The state of play in Ukraine appears little changed from where it was a few weeks ago, even in the wake of last week’s contested referendum, in which separatists in the country’s restive east voted to secede. There continues to be low-level fighting, but no dramatic escalation of the violence.
Most interesting is the apparent drift in Russia’s position. Russian president Vladimir Putin has had troops stationed on the border of Ukraine for months now, but they have not advanced, despite the fact that any number of clashes between Ukrainian troops and separatists would have provided far more of a fig leaf for intervention than he used in taking over the Crimean peninsula.
What’s more, Putin seems to have toned down his rhetoric quite a bit, even to the point of appearing to tentatively support the May 25 election, which will in all likelihood anoint a pro-European president.
The Fiscal Times asked former Under Secretary of Commerce for Economic Affairs Robert Shapiro, now an advisor to the International Monetary Fund and the co-founder of consulting firm Sonecon, for his views on the crisis in Ukraine. Dr. Shapiro said that while the future of Ukraine is unclear, the limited regime of sanctions imposed on Russia by the U.S. and its European allies may have had more of an effect than people realize.
TFT: Has the Obama Administration’s strategy of targeted sanctions and consensus with European allies worked?
Shapiro: It may very well be fair to say that the sanctions have worked to stop further advances. Certainly the strategy of creating a consensus with Europe has worked because we are now presenting a generally unified front.
This is a strategy I would call targeted and escalating sanctions. The strategy has clearly conveyed: This is not the end. So far, the sanctions have been imposed on individuals. These are much more effective in Russia than they would be in the U.S., because it is much more of an oligarchic regime
The next stage would be sanctions against their companies themselves. Those sanctions would have costs, more for Europe than for us. I think that step would only be taken if Putin turned around and reaccelerated the crisis.
TFT: What could undo the progress made so far?
Shapiro: Vladimir Putin getting up on the wrong side of the bed.
This is an unusual international crisis because so much of the outcome depends upon the state of mind of one individual -- an autocrat on top of an authoritarian regime.
You have to approach it understanding what the differences in the conditions or the political structure in Russia versus in the West. Putin faces no constraints from a legislature or from the press, which makes his state of mind more important than it would be for another leader.
One can also imagine another global crisis, probably in the Middle East, in which the US and Europe need the cooperation of Russia for something that’s of higher stakes. Putin could say, “All right, I’m going to help you out, but I’m taking another 15 percent of Ukraine and that’s the end.”
Is there room on the margin for him to take a little more? Probably under the right conditions, but he would have to have leverage, which another crisis could give him
TFT: How damaging have the sanctions been to the Russian economy?
Shapiro: Not very damaging yet, but again, the sanctions are really designed to put personal pressure on Putin from individuals and to signal a steady process of escalation.
The real damage to the Russian economy would be if foreign investors come to see the regime as not only unreliable, but in a permanent state of confrontation with the western governments. Russia is not a big economy. You take away oil and gas and there’s not much left there. They really need foreign direct investment. I think this has already done some long-term damage to the Russian economy, not from sanctions but from behavior of the government.
TFT: If further sanctions become necessary, and Russia retaliates by turning off the natural gas spigot, does Europe have any other viable options? For that matter, does Russia, given the degree to which energy exports fuel its economy?
There are a lot of people who have been trying to come up with viable options, but I don’t think that’s how Russia would retaliate. I think she would retaliate with the same kind of sanctions against the West.
Her energy exports are a matter of central importance to the Russian economy, so she has done this in political disputes, but never for long, because it is very costly. If you don’t think you can depend upon [Russian natural gas exporter] Gazprom to deliver what it is contracted to deliver, then you figure out how not to do contracts with Gazprom. That’s what people have been doing. They are looking for alternative source.
Could Russia cut off gas to Ukraine, and let them freeze? First of all, that only works in the winter. But that’s really not a viable position for a country to take unless it is already a pariah and is satisfied with remaining a pariah. North Korea could do it, but Russia can’t.
TFT: Assuming Ukraine (less Crimea) remains one nation, how long might it take to get back to some sort of economic equilibrium?
Shapiro: The truth is Ukraine has been an economic basket case for quite some time. This whole thing was in part precipitated by the fact that Ukraine needs a bailout, and the question was whether it was going to be Europe bailing them out, or Russia.
Ukraine has the worst economic record of any developed country in the world over the past 20 years. Its GDP today is 30 percent less than it was when it gained its independence in 1991. Even Russia is 30 percent bigger than it was 20 years ago, and a place like Poland is a 130 percent bigger.
If they adopt some serious reforms they can begin to grow pretty quickly at a pretty good rate, with or without Crimea. Can they recover and begin to modernize the economy on a market basis? Of course they can. But it has the danger of increasing the political pressures as well.
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