EconoMonitor

Thoughts From Across the Atlantic

Ukraine, Russia and the West

Ukraine faces interdependent military, political, and economic problems of enormous magnitude. Its territory has been invaded and occupied by a powerful neighbor, and armed separatists and Russian forces control territory in eastern and southern Ukraine. Since April of this year, more than 3500 people have died from the violence according to UN human rights observers. Requests for military assistance from NATO and the United States have so far been rejected.  Its government is new and weak, and its legitimacy is challenged in parts of the country. The economy is declining, and people and property are being destroyed.   Tax revenue is falling, the budget deficit and inflation are rising, and the currency (hryvnia) is depreciating. Natural gas imports from Russia have been cut off as the colder season approaches.

ORIGIN OF UKRAINE’S CURRENT PROBLEMS: FAILED RESPONSE TO INDEPENDENCE

The current crisis began with the overthrow of the administration of Viktor Yanukovych , and the subsequent Russian invasion and de facto annexation of Crimea. However, the vulnerability of the Ukrainian state in 2014 was the result of the failure of economic and political institutions that emerged since independence from the Soviet Union in 1991. One government after another was dominated by extractive institutions characterized by corruption, and the protection of special interests. The result was a small number of well-connected people (including billionaires) prospering among one of the poorest populations in Europe. At the time of independence, Ukraine’s per capita income was approximately equal to that of Estonia, Latvia, Lithuania, and Poland, but by 2013 it fell to less than half the level of its neighbors. Ukraine became an extractive economy that served the interests of serial oligarchs. Also Ukraine had no tradition of being an independent nation with its own political and economic institutions. As part of the USSR since 1922, Ukrainian officials took orders from the highly centralized government in Moscow.

WEAK UKRAINIAN INSTITUTIONS

When Ukraine became independent from the USSR in 1991, the political decision- making moved from Moscow to Kyiv, but the new government retained an extraordinarily high degree of centralization. The new constitution gave the authorities in Kiyv the power to appoint and dismiss regional governors. Critics, including Nobel-prize winning economist Roger Myerson, have pointed out that under this system, regional appointees have strong incentives to please leaders in Kyiv, but weak incentives to represent regional interests.  In addition, weak fiscal institutions resulted in persistent budget deficits that were influenced by the losses of Naftogaz, the Ukrainian national gas company. Monetary policy of the central bank was dominated by the fiscal needs of the finance ministry. Money creation by the central bank resulted in hyperinflation that required currency reform.  The initial national currency, karbovanets, was replaced in 1996 by the hryvnia. One hryvnia was declared to be worth 100,000 units of the Karbovanets. The portion of the government debt not monetized by the central bank has become large enough relative to GDP to induce speculation about possible default on the bonds.

The institutions related to energy policy continue to contribute to inefficiency and corruption. After independence, Ukraine remained totally dependent on Russia for natural gas, and the new government continued the Soviet-era practice of subsidizing gas prices to users. Naftogaz, subsidized gas to domestic users, and its losses contributed to fiscal deficits and monetary expansion. Ukraine’s energy subsidies have been criticized by many outsider observers, including the IMF, but subsidies continue (IMF 2014). Given the subsidized gas prices, domestic users have no incentive to economize on gas, and Ukraine continues to be one of the world’s biggest energy users per unit of GDP. Naftogaz has also been late in paying its bill to Russia’s OAO Gazprom, and the result has been supply cutoffs in 2006, 2009, and the current one that began in June, 2014. Ukraine has been identified as one of the most corrupt countries in the world by Transparency International, and Ukraine’s energy policy has been a major source of corruption (Johnson, 2014). The continued use of non-market prices to subsidize gas use has contributed to corruption, by allowing politicians to determine who receives the benefits from artificially cheap gas

