Not only has the situation escalated quickly (though it has yet to get as out of hand as the news anchor street fight in the movie), the theoretical context for understanding events seems to have shifted just as rapidly. One day, the Ukraine appears to be an example of emerging market turmoil among the several examples of Turkey, Venezuela, and Argentina. About a week later, it jumps out of the pack to become an example of the travails of democratic transition and consolidation. Then, by the weekend, it becomes a question of foreign intervention and international response.
Emerging Market Turmoil: Ukraine's economy has been suffering from a number of problems that are largely the result of policies that have not only failed to address the nation's economic challenges but have contributed to the problems facing the nation.
Pekka Sutela posted an in-depth analysis of Ukraine's economic development since 1991 entitled "The Underachiever: Ukraine's Economy Since 1991", which gives a good idea of his conclusion. In a nutshell, Sutela argues that Ukraine started off the post-Soviet era in a favorable geographic and market position between Russia and the rest of the world, but this ended up being a resources curse in that it lowered the incentive for increasing the diversification and sophistication of domestic industry. When Russia started demanding higher prices for gas and exploring alternate routes for shipping energy to Europe, Ukraine lost much of the windfall produced by its position, but had not developed its economy in a manner that would allow it to make up the loss elsewhere.
To make things worse, Ukraine had enacted policies, such as a strong currency and expanding public pensions and payrolls, that created a current account deficit, which was funded through foreign debt. Implicit and explicit subsidies have also kept the price of some goods, most notably gas, artificially and unsustainably low. Additionally, the political system is rife with corruption and the privatization of state businesses put most of the large domestic firms into the hands of oligarchs leading to inefficiency and a lack of competition.
Putella argues that strong domestic political leadership is needed to implement fundamental reform in three areas. First, despite the unpopular nature of doing so, prices need to be brought to realistic levels (largely through a weaker currency and the removal of subsidies). Second, the state needs to be reformed to lower corruption, remove state favors as a barrier to market activity, and lower pensions and payrolls. Third, foreign competition and investment needs to be encouraged (which will largely depend on the first two recommendations) to counterbalance the oligarchic structure of the economy.
Of course, neither strong leadership nor fundamental reform occurred and Ukraine's economy continued on a downward trajectory. In July 2103, Mark Adomanis argued that Ukraine was about to go bankrupt due to its unsustainable currency peg, current account deficits, dwindling foreign reserves and questionable government finances.
Though the outlook was alarming, the remedy of unpopular reforms by may have been even more alarming for Ukrainian leaders. Not only would removing subsidies on consumer goods be unpopular with the electorate, reforming the system of state favors would undercut the political leaders’ means of ensuring the support of elites (not to mention of lining their pockets). Opening the market to foreign competition would also be directly against the interests of those elites.
In this context, the choice between closer ties with the EU or Russia was undoubtedly a choice between engaging in the type of reforms Sutela recommended in the first case and buying more time for the status quo in the second. Going with the EU would not only require more extensive reforms, but doing so ran the risk of Russia retaliating by raising the price on gas and other inputs. While Russia would demand some reforms, they certainly wouldn’t demand greater openness to global competition or deep reforms in the state favor system or in the oligarchic structure of the economy which characterizes their own system. For the leadership, the choice might be roughly analogous to one of a cancer patient choosing between chemotherapy and morphine, and the choice to go with the latter makes some sense.
Jumping forward to the current situation, not only has the leadership changed but the context of the choice has changed as well. On Feb 28th, Bloomberg.com quoted Ukraine's new prime minister as telling parliament, “The issue now is national unity and anyone who calls for a split will act against Ukraine and its people...We face incredible economic challenges. The only way out is to do very unpopular things concerning tariffs, subsidies and social programs.” In this statement, the pain of needed reforms is cast as a sacrifice in the name of national unity in the face of an external threat. While that external threat was always there, it is now much more concrete and imminent.
