A Recipe for Disaster

Denis Salivanov, Effacement, 2020 © The Artist And The Naked Room


A Recipe for Disaster

Max Krahé on the Financial Origins of the War.

In Denis Salivanov’s semi-surrealistic paintings, detached bodies seem to act as machines, anonymous figures controlled by some invisible mechanism that is weirdly detached from real life. Are they cyborgs, human-beings or puppets only? Salivanov (born 1984, Kyiv) works at the intersection of painting, video, sound and digital media, and is also a member of Ubik group, focusing on human interaction with tangible spaces and the transformation of visual perception. He further studies sciences and neurosciences by himself, currently living and working in Kyiv.

Max Krahé on the Financial Origins of the War

Contrary to what Russian President Vladimir Putin has claimed, and what political scientists like John Mearsheimer believe, NATO enlargement did not cause Russia’s invasion of Ukraine. Nor did a sudden descent into irrationality by Putin, who, starting with his Munich Security Conference speech back in 2007, has long telegraphed his irredentist intentions. The key enabler of Russia’s invasion was European division and ambivalence, which left a void where there should have been a strategy.

The contest for Ukraine commenced in early 2008. With oil prices high and Putin’s rule entrenched, Russia began to turn to its near abroad. The summer war in Georgia demonstrated the Kremlin’s resolve and ambition, but the strategic prize was always Ukraine. At the same time, the West moved to attract Ukraine into its orbit, with the launch of the European Union’s Eastern Partnership and US encouragement for a NATO membership bid.

From this point on, tensions over Ukraine were always likely to mount. But over the next 14 years, the EU and its member states pursued a dangerously confused set of initiatives. Failing to align legal, security, and financial policy, this created the context in which war became possible.

In legal terms, the EU pursued a strategy of attraction. Through its Eastern Partnership, the Union encouraged slow but steady convergence of Ukraine’s legal, political, and economic order toward European standards. Making its geopolitical intentions clear, the EU emphasized that Ukraine would have to choose between Brussels and Moscow: It could not simultaneously join Russia’s Eurasian Economic Union and sign an Association Agreement with the EU.

An economically and financially stable Ukraine might have continued gravitating toward EU’s orbit, up to the point where NATO accession would have been bold but feasible.

On security policy, by contrast, division reigned. While the United States, the United Kingdom, and Poland had long favored Ukraine’s NATO accession, Germany, France, and Italy were opposed. From NATO’s Bucharest summit in April 2008 to the training and supply missions that followed Russia’s invasion of Crimea in 2014, the West continued sending mixed signals. These were too weak to deter Russia, yet too threatening for it to ignore. Ambiguity became a formula for escalation.

Security ambiguity alone may not have been fatal, had Europe pursued an effective financial strategy to complement its legal approach. An economically and financially stable Ukraine might have continued gravitating toward the EU’s orbit, up to the point where NATO accession would have been bold but feasible, or perhaps even unnecessary. Domestic unrest, civil war, and with it the moment for Russia’s invasions might never have come.

In 2013, as Putin observed Ukraine inching ever closer to the EU’s legal order, he imposed sanctions on Ukrainian exports, starting with the now-quaint “chocolate war.”

But the opposite occurred. At two crucial points when Ukraine most needed financial support, Europe left it out in the cold.

First, like most of Eastern Europe, Ukraine received scant attention during the 2008 global financial crisis. With half of all Ukrainian pre-crisis loans denominated in foreign currency, a dollar or euro swap line would have gone a long way toward preventing a financial collapse. But while the US was providing a dollar swap line for Mexico, the eurozone was unwilling to extend similar assistance to EU members Poland and Hungary, let alone to Ukraine.

Desperate for dollars and euros, Ukraine had no choice but to turn to the International Monetary Fund and austerity. This fueled a 15% decline in GDP, an inflation rate of 22%, and a harrowing and unabated crisis in Ukraine’s steel industry, which helped the pro-Russian Viktor Yanukovych win the 2010 presidential election. Yanukovych immediately turned to the Kremlin for financial support, trading an extension of Russia’s lease on the Sevastopol naval base in the Crimea for a 30% reduction in the price Ukraine paid for Russian gas.

Second, in 2013, Ukraine was hit by the global fallout from US monetary tightening. When then-Federal Reserve Chair Ben Bernanke signaled a tapering of the Fed’s quantitative easing program, dollars rushed out of emerging markets and back to the US. Ukraine’s borrowing costs jumped from 7-8% to more than 11%. At the same time, as Putin observed Ukraine inching ever closer to the EU’s legal order, he imposed sanctions on Ukrainian exports, starting with the now-quaint “chocolate war.” By late 2013, Ukraine was facing insolvency and recession.

Recognizing the opportunity, Russia made Ukraine a strategic offer: $12 billion per year of subsidies and economic benefits if the country abandoned the Association Agreement – or an escalation of sanctions, should Yanukovych sign the pact.

Europe’s offer to Ukraine was legally attractive, militarily ambivalent, and financially mean.

Europe’s economic and financial experts failed to register either Russia’s seriousness or Ukraine’s predicament. German officials estimated the impact of potential Russian sanctions at a puny $3 billion per year, a fraction of Ukraine’s figure – no doubt strategically inflated – of $160 billion per year. Blind to facts on the ground and to the geopolitical consequences of its penny-pinching, the EU made a counteroffer of €610 million ($670 million), less than a tenth of Russia’s proposed assistance.

Pressured by the Kremlin and low-balled by the EU, Yanukovych abandoned the Association Agreement, instead accepting further gas discounts and a $15 billion concessionary loan from Russia. This, too, might not have spelled war had Europe’s rejection been wholesale. But, while Yanukovych was trying to navigate Europe’s financial stinginess, the Ukrainian people had been won over by the EU’s legal attraction.

Whether a bold financial offer would have been realistic at the time, given EU internal divisions and corruption in Ukraine, is up for debate. Either way, the accumulated contradictions gave rise to the Euromaidan protests, which ousted Yanukovych but paved the way for Russia’s annexation of Crimea, its incursion into eastern Ukraine’s Donbas region, and today’s war. In what was surely an understatement, one European leader said at the time, “I think we underestimated the drama of the domestic political situation in Ukraine.”

Europe’s offer to Ukraine was legally attractive, militarily ambivalent, and financially mean. It was too expansive for Russia to be at ease, too weak on defense to provide effective deterrence, and too penny-pinching to keep fickle Ukrainian elites on a pro-EU course, especially when it mattered the most. Devoid of an overall strategy, Europe’s approach was a recipe for disaster.

Max Krahé is a political economist and co-founder of the think tank Dezernat Zukunft.

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