the year. Businessmen often complained that the Prosecutor General’s Office and the Security Service of Ukraine (SBU) engage in aggressive corporate raiding. The only Ukrainian institution that really fights corruption, the National Anticorruption Bureau (NABU), came under heavy attack from the ruling coalition in parliament and the Prosecutor General’s Office for that very reason, further undermining the credibility of the rule of law in Ukraine.

On the subject of the economic blockade of the Donbass mounted by Maidan radicals last year, here is what I wrote about it at the time
Far right groups and people who the Ukrainian and Western media euphemistically call “activists” have initiated a blockade of coal imports from the Donbass, claiming that such imports are “treasonous”.  Since the Ukrainian energy system depends heavily on Donbass coal the result is to cause an energy emergency in Ukraine, risking another downward spiral in Ukraine’s economy.  The government however appears too weak to do anything about it.
As to the collapse of investment in the second quarter, the likeliest cause was the closure of Russian banks, not the botched judicial reform Aslund refers to.
Here is what I wrote about the bank closures just before they happened.

Gryzlov’s reference to “the Ukrainian authorities destroying their own banking system” refers to action Ukraine is now contemplating against Russian banksoperating on Ukrainian territory.  This follows protests by Ukrainian ultra right radicals who since 13th March 2017 have blocking access to the central office in Kiev of the local branch of Sberbank, Russia’s biggest bank.

Gryzlov’s claim that the action Ukraine is contemplating against Russian banks operating in Ukraine would destroy Ukraine’s banking system may be overstated.  Russian banks account for roughly 10% of Ukraine’s banking sector, supposedly holding $425 million in private customer deposits and a further $276 million in deposits held on behalf of business customers.  Though these are large sums, they do not look large enough to cripple the Ukrainian economy as a whole, even if the money in the deposits were to disappear along with the banks, which of course is unlikely.

Having said this, launching an assault on Russian banks just 3 months after Ukraine nationalised PrivatBank, its own largely bank, hardly looks like a good idea, and at a time of economic crisis it is certainly not a move best calculated to inspire confidence in Ukraine’s banking system even if talk of it triggering a cascade effect may be overstated.

Given that Russia remains the biggest investor in Ukraine’s economy it is completely understandable why action against Russian banks would have had a chilling effect on investment.

That after all is what was predicted, so it should not be surprising that it happened.

Aslund does claim some economic successes for Ukraine

These negative factors overshadowed the positive developments. Ukraine’s macroeconomic performance has been stellar. Finance Minister Oleksandr Danyliuk has kept the budget deficit below 3 percent of GDP. The National Bank’s leadership has nurtured the international gold and currency reserves that have increased to $18 billion, corresponding to four months of imports. Naftogaz won its gigantic arbitration case against Gazprom in Stockholm and made a substantial profit. The parliament adopted Acting Health Care Minister Ulana Suprun’s impressive health care reform.

Most of this however is simply wrong.

The budget deficit may in reality be greater than 3% of GDP if GDP in reality is smaller than is being reported (see above).

The $18 billion of foreign currency reserves is less than the $20 billion Ukraine must pay to its creditors between 2017 and 2020, and with reserves only sufficient to cover four months imports and with Ukraine’s trade deficit widening the margin of safety is dangerously small.

To the $20 billion Ukraine must pay its creditors between 2017 and 2020 must now be added the $3 billion the High Court has recently ordered Ukraine to pay to Russia and the $2 billion the Stockholm Arbitration Tribunal has ordered Ukraine’s Naftogaz to pay to Gazprom.

As to Naftogaz supposedly “winning” the case against Gazprom in the Stockholm Arbitration Tribunal, Aslund’s extreme antipathy to President Putin, Gazprom and to Russia blinds him to the reality that it was Ukraine which lost the case (see my discussion of the Stockholm Arbitration Court’s award and this discussion of the award by Gazprom’s Vice President Alexander Medvedev and by Paul Goncharoff on RT).

Even the sum of $18 billion Ukraine has managed to put away in its reserves is less impressive than it looks.

The reserves have been boosted this year by a payment of $1 billion from the IMF, and a further $3 billion Ukraine borrowed in the international money markets at very high interest.

