Ukraine: Europe’s Partner or Puppet?

As the second most populous former Soviet republic, Ukraine has seemed uncomfortable with its independence since 1991 and less than committed to making it work. The fundamental issue has always been, does the country remain entwined with its larger neighbour Russia, or does it succumb to the blandishments of the West and distance itself completely from a country with which it was co-joined for over 1000 years?

Within the USSR Ukraine was an economic power house with a large heavy industrial sector and flourishing agriculture based on its excellent ‘black soil’. To Western eyes, the typical Ukrainian was Nikita Khrushchev — a plump, jolly fellow; a bit crude, perhaps, but a good, stolid Soviet citizen. When Gorbachev arranged a referendum on preserving a reformed Soviet Union in March 1991, 76 percent of voters in Ukraine supported remaining in the USSR. Yet only eight months later 90 percent of them voted for independence. Some might say, how capricious! Could things have changed so quickly? They obviously did, meaning that the Communist apparatchiki jumped the sinking ship and the sheep followed.

Since then, the country has been ruled by a mixture of ex-Soviet officials and Komsomolski joined by a growing band of oligarchs, some who have grown rich from the oil and gas transportation business. Typical of this genre is Yulia Timoshenko, the former prime minister, now serving a prison sentence for embezzlement and therefore regarded as a saintly martyr by the EU oligarchs who regard ripping off the peasantry as far less of a sin than being imprisoned for it.

Making matters worse is the fact that Washington and its European allies have repeatedly involved themselves in Kiev’s dysfunctional politics for their own purposes not the country’s well-being. The country is a strategic linchpin mainly because of its Black Sea coast where the Russians still maintain an important military base in the Crimea, rented from Ukraine.

The Curse of Orange

In 2004, large sums of Western money were poured into Kiev to overturn the results of the country’s presidential election which had been won by Viktor Yanukovich, a mundane but competent bureaucrat from the more Russian-leaning eastern Ukraine. Fears were that he might be less amenable to the ‘reform agenda’ pushed by Brussels and Washington. For several weeks hordes of young people camped in a tent city in central Kiev alleging fraud and claiming that their chosen candidate, Viktor Yushchenko, was the real winner of the poll. They were joined by members of the European Parliament and supported by the U.S. embassy mainly in the form of orange paraphernalia – scarves, flags, T-shirts – which gave the movement its name: the Orange Revolution. At the time, Western-sponsored, allegedly spontaneous ‘colour revolutions’ were all the rage in the former USSR.

By fair means (and certainly foul) the Oranges prevailed. A repeat election was held and Viktor Yushchenko – inevitably – was the winner. He became president and Mrs Timoshenko, also a heroine of the Orange Revolution, was appointed his prime minister. The youth melted away from Kiev now that the free food and drink, provided by the revolution’s western funders, had disappeared. But, soon, all was not well. Yushchenko and his prime minster fell out and she was dismissed a year later, in 2005.

The falling out inside the Orange camp was a symptom of the fractious and feuding nature of Ukraine’s post-Communist elite. The Ukrainian parliament (Verkhovna Rada) was another woeful example of institutional failure. Increasingly dominated by supporters of the defeated (or deposed) President Yanokovich, as the Orange factions fell out and lost support in fresh parliamentary elections, it was the scene of regular fisticuffs and brawls between different factions – all shown on television. Mrs Timoshenko’s supporters were usually the first to throw the punches. It seemed that the Orange team’s promise of Western-style, cutting edge politics was a forlorn dream.

In 2010 the reviled Yanukovich was elected president – again. Allegations of his 2004 election fraud were forgotten. The U.S. and its European friends had made little attempt to rescue their Orange protégées, still, the fear lurked that the new president would lurch perilously towards Moscow. But, surprisingly, his first post-election visit was to Brussels and he seemed keen to pursue closer ties with the EU. However, relations with Russia did improve and Yanukovich began to contemplate Ukraine’s possible participation in the Russian-Belarusian-Kazakh Customs Union, a rival organisation to the EU – certainly when it came to seducing former Soviet republics into the fold. It is at this point that the latest Ukrainian drama – potentially, its most consequential – begins to unfold.

Enter Salvation: the EU beckons

The European Union aware that its members were enlargement weary came up with the idea of a ‘Union Lite’ –  the Eastern Partnership – to ease the remaining post-Soviet orphans into the club but, sort of, through the back door. Unveiled in 2009, the idea was heavily promoted by Poland, whose Foreign Minister, Radislav Sikorski, promised all sorts of free trade and other economic benefits to the six potential ‘partners’, including Ukraine – the main one being closer contact with the economic paradise inhabited by their neighbours, the Poles. In truth, any ‘economic benefits’ that did emerge would go to the West rather than the poverty-stricken ‘partners’ who would find that Brussels’ largesse was restricted to its cronies.

