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Will Putin’s Crimea gamble backfire?

by Robert Samuelson

It’s a stunning comparison that, in some ways, explains everything about the crisis in Ukraine. Back in 1990, average per-person incomes in Poland and Ukraine were roughly equal, about $8,000 in each country. By 2012, they no longer were, reports economist Anders Aslund of the Peterson Institute. Poland’s per-capita income had jumped to about $18,000; Ukraine’s had dropped to $6,000.

These figures make it easy to understand why so many Ukrainians want closer ties with Europe — and why Russian President Vladimir Putin feels threatened. It’s not just geography and history. The hope is that adopting Europe’s more open economic and political system will promote faster economic growth and more freedom.

If this happens, Russia might suffer by comparison. Poland is again instructive. In 1990, its per-capita income was a third less than Russia’s; by 2012, it was one-fifth greater.

Putin’s successful campaign to persuade deposed President Viktor Yanukovych to reject a sweeping trade agreement with the European Union — which seemed a done deal — involves far more than trade. For Putin, it’s an act of political self-preservation. The point is to keep Ukraine weak and thereby prevent it from embarrassing Russia. But, ironically, Putin’s aggressive response may ultimately backfire.

Although Russia may acquire Crimea, Putin may not be able to keep Ukraine in Moscow’s economic orbit. Just the opposite: The crisis may have accelerated efforts to reorient Ukraine westward. For starters, the European Union decided to go ahead and give Ukraine the trade concessions in the agreement trashed by Yanukovych. The EU estimates the annual benefits for Ukraine at €500 million ($700 million).

Meanwhile, the severity of the crisis is forcing Ukraine to address comprehensive reforms sooner rather than later.

The economy is dismal. It’s been in recession since mid-2012. Last year’s budget deficit was about 9 percent of the economy (gross domestic product), and “we believe they may be hiding some losses in off-budget accounts and state enterprises,” says economist Ondrej Schneider of the Institute of International Finance, a think tank funded by banks and financial service firms. The current account deficit — a broad measure of trade — also reached roughly 9 percent of GDP last year. To pay for imports, Ukraine is draining its foreign exchange reserves of dollars and euros. They may be as low as $13 billion, says Schneider. That’s down from $38 billion in 2011 and equals only a few months of imports.

Ukraine desperately needs a loan to cover imports, including for Russian natural gas, and to make international debt payments. Putin initially pledged $15 billion, but now Russia probably won’t lend any more than it already has ($3 billion). Although the United States has pledged $1 billion and the EU at least $15 billion, most of that money would require Ukraine to reach an agreement with the International Monetary Fund. The IMF would insist on policy changes before giving approval and contributing its funds to the pot.

One target would be lavish energy subsidies. In 2012, they reached 7.5 percent of GDP, reports the IMF. These huge government subsidies bloat both the budget deficit and the current account deficit, because low prices “encourage one of the highest energy consumption levels in Europe,” as the IMF notes.

What really needs transforming is Ukraine’s economic culture. Corruption is said to be endemic, from getting a driver’s license to signing major business contracts. The Peterson Institute’s Aslund says that the “Yanukovych family” may have diverted as much as $10 billion for themselves.

Ukraine also needs to modernize its economic base. It remains excessively dependent on communist-era heavy industry, particularly steel.

It’s a tall order that may not succeed. Many vested interests have a stake in the status quo. But the crisis that stalks Ukraine also creates pressures for fundamental change. There’s a short and long game here. Putin may win the first. It’s less clear that he’ll prevail in the second.

© 2014 The Washington Post Writers Group

  • zer0_0zor0

    Some worthwhile points, but

    The economy is dismal. It’s been in recession since mid-2012.

    And how long has the US economy been in recession? Is the unemployment rate higher in Ukraine or, say, Spain?

    Many vested interests have a stake in the status quo.

    Sure, like bankers and Wall St. in the USA, and their counterparts in London.

    The crisis can not be reduced solely to the common denominator of economics. Choosing to ignore the communitarian (i..e., linguistic, religious, historic) divide while pretending to advance something that benefits one group over the other in the name of some falsely promoted universal principle is going to result in exacerbating the divide.

    Economics are important, which can be seen also from the fact that Ukraine owes Russia $1.89 billion in back fees.

    One also has to wonder why, if the EU can’t even help Greece (I already mentioned Spain) gets its economy on a firmer footing along the lines of the EU model, how they can afford to throw $700 billion to Ukraine. Someone (i.e., vested interests) must be seeking some advantage economically from that equation or it doesn’t balance.

    The “Yanukovych family” may be corrupt–maybe even as corrupt as the families connected to Halliburton and ENRON in the USA–but so was his predecessor (Orange revolution, etc), and that is likely part of the reason he was reelected.

    It is a given that, being from the eastern part of the country and representing that constituency (i.e., Russian speaking, Orthodox) that he is going to conduct his administration in lines with the aims of that constituency. And I don’t see any claims of illegality about that. The West is simply trying to state that the uprising that ousted him had a legal basis because it was popular. Meanwhile, the EU is ignoring the legal procedure in place for impeaching a president and holding new elections, etc.

    With all of the signs of political intrigue directly involving officials of the American state department, Putin would seem to be standing on pretty sound ground in the context of history.