Some Observations from Ukraine’s Protests

Posted: December 8, 2013 in Uncategorized

Ukraine EU

This blog is not a news service. I don’t have the time or the resources for something like that. Nor do I like making very precise predictions about the future as it’s too difficult to anticipate all the variables, especially given the shifting situation in a case as fluid as that which Ukraine now finds itself in.  For instance, a Ukrainian friend of mine has recently told me the protests are being misinterpreted in the west and are no longer about the failure of European integration, but about regime brutality against protestors.  I still think it’s about Europe, but what do I as a desk bound analyst know?  It’s hard to tell what the actual situation on the ground is.

Given the momentous events of the past few weeks, however, it is possible to list a few things I have learned following the government’s decision to delay signing the EU Association Agreement and the subsequent protests.

Yanukovych is thinking purely in the short term

Ukraine’s president is thinking no further than the 2015 presidential elections. That shouldn’t come as a surprise; most politicians are primarily concerned with their own positions of power. And pundits the world over have their hands full debating why he cannot bear to give up his position, even if it means cementing the favourable legacy of putting Ukraine on the path to Europe. You only have to google his name to read about the attacks on the media, the clan politics, the fact companies run by his son, Oleksandr, have received the majority of government procurement contracts in the last 3 years, or the public impression of Mr Yanukovych and his wife as thieves (Lyudmyla Yanukovych is often referred to as “Fortochka” – the word for a tiny window prevalent in Soviet era housing, but also a slang word for a thief).

Cops attackThe point is, regardless of “why” he needs to remain in office, Mr Yanukovych clearly reasoned he could survive the public anger over refusing to sign whereas he would certainly not survive public anger over the economic ramifications of falling out with Russia.  That is also probably behind the regime’s decision to use force against the protesters.  At first I thought Mr Yanukovych may have learned from the Russian experience of 2011 and 2012 that the best way to defuse street demonstrations was to allow them to take place, hold managed demonstrations by regime supporters to confuse international media, promise substantially increased state spending for key constituencies, and wait for opposition supporters to become demoralised.

I’ve come to realize that the Ukrainian situation is different, however.  Ukraine’s fiscal imbalance means the government does not have the financial resources to increase spending or wages.  Also, unlike the Russian system, Yanukovych does not enjoy support in large parts of the country outside Kiyv and the Donbas making it difficult for him to portray the protestors as a small, urban intellectual elite, as Putin was able to do in Moscow.  Moreover, he does not enjoy unified support from the oligarchical class, and although he has influential backers, he cannot ensure powerful businessmen will not support the opposition.  So he may have decided that if he could clear the protests out quickly, as he tried in the police attack of 30 November, he’d stand a better chance. That was obviously a mistake and he now appears to have opted for something closer to the Russian model, but his presidency is now in grave danger as police brutality has only served to bolster the protestors.

Yanukovych may have actually saved Ukraine’s European orientation though this reversal

This is a controversial observation but hear me out.

As usual at times like these, when citizens get caught up in the emotion of a historic event, many participants and observers lose perspective. Of course it’s easy for me to say this, not being Ukrainian, but I think much of the analysis that is coming forth, both from protesters and supportive pundits is taking too black and white a view. They are framing these events as a struggle of good v evil, Putin/Yanukovych and autocracy v the West and a democratic future.  This is too simplistic, which is perhaps why the contrasts are used, to garner support from the interested and media attentive, but ultimately ill-informed, international public.

Ukraine GasWhile one of the major issues at hand is whether Ukraine has a future where governance is conducted under the rule of law, something Mr Yanukovych has not always been committed to, this good v evil paradigm ignores several important facts. When Mr Yanukovych says he caved to Russian pressure it is largely dismissed by the western press as a convenient excuse, but I think he is being honest.  Almost absent from current discourse is the fact Ukraine’s economic and fiscal imbalances are becoming unbearable.  Its heavy industries, especially steel, are hugely energy inefficient and without Russian gas subsidies would have to endure a painful restructuring that would involve significant layoffs.

On an individual level, Ukrainian consumers enjoy generous gas utility subsidies, helping shield them from the drop in living standards that followed the 2008 crisis, but which are very expensive.  It is estimated the cost of industrial and personal gas subsidies in 2013-14 alone is USD 2.9bn and for a country already facing a high deficit, Ukraine simply can’t afford this.  Ukraine’s already faces USD 60bn in debt repayments in mid-2014, equal to one third of its GDP, and cannot access international markets due to its poor sovereign debt rating.  This has resulted in a severe shortage of foreign currency, putting pressure on the hryvnia which faces a potential devaluation next year.

Ukraine Financial MinistryAnd here is where I think people are missing the point. Russia’s position was blackmail yes.  Sign the Association Agreement with EU, Putin said, and there would be no more subsidised gas deliveries and an economic embargo that would have seen trade and revenues drop precipitously.  Russia has in its power the billions of dollars needed to support Ukraine’s existing imbalances. What did the EU offer by contrast? It offered only USD 1.6 billion in funding over the next year and a further unspecified support, not exceeding USD 15bn, from the IMF if Ukraine cut subsidies and restructured its economy.

