A tale of three countries' debts

The world is keeping a close watch on the Ukrainian crisis and intensified tensions between the United States and Russia. Ukraine was already facing a crisis when ousted Ukrainian President Viktor Yanukovich visited China and Russia in December. The main purpose of Yanukovich's visit to the two countries was to seek financial help to avoid a sovereign debt crisis.

By the turn of the year, Ukraine, along with Thailand and Venezuela, was caught in the web of serious social unrest. The three countries, in fact, have a common problem: shortage of funds.

Ukraine was facing a serious debt problem by the middle of 2013, with international credit rating agency Moody's downgrading its sovereign rating in September. Almost at the same time, Russia pressured Ukraine on the economic front to prevent it from joining a trade agreement with the European Union. This, in a way, added to the economic woes of Ukraine.

In October, to prevent state-owned oil company Naftogaz from defaulting, the Ukrainian government had to pay $22 million. At that time Ukraine's foreign exchange reserves was only $20 billion, which could sustain imports for just more than two months. The Reuters then cautioned international investors that Ukraine's $60 billion debt would be due for repayment in 18 months.

By the end of 2013, however, Ukraine's accumulated foreign debt had exceeded $100 billion, accounting for about 70 percent of its GDP. The Ukrainian government didn't have enough funds to meet the country's requirements and was in desperate need of foreign aid to repay its debt and fill the funding gap. The government sought help everywhere but met with no success. Russia, the EU and the International Monetary Fund all attached political conditions for providing assistance. As a result, Yanukovich was forced to change his pro-EU policy, which sharpened contradictions at home. Squeezed by the opposition at home and major powers externally, the Yanukovich government collapsed.

In Thailand, the Yingluck Shinawatra government introduced the rice subsidy scheme that paid farmers well above the world market rates. The government's plan to buy rice and sell it at higher prices in a rising world market failed because of competition from Vietnam and India. With international prices falling, Thailand lost its crown as the world's top rice exporter. Last year, the rice subsidy scheme cost Thailand about $15 billion, or about 4 percent of its GDP.

The Thai government was not in a position to sustain the subsidy scheme even before riots broke out in the country in July. But it could not reduce the subsidy, let alone scrap the scheme, because of farmers' strong opposition. To overcome the challenge, the government offered to sell the rice at a huge loss.

The billions of dollars spent on the subsidy scheme have deepened the country's political crisis. Protesters say the government failed to formulate a practical strategy to promote economic growth and allege that corruption ruined the implementation of the rice scheme. The Thai government's subsequent move to raise money from banks to settle farmers' debts caused widespread panic leading to protests (sometimes violent), which have not yet been quelled.

Venezuela, too, faces a debt problem because its funding has nearly dried up. To stave off the pressure of devaluing the currency, Venezuela has run out of its gold and foreign exchange reserves. About $5 billion of Venezuela's foreign debt will be due in 2014. Moreover, the country's non-financial payable funds on account is more than $50 billion and the government has defaulted in paying $27 billion in domestic debts. With shrinking foreign reserves and oil revenue, Venezuela's repaying capability is limited. So to avoid a sovereign debt crisis, the Venezuelan government chose to pay back foreign debt first and temporarily dodge domestic debt.

Media reports say that some foreign airlines have begun to limit the sale of tickets in Venezuela because the government has not cleared their dues, and some domestic enterprises are on the verge of halting their production because of the same reason. Combined with the slowdown in food and drug imports, Venezuela is running short on some essentials, leading to seething public discontent.

All the three countries first encountered debt problems, which led to socio-political crises. In general, debt problems induce or stoke social unrest in countries that follow three economic models. The first is the Ukrainian model, in which shortage of funds led to political unrest and eventually the collapse of the government. The second is the Thai model, in which fiscal woes have eroded government credibility, causing social unrest. The third is the Venezuelan and Brazilian model, in which shortage of goods and public spending cuts have fueled social discontent.

A debt crisis does cause social unrest. But if the impact of the unrest is not powerful enough and the government fails to grasp the opportunity to promote economic reform, the country will repeatedly be caught in turmoil. Egypt is a case in point. The problem is that in countries that go through such an experience, even the opposition cannot put forth a sound strategy to turn the economy around.

The author is a researcher at the World Politics Research Institute, affiliated to the China Institutes of Contemporary International Relations.