Ukraine - Russia's Younger Brother

By: Dr. Sam Vaknin

Also published by United Press International (UPI)


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Written April 14, 2003

Updated March 13, 2005

The "Orange Revolution" in October-November 2004 was a coup d'etat. It was a disorderly, though popular, transfer of power from one group within the "Dniepropetrovsk clan", headed by Leonid Kuchma and his henchman to another faction, headed by the volatile and incompatible Viktor Yushchenko and Yulia Timoshenko.

Both figures had served in senior positions (as prime minister, for instance) in the ancien regime and, therefore, may have skeletons in their cupboards. A spate of "suicides" committed by former and knowledgeable functionaries came as no surprise - both parties, outgoing and incoming, have a vested interest in suppressing embarrassing revelations.

Still, Ukraine's long-predicted economic revival is at hand. After a long hiatus, both the International Monetary Fund and the World Bank are expected to make new commitments in their forthcoming visits this year. As correctly observed by the former Finance Minister Mykola Azarov, Ukraine needs at least $600 to 800 million in fresh funds. Debt repayments amounted to $1.6 billion in both 2003 and 2004. Ukraine is even considering a bond issue.

Concurrently, as it did in 2003, NATO is likely to stage in Ukraine a massive one week long military exercise under the aegis of the "Partnership for Peace" - its collaborative program with the countries of East and Southeast Europe. It will involve army units from Armenia, Austria, Azerbaijan, Bulgaria, Germany, Georgia, Italy, Canada, Kyrgyzstan, Lithuania, Moldova, Norway, Poland, Romania, France, Ukraine, Uzbekistan and the United States.

But Ukraine was embraced by the international community long before the Orange Revolution. It is instructive to follow the rising temperatures that led to the thaw. It seems that in Ukraine's case carrots did the trick - not sticks, a lesson worth remembering in the forthcoming confrontation with Iran.

This, therefore, is an overview of the two years leading to Ukraine's 2004 presidential elections.

The USA already cancelled in 2003 financial sanctions it had earlier imposed on Ukraine on the recommendation of the Financial Action Task Force. Ukraine is no longer a center of money laundering, said the international watchdog. It was be removed from the agency's blacklist last year and joined the EGMONT group of the financial intelligence units of 69 countries.

There were other signs of thawing. A 16-month ban on $11 million in U.S. poultry imports was terminated in April 2003 with the signing of a revised veterinary certificate protocol. Simultaneously, Ukrainian officials held talks with their European Union counterparts to integrate the two space programs. Ukraine has expertise in launch vehicles, satellites and payloads. And Volkswagen inked a letter of intent in 2003 regarding the assembly of its Passat, Golf, Bora and Polo models in Ukraine.

According to Radio Free Europe/Radio Liberty, in March 2003, the EU offered Russia, Ukraine, and Moldova - its future neighbors following enlargement - "preferential trade terms, expanded transport, energy, and telecommunication links, and the possibility of visa-free travel to the EU." The door to future accession was left ajar, though the inclusion of North African nations in the "New Neighborhood Policy" bodes ill for Ukraine's future membership.

Long-stalled negotiations between Ukraine and the European Bank for Reconstruction and Development over the $215 million financing of two much-disputed nuclear power plants to replace the smoldering Chernobyl reactor were mysteriously restarted in April 2003 and successfully concluded the year after, to the chagrin of many environmentalists. The Bank's President, Jean Lemierre, promised at the time positive results by summer - despite environmental concerns and studies, financed by the EBRD itself, which cast in doubt the project's feasibility.

Quoted by Interfax-Ukraine, then Foreign Ministry spokesman Markijan Lubkivskyy, announced in early April 2003, that "the U.S. may subcontract Ukrainian companies (for postwar reconstruction in Iraq), particularly those that have experience in working with firms in the Persian Gulf."

There were good news from the East as well.

Turkmenistan and Russia started negotiating with Ukraine - a major gas importer - a tripartite 25 year agreement to exploit and export Turkmen natural gas with prices frozen throughout at current levels, well below the market. In return, Ukraine is supposed to co-finance the construction of a $1 billion, 1070 kilometer long, 30 to 40 billion cubic meters a year, pipeline, mostly on Kazakh territory, along the shores of the energy-rich Caspian Sea.

Inevitably, not all was rosy.

In contravention of all prior measures of liberalization, President Leonid Kuchma administratively halved grain exports to 1 million tons a month, due to a weak harvest in the first quarter of 2003 and rising domestic grain prices. The Crimean agricultural ministry announced at the time that one is seven hectares of winter crops - mostly barley - are lost due to the harsh weather.

This is half the average ratio in other parts of Ukraine. According to AgWeb.com, "the country's milling wheat crop (in 2003) may be only 10 million metric tons to 12 MMT, down sharply from 22 MMT in 2002 and 26 MMT in 2001". Domestic consumption, at 7 million tons, now equals inventories.

The country - formerly Europe's breadbasket - still lacks modern infrastructure and grain storage facilities. Its extempore export policy is muddled. Agricultural imports are surging. Ukraine bought 70,000 tons of - mainly Brazilian - sugar in February 2003 alone.

In the worst of Stalinist traditions, the former Deputy Prime Minister for Agriculture Leonid Kozachenko, a reformer, was promptly arrested by Kuchma's security apparatus for "bribery and tax evasion". Grain merchants, foreign investors and multinationals included, were placed under official scrutiny.

