Ukraine in Limbo

Well into the fourth year after Russia’s annexation of Crimea and the outbreak of hostilities in Donbas, Ukraine finds itself in a curious state of limbo. There is good news – the economy has bottomed out, the war in the east has frozen at low intensity, and the danger of yet another revolt in Kiev, a third Maidan, has receded. And there is bad news – rampant corruption continues to strangle business, the Minsk peace process is going nowhere, and hopes for reintegrating the separatist-held areas have vanished into thin air.

The evidence is so mixed that media accounts veer wildly from cautious optimism to despair. Politicians and policy experts who support Ukraine present upbeat assessments that have seasoned analysts shaking their heads in disbelief. Since the question of where Ukraine is headed has far-reaching implications for security in Europe, and for relations between Russia and the United States, it is imperative to take a systematic, realistic look at the possible scenarios.

Birth of a Nation

The biggest item on the plus side of the ledger is the formation of a Ukrainian national identity. Despite war and consistently crooked politics, Ukraine is surprisingly well on track toward becoming a nation-state. The loss of Crimea and the separatist-held parts of Donbas has even been helpful, as it removed large numbers of the Russian-speaking population. But the real driver was Russian aggression as such and Ukraine’s resistance to it. Both have fanned national sentiments and fostered emotional bonds with the independent Ukrainian state.

This marks an important break with the Russian imperial tradition, which has blocked any move toward nationhood in Russia itself. It also gives the lie to Russian President Vladimir Putin’s classic quip to President George W. Bush, uttered at the 2008 NATO summit in Bucharest: “You have to understand, George, that Ukraine is not a state.”

Ukraine’s ongoing consolidation has been a huge setback to the Kremlin. This process has been accompanied by the inculcation of a common set of beliefs – that Ukraine forms a natural part of Europe, that the country should aspire to membership in the European Union and NATO, and that society should mobilize to resist the armed insurgency in the east.

Young men and women responded to recruiting calls. The formation of a new National Guard, in particular, caught the Kremlin off guard. Kiev’s “anti-terror operation” in 2014 came very close to snuffing out the insurrection, and it was this early success that forced a Russian intervention.

Military Calculus

The armed forces of Ukraine are now far from capable of staging an offensive to reestablish government control over the separatist-held areas. Such a move would lead to an overwhelming Russian intervention, and perhaps even to a full-scale war – one in which the Kremlin would relish pointing at Kiev as the aggressor.

But following more than two years of recruitment and training, Ukraine is sufficiently strong to ensure that a renewed Russian military offensive, going beyond the daily grind of shelling along the line of confrontation, would encounter very serious opposition. It would in consequence require Moscow to commit forces so large that plausible denial of its involvement would no longer be possible.

Put simply, Ukrainians have decided that fighting for the freedom and sovereignty of their country is a worthwhile cause. In so doing, they have scuttled the Kremlin’s early hopes that the “fascist junta” in Kiev would be swept away by civil war and state collapse. Instead, Russia is trapped in a war of attrition, where combat teams from regular units across the federation must be sent on illegal tours to Ukraine, suffering casualties that must also be kept secret.

Borderland Mentality

The main weakness in this positive story of national consolidation is that it pertains mainly to the central and western parts of Ukraine. The southeast, the home territory of former President Viktor Yanukovych and the heartland of his Party of Regions, remains far less homogenous. This reflects the distinct mentality of the borderlands between Russia and Ukraine, where differences in historical memories have helped shape different forms of self-identification.

The Kremlin was badly disappointed in its early vision of creating a “Novorossiya” in the eastern and southern parts of Ukraine. But that does not mean these contested regions have evolved a Ukrainian identity. The prospects of Ukraine eventually reintegrating the separatist-held areas must be regarded as poor.

At this stage, both sides believe that simply freezing the conflict is preferable to resolving it. Ukrainian politicians win by fueling national mobilization against Russia; some even have serious business interests that thrive on war and instability. Meanwhile, the cost to Russia of supporting the self-proclaimed “people’s republics” is bearable, probably less than $1 billion per year, much less than the cost of sustaining Chechnya.

‘Fascist’ Coup

The Kremlin has also been proven wrong in its prediction that forces of the far right would rebel against Ukraine’s government, thereby triggering state collapse. While Russian propaganda has maintained a steady drumbeat about the “fascist junta,” and about widespread Ukrainian support for nationalist heroes of the far right, that propaganda rings increasingly hollow.

Nevertheless, the government in Kiev has often unwisely played into the hands of Kremlin propagandists. A case in point is Stepan Bandera, a Ukrainian nationalist and Nazi collaborator whose followers participated in the killing of many Jews and Poles. In January 2010, President Viktor Yushchenko decided to award him the highest state honor of “Hero of Ukraine.” The Kremlin spin doctors have taken this as confirmation that Ukraine is indeed ruled by a fascist junta of banderovtsy. Yet, recent opinion polls show very clearly that support for Bandera is marginal and highly localized, to parts of western Ukraine.

