Tuesday, December 03, 2013

Ukraine: Its the Russian economy, stupid!

Hundreds of Thousands of people on the streets of K'yiv. 

Viktor Yanukovych at bay facing allegations of corruption and criminality. 

Why it could almost be the Orange revolution of 2004 all over again.

Except it is 2013, and the stakes are even higher this time.

The root of the crisis does not lie in K'yiv, but in Moscow. The Kremlin is seeking to restore its influence in a remade USSR: the Eurasian Union. Ukraine is a country as similar to Russia as Denmark is to Sweden, so the idea that it would reject the Kremlin's overtures is shocking to many Russians. Yet the fact is that the Eurasian Union bears little resemblance to the European Union, which it seeks both to emulate and to compete with. Politically, Vladimir Putin's government lost its political legitimacy the day he sought to return to the Presidency, and as a result he was forced to fix the election in order to win it. Economically, Russia has little to offer except basic goods: oil, gas and other commodities. Its manufactured goods are low quality and -as a result of the oil-inflated Rouble- expensive. Russian competitiveness has been eroded by the kleptocracy to the point where only a captive market would buy Russian goods- a captive market such as the Eurasian Union.

Yet, for Ukraine the decision to head west has already been made. Over 60% of its trade is already now with the European Union and that percentage is growing, and the Ukrainians, like everyone else, have found Putin's Russia to be a distinctly unreliable trading partner: capriciously changing rules, breaking commitments and contracts at will. As a result Ukrainians have been forced- like Georgia before them- to upgrade their products to global standards of quality and seek out new markets.

Yet the process of Westernisation has been incomplete. Ukraine's political system is based on rival blocs of regional oligarchs. Unlike in Russia no one group has been able to achieve complete power, not even Viktor Yanukovych, despite the ruthless dispatch of his political enemy, Julia Timoshenko, to gaol has been able to avoid compromises with his rivals. To be quite clear, Ukraine has a political system, in a way that Russia does not; but like Russia it is a rule of plutocrats not democrats. Nevertheless, as the orange revolution showed, there is a very powerful democratic will in Ukraine- and Yanukovych has badly misplayed his hand. As the political system, so the economy, for the fact is that Ukraine has not modernized anything like enough to compete.

The problem for Yanukovych is that all sections of Ukraine are majority supporters of the EU association agreement- including his political rivals, and indeed his former supporters in Donetsk. By caving in to the overt pressure from Putin, he has alienated more or less everyone in his own country and made himself look like nothing more than Putin's puppet. Yet the crisis that this has created threatens to bring Ukraine to economic meltdown. 

A few weeks ago I was interviewed by the BBC about the chances of Ukraine signing the EU association agreement. I said then that Ukraine had little choice but to sign the agreement, because the Ukrainian economy urgently needs better access to the EU markets (and the prospect of visa free travel to the Schengen zone was a major incentive). Russia only has a negative hold on the Ukrainian economy- the gas weapon. The threat to deploy that weapon is only reinforcing the perception that Putin regards Ukraine as Russia's colony. In fact we now see that the pressure that Putin has exerted to get his way could lead to economic meltdown in Ukraine and have severe repercussions for Russia itself.

Putin has made himself into the enemy of the West. He believes that Russia is a separate civilization to the West- Orthodox and conservative. Yet what we might call this "Slavophile" vision is built on sand- Russia simply does not have the economic strength to stand alone. Any potential that it could have is undermined by the very polices of separate development that Putin wants to use to rebuild his authoritarian Empire. Russia is being destroyed by the greed and cronyism of late stage Putinism. The levels of corruption are way in excess of anything that Yeltsin might have tolerated, and the result has been the collapse of investment in the country. Russia itself is being consumed by the "party of crooks and thieves".

Of course that is what Yanukovych has been doing in Ukraine too. The Ukrainian economy has been undermined by the same kind of cronyism and corruption that is nibbling Russia to death. The difference is that the crisis in Ukraine is already happening now.

There are now three ways that the Ukrainian crisis might evolve. 

One is that Yanovych gets his way, faces down the protests and signs on to Putin's subversion of Ukrainian freedom. The consequences in the immediate term are economic meltdown, and the longer term profound political instability- and protests in Russia. 

The second is that Russia takes direct action and intervenes militarily. This would probably fail and might lead to revolution in Russia if it does so. 

The third is that Yanukovych is forced out and Ukraine decisively rejects the Russian road and starts down the road to full EU membership.

Last week Vladimir Putin must have been delighted at the humiliation he visited on the European Union. This week he has no good options. Putinism has crumbled a little further, and if one authoritarian, corrupt leader gets forced out in K'yiv, millions of Russians must be wondering if they might be able to do the same thing to their own brutal, incompetent and corrupt leader.

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