Diatribes of Jay

This is a blog of essays on public policy. It shuns ideology and applies facts, logic and math to economic, social and political problems. It has a subject-matter index, a list of recent posts, and permalinks at the ends of posts. Comments are moderated and may take time to appear. Note: Profile updated 4/7/12

13 December 2013

Understanding Ukraine

[For comment on the leading personalities in Ukrainian politics, click here.]

What’s going on in Ukraine? Whatever it is, our media have done a terrible job reporting it. We know little, mostly because our media know little. And they seem to care less.

That’s a shame. Ukraine is worth attention. According to our own CIA Factbook, besides Russia itself, Ukraine “was the most important economic component of the former Soviet Union, producing about four times the output of the next-ranking republic.” It’s a country of 44.5 million people, with an area slightly smaller than Texas’. A millennium ago, as Kyivan Rus, it “was the largest and most powerful state in Europe.”

But geography is Ukraine’s misfortune. It’s stuck in a continent across which armies have marched for all of recorded history. It’s been part of others’ empires for most of the last millennium, except for brief bouts of independence. After the Soviet Union’s collapse in 1991, it found itself independent again, maybe for good this time.

To say that Ukraine’s relationship with Russia is complex would be Obamanian understatement. Culturally, the two nations are close. As part of Kyivan Rus, Ukraine was the “center of the first eastern Slavic state.” So its national civilization and culture are older than Russia’s. In a strange way, you could think of Ukraine as Russia’s “mother country,” although Russia has dominated it for the last two centuries.

Ukrainian is once again the nation’s official language. It’s similar to Russian, a bit like Portuguese to Spanish. People speaking either language can understand the other, although sometimes with difficulty. Both languages use the Cyrillic alphabet (unlike Polish).

The two peoples are almost as mixed as the languages. Ethnic Russians are the largest Ukrainian minority (17.3%). But nearly one-quarter of Ukrainians speak Russian, partly because they are immigrants from places with less popular native tongues.

With all this commonality, you might think that Ukraine would relate to Russia as we Yanks to Britain. But you would be wrong. The primary reason is Stalin’s gratuitous brutality during the Soviet period.

The CIA’s spare prose tells the awful story:
“Following the collapse of czarist Russia in 1917, Ukraine was able to achieve a short-lived period of independence (1917-20), but was reconquered and forced to endure a brutal Soviet rule that engineered two forced famines (1921-22 and 1932-33) in which over 8 million died. In World War II, German and Soviet armies were responsible for some 7 to 8 million more deaths.”
In other words, Ukraine was Soviet Russia’s breadbasket, and Stalin stole the bread, sometimes even the seed corn. This was not just a matter of Russian need. Stalin in his paranoia believed in having weak neighbors and, if necessary, making them weak.

Stalin was no fan of Jesus’ advice, “love thy neighbor as thyself.” He did much the same thing to Poland. That’s one reason reason why Poland is now such an enthusiastic (and generally anti-Russian) EU member.

When the Great War came, many Ukrainians welcomed the Nazi troops and fought with them against Russian Communists. But they soon learned that the Nazis considered them inferior, not much better than Jews, and had scheduled them for liquidation and their territory for annexation. So the starved and largely unarmed Ukrainians got crushed between the great armies of two evil empires. The result was probably the second most dire wartime tragedy in Eastern Europe, after Russia’s own suffering in its “Great Patriotic War.”

Today, Russia is Ukraine’s largest trading partner, by far. It supplies about a fifth of Ukraine’s imports (worth 17.5 billion 2012 dollars). And it buys almost a quarter of Ukraine’s exports (worth 16.5 billion 2012 dollars). Thus Ukraine’s trade balance with Russia is negative, but not by much. It’s a pretty equal economic match.

Most of what Ukraine buys from Russia is energy. In 2009, it imported almost twice as much oil as it produced, mostly from Russia. It exported a negligible amount. In the same year, its imports of natural gas were 188% of its production, although it was able to export about 7% of its imports, mostly to Europe.

After 1991, the newly independent Ukraine and ex-Soviet Russia both struggled to convert their economies from Soviet-style command and control to free markets. Both incurred considerable hardship in doing so.

In 2009, their separate hardships collided in a dispute over natural-gas pricing. One result was a two-week cutoff of Russian natural-gas exports to Ukraine, and through Ukraine to Europe, in the middle of winter.

Ukraine and Russia soon resolved their dispute with a ten-year contract for natural gas supply and transit, which brought prices to market levels. Later, Ukraine won some price relief in exchange for extending the lease on Russia’s Black-Sea naval base.

As this brief summary shows, Russia’s relationship with its smaller “mother country” is far more fraught than ours with Britain. This is no result of national schizophrenia on Ukraine’s part. It’s a direct result of geography, demographics, economics, and a history of suffering and hardship the likes of which we Yanks have never experienced, except (for a much briefer time) during our Civil War.