IMMEDIATE CAUSE OF CURRENT CRISIS: EU AGREEMENT

The current crisis began with the proposed Ukraine-EU free trade agreement that was  rejected by the Viktor  Yanukovych administration after long discussion with the EU. Russia opposed the trade agreement itself, and Russian officials may consider any formal affiliation of Ukraine with the EU to be a first step toward Ukraine joining NATO. After protests in Kyiv against the rejection of the treaty with the EU, Yanukovych was forced out of office and replaced by Petro Poroshenko. An armed revolt against the new government in Kyiv resulted in Russian annexation of Crimea and occupation of Donetsk and Luhansk by separatists backed by Russian forces. Military action has resulted in large losses to people and property. The IMF’s latest forecast for real GDP is for a 6.5% drop in 2014 and inflation of 19%. The IMF officials have concluded that the crisis is so severe that Ukraine cannot satisfy the conditions and the schedule for repaying its outstanding loan to the Fund. Large arrears to Russia’s Gazprom have resulted in the company halting gas deliveries to Ukraine, although Ukraine is receiving some pipeline reverse flows from its neighbors. The EU, the United States, and Ukraine have denounced Russian aggression, and they have imposed economic sanctions against certain Russian businesses and individuals, and Russia has retaliated with its own sanctions. A ceasefire in the Donetsk/Luhansk area has been agreed to on September 5, but it is being widely violated. Russia and the separatists on the one hand and Ukraine, the EU, and the US on the other hand, continue to seek a political solution to the problem. Russia and the separatists oppose the free trade agreement with the EU, and they seek greater autonomy for Donetsk, Luhansk, and Eastern Ukraine. Some extremists seek complete secession from Ukraine by the East. The Poroshenko government signed an association agreement with the EU and Ukrainian and EU parliaments ratified it in a simultaneous session on September 16. He has offered to soften the language laws and to allow greater regional autonomy, including special status for Donetsk and Luhansk. These issues will be topical in the parliamentary elections of October 26.

NARROW OBJECTION TO THE UKRAINE-EU TRADE AGREEMENT BY RUSSIA

The Russian position on the EU trade agreement is puzzling. Russian officials claim that a Ukraine-EU trade agreement would allow cheap EU goods to flood the Russian market

by re-exporting them to Russia duty free. The current CIS free trade agreement (CISFTA) that includes Russia and Ukraine could easily deal with this potential problem. (See our September 16 posting, “Is Postponing the EU Trade Agreement Harmful to Ukraine?”) Currently Russia excludes 65 goods from the CISFTA, and other goods could be added if they created a problem. The CISFTA in its current form also allows Russia to apply anti-dumping laws if goods are imported into Russia at “dumped” prices.  However, the most common method for dealing with re-exports in a free trade agreement is to specify some minimum domestic value- added to qualify for tariff exemption . Russia and Ukraine could agree that imports from a partner would be exempt from tariffs only if they contained at least 50% (or any other percent) domestic value added from the partner country. The narrow issue of possible re-exports of cheap goods to Russia through Ukraine can be solved. It could be that the real reason for objecting to the trade agreement is that Russian leadership views it as the first step on Ukraine’s way out of the Russian sphere of influence.

SUCCESSFUL UKRAINIAN REFORM STARTS AT HOME

Successful economic and political reform must start at home, but it did not start prior to the 2014 crisis. The Yanukovych government was even less effective  and more corrupt than previous Ukrainian governments. The Poroshenko government and successors face an enormous task in dealing with military, economic, and political problems. However, sometimes a crisis can bring on a fundamental reform that would not have occurred under normal conditions. Domestic reform in Ukraine is complicated by the overt and covert influence of Russia and by the uncertain support of NATO members.  NATO members have ruled out military intervention, although some observers have interpreted the 1994 Budapest Agreement, in which Ukraine gave up its nuclear weapons, as a promise to defend the borders of Ukraine (Perry and Schultz). The Ukraine-EU trade agreement is conditional on certain reforms occurring in Ukraine.

Petro Poroshenko and other Ukrainian leaders believe successful domestic reform is more likely with an EU association agreement in place. Poroshenko has described the Association Agreement with EU as a roadmap for Ukrainian reform. Also the current IMF loan is conditional on reforms of energy, currency, and debt that were also conditions of earlier loans. Decentralization of the government and reduction in corruption are other commonly stated reforms.

