Political Crisis Deepens Ukraine's Dire Economic Conditions

As Ukraine steadies itself, a first order of business is to fix its economy. Renee Montagne talks to Simon Johnson, former chief economist for the IMF, who is now a professor at MIT.

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RENEE MONTAGNE, HOST:

And as we just heard, the political unrest that brought down Ukraine's president was set in motion by an economic policy decision. Last December, the now former-President Yanukovych faced a choice: take a trade-in loan deal backed by the EU that would require Ukraine to make deep cuts to its social benefits, or go with Moscow's offer of billions.

Yanukovych took the Russian offer, as we now know, and that set off protests by those who wanted closer ties with Europe. To talk about the economic realities facing Ukraine's new leaders, I'm joined now by Simon Johnson, former chief economist for the International Monetary Fund. Good Morning.

SIMON JOHNSON: Good morning.

MONTAGNE: So it sounded bad - you know, in Peter's story there. But Ukraine's acting finance minister is actually talking about defaulting on the debt. How big, in your opinion, is Ukraine's economy?

JOHNSON: Well, the economy is fairly large. They've had disappointing performance over the past 20 years. The last few years have also been disappointing, but they certainly could turn the corner and recover.

MONTAGNE: Well, then what exactly is the IMF looking for when it sits down with Ukraine's new leaders?

JOHNSON: The IMF is looking for legitimacy of those leaders and they're looking for a willingness to do some fairly difficult reforms. I'm afraid Mr. Yanukovych has left the public finances in a very big mess. And the whole issue of the relationship with Russia and the subsidies provided by Russia is also very difficult. If those are now withdrawn, as seems quite likely, then Ukraine is going to need some additional support from other people.

MONTAGNE: If Ukraine does move closer to the West, gets that additional support or at least keeps looking for it, what sort of economic retaliation could Russia take if it chose to do that?

JOHNSON: Well, there are already reports that Russia may curtail imports of food from Ukraine. That's a tactic they used from the past. They can also raise energy prices or withdraw the subsidy, the discounted price that they've currently offered. Those would be, I think, quite likely moves.

MONTAGNE: You think that Russia would chance pulling off something like that in light of everything that's happened?

JOHNSON: Well, I don't think Russia's going to push for an immediate direct confrontation, but there are various ways to put pressure on the country and there are people who are pro-Russian in various parts of the country, a lot of Russian speakers in the eastern part of Ukraine, for example. So Russia is going to be trying to push pressure and it's up to the U.S. and the European Union, acting through the IMF, to kind of counter that pressure and come up with some - you know, a sensible, reasonable and hopefully generous offer.

MONTAGNE: Now, Ukraine has been through more than one revolution since the breakup of the Soviet Union, and it was a part of the Soviet Union. Do you think this revolution could possibly lead to a stronger, more stable economy?

JOHNSON: Yes, I do. I think that there is an opportunity here. There was already a deal potentially on offer with the European Union and that's the key to moving forward, turning the economy towards the West, becoming more like Poland, less like Russia. That's a real opportunity and I think enough people want it in Ukraine, but there are many problems.

There will be pressure from Russia. Ukraine does not have a good track record dealing with the IMF and living up to its commitments there, so how much money is the West willing to put on the line? This is a big opportunity, a moment that's gripped all our attention, but are we willing and able to be sufficiently generous and take the risks with the money to give Ukraine that opportunity?

MONTAGNE: Well, just finally, it is desperately in need of foreign investment. What do you think investors want to see happen in Ukraine?

JOHNSON: They want a stable government, and hopefully the right kind of investors will want a legitimate government. There needs to be a decline in corruption. Governance has been very bad. Mr. Yanukovych, obviously, you know, a spectacular example of that, but unfortunately there's been a lot of corruption over the past 20 years. They need to clean up their governance.

The same problem has faced many countries in eastern Europe, the former Soviet empire, and some of them have made progress with that. Again, Poland is a good model and a model to which many in some parts of Ukraine look. So this is not at all impossible. It is going to be difficult and they need help from outside, sensible targeted help, but also generous help.

And the question is whether the European Union and the United States are in the mood politically to be smart about being generous.

MONTAGNE: Simon Johnson, economics professor at MIT. Thank you very much. You're listening to MORNING EDITION from NPR News.

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