Today Ukraine values its independence, as it always has. It still bears the painful scars of Stalin’s brutality. Its people want to be part of Europe so they can be freer from the Russian bear’s not-always-friendly embrace. They also want Ukraine to be the strong and independent European power that it was a millennium ago.

But how realistic are those dreams? How much hard work and hardship must precede their realization?

Aye, there’s the rub. Today, “Ukraine depends on imports to meet about three-fourths of its annual oil and natural gas requirements and 100% of its nuclear fuel needs.” Most of those imports come from Russia.

As of 2012, none of Ukraine’s largest export partners was in Europe. Turkey, which may some day become an EU member, took 6% of Ukraine’s exports. In comparison, China took 4.1% and Russia nearly a quarter.

The EU was more important for Ukraine’s imports. Germany and Poland collectively supplied 16.7%, not far behind Russia’s 19.4%. China was third, with 10.2%. Even considering imports, Ukraine’s trade relationship with Russia today is far more important to its economic prosperity and survival than the EU’s.

We need just one more fact to understand Ukrainian President Viktor Yanukovych’s recent pirouette. Trade pacts generally don’t reduce the prices of goods imported from abroad. Import tariffs may increase them, but that’s the importing country’s business.

In other words, Ukraine’s imports from Europe won’t get any cheaper when and if Ukraine joins the EU. They could get cheaper if Ukraine now imposes tariffs on them and dropped those tariffs to join the EU. But Ukraine could drop its tariffs unilaterally, right now. Nothing stops it (if it has tariffs), other than a potential loss of government tariff revenue and possible hardship for domestic competitors.

The main advantage of joining a trade pact is not reducing your own tariffs, which you could do by yourself. It’s improving the competitiveness of your own domestic industries by reducing or eliminating others’ tariffs on your exports.

Yet, right now, Ukraine exports little or nothing to Europe. And anyway, could Ukraine’s industries compete with Germany’s now, even on a level playing field?

So what benefit would EU membership, even if available now, offer Ukrainians? It wouldn’t make imported European products any cheaper than Ukraine could make them on its own by reducing or eliminating its own tariffs, if any. And Ukraine has few exports to Europe to promote.

There is only one answer that makes sense: jobs. The CIA cites Ukraine’s unemployment rate as 7.5%, not much higher than ours. But it also notes dryly, “official registered; large number of unregistered or underemployed workers.”

Apparently, official figures lie, and Ukraine has a big unemployment problem. Many of those people demonstrating in the streets, at the onset of a cold winter, might want jobs, or at least better jobs. If Ukraine were an EU member, they could go anywhere in Europe to get them, just like the Poles recently and the Irish and Spanish now.

So the large public demonstrations may be as much a vote of “no confidence” in the Ukrainian economy as in Mr. Yanukovych. Unemployed Ukrainians may want to vote with their feet. But without visas and special work permits from Europe, they have nowhere to go.

If they could get jobs in the EU, they might be willing to endure the hardship of temporary exile, like all “guest workers,” the better to support themselves and their families. And like all guest workers, they would send money back home.

These workers’ dreams make sense. But Yanukovych has done nothing to thwart them. In fact, he may have made brought them closer. By “pivoting” toward Russia, he got the EU to reduce its demands for entry. Maybe less austerity now will harm Ukraine’s economy in the long term. But in the short term, it might reduce ordinary Ukrainians’ hardship. Austerity is not easy; just ask Greeks, Irish, or Spaniards today.

It’s a good bet that Yanukovich knows his own economy, with all its warts and discontents, better than Europeans, let alone Yanks. So he was right to bargain with the IMF, and the IMF is right to be flexible.

In any event, there is no dilemma. This is not an either-or choice. There is no reason why Ukraine cannot be a member of both Russia’s Customs Union and the EU.

Customs Union membership would give Ukraine immediate, as well as long-term, benefits. While EU membership may offer better employment prospects for individual Ukrainians, it’s going to be a while before Ukraine’s industries can compete with France’s or Britain’s, let alone Germany’s. So EU membership is properly a longer-term Ukrainian goal.

To my knowledge, EU membership (like membership in any modern trade pact) does not require breaking earlier trade pacts. All it requires is so-called “most favored nation” treatment. If Ukraine gives Russia special trade concessions, it must give the same concessions to all the EU’s members when it joins. But no requirement of EU membership should force Ukraine to break a pact with Russia’s Customs Union or decrease its trade with Russia. Trade is not a zero-sum game.

So Yanukovych’s goal may be membership in both the Customs Union and the EU. If it’s not, it should be. That would be a global first and a win-win-win for the Ukraine, Russia and the EU. It would also be a fitting goal for a nation that once was the heart of Eastern Europe, and may some day be again.

Footnote: Most facts and figures in this post, and all direct quotes, come from the CIA’s online Factbook page on Ukraine.

Coda: Ukrainian Pols

Let me begin by saying that I know none of the people involved in Ukrainian politics personally. I haven’t even studied them. All I know is the bare, big facts about them, the headlines.