An association agreement was ratified on September 13th by Ukraine and the EU. The Kyiv government made concessions to Russia and Ukrainian separatists that included a three year special status for the Donetsk and Luhansk regions currently controlled by separatists. It also delays full implementation of the free trade agreement with the EU until the end of 2015, when Ukraine would eliminate tariffs against EU products. As a result of the compromise, Russia has agreed to refrain from raising tariffs against Ukraine in November. There has been a backlash against the compromise by pro-Western Ukrainians and outsiders for allowing Russia to veto an agreement between sovereign Ukraine and the European Union. The Ukrainian trade minister resigned in protest.

Reform of energy policy has been discussed for decades, but it has not been implemented. Proposed reforms include reducing subsidies by charging market-related prices, paying energy bills on time, and finding a way to reduce extreme energy dependence on Russia. The use of market prices would reduce energy demand and reduce corruption, although it would be harmful to users. Reducing arrears on energy bills would reduce the frequency of supply interruptions. Diversifying sources of gas would provide better protection against a cutoff of Russian supplies.

The idea of de-centralizing the government of Ukraine has wide support from reformers. The research of Roger Myerson points to the benefits of decentralization in Ukraine and elsewhere. He advocates giving more power to all local governments (not just Donetsk and Luhansk) including the power to spend and make some patronage appointments. Ukraine is an extreme case in which the constitution allows the President to appoint or dismiss mayors. In Ukraine decentralization would also give local governments more control over language issues. However, there is disagreement about how far decentralization should go. Russian spokesmen have advocated federalism that would more severely constrain the Kiev government than most Ukrainian reformers would accept.

INTERACTION OF DOMESTIC REFORM WITH INFLUENCE FROM RUSSIA AND EU/NATO

So far the response by the EU and the US members has been limited to economic sanctions that have not deterred Russian intervention and occupation in Crimea and Eastern Ukraine. President Obama continues to say that Russian aggression will result in costs, but any additional costs have not influenced Mr. Putin and Russian leaders. Any costs to Russian consumers are probably small, and not borne heavily by Putin supporters. Costs of diminished trade are also borne by EU members, which is one reason members are reluctant to extend sanctions and enforce them vigorously. Studies of previous sanctions have shown that the longer they are in place the easier it is for the target country to find substitute trading partners and domestic substitutes. There is evidence that sanctions are hurting the Russian economy (Wall Street Journal, 2014), but there is no evidence that it is changing the policies of Russia toward Ukraine.

INFLUENCE ON UKRAINE FROM RUSSIA

Mr. Putin seeks continued influence over Ukraine in the same way he has carved out  Transnistria from Moldova and Abkhazia and South Ossetia from Georgia. Separatist control over Donetsk and Lukhansk provides influence for Russia, although some separatists may be easier to control than others. His concept of “near abroad” (Dolan 2014) would consist of a set of compliant former Soviet states and Warsaw Pact states that would serve as a buffer against the West. A sphere of influence would be established by a combination of covert and overt actions, including a credible threat of overt invasion. A credible threat could increase power, including delaying implementation of the Ukraine-EU treaty. Tools used for “soft coercion” include cutting off gas supplies and sending troops and equipment to Ukrainian separatists, including massing troops on the Russian side of the border with Ukraine.  Denying Kyiv control of part of Ukraine’s territory increases Russia’s influence, including its influence over the terms of an EU-Ukraine trade agreement.

Russia’s ability to continue an aggressive policy toward Ukraine is subject to economic limits. Russian economic growth has already slowed, and forecasts are for zero or negative growth for 2015. Broader economic sanctions against Russia could have greater negative effects. However, Russia’s heavy dependence on energy exports may be the most important constraint on its aggressive activities. Recent large decreases in world oil prices can significantly reduce Russia’s export earnings. The price of Brent crude oil has fallen by 22% since June to its lowest levels in four years. The 2015 Russian budget is based on an oil price of $96 per barrel, but the

Brent price has fallen to $84, which would require borrowing or drawing down the sovereign wealth fund. Large and sustained decreases in real oil prices in the 1980s have been cited as a factor that weakened the Soviet economy and contributed to the disintegration of the Soviet Union.  Other signs of weakness in the Russian economy include large capital outflows and depreciation of the ruble by 18% so far this year. An additional economic problem is that Crimea is an economic liability for Russia, and Donetsk and Luhansk may be economic liabilities for both Russia and Ukraine (Dolan). The important steel sector in that region faces a bleak future in the world economy.