Had Mr Yanukovych gone down that path, I don’t think many appreciated how difficult life would have become.  As industries were forced to become more efficient unemployment would have risen rapidly, shrinking gas subsidies would have seen the cost of living go up, especially for those on a fixed income such as pensioners, and a likely devaluation of the hryvnia would have damaged savings and created upside inflationary pressures.  While the long term benefit of joining the EU would be enormous, in terms of cheaper procurement and a larger market for Ukrainian goods, the short term results would have been painful.

Would the Ukrainian people have endured this economic turmoil stoically, reasoning that it was worth it to be a step closer to EU membership? I doubt it. The EU membership process can take years.  The people would have cursed the EU for failing to support them in transition.  We saw it after the Orange Revolution, when faced with the painful loss of Russia friendship and unwillingness in Europe to support the costs of the transition, the people eventually turned to Yanukovych to restore Ukraine’s economic relationship with Russia.  Ukraine must use what little time remains in its beneficial relationship with Russia to start resolving its economic imbalances, because Europe is very hesitant to bear the cost.

Which leads to observation 3:

Europe is probably pleased that Ukraine backed out of the deal

BarossoThe EU has been very quiet and non-committal about Ukraine’s about-face and the prospect for its future association.  Leave aside European Commission officials, whose job it is to promote EU policy and institutions, and are shocked and disappointed by Ukraine decision to delay the Association Agreement’s signing.  I haven’t heard much out of France, Germany or the UK.  I think on a national level many of the EU’s member states are secretly pleased at this turn of events.  They will make all the right noises about their commitment to bringing Ukraine into the Euro-Atlantic community, and denounce violence in Kiyv, but we must remember that at its core the EU is not a united entity.  It’s a confederation of tribes where national interest often trumps collective decision making.

The two countries behind the Eastern Partnership, designed to bring former Soviet States closer to the EU and keep Russia at arm’s length, have been Sweden and Poland.  Now, I won’t go as far as the Russians in claiming the Association Agreement is motivated by a Polish-Lithuanian desire for revenge from the 1700s, but Poland at least has been a leading voice of suspicion and hostility toward Russia in Eastern Europe since the collapse of communism.  The Poles have made no secret of their view that Russia seeks to dominate not just the former Soviet Union but Eastern Europe as well, and trade disputes and recrimination is just regular business between these two neighbours.  At the time of the 2008 Russian war with Georgia a significant number of Poles surveyed said they expected an imminent Russian invasion. This was one of the main reasons they supported missile defence in Eastern Europe during the 2000s and why they launched the Eastern Partnership.  The building of economic, cultural and political links between states in Eastern Europe will help form a buffer against Russian encroachment.

By contrast, France and Germany have never been that hot on the Eastern Partnership, especially the prospect it held out for eventual Ukrainian membership in the EU.  Why would they, the two most powerful states in the EU, want to embrace a rival of comparable population and geographic size in Eastern Europe? Although not immediate this would create an alternative power centre away from Western Europe along with all the regional rivalries and disputes that go with it.  Additionally, and more immediate, France and Germany balked at supporting Ukraine’s transition from its post-Soviet incarnation to a modern European democracy.  Yes, the EU has previously supported states struggling with economic imbalances, poor governance and ingrained corruption, but Ukraine is no Slovakia or Romania.  Its needs are larger, its oligarchs more powerful and its politics more divisive than the EU has ever attempted to reform.  For countries struggling with their own economic recoveries and where populations are becoming more dubious on the benefits of the union (support for the EU in France fell to 41% in 2013), the prospect of having to provide large scale financial support for years to Ukraine is extremely unpalatable.  Mr Yanukovych’s decision to postpone the signing of the Association Agreement will give these members of the EU years to continue expressing scepticism over its suitability for membership.

Finally, this will not derail Ukraine’s inexorable move towards Europe

These protests not a struggle to keep Ukraine from joining some neo-Soviet Union, although that sounds great on TV!  The outpouring of public anger is proof that huge parts of the country want eventual EU membership, or at least closer alignment. Polls have shown that over 50% of the country wants closer association with the EU.  I have seen very little evidence many want to be part of Russia’s Customs Union.   Ukraine is a European nation, not just some upstart region of the former Russian and Soviet empires. Don’t be deceived by those who say this is a civilizational choice or that Ukraine is the birthplace of Russia.  That is a disservice to the Grand Duchy of Muscovy, for starters and neither orthodox Christianity nor a sense of Russian nationalism can definitively have been said to start in Kiyv.

