Tag: ukraine

Ukraine: The World’s Second-Highest Inflation

I estimate the current annual implied inflation rate in Ukraine to be 92%. This is the world’s second-highest inflation rate, far lower than Venezuela’s 480% but slightly higher than Syria’s 75%.

Ukraine's Annual Inflation Rates

I regularly estimate the annual inflation rates for Ukraine. To calculate those inflation rates, I use dynamic purchasing power parity (PPP) theory. I computed the 92% rate by using black-market exchange rate data that the Johns Hopkins-Cato Institute Troubled Currencies Project has collected over the past year.

A recent front-page feature article in the New York Times attests to the severity of Ukraine’s inflation problem. Danny Hakim’s reportage contains many anecdotes that are consistent with my inflation estimates based on PPP. For example, chocolate that used to cost 80 Ukrainian hryvnia per kilogram has dramatically increased to 203 Ukrainian hryvnia per kilogram over the past 17 months – a 154% increase. On an annualized basis, this amounts to an inflation rate of 93% – almost exactly the same number I obtained when applying the scientific PPP methodology.

As evidence of the Alice in Wonderland nature of Ukraine’s current state of affairs, President Petro Poroshenko penned an op-ed in the Wall Street Journal on June 11. The title of his unguarded, gushing piece perfectly reflects the sentiments contained in his article: We’re Making Steady Progress in Ukraine, Despite Putin.

The President failed to even allude to Ukraine’s inflation problem. He is apparently unaware of the harsh realities facing the citizens of his country. He is also apparently unaware that his finance minister, Natalie Jaresko, whom he praises to high heaven, was recently in Washington, D.C., where she used a new Ukrainian law as cover to threaten a sovereign debt default. The reportage on these threats appeared in London’s Financial Times on June 11, the same day the Wall Street Journal published President Poroshenko’s op-ed.

It is time for Ukraine to get real.

Ukraine: The World’s Second-Highest Inflation

Venezuela has the dubious honor of registering the world’s highest inflation rate. According to my estimate, the annual implied inflation rate in Venezuela is 252%.

The only other country in which this rate is in triple digits is Ukraine, where the inflation rate is 111%. The only encouraging thing to say about Ukraine’s shocking figure is that it’s an improvement over my February 24th estimate of 272%—an estimate that attracted considerable attention because Matt O’Brien of the Washington Post understood my calculations and reported on them in the Post’s “Wonk blog.”

As a bailout has started to take shape in Ukraine, the dreadful inflation picture has “improved.” Since February 24th, the hryvnia has strengthened on the black market from 33.78 per U.S. dollar to 26.1 per U.S. dollar. That’s almost a 30% appreciation (see the accompanying chart). 

Putin Returns

In a piece published today over at Townhall, I talk about Vladimir Putin’s recent disappearance from the public eye, and why it wasn’t as big a deal as you might think.

The rumors surrounding his ten-day disappearance ranged from the sublime to the ridiculous. Kremlin spokesman Dmitry Peskov was kept busy, scotching speculation that the Russian leader was ill, quashing reports of a power struggle within the Kremlin, and refuting assertions that Putin had been absent to attend the birth of his new child.

When Putin finally reappeared on Monday, he waved away all questions about his absence, simply noting that “life would be boring without gossip.”  We’ll probably never know where Putin was for those ten days, though his pallor implied a minor illness. Given the consistent unwillingness of the Kremlin to divulge information about Putin’s personal life, the whole thing may have been nothing more than the flu.

But it’s worth asking why Putin’s disappearance caused such a media furor. Putin’s centrality to the Russian political system is so well-accepted that commentators and policymakers routinely treat Putin himself as sole representative of the Russian state, psychoanalyzing the man for insight into Russian foreign policy choices. His disappearance, therefore, implied the possibility of chaos in Russia.

Putin is certainly the key figure in Russian politics today, in terms of both personality and power. His ability to mediate between key factions inside the Russian state has allowed him to solidify power, and to govern far more effectively than his predecessor, Boris Yeltsin, ever did. He is still overwhelmingly popular. Yet Putin is not the only player in Russian politics. He has a number of close, senior advisors, many of whom could fill a central role in the system Putin built. His death or incapacitation would be a shock, but it wouldn’t necessarily result in major political changes.

