The Price of Nostalgia
America’s Self-Defeating Economic Retreat
When German Chancellor Angela Merkel stood before the Bundestag on November 18, she warned that the shadows of the Cold War are still with us. Nowhere are they darker, she continued, than over those countries situated between the European Union and Russia. Cold War or not, Moscow’s pressure on them would be unrelenting. So, she concluded, Germany and the European Union would have to wage a campaign of their own -- “lived solidarity,” she called it -- to help the countries pick their partners wisely.
This was a clear signal that the EU, although seemingly fragile within its own borders, still has ambitions to extend its model abroad. At its upcoming Eastern Partnership summit, which will take place November 28–29 in Vilnius, Lithuania, the EU hopes to conclude an Association Agreement with Ukraine, which would boost economic, political, and social ties between them. Whether or not the EU’s gambit succeeds (and it is not yet clear whether Ukraine is ready to sign), the next few weeks could change the face of politics in Ukraine, decide Russia’s future role in Europe, and determine the EU’s broader relevance in the region.
Although it falls short of integration, the Association Agreement is an attempt to transform Ukraine by bringing it closer to European economic and political standards. It would abolish trade barriers and compel Ukraine to adopt EU technical regulations and rules for government procurement and competition. Ukraine would also have to undergo comprehensive political and legal reforms, with support from the EU and member state agencies. In return for long-term industrial transformation and economic growth, then, Ukraine would incur major short-term costs, the prospect of which has deterred some Ukrainians.
For the EU, the Association Agreement is far less of a mixed bag. The union has major strategic and economic interests at stake: strategically, the EU strives to create a benign environment for itself by spreading its model of rule of law and transparency to its periphery. And inducing Russia to respect Ukraine's sovereignty would help finally cement the post–Cold War European order. Economically, the Association Agreement with Ukraine would open up a large new market for the EU’s goods and services.
For its part, Moscow seeks not political change in the region but domination. That means that it must frame Ukraine’s future as a zero-sum game with the EU. From the EU’s viewpoint, Ukraine’s choice need not to be exclusive. Even as Ukraine pursues new economic arrangements with the EU, it could still make its own bilateral deals with Russia. In addition, any Russian investments in Ukraine would be safer after the Association Agreement is signed, thanks to strengthening rule of law. But from Russia’s perspective, Ukraine needs to pick one or the other. If it joins Russia’s Customs Union, Moscow’s own version of the EU, it could no longer negotiate bilateral economic arrangements with the EU. And for Putin, bringing Ukraine into his Customs Union is central to the project’s survival -- and his. For one, the inclusion of Ukraine would better shield the Russian market from cheap foreign goods, which is good for Russian producers but bad for its consumers. It would also lead to an integration of Ukrainian heavy industry, such as aviation, which is crucial for Russia’s indigenous defense industry.
Overall, the economic benefits would be modest, though, which is why the political dimension of the Customs Union is so much more important. As Putin and his acolytes see it, Ukraine has a special status as the origin of the Russian civilization, going back to the Kievan Rus, a federation of East Slavic tribes during the Middle Ages. Many Russians even believe that Ukraine should be dominated by Russia; the vast majority of Russians think that it should at least be close to Russia. If Kiev signs on to Putin’s integration project, Putin’s popularity at home would rise. His power in Europe would rise as well: having snubbed greater integration with the EU for now, Putin hopes to be in a better position to bargain with Brussels at a later stage. For Putin, reintegrating the former Soviet states under a resurgent Russia before he goes knocking on doors in Berlin, Brussels, and Paris is a way to do that.
In the short term, Putin’s hand would be strengthened if the Association Agreement goes unsigned. But to bring Ukraine to its own side, Russia would be forced to commit enormous economic resources to Ukraine when it joins the Customs Union -- including, perhaps, a gas subsidy of over three billion dollars a year. In other words, the long-term economic sustainability of the union is questionable and would hinge primarily on the price of oil.
At the same time, should the EU sign the Association Agreement with Ukraine without committing its own resources to aid Ukraine’s transformation, the outcome could be even worse. Russia would have forgone the economic costs associated with integrating Ukraine, whereas the EU would have committed moral, bureaucratic, and some financial resources for naught. Ukraine, without significant help, would still be economically and politically backward. Russia could point to the EU as a failing model, and that would ultimately weaken the EU and strengthen Russia’s claim to regional leadership. It would herald a new era of the EU giving up its external ambitions and turning inward, a major abandonment of EU foundational principles.