INFLUENCE ON UKRAINE FROM EU/NATO

So far the EU and US have limited their support for Ukraine to economic sanctions that have been weak and leaky, and they have had no discernible deterrent effect on Russia’s actions. Already food banned by Russia from EU is arriving from Belarus. For example, Italian Parmesan cheese has been re-exported and crudely labeled as a “product of Belarus”. The EU and US have rejected military aid as an unnecessary provocation to Russia. Some Western critics, including William Perry and George Schultz, have advocated stronger assistance to Ukraine. Ukrainian leaders have requested anti-tank weapons and other lethal military supplies, but the US has provided blankets and night vision goggles. President Poroshenko thanked the US for the blankets, but he also pointed out that blankets do not win wars. Ukraine would benefit from EU policies that would provide more sources of supply to all of Russia’s current customers, such as LNG ports in Poland and Lithuania, currently under construction.  The US could increase competition in the European energy market by immediately eliminating all of its restrictions on exports of oil and natural gas. Greater access to the market of the European Union, even as an associate member, could be the greatest economic  benefit Ukraine could receive from Europe. An extreme form of non-military assistance could be offering membership in the EU and NATO.

BALTICS/POLAND AND UKRAINE: SIMILARITIES AND DIFFERENCES

The Baltic countries and Poland faced many of the same problems as Ukraine when they became independent, but they successfully carried out economic and political reform.  They all experienced fiscal and monetary difficulties that resulted in inflationary problems soon after independence. They have a history of being threatened and occupied by Russia, and Mr. Putin considers them to lie within his sphere of influence. They all continue to be heavily dependent on Russia for energy supplies, which makes them more vulnerable to bullying by Russia. There are also prominent differences. The Baltics and Poland were independent countries between the World Wars, whereas Ukraine was part of the USSR. The other current difference is membership in the EU and NATO. Ukraine’s attempt to move toward EU membership sparked the crisis. NATO leaders have so far been unwilling to provide military assistance to Ukraine, but leaders continue to promise to defend members against invasion. However, we have seen from the experience of Russian aggression in Crimea and Eastern and Southern Ukraine, it is possible for two governments to disagree on whether a nation has been invaded. Even if NATO membership does protect the Baltics and Poland from overt invasion, it does not protect them from Russia’s use of other forms of influence (including energy) short of overt invasion (Wall Street Journal 2014). Ukraine does face more serious problems than its neighbors, but their success under similar conditions indicates that it is possible to remain an independent nation and carry out successful economic and political reform.

CONCLUSION

Disagreement about the Ukraine-EU trade agreement triggered a series of events that led to the ouster of the Yanukovych administration in 2014. However, the failure to develop effective economic and political institutions after achieving independence from the USSR in 1991 made Ukraine vulnerable to a crisis.  The problems created by ineffective and corrupt domestic institutions were magnified by Russia’s repeated use of natural gas as a lever to keep Ukraine weak and subservient to Russia. Annexation of Crimea, control of parts of the Donetsk and Luhansk regions by separatists, and overt and covert support for separatists by Russia threaten the survival of an independent Ukraine, and it makes fundamental reform in Ukraine much more difficult. The EU signed a trade agreement with Ukraine, but beyond that EU and US support so far has been limited to economic sanctions against Russia. Domestic reform is complicated by clear regional, linguistic, and historical differences and a large neighbor that is willing and able to exploit differences to reduce the independence of Ukraine. The current Ukrainian constitution contributes to regional disagreements by producing a highly centralized government that does not inspire loyalty from certain regions. In spite of these formidable problems, successful economic and political reform is possible in a sovereign Ukraine, as demonstrated by the success of the Baltic States and neighboring Poland. Membership in the EU and NATO have probably made it easier for the Baltics and Poland to implement reforms than Ukraine. However, successful economic and political reform must begin at home.

