By William K. Black

We all understand why Russia is waging economic war on the Ukraine, but why is Obama doing so? The New York Time’ web site has posted a remarkable Reuters story (dated April 5, 2014) entitled “Ukraine PM Says Will Stick to Austerity Despite Moscow Pressure.”

“The Kiev government will stick to unpopular austerity measures ‘as the price of independence’ as Russia steps up pressure on Ukraine to destabilise it, including by raising the price of gas, Prime Minister Arseny Yatseniuk told Reuters.”

“Unpopular austerity measures” are, of course, among the best things Ukraine can do to aid Russia’s effort to “destabilize” the Ukraine. Indeed, Yatseniuk admits this point later in the article.

“The subtext of Russia’s message to Ukraine’s Russian-speaking population, he said, was that they would enjoy higher living standards in Russia, with higher wages and better pensions and without the austerity that the Kiev government was now offering. The subtext of Russia’s message to Ukraine’s Russian-speaking population, he said, was that they would enjoy higher living standards in Russia, with higher wages and better pensions and without the austerity that the Kiev government was now offering. ‘They’re saying: if you go to Russia, you’ll be happy, smiling, and not living in a Western hell,’ he said. ‘They (the Russians) are trying to compensate (for the Western sanctions). But we can pay the price of independence,’ he said, with financial support from the West.”

So, our strategy is to play into Putin’s hands by inflicting austerity and turning the Ukraine into “a Western hell.” Not to worry says our man in Kiev, because he’s sure that ten million ethnically-Russian citizens of Ukraine will gladly “pay the price of independence” to live in “a Western hell.” That strategy seems suicidal. Indeed, Yatseiuk emphasizes that he knows the strategy he is following is suicidal.

“[Yatseiuk] has called himself the leader of a ‘kamikaze’ government, doomed by unpopular austerity measures it must take, but he said Ukraine would stick to the measures, which include doubling gas prices for domestic consumers from May 1 and holding down state pensions and salaries against a background of a 3 percent contraction of the economy and double-digit inflation. IMF support – a $14-18 billion financial lifeline in return for tough economic reforms – would be a “tremendous step forward”, he said. ‘We will regain trust and credibility from foreign investors. This is the roadmap for Ukraine,’ he added. The Kiev government has said that without the IMF-mandated austerity measures, the economy could shrink by up to 10 percent this year.”

Six Degrees of Crazy

The Reuters article presents a stream of incoherent odes to the supposed benefits of financial and political suicide (kamikaze economics and politics). It was at this juncture in reading the article that I began to have a sick suspicion about Yatseiuk’s ideological dogmas and likely background. Sure enough, the article soon confirmed my worst fears: “Yatseniuk [is] a former economy minister, lawyer, and economist by education.” Another theoclassical economics acolyte is eager to sacrifice his economy and his fellow-citizens on the altar of austerity.

The rush to austerity is not a product primarily of Yatseiuk’s ideology, but of the EU’s worship of austerity. The IMF serves as the EU’s “leg breaker” for the Ukraine. The EU is making clear that it will only provide aid if the IMF is in place to extort the Ukraine to inflict austerity on an economy that is already in recession.

This is crazy on multiple dimensions. First, the Ukraine defines the concept of “political instability.” Playing into Putin’s hands by inflicting austerity on the Ukraine and producing “hell” is ludicrous.

Second, the Ukraine is in a severe recession. Austerity makes recessions worse. The Ukraine should be spending material amounts of money (from its perspective; tiny amounts from our perspective – or compared to the cost of a military conflict) dealing with Ukraine’s acute problems.

Third, the Ukraine has an inflation problem not because of excessive demand (demand is grossly inadequate) but because Russia has dramatically increased the cost of energy. Austerity is not the answer to this variant of cost-push inflation.

Fourth, the Ukraine has a tiny economy and small debts (relative to the West). The EU and the U.S. can easily pay off Ukraine’s debts (or if they prefer any debt owed to non-Russian entities) and replace it with very low interest rate debt in the Ukraine’s own currency with interest payments deferred for a decade. Ukraine has made the double mistake of trying to peg its currency to the dollar and to borrow in foreign currencies. The U.S. and EU could solve these problems, going forward, by giving the Ukraine a fresh start. This would speed the Ukraine’s economic recovery and remove one of the potential sources of an economic shock that could harm the EU and U.S. economic recoveries.

Fifth, the Obama administration purports to oppose the eurozone’s austerity policies. The case against inflicting austerity on the Ukraine is even stronger. Obama is under enormous criticism from Republicans for failing to take more decisive actions to support the Ukraine. The Ukraine offers the administration the perfect opportunity to do the right thing economically and politically, to demonstrate his leadership, and to force the Republicans to admit that austerity is a destructive policy that the U.S. needs to prevent by forceful action.

Sixth, instead, austerity dogma trumps – simultaneously – good economics, good domestic politics in the U.S. and the Ukraine, and U.S. national security. That’s how insanely powerful the failed dogma of austerity has become. The CEOs who run the banks that loan money to the Ukraine are more powerful than the Pentagon and our State Department.

Conclusion

The Ukraine faces severe problems beyond Russia and its energy dependence on Russia. It has an enormous informal business sector because it is so difficult to start a legitimate business. Ecuador recently adopted a law, and new technology, to make it radically faster to start a legitimate small business. This is great for entrepreneurs, growth, reduced corruption, and collecting taxes. It is a radical reform that people of all political stripes can support. Similarly, ant-fraud and corruption efforts can save the Ukraine billions of dollars and spur growth. President Obama could develop an aid, stimulus, debt relief, and reform package for the Ukraine based on ideas like this that would that have broad appeal and help the working class and entrepreneurs. It would also be good for peace and security without being hostile to anyone. Instead, we are committing kamikaze capitalism that is so crazy that it should be criminal.