A third option, Ukraine’s successful transition into the EU, would deal a severe blow to the Kremlin’s claim that Russia is the center of a civilization with distinct values from those of the EU. There would be economic costs as well: Ukraine’s agreement with the EU would increase economic competition within Russia because the price of Ukrainian goods would initially fall (due to competition with goods from elsewhere in Europe) and would increase in quality later on. If Russia tried to resist by blocking Ukrainian goods, as it has done in the past, international legal battles could follow suit, further tainting Russia’s image. Indeed, Russia’s blockade of Ukrainian chocolate has already sparked a WTO complaint.
In the longer run, the political costs for Moscow of the Association Agreement could be even worse: Ukraine’s adoption of the rule of law and the strengthening of its democracy will put pressure on Russia to follow suit. The Kremlin already felt the danger of such contagion once before, in 2004: during Ukraine’s Orange Revolution. Young Ukrainians, who took to the streets to protest fraud at the ballot box, mobilized their fellow citizens. Fearing a similar movement across the border, the Kremlin launched its own nationalistic youth movement and started a major crackdown on nongovernmental organizations, which only hurt its development. As the balance tips, the EU could think of negotiating a similar Association Agreement with Russia, or with its weakened Customs Union, which would put EU-Russia relations on substantially new ground.
Thus, as seen from the Kremlin, the EU is a serious challenge. Not surprisingly, Russia has thrown all its economic, social, and even cultural weight behind preventing such a scenario. In August, it temporarily tightened the rules for importing Ukrainian goods to demonstrate that signing the agreement with the EU would be “suicidal,” as Sergey Glazyev, a Putin adviser, put it. Russia also cancelled some joint industrial projects and mutual trade has already fallen by a quarter this year. Furthermore, Russia has considered increasing its support of Russian-speaking minorities in Ukraine by supporting political movements and through covert action, which could eventually lead to the country’s breakup. The Kremlin has also painted the EU’s liberal interpretation of human rights -- such as equal rights for gays and lesbians -- as culturally alien.
To some extent, Moscow’s heavy-handed approach has played into Brussels’ hands. Ukrainian elites, for one, have steered toward dealing with the EU. They fear that closer integration with Russia would subject them to Moscow’s whims. So they have not given in readily to Moscow’s pressure and have, indeed, enacted most of the reforms required by the EU prior to the signing of the agreement. But elsewhere, Russian pressure has been effective: the traditional electorate of President Viktor Yanukovych, which is located in the east and south of Ukraine and which has close economic and cultural ties with Russia, sees his ongoing drive toward the EU as a dangerous gamble with their livelihoods. This group, which is a large minority, has thus lost trust in the president. But it is faced with a more powerful segment in the western and central parts of the country, where support for the EU has deepened as a result of Russia’s pressure. Now, after shedding so much capital with traditional voters, the elites have to make a decision.
The timing of the Lithuania summit might be a lucky break for the EU: the Ukrainian economy is weak, but its government is relatively consolidated. Yanukovych, with waning support from his traditional voters, needs to build up credibility among a wider swath of Ukrainians -- and it might as well be the pro-European-integration ones. And, for the moment, the EU’s debt crisis does not seem as pressing, making it an even more attractive-looking partner. At the same time, Russia will not want to take overly drastic measures to win over Ukraine, before and during the 2014 Sochi Olympics. If ever the Association Agreement could be signed, now is the time.
Regardless of whether the agreement is signed, the EU will have to find new ways to engage with the Ukraine’s population and increase its effectiveness in the eastern and southern parts of the country that remain solidly pro-Russian and anti-EU. It can do so by liberalizing visas, and by beginning to open the EU labor market. On top of this, it could create an investment fund, which would help lessen the high costs of transition. As Merkel already stressed, the EU would also have to engage in “lived solidarity” and devise ways to help distressed Ukrainian factories find new markets and partners in the EU.
Europe has some historic decisions to make. What the EU and Ukraine do will help define Europe’s future as a whole. If Ukraine doesn’t sign, fails to reform, and remains a dysfunctional and oligarchic regime, Russia will be strengthened. Ukraine would be likely to join the Russia-led Customs Union, strengthening perceptions in Moscow that it can achieve what it wants by bullying its neighbors. A successful Customs Union would give Moscow a greater say in future bargains about the design of a potential Greater Europe, connecting the EU with Russia. If Ukraine signs and the EU succeeds in transforming Ukraine into a showcase of successful economic reform, and if it promotes strengthened rule of law and democracy, Moscow’s claim that Russia constitutes the center of a distinct civilization will be difficult to uphold. This would weaken the Russian regime and undermine the Customs Union. In the end, the EU could plausibly claim that its model is the only game in town -- one that Russia has no choice but to play, too.