The Russian ruble is dragging down the Ukrainian hryvna, which for two years has been remarkably stable. It seems even when Russia isn't trying it can make a mess of things in Ukraine. But that's not the whole picture.
Ukraine is not being battered by external forces. Ukrainian leaders have willfully tied their fate to Russia's and now the state is paying the price.
Russia's crisis should be a profound warning to Ukrainian policy makers, who largely patterned their financial system after Russia's – a system premised on bullish attitudes among international investors about emerging markets.
Both countries have tried to avoid adjusting to the new investment climate that emerged after inflated southeast Asian markets crashed by continually pumping up the yields on their treasury bills.
It's been obvious from day one it couldn't be sustained. The only reason Russia is flopping about while Ukraine is more firm is that Ukraine didn't go as far out on the same limb.
Russia's devaluation is expected to force Ukraine to follow suit because Ukraine relies heavily on exports to Russia. In effect, those exports have been propped up by a quiet but intentional policy of keeping wages significantly lower than in Russia. Russia's devaluation goes a long way toward closing that gap, but that could make Ukrainian products uncompetitive in Russia.
Had Ukraine attempted to restructure its industry and agriculture, it could by now be selling much more of its products on international markets for hard currency. Instead, it scrapes by on odd barter deals with Russia that leave both countries' industries without cash for investment.
If Ukraine's financial system manages to hang on while Russia's collapses, perhaps Ukraine's leaders will finally give some serious thought to their direction. But if Ukraine follows Russia down, they will only have themselves to blame.
