By Ben Aris, Intellinews, 8/2/22

A financial crisis has begun in Ukraine. The currency is in free fall to the point where the national bank has just ordered exchange kiosks to stop displaying the exchange rate. The government is running a deficit it can’t cover and the leading state-owned companies have started defaulting on their debt. And the economy is on course to contract by over a third by the end of this year – a catastrophic crash, worse than any of the multiple crises seen since the collapse of the Soviet Union.

The war with Russia is the main cause, but the paucity of financial help from the West is making the collapse of Ukraine’s economy worse. As bne IntelliNews has reported, Ukraine is running out of money. During a call on August 1, President Volodymyr Zelenskiy asked his French counterpart Emmanuel Macron to help release the EU’s second tranche of macro-financial assistance to Ukraine worth €8bn. Earlier, European Commission spokesperson Arianna Podesta said there are currently insufficient funds to provide Ukraine with the second tranche. The government has to cover enormous military spending, the fiscal deficit stands at approximately $5bn per month, and without external help, which Ukraine is not getting, it cannot sustain this spending.

According to the estimates of IER experts, real GDP dropped by about 46% year on year in March 2022, and over the next three months, the rate of GDP contraction stabilised at the level of 39-40% y/y. In the worst of the 2014 Euromaidan revolution the economy contracted by 17% in the second quarter of that year, but then began to bounce back and was back in the black by the start of the following year.

In June, the contraction of real gross value added in the agricultural sector accelerated. This was primarily a result of the temporary occupation of the Kherson oblast and part of the Zaporizhia oblast, which substantially contributed to crop production (grain, vegetables and fruits) in June 2021. However, in the second half of this year, the IER forecasts a gradual improvement in the economic situation, depending on how the war goes. As a result, real GDP is estimated to decline by about 30% y/y in 2022.

However, the GDP contraction may be much higher if inflation accelerates further, logistics do not improve and hostilities intensify.

The physical economy is bearing the brunt of the war and has shown itself to have some resilience, but the financial system is starting to buckle. The central bank hiked its prime rate to 25% on June 2 and intends to keep it there for two years. The National Bank of Ukraine (NBU) also devalued the currency on July 21 from around UAH28 to the dollar to UAH36, a drop of 25%, to bring the official rate in line with the cash rate on the street. But the currency immediately fell further to UAH41 and will continue to slide. (chart)

The government is running a deficit of around $5bn a month, which is being financed almost entirely by the NBU’s printing presses. This is not sustainable. The Western donors have sent a total of $12.3bn since the start of the war five months ago – about $2.75bn per month – but this is insufficient to cover the funding gap. The EU and the US have promised another $16bn but the distribution of this money has been dogged by bureaucratic delays, and in the meantime the economy is in a slow crash.

The shortfall is already having an impact on the NBU’s reserves, which have fallen by about $5bn in the last two months, further undermining the value of the hryvnia. And the government has ordered all the state-owned companies to delay their debt payments to “preserve cash.” As a result, Naftogaz defaulted on a $335mn bond, despite having the money to hand and management wanting to pay to preserve the company’s credit history.

Grain exports resumed on August 1, which will bring some badly needed revenues, but as grain shipments are only expected to earn some $1bn a month, the numbers still don’t add up. Kyiv got some relief as the Paris Club of sovereign creditors agreed to delay all payments on sovereign debt for at least one year, but the private investors are less enthusiastic. The holders of Naftogaz’s bond were advised to reject the company’s request to delay redemptions and coupon payments as the company was “still a going concern” and had the cash to pay on its balance sheet.

The government is in a very difficult place now. With much of its manufacturing industry and infrastructure damaged or destroyed and with insufficient income to cover the budget, it is in a poor position to sustain what increasingly looks like a long fight. Kyiv is now entirely dependent on the West’s supplies, especially materiel, but the West is running down its stocks of ammunition and its manufacturing sector is not able to quickly produce more. The US in particular has compensated by sending more powerful weapons, such as the US M142 High Mobility Artillery Rocket Systems (HIMARS), that have had a devastating effect on Russian forces, but these are not game-changers, as the Russian military machine keeps grinding on.

In two ominous signs in July the Kremlin cancelled the second Russia-Africa Summit, due to be held in November, and at the end of July Kyiv ordered the evacuation of the parts of the Donetsk region it still controls, nominally to avoid problems in the winter. Both suggest that the fighting will continue into November and possibly beyond and that Russia continues to make steady, albeit very slow, progress in its campaign to take control over the whole of the greater Donbas region.