REFERENCES

Boone, Peter and Simon Johnson. New York Times. ”What Ukraine Needs for Sustained Prosperity”. February 27.

Dolan, Ed. 2014. “The Economic Future (If Any) of Novorossiya”. EconoMonitor. Oct 7.

International Monetary Fund. 2014. „First Review under the Stand-by Arrangement”. IMF Country Report No. 14/263, September.

Kyiv Post. Sept 15, 2014. “Chicago Recipe for Treating Ukraine’s Weaknesses”. September 15.

Perry, William J. and George P. Schultz. 2014. “Helping Ukraine is a U.S. Imperative”. Wall Street Journal, August 27.

Strazds, Andris and Thomas Grennes. 2014.  “Is Postponing the EU Trade Agreement Harmful to Ukraine?” EconoMonitor, September 16.

Wall Street Journal. 2014. “Delay to EU Deal Triggers Backlash in Kiev” Sept 15.

7 Responses to “Ukraine, Russia and the West”

DiranMOctober 22nd, 2014 at 3:57 am

Your analysis is not bad, except for your blatant use of the current anti-Russian rhetoric of the present regime in Kiev.

As you rightly say, Ukraine has never really functioned as a country. From the regional breakaway from Russia after demise of USSR, it has become a failed state. Russia has poured more money and effort to support the Ukraine than any other country out of their national self interest for regional stability despite all the calumny of the West that somehow they know better than the Russians, etc.

Russia-West boils down to a grand game mentality. The EU wants ever to expand in a quasi Marxist imperialist mode. The US uses the EU as a proxy to fund and promote their interests to weaken Russia, etc. in the grand game mentality of US State Department policy makers.

The Ukraine is a typical EU candidate client state with a corrupt political elite, who is easily sold to the highest bidder. The pretext is EU bootstrapping and the catalyst is EU transfer money of which the local political elite will use for rent extraction and to the extent possible outright theft. The Ukrainian political elite are accustomed to dependency and a deep pocket.

Yanukovich was playing both sides, but chose ultimately Russia as the safer bet to try to keep the country together. The US and EU were enraged and used the pro-West faction of Neo-Nazis, Uniate Catholics, etc, who hate deeply Russians and people of the Christian Orthodox faith. Westerners like yourself refuse to admit these primordial cultural divides, but they are very real. We saw them in the break up of Yugoslavia, where the EU moved in via Croatia – historically Catholic faith and pro-Nazi in WW2 – and had no problem to bomb Serbian Orthodox as inferior 'trash' in their way of thinking. This infurates people of the other side like Serbs, Greeks, Russians, who resent sharply these attitudes as bigoted, etc.

If you can understand this, then it is not hard to understand the reaction of people in Crimea and Donbass against Kiev. The older voter patterns support this. There was almost zero support of the parties and people now in power in Kiev, popped up by EU/US. Yet you accept the EU/ US/ Kiev brainwashing that somehow these people were coercively forced to reject your version of 'paradise' for what you consider inferior and evil: i.e. to live freely with the Russians as Orthodox, etc. I do not add the obvious economic interests because the Eastern and Southern Ukraine is more developed industrially and wealthier than the Western Ukraine and was always economically and culturally integrated with Russia – despite your view that the EU is 'paradise' and anything to do with Russia is evil, inferior and backwards….

Bottom line, since the change of government and shift ot US/EU proxy state, the Ukraine has gone from bad to worse with economic collapse and civil war. Who told the Kiev government to bomb the Donbass to submission, destroy factories and coal mines and burn the fields??? Who advised them??? Your version is totally one sided that it is all Russia's fault.

Yet the EU does not have the resources to take on the Ukraine. It was hubris and over expansion, when the EU is already in an economic morass and has impoverished vast swathes of the EU periphery. The US wants to use EU resources for their Ukrainian ambitions and has only given token economic support. The EU is trying to use the IMF to fund their Ukrainian ambitions. The present Kiev regime sees the West as money bags, but there is really not the money or resources that they expect for their personal ambitions.