Like the rest of the bloc, Ukraine’s economy had suffered during the 1990s as its Soviet markets disappeared. Things began to improve during Leonid Kuchma’s presidency (and Yanukovich’s premiership). Although courted by the west, Kuchma did not completely shut down the country as required by the ‘Washington consensus’. In fact, with economic boom in places like China, Ukraine’s raw materials (iron and steel from the east) were in strong demand. The country’s agricultural base had survived and its farms were productive – unlike the Polish version in Sikorski’s Euro-paradise.

Immediately, things started to go wrong as the Orange team began their time in office by interfering in the gas transit arrangements with Russia. In early 2006, after much provocation, Moscow cut off gas supplies to the West through the Ukrainian pipeline system due to Kiev’s arrears of payment as well as its aberrant behaviour. Negotiations with Moscow followed, and fed up with the debts and messing around, the Russians started to charge the Ukrainians more for their domestic supplies of gas. This impacted the country’s energy-dependent, heavy industrial base which was about to be hit anyway by the economic collapse in 2008 which resulted in less global demand for iron and steel.

Despite a change of government in 2010 rather than cease trouble making and find a solution to disagreements with Moscow, it seems that the apparat in Kiev has decided to walk away and accept the West’s somewhat poisoned chalice. Even the apparently, Moscow-friendly Yanokovich. In August 2013, his government indicated that it would sign the partnership agreement in November 2013 during the forthcoming European summit in Lithuania (another lucky beneficiary of the European project).

Tug of War: Moscow Reacts

The Russians have reacted angrily, stating that Ukraine cannot be a member of both customs unions. Ukraine’s economy is heavily dependent on Russia which takes 35 percent of Ukrainian exports. As Vladimir Putin’s envoy Sergei Glazyev points out: “Millions of people working in the industrial sector, with which we cooperate and which has thousands of ties with Russia, want [Ukraine’s accession to the Customs Union]. These are rocket constructors, shipbuilders, chemists, metallurgists, and especially farmers and producers of food, whose products are not in demand anywhere else except Russia,” Glazyev said in an interview published in the Russian-language Ukrainian newspaper Vesti.[1]

If the agreement is finally signed, Moscow says it will impose tariffs on Ukrainian goods which are likely to be ‘dumped’ in Russia as Ukraine is flooded with imports from the EU. But, the Ukrainian elites aren’t worried by any of this. They yearn to belong to the Euro club with its juicy perks and prospects for further self-enrichment. As Glazyev noted: “Numerous political scientists and experts, who have fed on European and American grants for 20 years … are doing a certain political job on their clients’ behalf. In addition, a whole generation of diplomats and bureaucrats has appeared after the years of the ‘orange’ hysteria, who are carrying out an anti-Russian agenda”.[2]

Having embraced several economic basket-cases (including the over-hyped Poland) since 2004, what is in the deal for Europe? Yes, they can flood Ukraine with food and drink (thus destroying the country’s still productive agricultural base) and they can – for a price – plaster the country with European super and hyper markets. For Tesco, Aldi & co. a population of 48 million is virgin territory – a boost for Tesco whose eastern European outlets have lost money in the last few years. Otherwise, after 22 years of ‘freedom’ there is precious little left for the much vaunted ‘strategic foreign investor’ to gobble up.

Cheap labour and cut-price prostitution will be Ukraine’s major exports if the Polish or Baltic model of European integration is anything to go by. Poland’s main ‘export’ is cash remittances from almost three million migrants scattered across the western EU, especially in Britain. Maybe Foreign Minister Sikorski hopes that Ukraine will replace Poland as the mega-El Salvador of Europe if it accedes to a visa-free association with the EU? 

For Ukraine’s future, the immediate and most troubling issue is energy: the country is haunted by its fragile status as a transit route to Western Europe and its own parlous ability to pay the world market price for fuel .

In 2010 a joint Russian-German pipeline began to carry Russian gas to Europe under the Baltic sea. Moscow’s decision to redirect energy exports to the west had been driven by ongoing problems with the Ukrainian route, mainly caused by the Orange politicians (and encouraged by the west). By 2013 Ukraine’s revenues for transporting Russian gas to Europe had nearly halved. Meanwhile, under pressure to ‘distance’ themselves from their evil neighbour, in 2012 Ukraine started to import some gas (at subsidised prices) from Germany’s Ruhrgas. Presumably, this was Russian gas going on a rather roundabout journey but, for good, geopolitical reasons.

Ukraine: an economic basket case?

However, the much promoted energy independence might be achieved – at least, sometime in the future. In 2013, with hubris at fever pitch, various regions in Ukraine began signing contracts with companies like Chevron and Royal Dutch Shell for shale gas exploration. Initial tests have indicated large deposits around the country. Perhaps, finally, the Ukrainians would be free from Russian imports, although exactly when is unknown (2050 is one date bandied about). And, will the domestic customer benefit from lower prices, especially when the profits will go to Chevron & co.? None of this concerns the greedy mix of energy companies and Ukrainian politicos, noses already in the trough and snouts sniffing for more kickbacks.