In an unusually strongly worded letter to Ukraine's then Ambassador to the United States Kostyantyn Hryshchenko, President of Ukraine-US Business Council, Kempton B. Jenkins wrote:

"We hope that this effort to turn back the clock to Soviet-style management of Ukraine's critical sector will soon disappear and allow Ukraine's dramatic march to productivity and prosperity to resume."

Nor has Ukraine forsaken its erstwhile clients, frowned upon by an increasingly assertive United States. According to IRNA, the Iranian news agency, a Ukrainian delegation visited Iran in April 2003 to discuss the construction of Antonov An-140 aircraft. Later that week, Pakistan and Ukraine negotiated a free trade agreement.

Standard and Poor's, the international rating agency, concluded, in a report it released the same month, that "despite some early successes, the political environment in Ukraine remains difficult and financing uncertainties continue".

The Sovietologist John Armstrong dubbed the Ukrainians the Russians' "smaller brothers". This is no longer true. Unlike Russia, Ukraine aspires to NATO membership but is far less pro-American. It seeks Russian investments but is wary of the imperial intentions of its neighbor. Despite Russian coaxing, Ukraine hasn't even joined the Eurasian Economic Community, a pet project of the Russia-dominated Commonwealth of Independent States.

In the meantime, Ukraine is bleeding both its least-skilled, menial workers - and its most highly educated brains. Ukrainians are welcome nowhere and abused everywhere. Israel deported 300 illegal Ukrainian aliens in 2003 alone. Others - notably Turkey, Hungary, Poland, Slovakia, and Italy - followed suit.

Ukraine's then ombudswoman Nina Karpachova pegs the number of economic exiles at between 2 and 7 million. At least 5 million - one fifth of the workforce - seek seasonal employment abroad. Remittances amount to between $2 and $3 billion a year.

One quarter of all Ukrainians barely survive under the wretched poverty line. Official unemployment - at 11 percent - underestimates the problem by half. A low birth rate conspires with elevated mortality to produce a self-induced demographic genocide.

Capital flight is on the rise and equals half the foreign direct investment in the economy. Then Governor of the National Bank, Sergiy Tyhypko, estimated in February 2003 that as much as $ 2.27 billion fled Ukraine in 2002 - compared to $898 million in 2001 and $385 million in 2000. This is the reflection of a thriving informal economy, half the size of its formal counterpart, by some measures.

Appearances aside, ubiquitous corruption, tottering banks, clannish institutions, compromised leadership, illicit deals and barely contained xenophobia are entrenched in Ukraine's criminalized economy. As the 2004 presidential elections neared, the oligarchs augmented their war chests abroad. Kuchma failed to postpone the elections to 2006 or 2007. The opposition aggressively opposed such chicanery. Despite the Orange Revolution, or maybe because of it, Ukraine may be in for a bumpy ride ahead.

Interview granted to Nova Makedonija on March 10, 2014

1. Russia is on of the main sources of energy (natural gas) for Europe and the Russian market is one of the biggest export markets for EU. Also, USA have exports in Russia and imports worth billions. Do you think NATO countries will risk their economic benefits by military action in Ukraine?

 

SV: No, I don't. But not for economic reasons. The entire economy of Russia is equal merely to the economy of Italy. The Russian economy is also mainly oil- and minerals-based, not really industrial. Europe gets 31% of its energy needs from Russia. Germany has a dedicated Russian natural gas pipeline which doesn't cross Ukrainian territory, but the other members of the EU depend on safe transit of carbohydrates via Ukraine. Yet, these energy needs can be supplanted by natural gas from North Africa and even from the USA.

 

Certain European financial institutions are exposed to Russian and Ukrainian loans, but their exposure is far from dangerous: $25 billion to Austrian banks (equal to 5.6% of their foreign portfolio), $34.5 billion to Italian banks (4.1%), and $52.4 billion to French banks (1.9%).

2. Do you think that NATO countries could block the trade arrangements with Russia?

 

SV: Yes, they can and they will, if Putin doesn't back down. It is just about the only effective sanction they have on a state-to-state level. But these export arrangements benefit Russia much more than they benefit the EU. Similarly, the USA has a trade deficit with Russia (it imports twice as much as it exports). Only Russia stands to lose from such an eventual embargo.

3. Since the crisis began, the value of the Russian ruble fell 2,5 % against the dollar and 1,5 % against the euro to 50.30. Can you explain why the ruble is falling?

 

SV: Mainly because Russians, oligarchs, and foreign investors are selling rubles to purchase foreign exchange (and then smuggle the proceeds out of the country). The central bank of Russia has had to buy $10 billion worth of rubles in a single day last week to protect the currency. It has also raised interest rates by 1.5% to render the ruble more attractive.

4. How will this affect the trade relations between the east and the west?

 

SV: Nothing very serious. Russia is the world's largest energy and minerals producer. It cannot afford to not sell oil, natural gas, and extractive minerals to it customers because then its economy will crash. It manufactures little else that is exportable. It is a hostage to its own economic monoculture and addiction to oil's easy profits.

5. What does this mean when it comes to global currency battle?

 

SV: If a real crisis erupts, the main beneficiaries will be the Asian currencies. Both the euro and the dollar will suffer mildly and then recover: the euro because of the short-term and limited economic European implications of an all-out conflict and the US dollar because of the US involvement in yet another destablising event. The USD used to be a "refuge currency" where people invest when geopolitics heats up. Now, it is merely the currency of a teetering empire on the brink which keeps getting involved in wars and conflicts, often of its own making.

 


Also Read:

Ukraine - The Crouching Tiger

Selling Arms to Rogue States


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