Russia and Ukraine: That Reichenbach falls moment? Reviewed by Momizat on . [caption id="attachment_5465" align="alignnone" width="615"] Both Ukraine and Russia`s Despair Index scores – an economic measure that combines inflation, unemp [caption id="attachment_5465" align="alignnone" width="615"] Both Ukraine and Russia`s Despair Index scores – an economic measure that combines inflation, unemp Rating: 0

Russia and Ukraine: That Reichenbach falls moment?

Both Ukraine and Russia`s Despair Index scores – an economic measure that combines inflation, unemployment and poverty, as compiled by Businessneweurope, - have continued to deteriorate sharply throughout 2015.

Both Ukraine and Russia`s Despair Index scores – an economic measure that combines inflation, unemployment and poverty, as compiled by Businessneweurope, – have continued to deteriorate sharply throughout 2015.

By Chris Weston, CEE Consulting Group

The town of Reichenbach and the falls are known the world over as the setting for a fictional event: it is the location where Sir Arthur Conan Doyle’s hero, Sherlock Holmes, fights to the death with Professor Moriarty, at the end of The Final Problem, first published in 1893. For reasons of balance, let us avoid saying which of the countries above represents Holmes and which Moriarty but Russia and Ukraine remain in a death grip with a real chance of mutual collapse.

Both Ukraine and Russia`s Despair Index scores – an economic measure that combines inflation, unemployment and poverty, as compiled by Businessneweurope, – have continued to deteriorate sharply throughout 2015.

At the beginning of 2015, Ukraine`s Despair Index score had nearly tripled in two years from 16.5 in 2013 to 46.5. Since then, it has increased to 77.2 as of May 2015. In part, this has been driven by high inflation with it reaching 58.4 percent up to May. It has since edged down to 55.3 percent in July.

Russia`s Despair Index is also arching upwards from 24.1 at the beginning of 2014 to 36.5 at the end of May. In part, this is also a symptom of inflation, with the sharp depreciation of the rouble as well as sanctions on EU food, contributing to a rate of 15.8 percent in May. In July, this registered 15.6 percent, but recent rouble declines could seek that go higher.

More worrying is a recent World Bank report which has forecast a poverty rate in Russia of 14.2 percent in 2015 compared with 11 percent in 2014.

Russia`s unemployment rate of 5.5 percent also looks too low given the fact that the second quarter registered a fall in the quarter`s GDP of 4.4 percent.

The effects of their conflict have thus fed into a mutually linked increase in their respective Despair Indexes.

This has also led to some marked schizophrenic behaviour. On the one side, Russian gas giant Gazprom has sought to curb exports of gas to Ukraine, in part due to non-payment although the IMF has set aside monies in a special Ukrainian Central Bank account and the EU has also promised to make funds available to the Ukraine to settle outstanding balances with Gazprom. In the past, Gazprom sales to Ukraine have come to about 20 percent of sales to Europe, making Ukraine a trading partner roughly equal to Germany. Such a cessation which would lead to Ukraine reinforcing a tendency to reduce its exposure to Gazprom, would seem  rather self-indulgent acts on both Gazprom`s  and its owner`s part given falling volumes, a more competitive market and expected price collapse given the time lags in gas prices following oil price drops.

On the other hand, Russian ownership of the Ukrainian mobile telecoms market is wholly dominant with two Russian owned entities, Kyivstar and MTS, accounting for almost 80 percent of the market. Mikhail Fridman, the owner of Vimpelcom, also exercises influence, albeit indirectly, over a third operator, lives with a 16 percent market share.

These Russian companies have invested heavily in the Ukraine over the years, with MTS alone investing USD 10 bln.

In February 2015, the companies were awarded 3G licences for an amount of more than UAH 8.1 bln, which the Ukraine State Treasury collected and a proportion of which was spent on the conflict. This was a not insignificant infusion of funds at a time when Ukraine was calling for its foreign debt rescheduling.

One report has noted that Russian – owned mobile operators` fees and tax payments account for 1.5 percent of the country`s GDP. This is no mean amount considering overall GDP to have fallen by 17 percent in the first quarter of this year.

Both countries import/export structures as well as their wider economies are, notwithstanding statements and actions to the contrary, heavily dependent upon each other. The war and conflict have inflicted significant costs on both sides. Time for both, perforce, to take steps to reverse those Despair Indexes.

Photo courtesy of Фране и Единая Россия (Wikimedia Commons).

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