But, maybe the Europeans have failed to take note of some of the risky business practises encountered by Western investors in Ukraine. According to the Financial Times “Swissport, for example, claims to have spent much of this year struggling to reverse a court ruling that stripped it of a 70 per cent stake in Ukraine’s largest air cargo handler. It won a victory in Ukraine’s highest commercial court on October 2, but could face further legal challenges. London & Regional Properties recently lost management control over Globus one of Ukraine’s top shopping malls. Even McDonalds has been caught up. The fast food giant claims that raiders are trying to seize ownership of one of its 75 local restaurants. Other investors whose assets have faced legal threats in Ukraine steelmaker ArcelorMittal , the biggest foreign investor in the country.[3]

Sometimes, pressures appear to be applied by state law enforcement itself. In two separate incidents last month, fraud investigators raided and temporarily paralysed the local subsidiary of Italy’s Unicredit bank; at Vitmark Ukraine, a juice manufacturer owned by private equity fund Horizon Capital, documents, computers and other items were seized.

On top of this, Ukraine is in debt and, again, poised to go cap in hand to the IMF for further loans. At the end of September the cost of insuring 3-year Ukrainian debt hit a three year high. Among emerging markets, the country has one of the biggest burdens of short-term external debt relative to foreign exchange reserves. Its reserves fell by about 30 per cent to less than $20bn in the year to the end of August. According to Moody’s, this provides 2.3 months’ import coverage. The ratings agency said in its downgrade note”.[4]

Bizarre, then, that while he was in Germany in May 2013, President Yanukovich boasted that the Partnership Agreement “will have a substantial positive influence on the European economic situation and will help Europe emerge from the crisis”. As one commentator pointed out “even without any trade liberalization Ukraine is buying more and more German goods, but it essentially has nothing to export there. Under these circumstances, offering itself as the “saviour of Europe” is a bit presumptuous”.[5] Germany isn’t going to promote anything in Ukraine that might smack of competition (in heavy industry, for example). Instead various ‘green’ projects were floated around at the May meeting.

So, Ukraine is broke; its goods are of an inferior quality and unlikely to appeal to the European consumer; its business practices (including their legal underpinning) are dubious. Why bring the EU closer to such a place when over twenty years of western involvement has not led to any improvement? The answer, as everyone really knows, is political. This is the first really promising opportunity to drag Ukraine away from Russia, a country with which is shares a long border, a common language and historical experience as well as family and religious ties. But, the hatred felt in the west for Mr. Putin has only intensified with his intervention to stop an attack on Syria. Sealing Ukraine’s ties with Europe are a good way of giving him a bloody nose.

The deal still needs to be finalised and this seems to pivot upon Yanukovich agreeing to Brussels’ demand that Yulia Timoshenko, jailed in 2011 for embezzlement and abuse of office, be freed. The Europeans see her plight as a human rights tragedy almost on a par with Nelson Mandela’s incarceration on Robben Island, ignoring the fact that this is the second time she has been imprisoned for economic crimes – in 1994 she was convicted of money laundering and extortion. Many Ukrainians find this sanctification hard to take. They are more likely to accept Matthew Brzezinski’s description of her modus operandi as the ‘gas princess’ in his book Casino Moscow.[6] The incarceration of a rich and powerful lady with a shady past is what seems to separate the Ukrainians from economic nirvana in the EU’s embrace.

As of this writing, Timoshenko’s release looks to be imminent, as Yanukovich has indicated his support for parliamentary action to allow her to be released from prison and sent to Germany, ostensibly for medical treatment.

Why does all this matter? Several basket cases have been absorbed into the EU already but with many negative repercussions, never mentioned by politicians like Sikorski. As people in former Soviet Bloc countries have fled the poverty resulting from membership of the EU, Ukrainians will also flee to western Europe once the ‘free trade’ rules kick in and visa rules are liberalised. How much more migrant labour can countries like Britain support? The Russians seem to be much angrier by Ukraine’s European aspirations than they were when the Baltic States joined NATO and EU. At the recent Yalta Conference where old globalist hands like Tony Blair and Bill Clinton urged Ukraine forward to the promised land, Putin’s envoy, Glazyev (also present) warned that signing the pact – rather than entering a Russian customs union – could tip Ukraine into default.

If the EU’s embrace of Ukraine precipitates a crisis in the debt-laden country with its currency worthless and Russia breathing down its neck, won’t Brussels feel obliged to ‘rush forward’ to save Ukraine by offering immediate entry into the EU? In the past, admission to NATO has preceded EU accession in ex-Communist countries. But when Ukrainians have been polled on joining an anti-Russian alliance, with them in the front-line, they have rejected the idea. So now the double-headed Western political monolith in Brussels is pushing EU accession first, to be followed by membership of NATO down the road.

With its shaky economy and political turmoil in several EU and euro member states, is this what the European Union really needs? With Russia now showing a more robust approach to what it sees as its ‘national interest’ who knows whether what seems on the surface to be an economic spat could lead to something deadlier. The EU’s claim to be a stabilising force for peace on the European continent looks set to collide with its geo-political ambition to do down the Russian state regardless of the costs to ordinary people inside the EU, Ukraine and Russia itself.