Wednesday, February 26, 2014

Ukraine: Countering Threats of Strategic Drift and Economic Collapse

By Matthew Bryza

This article first appeared on Eastbook and on the International Centre for Defence Studies (ICDS, Tallinn) blog page.

Last weekend’s breathtaking triumph of those who seek a democratic, prosperous, and modern future for Ukraine will remain fragile for months to come, even in a best-case scenario. Assuming Ukraine succeeds in forming a new government, revising its Constitution, and electing a new President, the country will remain vulnerable to two other serious threats: strategic drift and economic collapse. Now is the critical moment for the European Union and United States to act together as a lighthouse, guiding Ukraine’s new ship of state toward a safe geopolitical harbor where groundbreaking reforms will be rewarded with lifesaving economic support.

Strategic drift is perhaps the more urgent threat. Tension is likely to persist in pockets of eastern and southern Ukraine, where sentiment runs strong for Ukraine to sustain its historical closeness to Russia rather than Europe. Moscow is feeding these tensions: Foreign Minister Lavrov has denigrated Yanukovych’s ouster as a coup d’├ętat, while Kremlin-controlled Russian media warn of possible civil war and partition. The Russian government may step up the pressure by withdrawing promised economic support, restricting imports of Ukrainian goods, manipulating natural gas supplies and prices, issuing Russian passports to residents of eastern Ukraine and Crimea, and supporting pro-Russian politicians (whether openly or covertly). Such tactics have a twofold aim: to hamper the push by Ukraine’s new leaders toward Europe; and to counter the West’s pull of Ukraine toward a modern future outside Russia’s geostrategic orbit.

Moscow’s tactics appear to be working in Washington. Since the dramatic events of Saturday, February 22, the White House has claimed that Ukraine is not the object of an East-West tug-of-war, despite a myriad of signs from Moscow to the contrary. The White House seems to ignore that the genesis of these past three months of popular unrest in Ukraine was Russian President Putin’s successful intimidation of Yanukovych into abandoning the then-Ukrainian President’s own policy of signing an Association Agreement with the EU last November at the EU’s Eastern Partnership Summit in Vilnius. Moscow will now employ the growing range of tactics outlined above to pursue President Putin’s most urgent geopolitical goal: preventing Ukraine from aligning with the EU and sliding from Russia’s exclusive geo-economic grip.

There is nothing Washington can do to dissuade President Putin from his zero-sum approach, or to convince him that the U.S. and EU did not somehow engineer Yanukovych’s ouster. In fact, by pretending they do not have a profound and historic strategic interest in Ukraine’s deeper integration with into the West, the U.S. and EU risk tempting Russia to manipulate centrifugal political forces in eastern Ukraine and Crimea with increasing intensity.

In reality, the Kremlin does not seek civil war or the partition of Ukraine. On the contrary, as President Putin contemplates a long-term plan to counter his humiliating defeat in Kyiv, his fundamental goal remains—over time—to reintegrate a united Ukraine into Russia’s economic and political orbit. President Putin’s greatest geopolitical project, the Eurasian Union, can achieve genuine geopolitical and geo-economic heft only if all of Ukraine—not just the eastern half—joins Russia, Belarus and Kazakhstan in this embryonic bloc.

There is, therefore, little to lose and everything to gain by Washington articulating clearly and loudly the geostrategic truth: Ukraine’s closer alignment to the European Union is a key strategic interest of the entire Euro-Atlantic community. Such a rhetorical shift by the White House would provide both the strategic guidance and shot-in-the-arm that Ukraine’s new government and the brave protestors who got it there so urgently need.

At the same time, the EU and U.S. should also demonstrate their readiness to help Ukraine tackle its second serious vulnerability, economic collapse. The Ukrainian economy is stalled, with zero percent GDP growth in 2013—and far worse expected this year. The country’s huge debt burden is unserviceable absent serious external help, with 25 percent of some $75 billion in external debt due within the next 18 months. Meanwhile, Ukraine’s currency has been depreciating sharply, thanks to rising prices for natural gas imports, decreasing prices for Ukraine’s metal exports, and a flight toward the safety of international currencies during political crisis; Ukraine’s foreign currency reserves can now cover only two months of imports. Finally, Ukraine’s new government will not be able to sustain the Yanukovych regime’s unrealistic budgetary promises in pursuit of political stability, which included subsidies to inefficient heavy industry and its oligarchs in the East and social welfare programs that eat up 50 percent of GDP. Cancelling these benefits will not boost the stability of Ukraine’s next government.

Fortunately, the EU and U.S. are scrambling to provide Ukraine a hefty bailout package, which EU Economic Commissioner Olli Rehn said during the G20 meeting in Sydney “will have to be measured in the billions rather than hundreds of millions.” Such Western aid was unthinkable during Yanukovych’s criminally inept and kleptocratic regime. Nor was it possible following the Orange Revolution of November 2004, the first time when Yanukovych was ousted by mass protests, as Ukraine’s victorious “reformers” disappointed their domestic and international supporters with their inability to break the inefficient and corrupt practices stretching back to the Soviet era, which continue to hamstring the Ukrainian economy to this day.

This time, however, things could be different. The historical stakes seem higher today than following the Orange Revolution in late 2004, given the loss of life and the new generation of political leaders that have now emerged in Ukraine. If Ukraine’s new leaders demonstrate the same commitment to groundbreaking reforms as did their predecessors in neighboring Poland in 1989, they should enjoy similar aid from the international community, including help from the IMF in restructuring official debt, as well as technical assistance and budgetary support from the World Bank and EU. Such resolve would be unprecedented in Ukraine’s political history, but must remain a precondition for any international bailout. Otherwise, Ukraine will likely return to the darkness that has plagued the country over the past few months.

At the center of any serious reform effort must be Ukraine’s natural gas sector, where massive corruption has allowed Moscow’s favored Ukrainian political and business leaders to become oligarchs; it has also perpetuated Ukraine’s vulnerability to Russian gas cutoffs during disputes over Ukraine’s non-payment and exorbitant transit fees to pump Russian gas to European markets.

Many American and European politicians now hope that by soft-pedaling the geopolitical contest that has undeniably taken shape over Ukraine, they can bring along Russia as a partner in stabilizing its big neighbor. A litmus test of this approach’s integrity could be whether Moscow is willing to abandon its hardball tactics on natural gas supplies to Ukraine and instead partner with Brussels and Kyiv to develop a transparent and efficient transit system for Russian natural gas to cross Ukraine and reach European markets. Such a solution would mark a joint victory for Ukraine, the EU and Russia itself. And, precisely because of its win-win nature, this option will likely be rejected by Russia. Moscow will instead likely choose to stick with its hardball tactics of gas cutoffs and gargantuan subsea pipelines like Nord Stream and South Stream, each of which costs more than the entire Sochi Olympics and drains the Russian treasury of resources that could be better invested in the welfare of Russia’s own citizens.

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