Glen Ruffle: Crossroads in Kiev

Ukraine’s journey either to
the East or the West is heading nowhere. This enormous country is still one
undergoing transition: when Victor Yushenko swept
to power as President of Ukraine in 2004, many in the West hoped for an opening
of markets and a compliant new ally. History, however, does not just let go.
With over a thousand years of close connections with Russia, Ukraine found
itself in an identity crisis. Those in the West of the country,
with the least connections with Moscow, wanted more Europe; those in the East opted to
maintain their historical legacy. Yushenko and his Prime Minister, Yulia Tymoshenko,
nevertheless moved the country towards the EU.


Russian coup

Many
thought that Ukraine was breaking out of the Russian shadow until, in 2010,
Vladimir Putin's favoured candidate, Victor Yanukovich, won the election.
Tymoshenko was betrayed, backstabbed and thrown into prison; Yushenko was cast
into the political wilderness. Ukraine was again heading East.

Independent nation

However,
Yanukovich has not been as submissive as Moscow hoped. At heart, Yanukovich is
a nationalist, and he has sought to balance competing directions for Ukraine:
on the one-hand, he has courted the EU, signing an Association Agreement
(though one which is still on ice), while on the other hand discussing with
Russia membership of the Putin-sponsored Eurasian Customs Union of Belarus,
Russia and Kazakhstan.

Stuck in the mud

Ukraine
thus finds itself in the middle of competing visions. Joining the Russian customs
union would reduce ties with Europe and increase Moscow's influence over Kiev,
and while Yanukovich has described Russia as a ‘strategic partner’ of Ukraine,
he has not sought to lose sovereignty to Moscow as he has done to Brussels.

The
EU, however, is not serious about Ukraine joining, as Paris and Berlin fear the
size of the country; and there is no guarantee of Ukraine even
choosing to become a member either, as Yanukovich has promised a referendum on
any Ukrainian membership of the EU (or Russian customs union). Yulia
Tymoshenko's political imprisonment remains a problem as well: as long as she
remains behind bars, Ukraine will remain outside of Europe. Thus a stalemate
rules, and this suits many of the stubborn players in this game. Yanukovich can
pit Russia against Europe; while moves toward the EU sell the right image to
investors.

Vladimir Putin,
however, has made it clear that he will not be waiting forever. Desiring
greater control over Ukraine’s gas pipeline network, he has banned some Ukrainian
chocolate in Russia as a first sign of Moscow's displeasure, and swung his
support behind Medvedchuk, a pro-Russian candidate for the 2015 Ukrainian
election.

Economics

In
terms of Ukraine's options, the country is between a rock and a hard place.
Eurozone growth has only just, after
4 years, shown a few green shoots: 0.3% of growth was
the latest result, and this principally coming from France and Germany. The
general macroeconomic situation of the EU remains dire.

Yet
Russia has also been hovering around the zero-growth level recently, and
the EU market is considerably larger than Russia's. However, Russia's main
advantage is its ability to offer cheap energy and hard cash; something the EU
cannot do. Joining the EU would also cause Ukraine to lose its special partner
status with Russia which it at the moment enjoys.

In
terms of debt, Ukraine has public debt of around 38% of its GDP. Russia has
national debt of around just 11% of GDP. The EU, on the other hand, has public
(national) debt at 85% of its GDP, and is a heavily saturated market. Russia also fears an influx of cheap, quality
goods coming into Ukraine should it join the EU, increasing smuggling and
hitting the Russian economy. The downside is that Ukraine is not in an ideal
place to compete directly with hi-tech German manufacturers.

Future prospects

Russia
has been building relations with China more and more, and, as well as having natural resources in
abundance, has immense influence in Central Asia. The
European Commission recently expressed its concern at rising trade barriers
coming from countries like China and Russia. This is because the EU is
suffering a crisis of overproduction: it needs foreign markets to get rid of
the cars and electronics being made; for if these markets dry up, the EU's
house of cards will collapse. Unemployment will rocket as companies collapse,
people will ask why national, accountable governments can't act, and the EU
project will flounder.

Ukraine
should choose its course carefully. The EU may at present be the largest
market, but it is largely unsustainable, built on debt and continuing only by
other governments' purchases of European government debt. When these states
start to sell, the EU will suffer massive inflation and very serious social
changes. Ukraine has lived through this once with the fall of Communism.
Choosing this route a second time would be most unwise. It appears having two
blocks fight over you is a rather good place to be.

 

 

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