Russia Is Doing More for the Crimeans than either the EU or the US is doing for Ukraine

There is an ongoing political conflict between the West and the East, and it has to do with whether Crimea should be part of Russia or not. While I think that the Russians have certainly violated international law through the annexation of Crimea, they are certainly the more powerful country in the region, and have an easier time to assert their rights. Russia considers the Ukraine to be part of its own backyard, and its own sphere of influence, just like every US administration has considered Latin America to be part of the US sphere of influence. It should be easy for many American school kids to recall numerous military and political interventions in countries as diverse as Chile, Mexico, Honduras, Nicaragua, Cuba and El Salvador (small selection offered here). While I wish that international relations could only emerge out of reason and notions of justice and equality, in the real world, it is the more powerful parties that can get their way.

I consider the annexation of Crimea to be permanent. Unless the US is willing to start a war over Crimea, it will be entirely futile to speculate on ways how to return Crimea back to the Ukraine. The sanctions that had been threatened and implemented against Russia are entirely laughable. The US and Europe have slapped some travel restrictions on high-ranking Russian officials (except Putin and other important foreign policy cabinet officials in the Russian government), but they are not inclined to travel overseas anyways. The gesture is purely symbolic. I doubt that many Russian oligarchs will face severe travel restrictions in the West, particularly because the temptation for a few European countries to ignore the sanction policy to allow Russian oligarchs to park their money within their country is simply too great. Money is power, and no talk by any Western politician can obscure it.

The important question that needs to be addressed in today’s Ukraine is how much financial aid they will expect to receive after having switched sides by overthrowing the Yanukovych government back in February. But a little bit more context is required here. The proximate cause for the Maidan uprisings, which brought Yanukovych to fall, was his decision to reject the EU association agreement. He then turned to Russia, which extended $15 billion in bailout and $3.5 billion worth of gas discounts in the hope of stabilizing the weak finances of the Ukraine (Marchak 2013). How much that is actually benefiting Ukraine as a country is a tougher call to make, because the new government under Yatsenyuk has accused Yanukovych and his cronies for embezzling $70 billion during his tenure as president (EU Observer 2014).

But was it right for Yanukovych to reject the EU deal? For one, signing the EU trade deal would have implied that the Russians would retaliate with an import tariff on Ukrainian steel. 13% of Ukraine’s steel and iron exports go to Russia, and this Russian tariff would have been devastating to the Ukraine. The EU trade deal would have done nothing to benefit the Ukraine, because the Ukraine has been part of the WTO since 2008, in which it had been promised not to receive tariffs for exports to the EU (Popov 2014). Ukraine exports roughly 27% of its total goods to Russia, and is, therefore, an essential export partner (Observatory MIT).

Second, the trade deal would have meant that Ukraine would have to drop its trade restrictions with the EU, which means that the Ukrainian manufacturers and farmers have to directly compete with EU products (primarily France and Germany) that have much higher levels of productivity and can easily out-compete Ukrainian industry, which is still mostly using technology from the Soviet era. The resulting increase in the unemployment rate would have dramatically negative social consequences. In addition, part of any deal with the EU are IMF-induced structural adjustment policies of government budget austerity, which would mean a further fall in the short-term living standards of the Ukrainian people (Borotba). It was, therefore, a good idea to reject the EU association agreement.

Now with the fall of the Yanukovych government, the tide has turned in favor of the pro-EU interests in the Ukraine, and Putin immediately retaliated by cancelling the $15 billion in financial aid (only $3 billion had been disbursed when Yanukovych was toppled), and renouncing the gas discount. This blew an immediate hole into the Ukrainian budget, and it is scrambling for financial aid from the US, the EU and the IMF. When Russia occupied Crimea it had also provided financial assistance to Crimea, which Russia considers now to be a province of the Russian Federation.

So let us talk some numbers here. I will start with the new Ukrainian government in Kiev. The Ukraine is expected to receive between $14 and $18 billion in loans from the IMF. Another $10 billion is expected from the EU and the US. The US had already passed a $1 billion aid package. Canada, Japan and Poland separately also consider to make contributions. So the total expected aid package is estimated to be $27 billion. But there are some significant conditions attached to it, as so much of the things that the IMF is proposing with regard to foreign aid in the form of loans (not in the form of grants!). Notice that the Ukrainian government requested $35 billion to immediately pay its bills, but if there is an expected gap of, say, $8 billion, it is expected that Ukraine imposes severe austerity measures on its people to help contribute to deficit reduction. These were the tough measures that had been avoided, when the Ukraine was under Russian tutelage.