However the $1 billion payment from the IMF was supposed to be just one tranche out of $4 billion which the IMF was supposed to give to Ukraine over the course of the year.

Here is what Anders Aslund has to say about why the extra $3 billion was not paid

Thanks to its improved macroeconomic situation, Ukraine’s government sold $3 billion of Eurobonds in September. Unfortunately, this sign of economic health tipped the political balance against reform. The International Monetary Fund (IMF) was supposed to give Ukraine credits of $4 billion in 2017. But since the government did not fulfill the IMF conditions, the country received only $1 billion, while it had to pay back $1.3 billion. The European Union canceled its last tranche of €600 million after Ukraine failed to fulfill four conditions.

At present, it looks doubtful whether either of these institutions will provide Ukraine with any funding in 2018, as their compassion has been replaced with distrust. The IMF is currently demanding five prior actions for further funding, namely the establishment of an independent anticorruption court, the legalization of private sales of agricultural land, the adoption of a privatization law, an improved pension reform, and adjustment of gas prices to market prices. The focal demand of all international creditors is an independent anticorruption court, since the court system has proved incapable of sentencing corrupt senior officials.

In reality the IMF almost certainly refused to provide Ukraine with the additional $3 billion not because Ukraine failed to perform its ‘reform’ obligations but because of the chilling effect of the High Court Judgment in London.

That threatens to declare Ukraine in a state of formal default, placing institutions like the IMF and the European Commission in unknown and potentially highly dangerous legal territory if they continue lending to Ukraine despite it.  I have discussed this previously at length for example here.

Since admitting this would be politically highly embarrassing given how much the IMF and the European Commission have loaned to Ukraine already, the IMF and the European Commission are hiding behind the fiction that it is Ukraine’s supposed failure to carry out its ‘reform’ programme which is causing them to stop lending.

The years 2016 and 2017 ought to have been economically favourable for Ukraine.

The weather was good, allowing for good harvests, the worst of the fighting in the Donbass was over, the country had restructured its debts and was obtaining support from the IMF and the European Union, and – most important of all – the oil price had more than halved, drastically reducing the country’s import bill and taking pressure off its budget.

Anders Aslund was not completely misguided when he predicted on 3rd January 2017 that 2017 would be Ukraine’s breakthrough year.

In truth 2016 and 2017 were for Ukraine as good as it is ever likely to get.

The favourable conditions of those years are now ending.

The situation in the Donbass is unresolved, the weight of debt repayment is once again increasing, and $5 billion of payments to Russia will shortly fall due.  Meanwhile IMF and EU lending has stopped.  Most serious of all, the oil price is rising again, and has now reached $70 a barrel.

As the TASS article I quoted at the beginning of this article says, Ukraine’s already very high inflation rate is likely to increase still further in 2018, putting even greater pressure on living standards and on the country’s economy and budget.

Even Anders Aslund is no longer optimistic about the future.

For once Anders Aslund puts his finger on the problem: Ukraine’s hopelessly dysfunctional political system, which makes rational decision making impossible

Sadly, the ruling coalition does not seem to be interested in a real independent anticorruption court or electoral reform even if legislation is under way. Absurdly, Ukraine’s politicians seem to be absorbed by the presidential election scheduled for May 2019. Instead, they should focus on securing real property rights so that Ukraine can boost its investment ratio to 25-30 percent of GDP and grow by 6-8 percent a year.

To which all I can say is that given Ukraine’s realities it is baffling Aslund ever expected otherwise.

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“Foreign entity, NOT RUSSIA” hacked Hillary Clinton’s emails (Video)

Rep. Louie Gohmert (R-Tx): Hillary Clinton’s cache of 30,000 emails was hacked by foreign actor, and it was not Russia.

Alex Christoforou

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A stunning revelation that hardly anyone in the mainstream media is covering.

Fox News gave Louie Gohmert (R-Tx) the opportunity to explain what was going on during his questioning of Peter Strzok, when the the Texas Congressman stated that a “foreign entity, NOT RUSSIA” hacked Hillary Clinton’s emails.

Aside from this segment on Fox News, this story is not getting any coverage, and we know why. It destroys the entire ‘Russia hacked Hillary’ narrative.

Gohmert states that this evidence is irrefutable and shows that a foreign actor, not connected to Russia in any way, intercepted and distributed Hillary Clinton’s cache of 30,000 emails.

