The Ukraine Delusion: Freedom Over the Economy

The Ukraine Delusion: Freedom Over the Economy

REUTERS/Jonathan Ernst

Charges and counter-charges now overtake the Ukraine crisis. It is a thicket at this point, with contradictions and hypocrisy in plentiful supply.

The self-appointed government in Kiev, the parliament in constitutionally autonomous Crimea, the Russians, the Americans and Europeans—all miss no chance to denounce adversaries, claim legitimacy, and deem opponents illegitimate.  

At the weekend, Crimean lawmakers voted to secede from Ukraine and join the Russian Federation, setting March 16 for a referendum to ratify the decision. Instantly they won Moscow’s approval, while Kiev condemned them and Washington condemned the Russians.

Related: The Limits of East-West Fusion in Ukraine

But the provisionals in Kiev have a flimsy claim to legitimacy, and Washington must now explain why self-determination is suddenly not a primary principle—even as it was deployed as such when protesters drove President Viktor Yanukovych from office February 21.  

The talk and cross talk among political leaders and diplomats now turns on national boundaries, autonomy vs. sovereignty, self-government, constitutionality, and other legalities. But law is unlikely now to resolve the Ukraine crisis, not least because all sides invoke it when convenient but rarely otherwise.

Here is the emerging reality: Economic exigency is now the ruling principle in the Ukraine question. The rest will soon amount to little more than a new take on the Tower of Babel—many tongues, many uncomprehending ears.

The reality within this reality: Russia holds the better cards.

The Obama administration and the Europeans implicitly acknowledged this when they announced sanctions last week. To target individual Russians but not Russia amounts to piddle once you set aside all the huffing and puffing that dressed up official statements in Washington and the European capitals.

Related: What the Russian-Ukraine Crisis Means for Gold, Grains and Oil

The Americans have little leverage over Russia on the economic side because relations are stymied, still scarred with the Cold War’s stamp. In Europe, it’s the opposite: Ties have grown too dense and intimate for the European Union to afford its declared principles.

As to Ukraine, balancing Russia’s influence with an opening westward is a great ideal—in my view the worthiest aspiration any nation could have in the post–Cold War era, self-determination in its fullest meaning. The bitter truth for Ukrainians is that ideals, by definition, are never fully achieved; they are telos in the ancient Greek—eternally ahead, goading.

The Americans have the weakest hand—a pair of deuces and a broken straight, roughly. Bilateral trade is about $40 billion a year, penny poker for both sides. Administration officials recently acknowledged that now-aborted talks on trade and investment were make-work—something to discuss because there was nothing else. For Vladimir Putin, choosing between Washington’s toughest blows and the value of Ukraine is a no-brainer.

The picture in Europe is different but little better. Russia is the world’s No. 1 natural gas exporter, No. 2 oil exporter, No. 1 supplier of industrial metals, and No. 5 consumer market. EU states, Germany above all, are highly dependent on Russia in every one of these categories.

Related: 35 Intense Photos of the Ukraine Riots

Visiting Kiev just after Yanukovych was deposed, British Foreign Secretary William Hague threatened Russia with “significant costs” if it tightened its grip in Ukraine—the apparently rehearsed threat from all the Western allies. Days later Prime Minister David Cameron told his EU counterparts that the City of London must be exempted from any sanctions.

The European story is NIMBY, then—not in my backyard. Sanctioning Russians but not Russia is just fine with the allies: Looks good, means little.

Late last week four central European nations—Poland, Hungary, the Czech Republic, and Slovakia—petitioned prominent members of Congress to expedite US gas shipments to Europe. It is so unrealistic as to be sad.

There are now no American gas exports to Europe, and American lawmakers have no say in the markets. These four countries buy 70 percent to 100 percent of their gas from Russia, reflecting an extensive infrastructure connecting Russia westward, much of which consists of pipeline passing through Ukraine.

And it is the same times two for Ukraine itself. Its industry is concentrated in the eastern sections of the country; so are its coal reserves, which are the world’s seventh-largest and which supply 44 percent of the nation’s power-generating energy. (The rest comes from Russia.)  Lose the east to pro–Russian sentiment and Kiev will be the destitute orphan of its own political recklessness—which is what the ouster of Yanukovych starts to look.     

Related: Obama Used Invisible Ink to Draw a Line with Putin

As details of Western aid offerings emerge, the likelihood is that Ukrainians are about to go from suffering to worse suffering. Europe offers aid of $15 billion, but most of this consists of funds already committed and repackaged. Washington offers $1 billion in loans, and the International Monetary Fund will negotiate its deal once it gets a read on the extent of Ukraine’s economic disaster.  

What can this come to against the $35 billion Ukraine needs to dig out of its hole over the next two years and pay sovereign debts ($30 billion in the next two years, two and a half times foreign reserves)? And the picture darkens further when the IMF’s conditionality is factored in.

Even amid the turmoil of the past several months Russia did not withdraw its gas discounts to Ukraine, which kept prices at about a quarter of market. But these expire April 1, and the IMF wants Kiev to cut out its subsidies to customers, which cost the government the equivalent of 7.5 percent of GDP last year. 

Related: Pressure on Putin as Russian Wealth Disappears

Net this out: Gas supplies will go from $100 per thousand cubic meters to roughly $400 once Russia charges market rates. Atop this the subsidies go. Keeping things sweet, Gazprom just informed Kiev that it would cut off supplies, as it did five years ago, if a debt of $1.9 billion is not paid.

The new crowd in Kiev is bracing. Invoking the casualties of the Independence Square demonstrations, Finance Minister Pavlo Sheremeta just told a New York Times correspondent: “We had the option to choose to pay a lower price to Russia or to choose freedom. If we paid so much for freedom, can’t we find the money to pay more for gas?”

I read catastrophe in these words. Relying on the fervent nationalism of a protest movement heavily salted with gruesome extremists, especially when these sentiments are so far from universally shared among a ground-down populace, is weak-minded strategic planning, the stuff of amateurs and charlatans.

Yet another dimension of a multi-sided tragedy in Ukraine and elsewhere in Eastern Europe: the raising of hopeless hopes. In the end it is the economy, and one would be stupid indeed to place faith anywhere else.

Top Reads from The Fiscal Times: