Jun 17th 2015

A Winning Strategy For Ukraine

by George Soros

George Soros is Chairman of Soros Fund Management. His most recent book is Reflections on the Crash of 2008.

"European leaders, in particular, have failed to appreciate Ukraine’s importance. By defending itself, Ukraine is also defending the EU. If Putin succeeds in destabilizing Ukraine, he may then apply the same tactics to divide the EU and win over some of its member states."

BUDAPEST – At the beginning of this year, I proposed a strategy for Ukraine that recognized that sanctions on Russia are not enough. They must be coupled with a political commitment by Ukraine’s allies to do whatever it takes to enable the country not only to survive, but to succeed in implementing far-reaching political and economic reforms, despite the implacable opposition of Russian President Vladimir Putin.

Sanctions, though necessary, are harmful not only to Russia but also to Europe’s economy. By contrast, enabling the Ukrainian economy to flourish would benefit both Ukraine and Europe.

Even more important, sanctions by themselves reinforce Putin’s narrative that Russia is the victim of a Western or Anglo-Saxon plot to deprive it of its rightful place as a great power equal to the United States. All of Russia’s economic and political difficulties, the Kremlin’s propaganda machine argues, have resulted from Western hostility.

The only way to counter this narrative is to combine sanctions with effective support for Ukraine. If Ukraine prospers while Russia declines, no amount of propaganda will be able to conceal that Putin’s policies are to blame.

Unfortunately, Europe’s leaders have chosen a different course. They treat Ukraine as another Greece: a country in financial difficulties – and one that is not even a European Union member state.

This is a mistake. Ukraine is undergoing a revolutionary transformation, and the current government is probably the one best able to deliver radical change.

There are indeed some significant similarities between the “old Ukraine” and Greece: both suffer from a corrupt bureaucracy and an economy dominated by oligarchs. But the new Ukraine is determined to be different. By keeping Ukraine on a short financial leash, Europe is jeopardizing the country’s progress.

In a sense, Europe’s failure to recognize the birth of a new Ukraine is not surprising. Spontaneous uprisings occur frequently; the Arab Spring, for example, spread like a wave across North Africa and the Middle East.

But most revolts do not endure; their energy is exhausted quickly – as with Ukraine’s Orange Revolution a decade ago. Today’s Ukraine is one of the rare cases in which protest is transformed into a constructive, nation-building project. Although I participated in that transformation process, I confess that even I underestimated the new Ukraine’s resilience.

Putin has made the same mistake, but on a much larger scale. He has been so successful in manipulating public opinion that he was unwilling to believe that people could act spontaneously. That has been his Achilles’ heel.

Twice he ordered former Ukrainian president Viktor Yanukovych to use force against the people protesting in the Maidan, Ukraine’s Independence Square. But, instead of fleeing the violence, people rushed to Maidan, willing to sacrifice their lives for their country. The second time, in March 2014, when the protesters faced live ammunition, they turned on the police, and it was the police who ran away. Such an event can become a nation-founding myth.

Putin knows that he is responsible for turning Ukraine from a pliable ally into an implacable opponent, and he has made it a top priority to destabilize the country ever since. Indeed, he has made considerable – though purely temporary – progress on this front. Given that Putin also recognizes that his regime may not survive two or three more years with oil substantially below $100 a barrel, his sense of urgency is understandable.

His progress – measurable by comparing the Minsk II ceasefire agreement with Minsk I – can be attributed partly to his skills as a tactician. More important, whereas he is willing to go to war, Ukraine’s allies have made it clear that they are incapable of responding quickly and unwilling to risk a direct military confrontation with Russia. This has given Putin the first-mover advantage, because he can switch at will from hybrid peace to hybrid war and back again. Ukraine’s allies cannot possibly outbid Russia by military escalation; but surely they can outbid Russia on the financial side.

European leaders, in particular, have failed to appreciate Ukraine’s importance. By defending itself, Ukraine is also defending the EU. If Putin succeeds in destabilizing Ukraine, he may then apply the same tactics to divide the EU and win over some of its member states.

If Ukraine fails, the EU would have to defend itself. The cost, in financial and human terms, would be far greater than the cost of helping Ukraine. That is why, rather than drip-feeding Ukraine, the EU and its member states should treat assistance to Ukraine as a defense expenditure. Framed this way, the amounts currently being spent shrink into insignificance.

The problem is that the EU and its member states are too fiscally constrained to support Ukraine on the scale needed to enable it to survive and prosper. But that constraint could be removed, if the EU’s Macro-Financial Assistance (MFA) facility were redesigned. The MFA already has been used to provide modest assistance to Ukraine; but it needs a new framework agreement to fulfill its potential.

The MFA is an attractive financing instrument because it requires no cash outlay from the EU budget. Instead, the EU borrows the funds from the markets (using its largely untapped triple-A credit rating) and lends these funds to non-member governments. A cash outlay from the EU budget would materialize only if and when a borrowing country defaulted. Under prevailing rules, just 9% of the loan amount is charged to the current budget as a non-cash outlay to ensure against this risk.

A new framework agreement would allow the MFA to be used on a larger scale and in a more flexible manner. At present, the MFA can be used for budgetary support but not to provide political risk insurance and other investment incentives to the private sector. Moreover, each allocation must be approved by the European Commission, the European Council, the European Parliament, and every member state. The EU’s contribution to the International Monetary Fund’s rescue package in February took until May to process.

The strategy for Ukraine that I proposed at the start of the year has run into three roadblocks. First, the debt restructuring that was supposed to account for $15.3 billion of the $41 billion contained in the second IMF-led rescue package has made little progress. Second, the EU has not even started to construct a new MFA framework agreement. And, third, EU leaders have shown no sign that they are willing to do “whatever it takes” to help Ukraine.

German Chancellor Angela Merkel and French President François Hollande are eager to ensure that the Minsk II agreement, which carries their signatures, is successful. The trouble is that the agreement was negotiated by the Ukrainian side under duress, and was left deliberately ambiguous by Russia. It calls for negotiations between the Ukrainian government and representatives of the Donbas region, without specifying who those representatives are. The Ukrainian government wants to negotiate with representatives elected according to Ukrainian law; Putin wants Ukraine’s government to negotiate with the separatists, who took power by force.

The European authorities are eager to break the stalemate. By taking a neutral position on Minsk II’s ambiguity and keeping Ukraine on a tight leash, Europe’s leaders have been unwittingly helping Putin achieve his goal: financial and political crisis across all of Ukraine (as opposed to territorial gains in the east). Drip-feeding Ukraine has brought its economy to the brink of collapse. Precarious financial stability has been achieved at the price of accelerated economic contraction. Although political and economic reforms are still moving ahead, they are in danger of losing momentum.

On a recent visit, I found a troubling contrast between objective reality, which is clearly deteriorating, and the reformist zeal of the “new” Ukraine. When President Petro Poroshenko and Prime Minister Arseniy Yatsenyuk cooperate – usually whenever some external financing is to be obtained (the conditions for the IMF-led program, for example, were met in two days) – they can persuade the Rada (parliament) to follow their lead.

But such opportunities are becoming scarcer. Moreover, Poroshenko and Yatsenyuk will be competitors in local elections in October, when opposition parties associated with oligarchs could, according to current public-opinion polls, make considerable gains.

This would be a setback, because there has been considerable progress in recent months in preventing the oligarchs from stealing large amounts of money from the budget. The government won a sharp confrontation with the worst and most powerful offender, Igor Kolomoisky. And, although an Austrian court failed to extradite Dmytro Firtash to the United States, Ukraine’s authorities are now confiscating some of his assets and reining in his gas-distribution monopoly.

Moreover, although the banking system has not yet been recapitalized and remains vulnerable, the National Bank of Ukraine is exercising effective control. There has also been some progress in introducing e-government and transparency in procurement. Unfortunately, efforts to reform the judiciary and implement effective anti-corruption measures remain disappointing.

The lynchpin of economic reform is the gas sector. A radical makeover could ensure energy independence from Russia, root out the costliest forms of corruption, plug the largest drain on the budget, and make a significant contribution to a unified gas market in Europe.

All of the reformers are determined to move to market pricing as fast as possible. This requires introducing direct subsidies to needy households before the start of the next heating season. Mistakes and delays in registering households could generate a flood of complaints and ruin the governing coalition’s chances in the upcoming local elections.

This danger could be removed by assuring the public that all applications will be approved automatically for one heating season; but that may require additional budgetary support. Worse, many within the government are reluctant to move ahead with market pricing, to say nothing of the oligarchs who profit from the current arrangements. Poroshenko and Yatsenyuk have yet to assume joint personal responsibility and overcome all opposition. Ukraine’s reformist zeal could weaken.

Given the deteriorating external reality, reform exhaustion in Ukraine is all the more likely if the EU persists on its current course. Radical reform of the gas sector may be derailed, a renewed financial crisis will be difficult to avoid, and the governing coalition is liable to lose popular support.

Indeed, in the worst-case scenario, the possibility of an armed insurrection – which has been openly discussed – cannot be excluded. There are more than 1.4 million internally displaced people in Ukraine today; more than two million Ukrainian refugees could flood Europe.

On the other hand, the “new” Ukraine has repeatedly surprised everyone by its resilience; it may surprise us again. But Ukraine’s allies – particularly the EU – can do better. By revising their policies, they can ensure that the new Ukraine will succeed.




Copyright: Project Syndicate, 2015.
www.project-syndicate.org

 


This article is brought to you by Project Syndicate that is a not for profit organization.

Project Syndicate brings original, engaging, and thought-provoking commentaries by esteemed leaders and thinkers from around the world to readers everywhere. By offering incisive perspectives on our changing world from those who are shaping its economics, politics, science, and culture, Project Syndicate has created an unrivalled venue for informed public debate. Please see: www.project-syndicate.org.

Should you want to support Project Syndicate you can do it by using the PayPal icon below. Your donation is paid to Project Syndicate in full after PayPal has deducted its transaction fee. Facts & Arts neither receives information about your donation nor a commission.

 

 

Browse articles by author

More Current Affairs

Sep 27th 2020
EXTRACT: "Four years of political turmoil under Trump may well end with massive violence akin to a civil war. Trump is priming his base to act violently, and with over 390 million firearms in the hands of Americans, one can only imagine the calamitous consequences if violence is to erupt between his supporters and those who oppose him..... The Republican leadership in every state and every municipality are the prime body that can stop this potential calamity from occurring. Time is of the essence. Should the Republican Party as a whole fall short of taking a stand against Trump at this juncture, they will subject the nation to turmoil unseen since the Civil War. Not a single Republican leader will be able to claim that he or she were not warned."
Sep 27th 2020
EXTRACT: "I continue to expect this broad dollar index to plunge by as much as 35% by the end of 2021. This reflects three considerations: rapid deterioration in US macroeconomic imbalances, the ascendancy of the euro and the renminbi as viable alternatives, and the end of that special aura of American exceptionalism that has given the dollar Teflon-like resilience for most of the post-World War II era."
Sep 26th 2020
EXTRACT: "Covid-19 essentially hit the “fast forward” button on emerging trends in a variety of sectors of national economies, hastening the demise of the shopping mall, laying bare how unnecessary being physically located in commercial work spaces is, and sounding the death knell for numerous 100+ year-old brands that had failed to adapt to the blistering pace of change in the digital economy. Failure to contemplate and embrace the future is leaving carnage in its wake.......The onslaught of dramatic change that has accompanied Covid-19 reminds us that fragile systems crack when exposed to unexpected events while antifragile systems have the ability to resist shocks."
Sep 24th 2020
EXTRACT: "China’s foreign minister, Wang Yi, recently declared that aggression and expansionism have never been in the Chinese nation’s “genes.” It is almost astonishing that he managed to say it with a straight face. Aggression and expansionism obviously are not genetic traits, but they have defined President Xi Jinping’s tenure. Xi, who in some ways has taken up the expansionist mantle of Mao Zedong, is attempting to implement a modern version of the tributary system that Chinese emperors used to establish authority over vassal states: submit to the emperor, and reap the benefits of peace and trade with the empire."
Sep 16th 2020
EXTRACT: "Seventy-five years ago, the prestige of the United States and the United Kingdom could not have been higher. They had defeated imperial Japan and Nazi Germany, and they did so in the name of freedom and democracy. True, their ally, Stalin’s Soviet Union, had different ideas about these fine ideals, and did most of the fighting against Hitler’s Wehrmacht. Still, the English-speaking victors shaped the post-war order in large parts of the world. The basic principles of this order had been laid down in the Atlantic Charter, drawn up in 1941 by Winston Churchill and President Franklin D. Roosevelt on a battleship off the coast of Newfoundland."
Sep 14th 2020
EXTRACT: "After Trump’s inauguration in January of 2017, millions demonstrated their disapproval. We can expect the same, no matter how this election turns out. With both sides framing this election in “end of the world” terms; with the president calling into question the legitimacy of the vote, even before it happens; and with the president warning his supporters that they may have to take up arms to defend him – we have a recipe for disaster that may occur in the days that follow this election. This may very well be the Armageddon election of our lifetime."
Sep 8th 2020
EXTRACT: "The Huawei case is a harbinger of a world in which national security, privacy, and economics will interact in complicated ways. Global governance and multilateralism will often fail, for both good and bad reasons. The best we can expect is a regulatory patchwork, based on clear ground rules that help empower countries to pursue their core national interests without exporting their problems to others. Either we design this patchwork ourselves, or we will end up, willy-nilly, with a messy, less efficient, and more dangerous version."
Sep 7th 2020
EXTRACT: "China’s footprint in global foreign direct investment (FDI) has increased notably since the launch of the Belt and Road Initiative (BRI) in 2013. That served to bring Chinese overseas FDI closer to a level that one would expect, based on the country’s weight in the global economy. China accounted for about 12% of global cross-border mergers and acquisitions and 9% of announced greenfield FDI projects between 2013 and 2018. Chinese overseas FDI rose from $10 billion in 2005 (0.5% of Chinese GDP) to nearly $180 billion in 2017 (1.5% of GDP). Likewise, annual construction contracts awarded to Chinese companies increased from $10 billion in 2005 to more than $100 billion in 2017."
Sep 2nd 2020
EXTRACT: "Emergence and spread of the coronavirus COVID-19 have created and still creating health issues, economic challenges, political crises and social conflicts around the world. These challenges and conflicts lead the international community to re-evaluate global governance and international structures, which is based on the second world-war and post-cold war. The pandemic will emerge a new era of international society that will not be similar to the pre-Corona world."
Aug 28th 2020
EXTRACT: "Russia has changed, and has been changing, since its beginnings in ancient Muscovy to its current condition as Putin’s realm. Some general features appear in much of Russian history. Most of its rulers have been authoritarian—but so, too, were most of England’s, France’s, and Germany’s. Many of its political and intellectual elites have considered Russia a special civilization deserving a place in the sun—but just as many have not, wanting to transform Russia into a Western state with Western values. Many Russians have been enamored of their country, but even more have probably damned it for destroying them and their children. What, then, is Russia? It is, and has always been, many, oftentimes contradictory, things—sometimes coexisting, sometimes getting the upper hand, always shifting, always eluding simplistic analysis. But, and this needs to be emphasized, the same holds true for every other country in the world."