The weak point in this otherwise hopeful account is that if the moment is right, and the legitimate government is discredited, even a small group of highly motivated extremists may achieve dramatic results. One needs only recall what the Bolsheviks did in 1917.

Change from Below

The trigger could be serious economic deterioration. Fortunately, there is plenty of good news to suggest that this is not in the cards. Early fears of a sovereign default have been laid to rest. The National Bank of Ukraine performed impressively in its struggle to stabilize the currency, which in 2014-2015 was in free fall. It has also succeeded in bringing under control once-rampant inflation, which slowed from a peak of 60 percent in 2015 to 12.4 percent at the end of last year.

Economic growth has returned, and structural reforms are being pursued. The government, under tough pressure from the International Monetary Fund and the EU, at last took serious steps toward fighting corruption, creating an Anticorruption Bureau and requiring civil servants to declare their wealth. A cleanup of the banking system has started, including the nationalization of oligarch Igor Kolomoisky’s notorious Privatbank, and the energy sector is undergoing a much-needed overhaul.

Meanwhile, a vibrant civil society is emerging. The Ukrainian case helps confirm a key lesson derived from the Russian experience of failed reforms: sustainable change cannot be decreed from above. It must spring up from below, and that is precisely what has happened in Ukraine.

For all the rampant corruption and abuses of power at the top, initiatives from the grassroots have helped compensate for areas of state dysfunction. Volunteers have made large contributions, both in raising money to support soldiers at the front and in helping take care of internally displaced persons. Civic initiatives also counterbalance otherwise unbridled corruption, and they thrive in a climate of relatively free media.

Losing Momentum

All this progress is most encouraging, but the question remains: is it fast enough? IMF loans have helped stabilize the economy, but such support can never do more than buy time. If that time is not put to good use, the exercise will have been in vain. Many Ukrainian reformers are only too eager to point out that what the country really needs is not millions of euros in aid, but sustained pressure from outside to keep the government at work on building a functioning state.

This is where the bad news takes over.

The Ukrainian parliament, or Rada, has become a trading floor for transacting dirty business, mainly by preying on the state budget. Deputies often do not bother to conceal what they are up to. Given that both oligarchs and politicians stand to lose from structural reform, it is not surprising to hear claims that Ukraine does not need the IMF’s money and should tell the fund to get lost.

Those hoping for such an outcome should be careful. If outside pressure for reform is removed, the drive to create a civil society will weaken. This is where the future of Ukraine will be decided.

Expiration Date

Crunch time will come in 2019, when President Petro Poroshenko must stand for reelection. That is also the expiration date of the IMF’s current four-year Extended Fund Facility. The $17.5 billion loan will probably have to be repaid or refinanced from domestic resources, since Ukraine will almost certainly still be denied access to the private credit markets.

In two years’ time, there is an increasing danger that “Ukraine fatigue” among Western governments will have eroded any ambition to provide more than token assistance, while “war fatigue” and “corruption fatigue” among Ukrainians will have caused an equally serious erosion of the grassroots movement to create a civil society. If oligarchs and politicians persist in obstructing reforms that threaten their personal wealth, the situation may become explosive. The threat from the far right can then no longer be dismissed.

Russian agents of influence will be hard at work fanning any signs of discontent, much as they do in supporting populist movements in Europe. They will exploit any possibility of supporting and manipulating leading figures on the far right, at times perhaps even unbeknownst to the latter.

The obstacles that will have to be overcome to prevent this outcome are formidable. A heavy legacy of poor institutions explains why Ukraine has performed three times worse than neighboring Poland (as measured by growth in gross domestic product per capita) in 1991-2013. The only sector presently showing serious growth is agriculture, and free trade with the EU mainly favors primary goods such as honey. The export of refined or processed goods still faces cumbersome certification rules.

Kiev’s recent embargo on trade with the separatist-held areas, prompted by war veterans’ disgust at such profiteering, hurts prospects for economic growth, and bottlenecks imposed by Ukraine’s ramshackle infrastructure could choke off a recovery almost before it gets started.

Wake-Up Call

The only positive scenario for Ukraine involves a drive for structural reform, which can only be sustained by outside pressure combined with an active civil society. Only these can yield tangible economic results that would provide legitimacy to the government in Kiev. Failing that, growing economic hardship and disgust with elite corruption may cause another revolt from below.

In the longer term, there is an increasing likelihood that Ukraine will slowly but surely revert to the Russian sphere of interest. The Kremlin is the only player with the motivation, resources and patience to rescue a collapsing Ukrainian economy. The key question is whether even this awful prospect will be enough to make Ukraine’s financial and political elites place the national interest before their own enrichment. The answer, by all appearances, is no.

Stefan Hedlund is Professor and Research Director at the Centre for Russian and Eurasian Studies at Uppsala University.


The views expressed on austriancenter.com are not necessarily those of the Austrian Economics Center.

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