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Come in, Ukraine, your time is up

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Ukraine, caught between Russia and the EU, has spent almost twenty years avoiding a decision about which way to turn, but with the possible signing of an Association Agreement with Europe in Vilnius just over two months away, it can prevaricate no longer.

Elena Gnedina
4 October 2013

For almost two decades the geopolitical game that the Ukrainian elite called ‘multi-vector’ foreign policy allowed them to develop economic and political links with both Russia and the EU without committing themselves to greater cooperation, often to the irritation of both Moscow and Brussels. This game may be up now, as both Russia and the EU insist that Ukraine should finally choose to integrate economically with either one or the other.

Ukraine’s dilemma is tougher now than ever. Russia and the EU are Ukraine’s most important economic partners, and it is in its interest to keep good relations with both. In 2012 it traded 28% of goods with the EU, 29% - with Russia, and 37% with the ECU – the Eurasian Customs Union formed by Russia, Belarus, and Kazakhstan in 2010 - as a whole. The EU is the major source of foreign direct investment (FDI) to Ukraine - over 80% in 2012 - although 32% of overall investment into Ukraine came from Cyprus, where many Ukrainian and Russian businessmen hold money which they then re-invest in Ukraine. On the other hand, Ukraine is heavily dependent on Russian gas, despite successful, albeit limited, recent attempts to reduce its gas consumption and diversify its supply via Hungary and Poland.

Ukraine’s dilemma is tougher now than ever. The EU is the major source of its foreign direct investment, but on the other hand, it is heavily dependent on Russian gas.

The timing of Ukraine’s dilemma is also bad for Kyiv, as President Yanukovych could be running in the presidential elections in early 2015 against the background of an economic downturn, for which the public would hold him responsible. Yet he is likely to try to escape the current squeeze with the same old ‘multi-vector’ trick that has been the cornerstone of Ukrainian foreign policy for the last two decades.

How to be multi-vectored

Ukraine’s current dilemma is not new. Like Yanukovych, Leonid Kuchma was elected president on a pro-Russian ticket in 1994, but was soon declaring that Ukraine’s strategic objective was European integration, partly in response to Russian bullying over Crimea, which is part of Ukraine but has a majority ethnic Russian population and a Russian naval presence in Sevastopol. However Kuchma’s increasingly undemocratic rule undermined relations with the EU and in 2003 he agreed to join Russia, Belarus and Kazakhstan in the Single Economic Space in return for considerable concessions from Russia in the trade, energy and aviation sectors. But he buried that idea a year later by constantly dragging his feet during the negotiations.

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Ukraine's Russian foreign policy vector is most demonstrably visible in the Russian Black Sea Fleet present at Sevastopol in Crimea, which also boasts a large ethnic Russian population. Photo CC2.0 Nick Savchenko

‘Multi-vector’ foreign policy – in a somewhat different form –also characterised the presidency of Victor Yushchenko, who came to power with a strong pro-European agenda. While Ukraine’s relations with Russia deteriorated during his presidency, the Ukrainian authorities failed to carry out democratic reform or to lock the country onto the European track. Contrary to their pledges, for instance, they did little to reduce Ukraine’s energy dependence on Russia. Meanwhile the EU began to suffer from so-called ‘Ukraine fatigue’ as its potential recruit failed to live up to its high expectations.

Haggling in an international marketplace

Ukraine’s multi-vector foreign policy appears to be rooted in a competition between Russia and the EU for power and influence in their European neighbourhood that emerged and gained strength in the 2000s. Both Russia and the EU offered their post-Soviet neighbours economic integration in their respective regional alliances, while pursuing different objectives – where Russia sought leadership in the region, the EU was attempting to create ‘a ring of friends’ governed by its norms and rules – with many in both camps seeing these aims as mutually exclusive.

Neither of these arrangements, however, looked attractive to post-Soviet ruling elites, eager to exploit the opportunities that regional economic integration offered but at the same time unwilling to lose their autonomy to either Russia or the EU. They didn’t trust Russia’s integration initiatives, fearing that Russia would promote its unilateral agenda at the expense of their political and economic interests, and they also wanted to avoid the deep transformation required by Europe, which threatened to undercut their power and profits. Ukraine’s solution was its multi-vector foreign policy, where it cherry-picked what it wanted from both Russia and the EU, while avoiding or ignoring costlier commitment.

Competition between Russia and the EU has enabled the Ukrainian elites to promote their own interests by playing one side against the other. Kuchma, for example, played the EU against Russia to win concessions from both, like a customer at an eastern bazaar moving from stall to stall, haggling for the best deal. During Yushchenko’s presidency, Ukrainian elites spent more time trying to increase their EU support by sniping at Russia over symbolic issues than by implementing real reforms in line with EU standards. Just as in the earlier period, the thinking was that they would be able to obtain concessions from the EU despite their poor record on reform.

