Global Economics
Ukraine doesn’t seem like the kind of place that world powers would want to tussle over. It’s as poor as Paraguay and as corrupt as Iran. During the 20th century it was home to a deadly famine under Stalin (the Holomodor, 1933), a historic massacre of Jews (Babi Yar, 1941), and one of the world’s worst nuclear disasters (Chernobyl, 1986). Now, with former President Viktor Yanukovych in hiding, it’s struggling to form a government, its credit rating is down to CCC, a recession looms, and foreign reserves are running low. Arseniy Yatsenyuk, head of the opposition party affiliated with former Prime Minister Yulia Tymoshenko, said on Feb. 24 in Parliament, “Ukraine has never faced such a terrible financial catastrophe in all its years of independence.”
But Ukraine is also a breadbasket, a natural gas chokepoint, and a nation of 45 million people in a pivotal spot north of the Black Sea. Ukraine matters—to Russia, Europe, the U.S., and even China. President Obama denied on Feb. 19 that it’s a piece on “some Cold War chessboard.” But the best hope for Ukraine is that it will get special treatment precisely because it is a valued pawn in a new version of the Great Game, the 19th century struggle for influence between Russia and Britain.
Russia, which straddles Europe and Asia, has sought a role in the rest of Europe since the reign of Peter the Great in the early 18th century. An alliance with Ukraine preserves that. “Without Ukraine, Russia ceases to be a Eurasian empire,” the American political scientist Zbigniew Brzezinski wrote in 1998. Russian President Vladimir Putin wants Ukraine to join his Eurasian Union trade bloc, not the European Union. Russia’s Black Sea naval fleet is headquartered in Sevastopol, a formerly Russian city that now belongs to Ukraine. Last year Russia’s state-controlled Gazprom (OGZPY) sold about 160 billion cubic meters of natural gas to Europe—a quarter of European demand—and half of that traveled through a maze of Ukrainian pipelines. Those pipelines also supply Ukrainian factories that produce steel, petrochemicals, and other industrial goods for sale to Mother Russia. “Ukraine is probably more integrated than any other former Soviet republic with the Russian economy,” says Edward Chow, a senior fellow at the Center for Strategic and International Studies in Washington.
China looks to Ukraine as a secure source to satisfy its ravenous appetite for food and energy. It’s lending the country billions of dollars to upgrade farm irrigation and develop coal gasification. In December, Yanukovych and Chinese President Xi Jinping gripped and grinned while signing a “treaty of friendly cooperation.” According to the official China Daily, in addition to agriculture and energy, they agreed to collaborate on infrastructure, finance, high-tech, aviation, and aerospace.
Western nations want to keep Ukraine from becoming a failed state and to discourage Putin from retaking the nation by force. The U.S., busy with conflicts from Syria to Afghanistan, regards Ukraine as mainly the EU’s problem. The EU hopes eventually to welcome a stable Ukraine as a member, but not yet. On Feb. 25, EU policy chief Catherine Ashton stressed to reporters “the importance of the strong links between Ukraine and Russia.” Even Poland, which identifies with Ukraine because it too was once under the Soviet thumb, isn’t prepared to rescue its eastern neighbor unconditionally. “Poland will not sweat its guts out” providing foreign aid that just props up oligarchs, Prime Minister Donald Tusk said on Feb. 24, according to the New York Times.
The geopolitical struggle comes down to money. Russia pledged $15 billion in loans to pull Ukraine into its nascent Eurasian Union, but after paying out $3 billion it has put further funds on hold. On Feb. 26, Secretary of State John Kerry said the U.S. was organizing a stopgap $1 billion loan guarantee—far short of the $35 billion in aid Ukraine is seeking. The Institute of International Finance, which represents big banks, estimates that with no change in policy Ukraine would need $30 billion in foreign assistance this year alone. The IIF predicts that the International Monetary Fund will insist as a condition for aid that Ukraine cut natural gas subsidies to consumers and industry, and allow its currency, the hryvnia, to fall further, shrinking the trade deficit. The problem: Those measures will be so unpopular that they will jeopardize any new government.
The risk is that Ukraine will disintegrate. Opposition parties united only in their hatred of Yanukovych range from Europhile democrats to rightist nationalists. If the West doesn’t manage to stabilize Ukraine, Putin could plausibly present himself as the nation’s savior a year or two from now.
Ukraine stumbled after the Orange Revolution of 2004-05; the oligarchs kept power. The rebellion that brought down Yanukovych is a second chance. “The awakening of the people is much stronger this time,” says Oleh Shamshur, a former ambassador to the U.S. For those who want a free and democratic Ukraine, says Timothy Ash, chief emerging-market economist at Standard Bank in London, “it’s now or never.”
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