But I do know how the world works, and I try not to view it through rose-colored glasses. Like most Ukrainians, I suspect that Yanukovych was complicit in, or at least aware of, the dioxin poisoning of Viktor Yushchenko, which former members of the Ukrainian branch of the KGB probably perpetrated. Whether they did it on their own initiative or on orders from Yanukovych or Moscow I have no idea.

Like most Ukrainians, I suspect that the corruption charges against Yulia Timoshchenko are either trumped up or exaggerated. Lining their own pockets is seldom the goal of people who lead movements for freedom and democratic change. And if that’s true for men, it’s doubly true for women.

So like most Ukrainians, I suspect that Timoshenko sits in jail not because she’s a criminal, but because she’s a political threat. For a Yank, Ukrainian “politics” gives the term “hardball” a whole new meaning. It’s not just a contact sport. It’s mortal combat.

That said, I can’t help but return to a fundamental principle of democracy. Voting for the lesser of evils is not just a necessity, but a duty.

This was certainly true for us Yanks. If a few more people had voted for Hubert Humphrey in 1968, rather than Richard Nixon, our Yankee misadventure in Vietnam would have ended years earlier, tens of thousands of dead Americans might still be alive, and we would never have had the Watergate scandal or possibly Nixon’s racist “Southern Strategy,” which has prolonged dysfunctional government for yet another generation. If a few more people had voted for John Kerry in 2004, Dubya’s and Cheney’s imbecile regime might have ended four years earlier, and we Yanks (and the Afghans) all might be better off.

You can see how much better a president Kerry would have been from the superb job he’s now doing as our Secretary of State. How much could we Yanks have benefited from four less years of rule by an idiot and four more by an intelligent, diligent, good-hearted man?

But I digress. My point is very simple. I doubt Viktor Yanukovych is as good-hearted as Kerry. But he appears to be intelligent and experienced, perhaps the most of any Ukrainian pol. He appears to know something about the world outside Ukraine, and he has had some success in dealing with it.

The proof is in the facts of recent history. A few years ago, Yanukovych negotiated some natural-gas-price relief for Ukraine in exchange for extending the lease on a Russian Black-Sea naval base. Today, he is (albeit somewhat awkwardly) using Russia’s and the EU’s mutual desire to trade with Ukraine to negotiate a better deal from both.

Are these the acts of a Ukrainian patriot or of a tool of Moscow? Ukrainians have to judge, each for himself or herself. But these acts are least consistent with the patriotism of a man who knows that, today, military might means little because it is unlikely to be used, except to keep the peace. Trade and economics are all.

As far as I can see, Yanukovych’s main failing is the same as that of all pols who cut their teeth in the Soviet era. He doesn’t communicate well with his people, and he has a penchant for secrecy. True democracy comes to him (and to all his ilk) uneasily.

That may be changing. His recent decision to negotiate with the opposition is healthy and proper.

But it’s a brief opportunity. He must seize it quickly and well. He must negotiate with his own country’s skeptics honestly and flexibly, just as he did recently with the IMF.

Here his old Soviet love of secrecy can hurt him badly. What he’s doing appears obvious, even to this Yank watching from halfway around the globe. He’s playing off Russia and the EU against each other in order to get the best deal for Ukraine.

In the long run, Ukraine will probably be a member of both Russia’s Customs Union and the EU. As I explain above, it should be.

But which comes first is a matter of some interest not only to Ukrainians, but to the EU, and especially to Russia. Including its Soviet days, Russia has dumped unholy amounts of money into countries like Cuba and Syria, with very little economic return.

Ukraine is different. It’s been a breadbasket and a trading crossroads of Eastern Europe for a millennium. Russia knows that Ukraine, as a trading partner, is a big commercial prize.

That fact alone lends force to the suspicions about Yushchenko and Timoshenko. But Putin now appears to be going slowly and carefully. He knows the whole world is watching, including Ukraine. If his own considerable intelligence did not tell him that strong-arm tactics would be counterproductive, the recent massive protests undoubtedly did. Those protests were invaluable, if only for that reason.

So Yanukovych is putting the priority of Ukrainian trade concessions on the block to the highest bidder. What’s wrong with that?

What’s wrong (so far) is that he’s not explained to his people what he’s doing. And perhaps he’s not considered his people’s lust for jobs and easier travel in Europe in the near term.

Here his old Soviet penchant for secrecy is hurting him, badly. There is nothing secret about what he’s doing. It’s obvious. If I, a Yank, can see it from half a world away, you can bet his countrymen and negotiating partners can see it. But in the absence of any clear explanation from Yanukovych, his people credit all kinds of conspiracy theories.

Yanukovych needn’t give away all the details of his bargaining strategy. But he’s got to convince his people that he’s on their side, not Russia’s, and that he has a strategy to make their lives better. And if they want European jobs sooner, rather than later, he’s got to listen and respond.

If he can do that, perhaps he can release Timoshenko and still win free and fair elections. If he did that, even I, if Ukrainian, might hold my nose and vote for him.



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