IB Notes: Ukraine and the economy

As if there weren’t enough reasons for concern about the recent events in Ukraine, here’s another: The Ukrainian economy is in very poor shape. Converged communicators in GEB3373 (International Business) have learned about several critical factors influencing a nation’s economy. Among those are subsidies, in which a government assists companies to make them more competitive. These subsidies are becoming a serious issue in Ukraine’s financial status.

As reported by Paul Waldie in the Globe and Mail (Toronto), Ukraine’s economic challenges are enormous. Energy subsidies are driving the country into deep debt, but ending those subsidies could see rates for consumers soar – perhaps by as much as 40 percent. Add the likelihood of conflict (political, economic, and perhaps even military) with Russia, which supplies most Ukrainian fuel, and it’s a recipe for a sharply-reduced standard of living.

The International Monetary Fund and European Union are interested in stepping in. However, this help comes as a price. Since some well-connected business leaders wield overwhelming industrial and political power, the IMF and EU would likely demand changes in the nation’s economic structure – changes that these leaders would oppose. Plus, those who remember about the uses of tariffs from Chapter 7 will think about one more function of tariffs (beyond protection and revenue): Tariffs can be used as a bargaining tool, or in this case more of a blunt instrument, to bring other countries into line. Thus, if Ukraine accepts a deal with the EU, some analysts believe Russia will retaliate with stiff tariffs on trade with Ukraine. This would damage the Ukrainian export market.

Obviously, there are many facets to the current volatile situation in Ukraine. For those of us who are studying the business aspects, it’s useful to see ways that some of the seemingly complicated ideas of world trade – tariffs, subsidies, and the like – play out in the modern world.

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