ProtestsUkraine has a long, distinguished and distinct history from Russia.  Its cultural heartland in Western Ukraine speaks a different language (think French to Spanish) and has long established links to the Catholic Church, not Orthodox Christianity.  Younger Ukrainians, from both east and west, may feel a sense of affinity with other parts of the former Soviet Union, but it does not dictate their political orientation. Yes, the Russian language helps them to communicate with citizens in other former Soviet republics, yes they remember the TV shows, the songs, and the schools of their Soviet youth, but they feel European.  We’re on the cusp of a new generation who won’t even remember the Soviet Union.

Moreover, Putin aside, few in Russia are willing to shoulder the cost of absorbing the Ukraine into a Russian-sponsored federation.  It has already been announced this last week that Yanukovych, on his way back from China where he has been trying to drum up financial support for Ukraine’s weakened economy, stopped off in Sochi and discussed renewed gas subsidies with Vladimir Putin. No surprise there, given the stated Russian position, but the cost of this subsidy will also be a burden for Russia’s economy, which is by no means booming.  Although oil and gas prices remain above the oil benchmark rate of USD 100 a barrel the Russian state’s financial commitments are ever expanding and the non-oil deficit is due to average 9.6% of GDP by 2015. There is very little margin for error if oil prices fall and this subsidy will further harm the balance if locked in by contract.  Gazprom, which will bear the primary cost of this subsidy, is already experiencing difficulties, as it saw profitability drop in early 2013 on the back of falling exports to Europe.  Although exports have subsequently recovered, long term trends suggest exports to Europe will continue to decline.

Finally, and similar to the position of France and Germany, why would Russia want to absorb a Ukraine that has a highly developed sense of nationalism and independence? As one of the most respect scholars of post-Soviet studies, Dmitri Trenin, has repeatedly pointed out, the threat posed to any Russian plans for post-Soviet reintegration by a Slavic country of over 40 million, with its own political and economic elites and agenda would be tremendous.  Especially as Ukraine would constantly be challenging Russia’s leadership of such a union.  What a headache!

Take heart Ukrainian friends. The march towards Europe can’t really be stopped, only delayed. A more important question for another day is: Do you really want to be in Europe?

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Comments
  1. Minsky says:

    very astute summary…I’ve also been wondering whether the Kremlin committed to a a lose/lose proposition on Ukraine… to keep the Ukraine only temporarily from signing up with the EU, Russia will end up spending billions at a time when its own economic growth has stalled even a slight drop in oil prices could lead to a severe situation. And Ukraine will eventually join the EU (this play has only made the demand for EU membership more pressing as a political issue in the Ukraine) so Russia’s “investment” is only in a temporary fix.
    and, given the expenditure of political capital, it’s a lose proposition of the Ukraine now goes back on its word again and signs with Europe.

    • Arioch says:

      > Russia will end up spending billions

      No. We were spending money on Kyiv economies last years – and we were restructuring our industries – from helicopters manufacturing to gas transportation – to get independence. Now we are mostly independent and we have no much zeal to support Ukraine economy any more.

      > And Ukraine will eventually join the EU

      Like Lybia and Turkey ?

      > Russia’s “investment”

      What? We *stopped* investments, We don’t put a thing in!

      > and signs with Europe.

      And americans would lost their money ? I doubt…

      PS. more opinions at http://www.reddit.com/r/ukraine/comments/1se7h1/my_best_friend_writes_a_blog_on_former_soviet/
      PPS. Next step in being Europeans: http://www.youtube.com/watch?v=sBLRudxREG4

      • oktoberist82 says:

        Reports from Kremlin officials suggest Russia is holding out the possibility of USD 10bn in immediate loans to keep Ukraine afloat financially and a deal may be struck to subsidize 1/2 of 2014 gas imports. As well Medvedev is speaking about the possibility of new aircraft manufacturing and space industries joint-ventures. These reports are in RIA Novosti, RT and the Financial Times. I call that significant investment.

        I’m not entirely sure Ukraine will eventually join the EU, France and Germany are too sceptical. But I think it far more likely their associations with the EU will grow as political links to Russia diminish.

        AF

      • Arioch says:

        @oktoberist82

        Ukraine might be raising its bid price. There was report EU promised EUR 20 bln of loan… So Kyiv just can continue running back and forth.

        OTOH there were voices that 160bln Azzarov asked is actually Europe’s unfullfilled obligations by their 1994 pact then Ukraine closed Chernobyl NPP and gave up on nuclear weapon. But then Europe forgot the pact immediately after Ukraine deed their duties. EU Association was told to be pre-empting that pact, thus basically writing off that 160 bln debt. And maybe that is what Yanukovich learned before pulling emergency brake in Vilnus.

        Dunno if that is true, but if it is, then the situation becomes even more unpredictable.

    • oktoberist82 says:

      Past experience tells us it’s very likely that whatever aid the Russians provide, Ukraine will eventually find a way to continue moving west. I just don’t think the Russians have the resources to continue to subsidize it forever for political reasons. I agree it’s a lose/lose scenario.

      AF

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