This is not to say that Russia and the EU have not influenced Ukraine at all – they have in so far as Ukraine has abstained from closer cooperation with either side, fearing retaliation from the other. Nevertheless Ukraine, far from being a pawn in a game between Russia and the EU, is a player that has pursued its own interests in a complex international environment.

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Ukraine is facing pressure from both the EU and Russia to make a decision. Image: Pyotr Sihuta. 

Future uncertainties

The fact that Ukraine is now being forced to make its choice – and the wind seems to be blowing in favour of an Association Agreement with the EU in Vilnius – does not mean that the choice will be fully satisfactory for either Ukrainian elites or the EU, at any rate in the short term. In fact, the former are interested in preserving their precarious status quo (i.e. maintaining a multi-vector foreign policy) rather than embarking on large-scale reform as requested by the EU. The ruling elites are mired in corruption and authoritarian tendencies, and this is unlikely to change in the short term. Ukraine could therefore pose more, not fewer, difficult questions to the EU in the very near future.

Russian sanctions could cost it up to an estimated 1% of its GDP growth and potentially cancel out any short term benefits from the Association Agreement.

If Ukraine signs the Association Agreement, the hope is that it will lock itself into the long-term reform process envisaged by the EU. This is, however, far from certain. Even apart from the issue of releasing political prisoners, and in particular former prime minister Yulia Tymoshenko, there is the fact that Yanukovych has been increasingly stifling political competition and judiciary independence at home and appears to be set on maintaining his grip on power for the foreseeable future and at any cost. If that means resorting to electoral fraud and harassment of the opposition ahead of the 2015 elections, it would certainly become a major bone of contention between Ukraine and the EU.

The Kremlin has already made it clear that it will restrict access to its market for Ukrainian goods if Ukraine signs an agreement with the EU. So unless Ukraine finds a way to quickly re-orientate its exports towards other markets – including the EU – Russian sanctions could cost it up to an estimated 1% of its GDP growth and potentially cancel out any short term benefits from the Association Agreement. The timing could not be worse, as Ukraine’s growing budget deficit, fast depleting foreign currency reserves and sluggish economy might trigger a full-blown balance of payments crisis in the near future. Ukraine would probably need IMF and EU assistance to deal with this eventuality, and would also need EU diplomatic support to re-negotiate its unfavourable 2009 gas contract with Russian state-controlled supplier Gazprom.

Russian sanctions would also damage the interests of many business groups in Ukraine. Dmytro Firtash, an influential powerbroker who has cut a sweet deal with Gazprom and sells Russian gas to Ukrainian enterprises reportedly more cheaply than Naftogaz, the Ukrainian state energy company, is just one among many oligarchs who would want to avoid the Kremlin’s wrath. Economic difficulties, as well as Yanukovych’s inner circle grabbing more power and wealth, may push some Ukrainian oligarchs to throw their weight behind other politicians, including Viktor Medvedchuk – Kuchma’s former chief of staff, whose daughter has Vladimir Putin as her godfather, – who has recently made a comeback in Ukrainian politics with Kremlin support. Medvedchuk has allies in the ruling Party of Regions and is a vocal and active voice in favour of the Eurasian Customs Union.

The battle for Ukrainians’ hearts and minds is unlikely to be won by the EU at this stage. The Association Agreement would certainly benefit both the EU and Ukraine, but it would still take years for the authorities to implement it and for the average Ukrainian to feel its beneficial effects. The last minute push to sign the Agreement in Vilnius is still worth the effort but both Ukraine and the EU should be aware of, and prepare for, the challenges ahead.Ukrainian public opinion is still divided, with a poll in May 2013 showing 41.7% supporting integration with the EU and 31% favouring membership of the ECU. The Customs Union’s supporters usually come from eastern and south-eastern Ukraine, Yanukovych’s main electoral base. So the country’s potential economic difficulties would not only hit Yanukovych’s popularity ratings, but also make it easier for anti-EU factions to stall the ratification and implementation of the agreement. The implementation especially promises to be bumpy, as trade liberalisation, a major overhaul of domestic institutions and harmonisation of technical standards would certainly meet resistance from Ukraine’s bureaucracy and other vested interests. So if both Ukraine and the EU do not have a clear strategy on how to address the challenges that Ukraine may face in the short and long term, the country may yet be tempted to return to its old multi-vector foreign policy.

 

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