Caitlin Huey-Burns On Ukraine Sanctions And Putin"s Next Steps

RCP reporter Caitlin Huey-Burns appears with Lou Dobbs on Fox Business Channel to discuss the situation in Ukraine.

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Caitlin Huey-Burns On Ukraine Sanctions And Putin"s Next Steps

Will Putin"s Gamble Backfire?

WASHINGTON — 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 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 euros ($ 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 European Union 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. 

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Will Putin"s Gamble Backfire?

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Putin"s reckless Ukraine gambit

Vladimir Putin’s surprise decision to ask for a Russian-style War Powers resolution from his parliament dramatically ups the ante in the Ukraine crisis and positions Russia for full-scale military action. It also signals Putin’s commitment to use all necessary means—many of which have already been in use in Crimea—to keep Ukraine in Russia’s orbit. If Putin follows through on his threat to invade Ukraine, he will signal yet again that the post-Cold War era that began with the “Velvet Revolutions” of 1989 has ended. The damage to Russia’s relations with the West will be deep and lasting, far worse than after the Russian-Georgian war. Think 1968, not 2008.

President Barack Obama’s handling of the Western response to the Ukraine crisis is now arguably the biggest test of his presidency. It is a crisis that no one anticipated and that the West has been frustratingly divided over since the European Union’s original, misguided attempt to force Ukraine to make an either-or choice about going east or west. For too long we have heard U.S. officials says repeatedly, “The Europeans are taking the lead.” That needs to stop.

Russia rolled over tiny Georgia with ease and the military phase of the crisis ended quickly. Ukraine will pose a much bigger challenge to Russia militarily, and the crisis will be more protracted and take a far less predictable path. The country is badly divided, of course, but anti-Russian sentiments are strong and undoubtedly growing in many parts of Ukraine. The forces of Ukrainian nationalism are on the rise throughout much of the country, provoked by Moscow’s disregard for Ukrainian sovereignty and irresponsible attempts to portray the Maidan revolution as a fascist triumph—patently offensive to a nation that suffered so much during World War II.

We should not take for granted that even in Ukraine’s east and south, where so many ethnic Russians live, that a military occupation will be a cakewalk. Many local residents surely do not want to become Russia’s 90th province. In Ukraine’s west, where the Soviet Army had to fight a protracted counterinsurgency campaign after WWII against Ukrainian nationalist guerrillas, armed resistance is certain to be strong. During the revolution, many army depots and armories were overrun so there are more weapons floating around Ukraine than at any point since 1991. And the leadership of the main instruments of coercion – the Army, the Interior Ministry, and the intelligence service – are all in the hands of political leaders with strong Ukrainian nationalist credentials.

Any invasion—which is what it would be—of a vast country of 46 million in the heart of Europe, sharing borders with NATO allies Poland, Hungary, Slovakia and Romania, would pose a major security challenge for the United States and other key European powers. Even without further Russian action, allies such as the Baltic countries will be seeking U.S. reassurance. Lithuania has already asked for Article IV consultations under the NATO Treaty in response to a clear threat to its security. These countries likely will also ask for hard reassurances—such as deployments of U.S. and other allied troops and equipment on their territory—as Turkey did in 2012 when Syria shot down a Turkish jet. They will also need help to shore up their eastern borders and prepare for possible flows of refugees from Ukraine. The Baltic states will probably ask for similar reassurances. One can also expect cyber attacks and intrusions, false alarms and an atmosphere of tension the likes of which have not been seen since the worst days of the Cold War.

Post-revolutionary Ukraine is in bad shape. Its economy is wrecked. Government institutions broke down completely after the Yanukovych government disappeared overnight. Corruption and criminality, Ukraine’s twin scourges, remain basically intact. Thanks to Russia’s unexpected moves in Crimea, the West will now have to put Humpty Dumpty back together on its own. These tasks demand that the president designate a senior point-person for coordinating Ukraine policy in all its complexity. Deputy Secretary of State William Burns, one of America’s ablest diplomats and an old Russia hand, is the obvious choice.

The break in the West’s relations with Russia is bound to be deep and lasting. The G-8 will be its first casualty with the Western powers likely to reconstitute the G-7 in its original form as a direct rebuff to Putin. Other important international mechanisms —the U.N. Security Council, ad hoc diplomatic efforts on Syria, the P5+1 process on Iran, the Six-Party talks on North Korea, and so on—will be filled with renewed acrimony and dysfunction. Some may break down entirely. Inevitably, there will be congressional calls for sanctions against Russia, which the White House will be hard-pressed to resist no matter how much it may want to preserve the shreds of cooperation with Russia on Iran, Syria or Afghanistan. The West and Russia are in uncharted waters.

Eugene Rumer is a senior associate and the director of the Carnegie Endowment for International Peace’s Russia and Eurasia Program.

Andrew S. Weiss is vice president for studies at the Carnegie Endowment. He served on the National Security Council staff during the Clinton administration.

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Putin"s reckless Ukraine gambit