Also, the criteria for assessing the success of reform may also have shifted from economic well-being to independence from Russia. To the extent this occurs, it may be important since the benefits of economic and political reforms are often long in coming and unevenly distributed. Indeed, it is easy to imagine a situation in which reforms are enacted that avoid an economic collapse but result in lackluster economic growth and a lower standard of living for many people in the society. In such a case, people might compare the performance of the economy to the its past performance instead of to what it would be if the avoided, and thus unobserved, collapse had occurred. However, if the main goal of reforms is seen as maintaining Ukrainian independence, than, so long as Russia does not invade more territory, the benefit of the policy will be more immediately perceptible (at least among those that actually value independence).
Of course, this is all speculative and the situation is fraught with uncertainty at this point. Indeed, this very uncertainty will probably hurt Uraine's economy and worsen their economic crisis. Western nations may be more forthcoming with aid but it is not clear if they will ease off demands for painful reforms. Ukraine's security concerns may make them more sympathetic to Westerners but they also make them more susceptible to Western pressure.
Foreign Intervention: While the role of Russia has always loomed large in discussions of Ukraine economic and political difficulties, Russian military moves, and the threat of larger ones, have shifted the context of the crisis and pushed the discussion of events into the popular political realm.
Charles Krauthammer was particularly quick to come out of his corner, swinging at Putin and Obama. On Feb 27th, he put what he called Putin's Gambit, in terms of the context of power and hegemony. In his view, Putin is seeking to restore a Russia mini-empire in Eurasia and his moves against Ukraine are just another step in the process of doing so. This process dates back to Russia's 2008 war with Georgia and was continued more recently with economic pressure on Ukraine to abandon plans for closer ties to Europe. As for Obama, Krauthammer blames him and other western leaders for creating a power vaccuum in which Putin was free to pressure Ukraine and now may be free to invade parts of it. Therefore, Krauthammer calls on the US ad EU to counter Russian pressure (with a naval flotilla in the Black Sea) and provide economic support to the Ukraine (starting with the $15 billion dollar loan) until the Ukraine is on a firm financial footing. He concludes, "Either Ukraine will fall to Russian hegemony or finally determine its own future — if America balances Russia’s power.
For the benefit of my students, let me point out that Krauthammer is apparently taking an offensive realist point of view, but that this appearance may be deceiving. Sure he is talking about power and the need to balance it, but I think he is missing a couple is key points. First, he is arguing that Putin’s goal is to restore the Soviet Empire while implying the US goal is to promote peace. Yet, realism assumes that all state have the same goals, either maximizing their security (Defensive Realism) or maximizing their relative power (Offensive Realism). Therefore, Putin supposed goal of restoring the empire would be more properly viewed as potential strategy for balancing or maximizing relative power. While peace in Ukraine is certainly desirable, the US’ overriding interest lies in maintaining its own security or relative power position.
This may seem like a quibble, but keeping one’s eye on the power might lead one to take a different view of the situation. If one asks what changes in the distribution of power are at stake in the current situation, one might argue that Russia was faced with more potential losses of power than potential gains. Closer ties between the Ukraine and EU would represent an indirect loss, but anything that threatened Russian access to its naval base in Sevastopol would represent a much more direct (if not quite catastrophic) loss. In this context, a move to take direct control of the region around its base would be more about avoiding a loss in power than in acquiring a gain in power. Therefore, Russia moves are largely defensive and understandable.
Looking at the US side of the equation, a Ukrainian shift from Russia to the EU is not unequivocally in US interests. Such a move might weaken Russia but it would strengthen Europe more than the US. While the Europeans are nominal allies of the US, this alliance is no longer enforced by a bi-polar distribution of power in the world and a gain European power is no longer an automatic gain for the US. Indeed, US interests might be best be served by maintaining a balance of power between Russia and the European nations, and one might argue that the Europeans already outweigh Russia. If one goes by military spending, the UK, France, Germany and Italy had a combined defense budget of $199.5 billion in 2012 that was twice as large as Russia's estimated $90.7 billion in defense spending (and 20% larger than China's estimated defense spending of $166 billion).
As far as Sevastopol is concerned, the Russians already have a base there and Russian moves to protect their access won’t produce a loss in relative power for the US. Of course, loss of the base might weaken Russia a bit, but not in any way that is especially helpful to the US. From this point of view, you would expect ambivalent or minimal efforts on the part of the US (i.e., exactly what Krauthammer is criticizing Obama for doing).
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