Business New Europe: The west has no plan for an end game in the Ukraine conflict
(Business New Europe – bne.eu – Ben Aris MOSCOW BLOG – August 14, 2014)
What does the west hope to achieve in its show down with Russia over the fate of Ukraine? An increasing number of articles have appeared recently arguing that the west has no long-term strategy to end this conflict and is being sucked into a destructive “sanctions spiral” that will only deepen the misery of the Ukrainians and is already beginning to hurt the wider economic recovery in Europe.
The influential editor of Handelsblatt Gabor Steingart wrote an opinion piece this week saying: “The idea that economic pressure and political isolation would bring Russia to its knees was not really thought all the way through. Even if we could succeed: what good would Russia be on its knees? We should stop demonizing 143 million Russians just because they look at the world differently than [US Senator] John McCain.”
Germany finds itself on the front line in the conflict mainly as it has ten times more companies invested and working in Russia than any other European country, not to mention its heavy dependence on Russian energy exports and its physical proximity to both Russia and Ukraine. The New York Times reported on August 12 that the German economy, which accounts for about a quarter of all western European economic activity, is beginning to falter thanks to the chaos in Ukraine.
“An important reading on the health of the Eurozone economy is expected to show this week that growth stagnated in the most recent quarter as German output faltered, confirming the assessment of many analysts that a lasting recovery remains out of reach for the region,” the NYT said.
Eurostat is expected to release data on Eurozone GDP that shows the expansion of the 18-nation bloc has slowed to 0.1% in the second quarter, quarter on quarter, half the rate of already slow growth in the first quarter.
The economic pain is growing and lead Denmark-based Danske Bank to release a note this week arguing that Europe cant stand much more of this and could look for a way to end the sanctions war with Russia in the next three months.
“We believe an escalating trade war would be unbearable for both Russia and the EU and that the EU will revoke the sanctions within one to three months, with Russia abolishing its own sanctions,” the bank said in a note released on August 12.
The alternative to backing out of the fight is to “win” it, but what exactly does Europe and the USA hope to achieve? The goals are fuzzy to say the least.
The Russian position is clear. Firstly it wants to protect its two strategic assets in Ukraine: its cash cow of a gas export pipeline to the west and its main warm-water naval base in the Crimea. More generally Russia wants to ensure that Ukraine never joins Nato and is happy to create a frozen conflict in Ukraine to ensure this never happens, unless the West can give it security guarantees that Ukraine will remain neutral Ð something that no one has ever even mentioned as an option.
With the annexation of Crimea the Kremlin’s latter goal has already been achieved. But dangers to the gas pipeline were highlighted last week when Ukraine’s Prime Minister Arseniy Yatsenyuk suggested that Ukraine will cut off Russian gas transits as part of a package of sanctions that could be imposed on Russia passed by the Rada this week.
Cutting off Russian gas transits to the west would be the geo-political equivalent of cutting off Ukraine’s nose to spite its face and Yatsenyuk was rapidly slapped down by multiple EU leaders as a ridiculous idea. But the fracas the suggestion caused highlights the main problem with sanctions Ð they don’t work.
“There are no recorded cases in which countries under sanctions apologized for their behavior and were obedient ever after,” Steingart wrote in Handelsblatt.
If the 2008 crisis didn’t show to the surprise of many (especially those in Kremlin) that Russia’s economy is deeply integrated with the rest of the world, then the current crisis has reemphasized it.
In addition to the German slowdown, Ukraine’s hryvna is down 40% this year — the world’s worst performing currency Ð the Kazakhs spent $700m defending the tenge last week in a desperate effort to stave off a second devaluation this year and countries across the region are struggling. Greece will go back into recession this year due to the crisis, Bulgarian exports have tanked, Finland is heavily exposed and also likely to go into recession and the economies of Tajikistan, Moldova and Armenia would probably collapse if real damage were done to the Russian economy as they, and many other countries, are very heavily dependent on remittances from guest workers in Russia. In short real sanctions on Russia would more than likely precipitate a 1997-like financial crisis in emerging Europe that could easily spread to the rest of the world.
Sanctions are more of a political sop to domestic political demands that “something must be done” and that “Russia must be made to pay” for its actions in Ukraine than any real political tool that will actually bring the current crisis to an end. But short of actually launching a NATO-backed military operation against Russia there is actually almost nothing the west can do to stop Putin. And even the rhetorical attempt to make Russia an international pariah have fallen on their face; so far only the US, EU, Australia, Japan and Canada have signed up to sanctions regimes, with New Zealand and Switzerland joining since the downing of the Malaysian Airliner MH17, while the rest of the world have remained studiously silent for the most part.
London-based think tank Teneo Intelligence summed up the problem neatly in a note this week: “There is a lack of an overall, medium-term objective behind the sanctions regime, other than catering to a growing domestic consensus.”
Teneo goes on to make the increasingly prevalent point that the Brussels’s attempt to bring Ukraine into the EU fold unilaterally was a big mistake.
“It was a miscalculation to picture the Maidan protests as a good opportunity to bind ethnically divided Ukraine closer to Brussels in its entirety. This also meant to wrongly assume that Putin would accept the involvement of the German, French and Polish foreign ministers in negotiating the departure of then-Ukrainian President Yanukovych,” Teneo said.
Political commentator and former head of research at Alfa Bank Peter Szopo zeros in on the basic flaw in the decision to pursue Urkaine unilaterally: “If Putin was such an aggressive warmonger aiming to restore the Soviet Union, then how could anybody be surprised about his reaction when the EU foreign ministers started to get involved in Ukraine? So either, the Europeans were na*ve (which I think they were) or they thought Russia was as weak as in the early 90s or they just wanted to provoke something (which I think was what the US administration wanted). None of the explanations supports a positive view about the key players in European foreign policy.”
The idea that Russia would cave in in the face of some economic pain is obviously na*ve. Countries in general are always willing to endure significant economic pain if they believe their national security interests are in danger Ð and we are talking about the Russians here: Russia does suffering like no one else.
“The Russian government has long accepted potential economic damage from sanctions as a possible price for its goal of preventing NATO and EU expansion along its western border. In contrast, Western powers have yet even to establish two fundamental requirements of a workable sanctions regime: clear objectives and a viable exit plan,” Teneo argues.
The bellicose and uncompromising stance of the Obama’s administration has actually probably made things worse. The US has fundamentally miscalculated in dealing with Russia as the bombast has stoked Russian militant nationalism, convinced Putin that the United States is weak and indecisive, and exposed the divisions within the West. The irony is that the rhetorical attack on Putin has actually strengthened him at a time when he had become vulnerable for the first time in his 14 year rule thanks to the rapidly slowing economy.
[featured image is file photo]