The government has limited capacity to raise resources to cover its funding gap via taxes (the economy is weak) or debt (international capital markets are closed for Ukraine; at the internal capital market, the Ministry of Finance is unwilling to sell debt at new higher interest rates which distort monetary transmission).

This situation is not sustainable. Although the NBU can provide direct support to the government, this comes at a cost of burning foreign exchange reserves at a fast pace. In June alone, the central bank sold approximately $4bn of its reserves to support the hryvnia and the NBU predicted a decrease in international reserves in the second half of 2022 by 8.6% – from $22.8bn to $20.8bn by the end of the year.

With limited resources and instruments, the central bank is caught on the horns of a dilemma, but cannot simultaneously defend the exchange rate, print money (UAH225bn, or $6.1bn, since the beginning of the war) to cover fiscal deficits, and support the stability of the financial system. Something will have to give – and the value of the currency is probably the first thing that will go. In the past few days the NBU has forbidden exchange kiosks from reporting the exchange rate, in an effort to “shield” the population from the rapidly collapsing currency.

A financial crisis is already upon us. The projected funding from the international community for the second half of 2022 is about $18bn. With monthly foreign exchange interventions of about $4bn and external debt payments (principal and interest) of $3bn in the rest of 2022, more defaults are on the cards, otherwise foreign exchange reserves could decline to a dangerously low level of $12-15bn, say experts – far below the level needed to support the value of the hryvnia.

Some of that pressure has been removed after the Paris Club of sovereign creditors gave Ukraine a one-year delay on payments in July, but the private creditors have not been as forgiving, and on July 26 the state-owned gas company Naftogaz defaulted on a $335mn bond redemption, despite having the cash to meet its obligation. The government has ordered the state-owned banks to delay their payments to “preserve cash.”

In addition to the debt another big call on the budget will be the need to buy more gas for the winter. Ukraine currently has the lowest level of gas storage in all of Europe, with the tanks only 22% full as of the last week in July. Naftogaz says it needs to buy another 5bn cubic metres of gas in an extremely tight market at an estimated cost of $7.8bn. It is not clear where the companies will find either the gas or the money to buy it with.

But there is some good news. Economic activity has begun recovering in Ukraine after a significant drop at the beginning of the full-scale invasion, according to Deputy Chairman of the National Bank Serhii Nikolaychuk. This does not mean that the GDP is growing but that the depth of the fall is decreasing, he said in July.

The economy’s recovery can be seen in the following indicators: revitalisation of trade networks, increase in restaurant turnover, and a drop in the number of non-working businesses. In addition, exports are also gradually recovering and the end of the blockade on Ukrainian ports should make a very big difference to Ukraine’s balance of payments.

Nevertheless, NBU predicts a 2022 drop in GDP of more than a third and an increase in inflation to more than 30%. The national bank estimates that the economy will decline by 40% in the first half of this year and will end the year down by 30-35%. At the same time, analysts of the regulator believe that the economy of Ukraine will show a recovery of 5-6% in 2023-2024. This will become possible if the active phase of the war ends and the Black Sea ports are unblocked.

The regulator expects inflation to return to the goal of 5% in 2025. According to the NBU forecast, inflation will decrease to 20.7% in 2023 and 9.4% in 2024.

By Steve Sweeney, Morning Star, 7/24/22

AJOURNALIST has accused press freedom group Reporters Without Borders (RSF) of “abetting genocide” after it launched a controversial appeal for funds to censor Russian media.

Canadian journalist Eva Bartlett accused RSF of silencing the voices of the Donbass region’s inhabitants.

The group launched an appeal on Friday (July 22, 2022) with an email from Jeanne Cavelier, head of the RSF Eastern Europe and Central Asia desk, asking for donations.

She claimed that several Russian television channels, including Rossiya 1, Perviy and NTV, were spreading “disinformation and content that in effect condones war crimes and incites violence and hatred, legitimising the invasion of Ukraine and the Russian army’s crimes.”

When pressed by the Morning Star, RSF was unable to point to any specific examples of such activity by the organisations cited in its appeal.

General secretary Christophe Deloire responded by saying that the channels were “created to destabilise our democracies in a context of information war” and had lied by describing Russia’s intervention as defensive.

“In short, they serve the interests of a repressive, censorious and propagandist state.”

He said that Russian media has challenged the dominant narratives on the bombing of a hospital in the Ukrainian port city of Mariupol and the massacre of civilians in the town of Bucha and also suggested that the US had funded “a secret network of biological laboratories used to design chemical weapons.”

But journalists say that it is right to scrutinise such incidents and seek to cut through the fog of war.

The appeal called for French authorities to act against Eutelsat, which RSF claims is profiting from broadcasting Russian media outlets and “deriving dividends from disinformation and censorship.”

It accused the satellite operator, in which the French state is a major shareholder, of “acting as an intermediary for the Russian war propaganda apparatus.

“Help us to get Eutelsat to comply with the international convention that requires respect for the right to freedom of expression and information,” it said above a donation button.

Mr Deloire denied that RSF was calling for censorship but accused the Russian outlets of promoting “propaganda and lies,” saying that “Eutelsat should rather broadcast independent Russian channels.”

He insisted this case was different from the state bans on RT and others which RSF opposed, but was about the jurisdiction of governments.

“We call on France and other signatory countries of the Eutelsat convention to impose the respect of the principles of this convention,” he said.

But Ms Bartlett told the Morning Star: “What RSF is actually doing is censoring the people of the Donetsk and Lugansk people’s republics, who have been living under Ukrainian bombing for over eight years.

“Ukraine has increased its shelling in the past four months, heavily hitting civilian areas and infrastructure, including schools, markets and hospitals.

“Russian media and those able to publish reports on sites like RT is giving those terrorised civilians a voice and holding Ukraine accountable for its war crimes,” she said.

“RSF is clearly working hand in hand with Ukraine in obfuscation of its murder of 754 civilians from January 2022 to July 21 2022 alone. That is in addition to the nearly 8,000 civilians alone Ukraine has killed over the past eight years.

“In covering this up, RSF is abetting genocide,” Ms Bartlett said.

RSF refused to comment on reports of journalists deemed to be “pro-Russian,” including Ms Bartlett, being placed on kill lists and declined to speak out about her case.

“Our team did not have the capacity to investigate the case. We need to get sources from all sides, and make sure that they provide information and not lies,” Mr Deloire said.

He denied that such appeals create a climate that puts journalists at risk, after some raised concerns that RSF is “placing a target on our backs.”

“On the contrary,” he said, “denouncing propaganda media is a way to defend the independence of journalists, whatever the editorial lines of their media,​​​​​” adding that RSF does not have any political bias.

The press freedom organisation was founded in 1985 by French journalist Robert Menard and others.

Mr Menard is now mayor of the southern city of Beziers, having been elected in 2014 following a campaign backed by the far-right National Front.

RSF has received funds from US regime change outfit the National Endowment for Democracy and USAID, among others.

It has been accused of targeting countries that the US has criticised or sanctioned as part of a new cold war and regime change efforts, including China, Russia, Syria and Venezuela.

In 2008, a number of its activists were arrested for attempting to disrupt the flame ceremony at the Beijing Olympics.

Difference Group founder Dr Dan Steinbock said that RSF has previously supported coups against Hugo Chavez in Venezuela, Jean-Bertrand Aristide in Haiti, Evo Morales in Bolivia and Manuel Zelaya in Honduras when those leaders held office.

He claimed that the group has admitted co-operating with the US State Department against Cuba, Bolivia, Venezuela and Nicaragua, while pursuing similar joint interests in Libya, Iran and Iraq.

By MK Bhadrakumar, Indian Punchline, 8/2/22

The Russian Defence Ministry announced yesterday that at around 9.20 a.m. Moscow time, Razoni, ship flying the flag of Sierra Leone, left Odessa port in Ukraine as part of the recent grain deal. Razoni is carrying a cargo of maize to Istanbul port.

The MOD said the “control of the humanitarian operation for the departure of the first ship carrying agricultural products was planned with the active participation of Russian officers who are part of the Joint Coordination Centre in Istanbul.”

Meanwhile, Secretary of State Antony Blinken said yesterday, “this is a good and important first step” that the first ship with 26-, 27,000 tons of grain sailed out of Odessa.

Searching for the needle in a haystack is exciting, as there could be sudden surprises. There are growing signs that the diplomatic front on Ukraine conflict is livening up.

On Monday, the US President Joe Biden offered talks with Russia. In his statement ahead of the tenth Non-Proliferation Treaty (NPT) review conference, Biden reiterated the US’ “shared belief” with Russia that “a nuclear war cannot be won and must never be fought” and that “my administration has prioritised reducing the role of nuclear weapons in our national security strategy.” 

Biden continued:

“I’ve worked on arms control from the earliest days of my career, and the health of the NPT has always rested on meaningful, reciprocal arms limits between the United States and Russian Federation. Even at the height of the Cold War, the United States and the Soviet Union were able to work together to uphold our shared responsibility to ensure strategic stability. Today, my Administration is ready to expeditiously negotiate a new arms control framework to replace New START when it expires in 2026. But negotiation requires a willing partner operating in good faith. And Russia’s brutal and unprovoked aggression in Ukraine has shattered peace in Europe and constitutes an attack on fundamental tenets of international order. In this context, Russia should demonstrate that it is ready to resume work on nuclear arms control with the United States.”