Aug 26th 2020
EXTRACTS: "Double dips – defined simply as a decline in quarterly real GDP following a temporary rebound – have occurred in eight of the 11 recessions since the end of World War II. .............Financial markets aren’t the least bit worried about a relapse, owing largely to unprecedented monetary easing, which has evoked the time-honored maxim: “don’t fight the Fed.” Added comfort comes from equally unprecedented fiscal relief aimed at mitigating the pandemic-related shock to businesses and households.......This could be wishful thinking."
Aug 26th 2020
EXTRACTS: "There is no question that the re-election of President Donald Trump would endanger both the US and the world. Moreover, there is ample reason to fear that a close election could drive the US into a deep, prolonged constitutional crisis, and perhaps into civil violence.........One can only hope that the election will produce a decisive winner both in the Electoral College and in the popular vote. Yet, even then, tallying the final result may take time, owing to the massive increase in mail-in voting that is expected. Every ballot that has a postmark of November 2 or 3 (depending on the state) will be considered valid, which means that the final result will not be known until after Election Day. During that window of uncertainty, either or both campaigns may try to claim victory based on the current vote count. In any case, there is no chance that Trump will wait graciously in the Oval Office for days or weeks to receive the final tally. In interviews, he has already issued vague statements suggesting that he will not leave the White House if he loses; indeed, he seems to be actively preparing for such a scenario. If he follows through, the world’s leading superpower will find itself facing a protracted – and perhaps intractable – constitutional crisis.
Aug 26th 2020
EXTRACT: "the European Union is a community of values as much as an economic and trade bloc. But the behavior of member states such as Poland and Hungary has called into question their commitment to liberal democracy. Above all, in the US, President Donald Trump is widely criticized, even by lifelong Republicans, for not respecting or understanding the US constitution and the separation of the executive, legislative, and judicial branches. Does Trump even believe in democracy? Does he want all Americans to vote in November, regardless of race or party affiliation, or only those who will support him? And will he accept the election result if it goes against him? "
Aug 25th 2020
EXTRACT: "The fundamental difference in values between the West and China will remain indefinitely, and it is here that the West must draw the line. Any concession that entails a sacrifice of fundamental principles, for example in cultural matters, must be rejected. If this values-based approach results in economic disadvantages, so be it. By the same token, the West should abandon the conceit that it can push, force, or cajole China to become a democracy wrought in its own image. "
Aug 16th 2020
EXTRACT: "China is light years ahead of most of the rest of the world in deploying digital payment technology. Alipay or WeChat Pay apps are all that is necessary to accomplish almost anything that requires a payment in China; the country is largely already making paper money obsolete. "
Aug 15th 2020
EXTRACT: "Seven hundred fifty billion euros is less than 5% of the stock of US government debt held by the public. It’s a drop in the bucket, in other words. And a drop does not a liquid market in safe assets make. Even if this really is Europe’s “Hamiltonian moment,” ramping up EU issuance by a factor of 20 will take decades. "
Aug 14th 2020
EXTRACT: "But the race is not over. In the 2016 election, prices moved the most in the two months just before the election. Trump trailed Hillary Clinton in prediction markets throughout the campaign and was seen as favourite only on election day – showing that the underdog can recover. So despite Trump’s poor position now, he might still regain some ground."
Aug 11th 2020
EXTRACT: "Last year, in the midst of the country-wide protests against corruption, I was honored by a Lebanese humanitarian organization. I began my remarks paraphrasing Kahlil Gibran’s poem “You have your Lebanon, I have my Lebanon.” Like Gibran, I love the Lebanese people, their poetry, art, song, and love of life. I love their generous and welcoming spirit. I also love what Lebanon has given to the world – especially its gifted people. And I love the sheer beauty of the country – its majestic snow-capped mountains and its pristine seascapes. And, like Gibran, I do not love Lebanon’s petty bickering politicians who lead because of an accident of birth. Nor can I embrace the country’s system of sectarian privilege and the corruption that is endemic to the political-economic regime that has squeezed Lebanon dry to the benefit of their chosen ones. And I reject the armed militias, whether they be Christian, Muslim, or secular that in the past and in the present continue to torment those who challenge their dominance. I told the audience that the Lebanon I loved was in the streets making their voices heard demanding fundamental reform – an end to sectarianism, corrupt feudal elites, and rule by force of arms."
Aug 8th 2020
EXTRACT: "It is time for the world’s governments and companies to wake up. Beijing’s reach is wide and deep. It is taking advantage of the West’s openness – and gaps and inconsistencies in our data protection protocols - to acquire information on all of us. The hacks on Anthem, Equifax, Marriott, and the US government are good examples of how they have already done so. American and Western companies need to take a hard look at the costs and benefits associated with operating in China and continuing to have Chinese partners. Those partners must comply with these Laws. American and Western companies that continue to operate with them may unwittingly well be aiding and abetting the Chinese government."
Aug 5th 2020
EXTRACT: "James Murdoch is not the most obvious candidate for editorial heroism. His route to resigning from the News Corp board because of “disagreements over certain editorial content” has been circuitous and colourful."