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Via Zerohedge

As we sift through the ashes of Thursday’s dumpster-fire Congressional hearing with still employed FBI agent Peter Strzok, Luke Rosiak of the Daily Caller plucked out a key exchange between Rep. Louie Gohmert (R-Tx) and Strzok which revealed a yet-unknown bombshell about the Clinton email case.

Nearly all of Hillary Clinton’s emails on her homebrew server went to a foreign entity that isn’t Russia. When this was discovered by the Intelligence Community Inspector General (ICIG), IG Chuck McCullough sent his investigator Frank Ruckner and an attorney to notify Strzok along with three other people about the “anomaly.”

Four separate attempts were also made to notify DOJ Inspector General Michael Horowitz to brief him on the massive security breach, however Horowitz “never returned the call.” Recall that Horowitz concluded last month that despite Strzok’s extreme bias towards Hillary Clinton and against Donald Trump – none of it translated to Strzok’s work at the FBI.

In other words; Strzok, while investigating Clinton’s email server, completely ignored the fact that most of Clinton’s emails were sent to a foreign entity – while IG Horowitz simply didn’t want to know about it.

Daily Caller reports…

The Intelligence Community Inspector General (ICIG) found an “anomaly on Hillary Clinton’s emails going through their private server, and when they had done the forensic analysis, they found that her emails, every single one except four, over 30,000, were going to an address that was not on the distribution list,” Republican Rep. Louie Gohmert of Texas said during a hearing with FBI official Peter Strzok.

Gohmert continued..

“It was going to an unauthorized source that was a foreign entity unrelated to Russia.”

Strzok admitted to meeting with Ruckner but said he couldn’t remember the “specific” content of their discussion.

“The forensic examination was done by the ICIG and they can document that,” Gohmert said, “but you were given that information and you did nothing with it.”

According to Zerohedge “Mr. Horowitz got a call four times from someone wanting to brief him about this, and he never returned the call,” Gohmert said – and Horowitz wouldn’t return the call.

And while Peter Strzok couldn’t remember the specifics of his meeting with the IG about the giant “foreign entity” bombshell, he texted this to his mistress Lisa Page when the IG discovered the “(C)” classification on several of Clinton’s emails – something the FBI overlooked:

“Holy cow … if the FBI missed this, what else was missed? … Remind me to tell you to flag for Andy [redacted] emails we (actually ICIG) found that have portion marks (C) on a couple of paras. DoJ was Very Concerned about this.”

Via Zerohedge

In November of 2017, IG McCullough – an Obama appointee – revealed to Fox News that he received pushback when he tried to tell former DNI James Clapper about the foreign entity which had Clinton’s emails and other anomalies.

Instead of being embraced for trying to expose an illegal act, seven senators including Dianne Feinstein (D-Ca) wrote a letter accusing him of politicizing the issue.

“It’s absolutely irrelevant whether something is marked classified, it is the character of the information,” he said. Fox News reports…

McCullough said that from that point forward, he received only criticism and an “adversarial posture” from Congress when he tried to rectify the situation.

“I expected to be embraced and protected,” he said, adding that a Hill staffer “chided” him for failing to consider the “political consequences” of the information he was blowing the whistle on.

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Donald Trump plays good cop and bad cop with a weak Theresa May (Video)

The Duran – News in Review – Episode 55.

Alex Christoforou

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US President Donald Trump’s state visit to the UK was momentous, not for its substance, but rather for its sheer entertainment value.

Trump started his trip to the United Kingdom blasting Theresa May for her inability to negotiate a proper Brexit deal with the EU.  Trump ended his visit holding hands with the UK Prime Minister during a press conference where the most ‘special relationship’ between the two allies was once again reaffirmed.

Protests saw giant Trump “baby balloons” fly over London’s city center, as Trump played was his own good cop and bad cop to the UK PM, outside London at the Chequers…often times leaving May’s head spinning.

Even as Trump has left London, he remains front and center in the mind of Theresa May, who has now stated that Trump advised her to “sue” the European Union to resolve the tense negotiations over Brexit.

Trump had mentioned to reporters on Friday at a joint press conference with Theresa May that he had given the British leader a suggestion that she found too “brutal.”