Simultaneously, Blinken also alluded to Russia’s key role for “making sure that countries with nuclear weapons, including the United States, pursue disarmament; making sure that countries that don’t have nuclear weapons do not acquire them by upholding and strengthening nonproliferation; and making sure that countries can engage in the peaceful use of nuclear energy, something that is even more vital as we deal with the challenges posed by climate change.”

Blinken has had a makeover lately pushing back an avalanche of hawkish opinion represented by House Speaker Nancy Pelosi, US Senate, Ukraine’s president Volodymyr Zelensky and the Ukrainian Parliament who demand that Russia be formally designated a state sponsor of terrorism, a label reserved for North Korea, Syria, Cuba and Iran.

Indeed, Blinken’s phone call to Russian FM Sergey Lavrov on prisoner exchange was a US-Russia re-engagement since February and therefore a subtle messaging in itself. (Biden’s offer of talks has come within the week.)

These fresh tidings need to be seen alongside the trend of the “collective West” lately working to ease the anti-Russian sanctions. The following developments suggest a pattern:

-Canada announced on July 9 — on Germany’s request and Washington’s backing — while also ignoring Ukraine’s objections, a waiver of sanctions that allowed the return of equipment for Nord Stream 1 pipeline so as to support Europe’s access to “reliable and affordable energy”;

-European Union issued a guideline on July 13 (in relation to the Russian exclave of Kaliningrad) “that the transit of sanctioned goods by road with Russian operators is not allowed under the EU measures. No such similar prohibition exists for rail transport” (via Lithuania.)

-On August 1, the UK eased some restrictions to allow companies to provide insurance and reinsurance to Russian entities, which have implications for shipping and aviation industries.

-The EU also allowed “exemption (for Russia) from the prohibition to engage in transactions with certain state-owned entities as regards transactions for agricultural products and the transport of oil to third countries.”

-Bloomberg had reported on June 13 that “US government is quietly encouraging” agricultural and shipping companies to buy and carry more Russia’s fertilizer, whose exports are down 24% this year as “many shippers, banks and insurers have been staying away from the trade out of fear they could inadvertently fall afoul of the rules… and (Washington) is in the seemingly paradoxical position of looking for ways to boost them (Russian exports.)”

However, on the war front, Russia’s special military operations to grind the Ukrainian forces are continuing, albeit without significant changes on the battlefield. The current frontline in Donbass appears to be along the Bakhmut –Soledar-Seversk line where Ukrainian forces try to slow down the Russian offensive on the cities of Slavyansk and Kramatorsk from the eastern direction.

Positional battles are also going on along the entire frontline in Eastern and Southern Ukraine. The western media, prompted by the Kiev regime, is hyping up an imminent Ukrainian “counteroffensive” in the southern region of Kherson, but that is a stretch. In fact, in the weekend, Ukraine’s 128th Mountain Assault Brigade in Zaporozhye direction reportedly suffered such heavy losses that demoralised troops began abandoning combat positions and desertion from the frontline.

Although Razoni sailed out yesterday, Russian strikes also destroyed one launcher of US-made anti-ship Harpoon missile system in Odessa Region while high-precision strike also destroyed 2 advanced US rocket launchers of HIMARS in Kharkov.

Against such a convoluted backdrop, an opinion is building up in the US that the Kiev regime is stringing the West, and needs to be firmly told that all good things must come to an end.

Reflecting this nascent thinking, the National Interest featured a piece last week by two influential American think tankers close to the Democratic Party circles who had served in the White House and State Department under the Obama administration.

Conceivably, there is a convergence here with Russia’s grouse that but for Kiev’s intransigence, peace talks are possible. Putin has invited Turkish president Recep Erdogan to meet up at Sochi on Friday. (here, here.)  Erdogan had said he hoped the recent grain deal would be a turning point for the resumption of political talks between Ukraine and Russia to end the armed conflict.  (here)

*Interview starts at around 16 minute mark.

YouTube link here.

Rumble link here.

“German journalist Alina Lipp said she was facing three years in prison in her home country for her reporting on crimes committed by Ukrainian forces against civilians. She also said that Germany would hold court hearings without her. They will not allow her to present her case as it would hamper the process. She is accused by the German authorities of supporting the Russian invasion of Ukraine and faces three years in prison under article 140 of the constitution or a monetary fine.” – India Today

Link here.