Bootstrapping and nation building will take years. The Ukrainians have not been able to put their act together from inception. Whilst the US and EU have unlimited hubris about their nation building expertise, their track record is very poor and dubious.

As I see it, the only way out of this morass is a political settlement with the Russians with the US/EU dropping Grand Game ambitions and a sharing bail out expenses for the Ukraine. The Kiev regime has blown up their country. It will take years to pick up the pieces. The Russian/ Orthodox sections may never want to be part of the Western Ukraine again after all the trauma of the Kiev 'anti-terrorist' campaign to bomb them to submission, sponsored and supported by the US/ EU with their covert military aid.

The EU moved partially in this direction at Minsk trying to reconciliate Kiev with Russia, but there are lots of interests against this and we do know whether it will hold. The US seems intent on undeclared war on Russia. The Russians would like reconciliation with the EU on a partnership basis, but that upsets Washington. The Ukraine is on the verge of humanitarian crisis with winter coming.

ThomasGrennesOctober 22nd, 2014 at 11:17 am

You accuse us of refusing to recognize primordial cultural divides. On the contrary, we
acknowledge regional, religious, and ethnic differences. However, differences are not unique to Ukraine. Estonia and Latvia have ethnic differences among the population, but they have dealt with them without resort to violence, and their economies have significantly outperformed Ukraine. Russia has even larger ethnic and religious differences within its current boundaries, especially in the Caucasus, but does this imply that Russia will disintegrate as a country?

What do you think of the proposal to decentralize the government? It would address the ethnic and regional differences, and move some decision-making away from Kyiv. Or do you favor secession by the East?

Is the East more economically advanced than the rest of Ukraine? Ed Dolan's recent posting gives the opposite impression. The East is heavily dependent on the old steel complex that is suffering from competition from more modern producers and excess steel capacity in the world.

The U.S. record of nation-building is very poor, but so is Russia's attempt to impose institutions on other countries. Poland has experienced much greater success since
abandoning the Warsaw pact. That is why we emphasize that successful economic and political reform for Ukraine must begin at home. It cannot be imposed on them from the West or from Russia.

DiranMOctober 25th, 2014 at 3:57 pm

In all fairness, you have written a thoughtful piece on the Ukraine crisis and likewise an interesting reply.

I can certainly agree that political reform must start at home in Ukraine and must not be imposed on them. By that criteria, the EU/ US should have respected the agreement that the Ukrainian govrement made with Russia and not actively sent Nuland and Ashton to support energetically the Maidan protestors. That was clear foreign meddling and contributed to the violent overthrow of an elected government and immediate recognition of a new pro-Western government and lustration removing all opposition to their policies.

That the present regime in Kiev can effect any reforms seems wishful thinking to say the least. The Ukraine is controlled by Oligarchs with private militia like the Azov Battalion headed by two neo-Nazi political groups. The economy is in free fall. The country has been in a bloody civil war. Top that: new parliamentary elections in a turbulent climate, where major poltical parties are outlawed and the Donbass is not voting. This is likely to produce even more polarity and even worse situation than previously.

This affair shows the gross irresponsibility of the Brussels bureaucracy. The whole concept of the Eastern Partnership was very dangerious. It was done through EU backdoor lobbying. If taken to EU voters for approval, it would have very likely been rejected. The EU never considered seriously the implications of expanding deeply into areas that were traditionally part of Russia and the diplomatic repercussions of ignoring Russian requests. The debacle shows the liabilities of EU membership for its member states, getting into unwanted and reckless expansion schemes and embroiled in trade sanctions with Russia.

Russia was never pretending to get involved in nation building. The presumption that the EU can transform the Ukraine seems dubious. To the contrary, the Ukraine debacle has been destabilizing to the EU, as it does not have the economic means to carry the Ukraine and the Russian trade sanctions are pulling the EU into recession. Use of the IMF in the Ukraine seems abusive. Should the IMF be funding a country in civil war?

