Thu | Aug 17, 2017

Ukraine: In memory of John Nash

Published:Friday | June 26, 2015 | 6:00 AM
File A woman lights a candle on Independence Square in Kiev, Ukraine on January 25, 2015 for the victims of a rocket attack on the coastal city of Mariupo.

IN LATE May, while en route from the airport, John Nash died in a freak accident.

The celebrated mathematician demonstrated that suboptimal equilibriums do stably exist. The concept became a bulwark of modern game theory, and it provides us with an analytical framework to examine the Ukraine's inherent political and economic problems.

Although the country's boundaries have been well-defined since the start of the 20th century, it sits at the crossroads of several major ethnic groups. The name of the country says it all. In Russian, it means 'frontier' or 'borderland'.

For centuries, it was part of the Polish-Lithuanian Commonwealth. This allowed it to develop close cultural ties with Western Europe. Nevertheless, its Slavic ethnic roots and Orthodox religious traditions are more intertwined with Russia. As a result, it is a veritable buffer zone where the West and East come together. Therefore, the equilibrium of the Ukraine is a constant state of instability.

No one understands this better than the Ukrainians. Peace accords, such as Minsk I and II, come and go, but the instability continues. Western fears of a Russian invasion will never subside, but the incursions will never materialise.

Much of the violence in the eastern parts of the country is a land grab by local thugs.

Nevertheless, the Russians are just as happy to see the region in turmoil. Russian concerns about the Ukraine's accession into NATO and the European Union are real, but they also won't happen. Within this framework, the country optimises its utility by playing one side against the other. This has allowed it to develop a rent-seeking mentality that permeates deep into the social fabric.

For decades, the country was an essential part of the Soviet Union. Now, it is the West's front line against Russian aggression, but this role comes with a price. In March, the International Monetary Fund approved a $17.5-billion package to help the ailing economy. The government is also trying to restructure its debt by imposing a haircut on creditors and extending its maturities.

Of course, the constant state of turmoil also has an economic cost. The Ukrainian economy should contract by more than nine per cent y/y in 2015 and consumer prices will rise more than 45 per cent.

Sadly, the war has a social dimension. More than 4,000 civilians and 2,000 soldiers have been killed. More than 1.3 million persons have been displaced from Donetsk, Luhansk oblasts and Crimea. Much of the country's industrial heartland was in the contested areas. The result has been a great deal of stress on the corporate sector.

However, there are signs that the situation may begin to improve. The currency is starting to appreciate. The hryvnia temporarily peaked above 34 in early March, but stabilised below 25. Recently, it has been creeping towards 20.

Life is starting to return to the streets of Kiev. The tanks are gone and tourists are reappearing. Real estate is one of the sectors that show a great deal of promise. The massive devaluation and recession slashed prices, inducing locals and foreigners to pick up bargains. Simultaneously, the government has launched important reforms to improve the rule of law.

reverse-diaspora

A reverse-diaspora is under way, with scores of western-educated Ukrainians returning home to accept senior positions in government and industry. Last of all, the government is taking steps to privatise assets. Top on the list is agricultural lands. The Poroshenko administration expects to generate US$450 billion in land sales.

Yet, the biggest challenge will be to rein in the rampant state of corruption. The country's rent-seeking mentality runs deep through all levels of government. Decades of Soviet rule followed by a long era of kleptocracy made corruption a staple of daily life.

President Poroshenko is attending the problem by starting with the police force in Kiev. New leadership and training is being provided to instill greater accountability and transparency.

The changes will not happen overnight, and many people are sceptical that they will happen at all. Fortunately, time is an important catalyst for change.

As the generations that lived through the Soviet era begin to move on, they are being replaced by a new generation that was raised on western values. This should propel the country into a modern model of development, and help it break out of the Nash equilibrium that has been a hallmark of its existence for the past millennium.

Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.

wmolano@bcpsecurities.com