As part of the deal, the state-owned Naftogaz will increase household gas prices by 50% on May 1, while utility companies announced a 40% hike in prices on July following cuts in energy subsidies on which so many Ukrainian people have been relying on. The corporate income tax is raised to 18%, the value-added tax is set to 20%, and grain exporters will see their VAT subsidies cut. Pensions are to be taxed by 15% if they are above 10,000 hryvnas or $900 (which only very few people receive). The personal income tax was set at 15, 17, 20, and 25% on a progressive scale. Car subsidies will be cut for cars and motorcycles with a capacity greater than 0.5 liters. Excise taxes on alcohol see a 39% increase, and tobacco increases by 31.5%. 80,000 civil servants will be laid off as part of the austerity deal (RT 2014).

These proposals sound to me like a really bad deal for the Ukrainian people. Whatever inefficiencies the Ukrainian industries might have had, reducing the short-term standard of living of the Ukrainians will do nothing to bolster public support for the EU and the West. This is a point that Mitchel Orenstein made as well (Orenstein 2014). Though, ironically, he is not so much against austerity per se, but only against the early timing of it. In other words, the Ukraine should go ahead with austerity after the elections are over. Screw the people… but not too early, better a little later. I very much doubt that such a stringent financial course will benefit the Ukrainian economy and society.

Needless to say, the EU association agreement, which will bring Ukraine closer into the Western orbit, will also ensure the economic consequences I had outlined earlier: loss of competitiveness of Ukrainian industry leading to wide-scale displacement, unemployment and outward migration into the European countries. The EU will likely give Ukraine a lifting of visa, travel and work restrictions, and some desperate Ukrainians will certainly be willing to relocate. This is precisely what happened in Latvia, when 10% of the population emigrated during the 2008 crisis (Sommers and Hudson 2013).

It is true that the alternative would be supporting the inefficient Ukrainian industries of the present, but the problem is that the enormous labor market shocks that happen as a result of liberalization will not be accompanied by significant institutional support in the form of retraining for workers and huge investments in plants in the Ukraine. Businesses always complain about red tape and corruption, particularly in the Ukraine, which itself arose from the Soviet legacy not too long ago (i.e. state-controlled industry with little respect for private property). But if there is not enough investment in the Ukraine then unemployment will be elevated over the long term, and social crisis will be guaranteed. There is very little surprise why so many people in Eastern Europe despise the neoliberal EU project. I am not saying that the EU should not reach out to Ukraine, but if it wants to do so, it has to do it with more generous conditions, more social welfare contributions, fewer loans and loan conditions.

Now, let us consider Russian subsidies to Crimea. Rather than austerity, we see increases in subsidies from Moscow. Putin had signed a decree to raise state pensions for Crimean senior citizens from the Ukrainian average of $160 a month to $277 a month, which is the average Russian pension. This would cost an additional $1 billion for the Russian treasury (Kramer 2014). In addition, the Russian government has pledged $6.82 billion for Crimea’s economic development in the year 2014 alone (Kyiv Post 2014). Since Crimea is now a province of Russia, these are not foreign loans, but they are domestic grants, which will not require any repayment from the Crimean citizens. This is in sharp contrast to what has been offered to the government in Kiev, which primarily receives a loan package.

Aside from that, if we divide the dollar amount of aid offered by each side by the total population in Ukraine and Crimea respectively, the values become even more lopsided. Let us first take the $27 billion pledged to Ukraine by the West. Ukraine has 45.5 million residents. If you take away the 2.35 million residents from Crimea, there are still 42.15 million residents in the rest of the country. That gives us $640.57 per person in aid from the West. The equivalent figure for Crimea, receiving $7.82 billion from Russia, is $3327.66 per person. This is a 5:1 ratio in aid. Clearly the Russians are more generous.

The numbers are certainly wrong, because the exact values of the aid packages need to be determined, but so far the picture is fairly clear. From an economic point of view, the Crimeans benefit more from Russian aid than the Ukrainians benefit from Western aid. If the West wants to receive Ukrainian support it needs to have a gentler stance to the Ukrainian people. Otherwise it will be very justifiable for some Ukrainians to turn to the secure arms of Vladimir Putin.

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