There are global ramifications to this mess: Russian sanctions threaten the foundations of the global monetary system, demonstrating the dangers of use of the US Dollar as a reserve currency. The IMF is effectively being hijacked as a geopolitical tool for the US and EU, ignoring the rest of the world that funds IMF. We have Cold War 2, which US policy makers calling for regime change in Russia. The EU in recession could pull down the US recovery, etc.

As for Ed Dolan's piece, I commented there, too. Yes, there are some valid points about the Donbass and its Soviet era production. That Kiev considers this region vital to the Ukrainian economy and that Western Ukraine is poorer and less developed only demonstrates the validity of the Russian objections about the EU free trade agreement and the need of a much longer accession period. Likewise it demonstrates how far from reality the Ukraine fits in the EU even on a customs union basis.

I think indeed that Ed Dolan – normally a very good economist if he does not get mixed up in politics – really misses the forest for the trees in his piece on the Donbass. Shouldn't Ed really have focused on the economic future (if any) of the Ukraine as a whole (if it actually remains as one country…). Nobody by myself has raised the gap between Ukrainian expectations of massive funding from the EU, when the EU does not have the resources nor willingness.

The Ukraine is clearly far worse off today than it was a year ago. Right now it is in free fall with rapidly shrinking GDP. It is totally insolvent. It has likely misused IMF funds for its profligate, immoral and disastrous military operations in the Donbass. The IMF itself estimates a far larger bill ahead. The Ukraine cannot even settle its gas bills not to freeze in the coming winter. The EU shows no appetite to bail them out for their overdue accounts to the Russians. Much of the Donbass is destroyed and there is no money for rebuilding. The Kiev government is asking the EU to provide them the funds for areas that their own military bombed and destroyed….. Is the Ukraine desirable as a country for EU involvement? I think not!

So doesn't Ed Dolan really miss the forest for the trees here? ….or his piece simply self-serving propaganda to support the present regime in Kiev despite all their misdoings, including war crimes like use of cluster bombs on civilians and attempts at ethnic cleansing…. There are already hundreds of thousands Donbass refugees displaced in Russia. Not even a comment from Ed on this matter….

Who knows what will happen after these sham elections are over shortly. There is talk about resumption of military operations to force the Donbass to submission and more ethnic cleansing.

None of this presents a flattering picture of EU nor US policy makers. Particularly, it exposes the EU as incompetent, reckless, over extended and incoherent in foreign policy. Member states should see the dangers of giving Brussels too much power and authority.

ThomasGrennesOctober 26th, 2014 at 10:44 am

The claim that the EU should accept Russian hegemony in areas that were traditionally Russian is an especially weak argument. Should Turkey today claim hegemony over Russian territory because Ottoman Turks once ruled that territory?

Ed Dolan can speak for himself, but his points about economic problems in Eastern Ukraine are relevant to our discussion. The steel sector in that region is among the least energy efficient in the world, and their extravagant energy use is a result of energy subsidies that began during Soviet rule and continue today. The energy subsidies that give great power to government officials are also a major source of corruption. Transparency International and others have rated Ukraine (and Russia) among the more corrupt countries in the world, and critics in and outside of Ukraine regularly cite corruption as a major reason for lack of respect for the government. Conversely, Estonia, Latvia, and Lithuania have carried out reforms that have resulted in much lower levels of corruption
(see Transparency International) in spite of their Soviet past. Poland has also achieved low levels of corruption.

Russia's aggressive policies toward Ukraine have not been good for the Russian economy either. Investors, especially Russians, who are concerned about Mr. Putin's lack of respect for the rule of law, continue to move their funds outside Russia. Finance Minister, Anton Siluanov and Economy Minister, Axel Ulyukayev, have both stated this week that they expect diminished or negative growth for Russia in the next year. Poor protection of property rights, high levels of corruption, and heavy dependence on energy exports are
serious problems for the Russian economy.

Ukraine faces enormous obstacles, but fundamental reform related to energy, corruption, and decentralization seem essential. What is your opinion of decentralization that would give more power to regional and local governments?

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