Asked Sunday on the BBC’s Andrew Marr Show what that suggestion was, May: “He told me I should sue the EU. Not go into negotiation, sue them.” May added…

“What the president also said at that press conference was `Don’t walk away. Don’t walk away from the negotiations. Then you’re stuck.”‘

The Duran’s Alex Christoforou and Editor-in-Chief Alexander Mercouris summarize what was a state visit like no other, as Trump trolled the UK PM from beginning to end, and left London knowing that he got the better of a weakened British Prime Minister, who may not survive in office past next week.

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Via CNBC

It wasn’t exactly clear what Trump meant. The revelation came after explosive and undiplomatic remarks Trump made this week about May’s leadership — especially her handling of the Brexit negotiations — as he made his first official visit to Britain.

In an interview with The Sun newspaper published Thursday — just as May was hosting Trump at a lavish black-tie dinner — Trump said the British leader’s approach likely “killed” chances of a free-trade deal with the United States. He said he had told May how to conduct Brexit negotiations, “but she didn’t listen to me.”

He also praised May’s rival, Boris Johnson, who quit last week as foreign secretary to protest May’s Brexit plans. Trump claimed Johnson would make a “great prime minister.”

The comments shocked many in Britain — even May’s opponents — and threatened to undermine May’s already fragile hold on power. Her Conservative government is deeply split between supporters of a clean break with the EU and those who want to keep close ties with the bloc, Britain’s biggest trading partner.

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Deep State poster boy Peter Strzok gives bizarre testimony that goes viral (Video)

The face of the Deep State.

Alex Christoforou

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If you were not convinced that the Deep State exists, then look no further than Peter Strzok’s bizarre, yet revealing, congressional testimony, showcasing the arrogance and smugness of a powerful FBI agent who worked diligently to push a fake Trump-Russia narrative onto the American public.

Via Zerohedge

While Peter Strzok’s marathon Congressional testimony was full of bickering, chaos and drama – mostly between members of the House Judiciary and Oversight committees – a clip of the disgraced FBI agent’s seemingly giddy reaction after answering a question is creeping people out.

Some have suggested that Strzok’s reaction was “Duper’s delight” – a hidden smirk that slips out at an inappropriate moment when a liar celebrates a successful manipulation.

Watching Peter Strzok, its hard, if not impossible to believe that this man is not a psychopath, who hated Trump so much that he was willing to forward a collusion story that has cost American taxpayers millions, and torn American society apart.

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The video clip even had Donald Trump Jr retweeting it, as he labeled Strzok “the creepiest person in America.”

Via RT

One particular moment from Peter Strzok’s raucous congressional hearing left Twitter users confounded and disturbed, even prompting Donald Trump Jr to label the FBI agent “the creepiest person in America.”

Strzok faced the House Judiciary and Oversight Committees on Thursday to answer questions about his conduct during the 2016 investigations into Hillary Clinton and Donald Trump.

The lengthy hearing quickly descended into a partisan shouting match, as Republicans and Democrats interrupted each other’s questions, heckling or applauding Strzok.

Strzok’s peculiar reaction to one question caught the eye of viewers and many took to Twitter to confirm that their eyes weren’t deceiving them.

Strzok’s facial expressions were also noticed by the congressmen in the room and prompted one of the most dramatic moments of the hearing when Rep. Louie Gohmert (R-Texas) accused Strzok of outright lying.

“I can’t help but wonder when I see you looking there with a little smirk; how many times did you look so innocent into your wife’s eyes and lie to her about Lisa Page,” Gohmert told Strzok, referring to the agent’s extramarital affair with his former colleague Lisa Page, with whom he exchanged anti-Trump text messages. Gohmert’s comment sparked vociferous objections from Democrats.

The hearing evoked a significant reaction, with many describing it as a farce. Former New York mayor and current attorney to US President Donald Trump, Rudy Giuliani, labelled it a “disgrace” and said it “taints the entire Mueller witch hunt.”

“President Trump is being investigated by people who possess pathological hatred for him. All the results of the investigation are ‘fruit of the poison tree’ and should be dismissed,” he added.

Democrats seemed to agree with that sentiment, as California Congressman Ted Lieu said it was “a stupid and ridiculous hearing.”

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