The diplomatic crisis over Ukraine hangs primarily on geopolitical questions that have festered since the Soviet Union collapsed over two decades ago. But any international political or military crisis inevitably involves some economic issues in terms of causes and effects.
Without succumbing to any quasi-Marxist theory that economic factors drive everything, it is important to consider the issues at play right now. Nations can get their backs up just as easily as individuals, and when they do, economic rationality tends to fly out the window. But to the extent that some element of reason can be maintained, all sides usually are better off.
Some “mainstream media” have created a simple tale: Corrupt and unpopular leader brings nation to brink of catastrophe. Freedom-loving citizens rise up in protest, and corrupt leader falls from power. But malicious neighboring country seeks to take advantage of situation by stealing sovereign territories. High-minded democracies, ever defending truth and freedom, march in on white horses to force craven neighboring country to disgorge its illegitimate seizures.
Reality is much more complex and, with the partial exception of some martyred protestors in central Kiev, hardly anyone can claim much moral high ground.
Ukrainian President Viktor Yanukovych was indeed highly corrupt and deeply incompetent. But so were most other key figures in Ukraine’s government over the past 20 years, including many in the parliament that voted him out of office and some in the new provisional government.
Many Ukrainians, particularly in Kiev and the western part of the country, sincerely desire democracy, honest government and a society and economy that is more aligned with Western Europe. But in past elections, many of them voted for the very leaders who have brought their country to ruin.
Moreover, some 17 percent of the population is ethnic Russian. Most are not immigrants but rather live in areas that have been Russian in fact or in law for decades or even centuries. They have legitimate reasons to fear they will be ill treated in a Ukraine that turns its back on relationships with Russia that have existed for centuries. The extreme anti-Russian rhetoric of some anti-Yanukovych protestors and the idiotic law the interim government adopted that limited use of Russian accentuates their unease.
Russia may be playing a cynical geopolitical game. President Vladimir Putin may be posturing to gain domestic political advantage for himself as Russia’s economy deteriorates. Russia may be a bully breaking international law. But this is often the norm for powerful nations. France intervenes militarily in its former African colonies quite regularly, often with U.S. logistical support.
The parallels between Russia’s military actions in Georgia and Ukraine and U.S. invasions of Grenada in 1983 and Panama in 1989 are closer than most Americans are willing to admit. And then there is Iraq and sundry actions in Libya.
So at some point, we will come down to dealing in practical facts rather than pious rhetoric. Some of these facts are economic.
The government of Ukraine is broke, regardless of who is at the helm. It needs injections of some $30 billion over the next year or two and $15 billion almost immediately to avoid defaulting on debts and to pay for needed imports. Yanukovych’s governance contributed to Ukraine’s fiscal straits, but the blame spreads far wider. Economic mismanagement stretches back without a break to independence more than 20 years go.
Ukraine’s economic problems are not limited to government finances. Unlike Poland to the west, it has never established self-sustaining economic growth on firm foundations. It remains highly dependent on transit fees charged for Russian natural gas passing through pipelines to the rest of Europe, although these fees have dropped now that more gas flows through the Nordstream pipeline that bypasses the country under the Baltic Sea. It depended on below-market gas from Russia for its own use, and it continues to sell gas to domestic industrial and residential customers at unsustainably below-market prices.
No internationally competitive industry has developed, and there is no business sector in which success can be separated from cronyism with politicians. Agriculture, in which the country should be one of the richest in the world, remains well below potential.
Remember that, only a few months ago, it seemed Ukraine was on a path to conclude an economic pact with the European Union. But the EU was unwilling to bail the country out of its immediate financial bind. Nor was the United States willing to do much. That drove Yanukovych back to Russia, igniting the protests that eventually drove him from power.
Now, in desperation, the EU has offered Ukraine $15 billion, and our government has offered another $1 billion. This infusion may plug immediate holes but affords no permanent cure. Ukraine has signed numerous agreements with the International Monetary Fund over the past 22 years, but has never complied with the terms of any for as long as one year. So underwriting the country to keep it out of Russian control may entail a long-term financial drain.
Those are economic factors in the cause of the crisis. There are others that are results. Fortunately, both sides seem to be willing to de-escalate a bit, but there are groups, within both Russia and the United States, quite willing to continue with provocative rhetoric. This is less true in Western Europe.
It has always been clear that neither our country nor NATO nor any combination of EU nations is going to use military force against Russia over Ukraine. The alternative is to impose diplomatic or economic sanctions. We can limit trade or investment flows, bar key Russian business or political leaders from our borders and so forth. Russia can do the same.
Such actions by either side have about as much potential for self-harm as for damage to the opponent. But potential damages to Russia are greater relative to its overall economy. Russia’s trade with the west and financial inflows from the west are a far bigger proportion of the overall Russian economy than the other way around.
True, Russia could hit Western Europe hard in the medium term by cutting off all gas shipments. The winter isn’t over, and establishing alternate supply channels to replace Russian gas would be a matter of years not weeks. The economies of key EU nations, especially Germany, would be hit hard. But such a cut off would impose enormous costs on Russia, too.
Much damage may already have been done to Western investment in Russian firms. Western money fled the Moscow stock market, forcing a 10 percent one-day drop. Some of that was recovered, but investor scares can inflict long-term scars. Money fleeing the country forced down the exchange value of the ruble. The Russian Central Bank had to raise interest rates to stem the outflow. This is bad for households and businesses alike.
These are just some of the eventual ramifications of economic tit-for-tats that may break out if economic reason does not damp down political passions. There are many more, and we may have occasion to discuss them, too.