Obviously, we can’t predict the future. After all, who could have predicted when Boris Yeltsin picked a young, unknown former intelligence operative as his presidential successor how successful Putin would be in reining in the corrupt excesses of the Russian state, or how effectively he would undermine Russian democratic reforms?

Yet it is unlikely that Putin’s departure from office, no matter when it occurs, will result in chaos and the collapse of the Russian government. It is even less plausible that his death would result in a pro-democracy or pro-Western protest movement like the one we saw in Ukraine.

Instead, as I argue in the article, it is probable that one of Putin’s close advisors would become his successor, taking over as Russia’s president, probably with a thin veneer of legitimacy in the form of largely uncontested elections. With a similar background and worldview, this successor would simply continue many of Putin’s policies. In short, Putin’s Russia – and its odious foreign policy – probably isn’t going anywhere, even if the man himself does. 

Ukraine Hyperinflates

Since the New Year, Ukraine’s currency – the hryvnia – has collapsed, losing 51 percent of its value against the U.S. dollar. To put this rout into perspective, consider that the Russian ruble has only lost 8 percent against the greenback during the same period.

Like night follows day, the hryvnia’s meltdown has resulted in a surge of inflation. The last official Ukrainian year-over-year inflation rate is 28.5 percent. This rate was reported for January and is out of date. That said, the official inflation rate has consistently and massively understated Ukraine’s brutal inflation. At present, Ukraine’s implied annual inflation rate is 272 percent. This is the world’s highest inflation rate, well above Venezuela’s 127 percent rate (see the accompanying chart).

When inflation rates are elevated, standard economic theory and reliable empirical techniques allow us to produce accurate inflation estimates. With free market exchange-rate data (usually black-market data), the inflation rate can be calculated. Indeed, the principle of purchasing power parity (PPP), which links changes in exchange rates and changes in prices, allows for a reliable inflation estimate.

To calculate the inflation rate in Ukraine, all that is required is a rather straightforward application of a standard, time-tested economic theory (read: PPP). At present, the black-market UAH/USD exchange rate sits at 33.78. Using this figure and black-market exchange rate data that the Johns Hopkins-Cato Institute for Troubled Currencies Project has collected over the past year, I estimate Ukraine’s current annual inflation rate to be 272 percent – and its monthly inflation rate to be 64.5 percent. This rate exceeds the 50 percent per month threshold required to qualify for hyperinflation. So, if Ukraine sustains its current monthly rate of inflation for several more months, it will enter the record books as the world’s 57th hyperinflation episode. 

Obama’s Hypocrisy Regarding Forcible Border Changes

In a joint press conference with German Chancellor Angela Merkel, President Obama stated that he was considering sending weapons to the government of Ukraine.  Noting that Russia had already annexed Crimea and was now backing separatist rebels in eastern Ukraine, the president warned that “the West cannot stand and simply allow the borders of Europe to be redrawn at the barrel of a gun.”

Such sentiments might have more credibility if the Western powers, including the United States, had not engaged in similar conduct.  But Washington and its NATO allies have indeed redrawn borders, including borders in Europe, through military force.  Two incidents are especially relevant.  Turkey, a leading member of NATO, invaded Cyprus in 1974 and amputated some 37 percent of that country’s territory.  Turkish forces ethnically cleansed the area of its Greek Cypriot inhabitants and, in the years that followed, desecrated a large number of Greek historical and religious sites.

Ankara subsequently established a client state, the Turkish Republic of Northern Cyprus in the occupied territories.  Turkey has steadfastly refused to atone for its illegal invasion and occupation, much less disgorge the land that it conquered.  Yet except for some token economic sanctions imposed shortly after the invasion, which were soon lifted, Washington has never even condemned the aggression that its NATO ally committed. 

One might assume that it would be awkward for U.S. leaders to excoriate Vladimir Putin’s regime for annexing Crimea or setting up puppet states in the occupied Georgian provinces of Abkhazia and South Ossetia (which Moscow did after a short, nasty war in 2008) when a NATO member is guilty of similar behavior.  But such flagrant inconsistency has apparently caused American officials little difficulty.

New Minsk, Not Quite the Same as the Old Minsk

After a grueling seventeen hours of negotiation, German, French, Ukrainian, and Russian leaders emerged with a compromise agreement aimed at ending the conflict in Eastern Ukraine. Although similar to last September’s failed Minsk accords, the new deal provides more details on timing and implementation, which may help a ceasefire to hold. After so many prior failures, strong skepticism is understandable. But if U.S. and European leaders actually commit to the specifics of the deal, it can provide Ukraine with much-needed time to rebuild, reform and address its dire economic problems.

The all-night negotiations between leaders in Belarus showed how far apart the parties were on a number of key issues, including whether the deal should rely on the boundaries laid out in the Minsk I ceasefire, or on the current situation in Eastern Ukraine. Since rebel forces have made substantial territorial gains since September, neither side is keen to concede on the issue. Other issues, including which side will control border crossings into Russia, and the withdrawal of foreign fighters and equipment, proved equally thorny.

Admittedly, the deal still leaves many issues unsettled. It calls for an immediate ceasefire, the withdrawal of heavy weapons and a demilitarized buffer zone in Eastern Ukraine.  It also mandates constitutional reform to allow the eastern regions increased autonomy, as well as amnesty for those involved in the fighting. But the issue of boundary lines is left effectively unsolved, requiring Kiev to adhere to the current front lines when withdrawing weaponry, and the rebels to adhere instead to the boundaries agreed upon in September. There is also no real mechanism to ensure compliance, although the situation will be monitored  by the OSCE.

Still, Minsk II provides more concrete details on each issue, which may help this deal to succeed. Timing is more clearly defined for the start of the ceasefire, the removal of troops and heavy weapons, the creation of the buffer zone, while all constitutional reforms and elections are scheduled to be completed by the end of 2015. The sequencing of events is also more clearly defined: the agreement calls for control of the border to be returned to Ukraine only after new elections in the region, which themselves must follow constitutional reform in Kiev. Since Minsk I’s failure can be attributed in part to disagreement between both sides over who would implement such steps first, this is a welcome change. The restoration of social transfers from Kiev to residents in rebel-controlled areas is also welcome, and may serve to reduce some of the misery in the region.

Don’t Raise the Stakes in Ukraine

The release of a report this week by eight former U.S. government officials calling for the United States to send arms to Ukraine has reopened debate on the issue. The dispute is also lent urgency by the recent sickening escalation of violence in the Donbas, especially against civilians, as well as signs that some within the Obama administration may be reconsidering their stance on this issue. As appalling as the ferocity of recent fighting has been, however, the arguments against arming Ukraine remain as solid as they were three months ago. It would raise the stakes with Russia, while offering little prospect of ending the conflict.

The arguments made in the report, cosponsored by Brookings, the Atlantic Council and The Chicago Council on Global Affairs - seem compelling on the surface. The authors argue that the provision of lethal, but solely defensive, weapons would better allow Ukrainian troops to defend themselves against continuing attacks from pro-Russian rebels. As the evidence indicates that the rebels themselves are being supplied with advanced weapons from Moscow, American weapons would place Ukrainian forces on a more even footing. The report further asserts that such weaponry could raise the continued costs of backing the rebels for Moscow, bringing Vladimir Putin to the negotiating table.

Unfortunately, arming Ukraine will cause more problems than it solves. Certainly, such a move would be a propaganda coup for Russia, which has already been using state media to perpetuate the idea that NATO is involved in the crisis. Russian media is extremely good at blurring key facts to make a coherent, anti-Western narrative, even if the narrative itself is fundamentally false. It won’t matter than the weapons are ‘defensive’ in nature; the Russian media can spin this to bolster their arguments that Ukraine’s government is illegitimate and that the conflict is being driven by NATO. It could even increase popular support for the war among the Russian population.

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