Why this Ukraine ceasefire will stick
By Anatole Kaletsky
Sept 19 (Reuters) – The war in eastern Ukraine, which has
had more impact on the European economy than any news coming out
of Frankfurt or Brussels, appears to be ending. Despite the
sporadic attacks that have wrecked previous ceasefire attempts.
Investors have mostly assumed that the ceasefire would not
hold, either because Russian President Vladimir Putin is
deceitful and greedy for more territorial conquest, or because
Ukraine’s President Petro Poroshenko would not accept the
splintering of his country that Russia demands. But this
fashionable pessimism is probably wrong.
The ceasefire no longer relies on good faith or benevolence
but on a convergence of interests: Putin has achieved all his
key objectives, and Poroshenko recognizes that trying to reverse
militarily the Russian gains would be national suicide.
Admittedly, there is still a “party of war” in Kyiv,
seemingly led by Prime Minister Arsenyi Yatsenyuk, who has
called on the North Atlantic Treaty Organization to back his
country in an all-out war with Russia. But this week’s vote in
the Ukrainian Parliament on temporary autonomy for the rebel
regions suggests that most of the country’s politicians have
abandoned hope of winning a war with Russia. They also
understood that Western military assistance is not coming.
This may sound like a grimly defeatist analysis. Yet a
modest victory for Russia was actually the least bad outcome to
be expected – given that there was never any chance of economic
sanctions stopping Putin, for reasons explained here in March.
There are several good reasons to welcome the incipient Ukraine
deal:
First, this compromise is infinitely better for Ukraine, as
well as for Europe, than a protracted war. Though Poroshenko has
been forced to make major concessions by offering partial
autonomy to the Donbas rebels, this was inevitable.
In fact, the compromise now under discussion seems close to
the deal that Putin and Poroshenko were near reaching over the
summer, partly in response to the German government’s appeal for
a non-military resolution to the crisis. Unfortunately,
potential progress was shattered when pro-Russian rebels shot
down Malaysian Airlines Flight 17. This outrage forced German
Chancellor Angela Merkel to abandon her role as an honest broker
and simultaneously emboldened Ukrainian hopes of gaining Western
military support.
Second, Putin shows no sign of wanting to extend Russia’s
boundaries after absorbing Crimea and destabilizing the Donbas.
Putin has proved that he will fight against any further
encroachment onto Russia’s boundaries by the European Union and
NATO, which he now views as an expansionist empire.
This does not mean, however, that Putin hopes to restore
Russian control over countries already absorbed by the EU and
NATO, such as Poland or Lithuania. Whatever Putin’s ambitions,
he understands that Russia is too weak economically to compete
directly against EU and NATO “imperialism.”
Rather than trying to reverse the territorial expansion
achieved in the 1990s by the European Union and NATO, Putin’s
record suggests a status quo leader trying to preserve existing
spheres of influence.
Third, the precedent set by carving out parts of Ukraine is
not necessarily catastrophic for international law in Europe.
Russia’s annexation of Crimea was not, as is often claimed, the
first attempt since 1945 to move European borders by military
force. Borders were forcibly changed in the breakup of
Yugoslavia, the Turkish invasion of Northern Cyprus and the
“frozen conflicts” in Moldova, Georgia and Azerbaijan.
Finally, what about the economic consequences for Russia and
Ukraine? For Ukraine, which could potentially challenge Poland
as the dominant power in Central Europe and overtake France as
Europe’s leading agricultural producer, the key question is how
much help the EU will provide by way of financial support and
technical assistance.
Ukraine’s population of 44 million is roughly equal to
Romania, Bulgaria and the former Yugoslavia combined. Whether
the EU is willing to devote the huge resources in money, time
and manpower necessary to reform Ukraine is far more important
to the country’s future than the precise terms of a Donbas
autonomy deal.
For Russia, the long-term effects of the Ukraine crisis are
equally ambiguous. Russia is certainly suffering from the
economic sanctions. In the long run, however, it could reap
economic benefits from them, while its politics become even more
authoritarian.
Russia’s economy is based on exporting energy to finance the
import of Western consumer and capital goods – a glaring example
of the “natural resource curse” described by textbooks of
development economics. Textbooks, however, often fail to mention
that the resource curse is a logical consequence of David
Ricardo’s theory of comparative advantage: the classical
free-trade idea that every country should specialize in whatever
it makes most efficiently and import other goods.
Overcoming the resource curse means counteracting
comparative advantage. One obvious way to do that is trade
protectionism.
A country that wants to become less dependent on exporting
resources must take steps to reduce its imports and support
domestic production of the goods and services it wants to
consume. While policies of self-reliance have sometimes proved
disastrous – as in India, Argentina and the old Soviet Union –
protection of domestic industries has been crucial for economic
development in Japan, South Korea, China and Brazil. It also was
key to the United States and Germany in their early stages of
industrialization.
Russia, in its two decades of post-Communist development
since 1992, has zealously applied the theory of comparative
advantage and become one of the most open large economies
outside the Organization for Economic Cooperation and
Development. Its trade-to-gross domestic product ratio of 52
percent is equal to China’s, far higher than Indonesia’s or
India’s and almost double Brazil’s
If sanctions push Russia onto a path of greater
self-reliance, its manufacturing and service industries will
surely grow faster, even if their quality falls further behind
Western standards. If Putin wants to strengthen domestic
industries, he will have to improve business and strengthen the
rule of law.
The Ukraine confrontation and subsequent sanctions could
help transform Russia from a petro-dollar society addicted to
imports of Western luxury into a poorer economy that is less
flashy – but better balanced and ultimately stronger.
(Anatole Kaletsky)
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