Europe’s Ukrainian life­line

Financial Mirror (Cyprus) - - FRONT PAGE -

Last week’s Euro­pean Par­lia­ment elec­tion and pres­i­den­tial elec­tion in Ukraine pro­duced sharply con­trast­ing re­sults. Europe’s vot­ers ex­pressed their dis­sat­is­fac­tion with the way that the Euro­pean Union cur­rently func­tions, while Ukraine’s people demon­strated their de­sire for as­so­ci­a­tion with the EU. Euro­pean lead­ers and cit­i­zens should take this op­por­tu­nity to con­sider what that means – and how help­ing Ukraine can also help Europe.

The EU was orig­i­nally con­ceived to be an ever-closer as­so­ci­a­tion of sov­er­eign states will­ing to pool a grad­u­ally in­creas­ing share of their sovereignty for the com­mon good. It was a bold ex­per­i­ment in in­ter­na­tional gov­er­nance and the rule of law, aimed at re­plac­ing na­tion­al­ism and the use of force.

Un­for­tu­nately the euro cri­sis trans­formed the EU into some­thing rad­i­cally dif­fer­ent: a re­la­tion­ship of cred­i­tors and debtors in which the cred­i­tor coun­tries im­pose con­di­tions that per­pet­u­ate their dom­i­nance. Given low turnout for the Euro­pean Par­lia­ment elec­tion, and if sup­port for Ital­ian Prime Min­is­ter Mat­teo Renzi’s were added to the anti-EU vote on the left and the right, it could be ar­gued that the ma­jor­ity of cit­i­zens are op­posed to cur­rent con­di­tions.

Mean­while, just as Europe’s bold ex­per­i­ment in in­ter­na­tional gov­er­nance is fal­ter­ing, Rus­sia is emerg­ing as a dan­ger­ous ri­val to the EU, one that has global geopo­lit­i­cal am­bi­tions and is will­ing to use force. Putin is ex­ploit­ing an eth­nic na­tional ide­ol­ogy to bol­ster his regime. In­deed, speak­ing on the Rus­sian ra­dio pro­gramme Di­rect Line last month, he ex­tolled the ge­netic virtues of the Rus­sian people. The an­nex­a­tion of Crimea has made him pop­u­lar at home, and his ef­fort to weaken Amer­ica’s global dom­i­nance, in part by seek­ing an al­liance with China, has res­onated favourably in the rest of the world.

But the Putin regime’s self-in­ter­est is at odds with Rus­sia’s strate­gic in­ter­ests; Rus­sia would ben­e­fit more from closer co­op­er­a­tion with the EU and the United States. And re­sort­ing to re­pres­sion in Rus­sia and Ukraine is di­rectly coun­ter­pro­duc­tive. The Rus­sian econ­omy is weak­en­ing, de­spite the high price of oil, ow­ing to the flight of cap­i­tal and talent. Us­ing vi­o­lence in Kyiv’s Maidan has led to the birth of a new Ukraine that is de­ter­mined not to be­come part of a new Rus­sian em­pire.

The suc­cess of the new Ukraine would con­sti­tute an ex­is­ten­tial threat to Putin’s rule in Rus­sia. That is why he has tried so hard to desta­bilise Ukraine by fos­ter­ing self-de­clared sep­a­ratist republics in east­ern Ukraine.

With the Don­bas re­gion’s largest em­ployer protests against the sep­a­ratists,

Putin’s plan may not work, and he is now likely to ac­cept the re­sults of the pres­i­den­tial elec­tion, thereby avoid­ing additional sanc­tions. But Rus­sia is likely to seek other av­enues to desta­bi­lize the new Ukraine, which should not be too dif­fi­cult, given that the se­cu­rity forces, hav­ing served the cor­rupt regime of for­mer Pres­i­dent Vik­tor Yanukovych, are de­mor­alised and not nec­es­sar­ily loyal to the new lead­er­ship.

All of this has hap­pened very fast and very re­cently. Both the EU and the US are pre­oc­cu­pied with their in­ter­nal prob­lems and re­main largely un­aware of the geopo­lit­i­cal and ide­o­log­i­cal threat that Putin’s Rus­sia poses. How should they re­spond?

The first task is to coun­ter­act Rus­sia’s ef­forts to desta­bilise Ukraine. With the EU’s “fis­cal com­pact” and other rules lim­it­ing the scope of govern­ment as­sis­tance, in­no­va­tive think­ing is needed.

The sin­gle most ef­fec­tive mea­sure would be to of­fer free po­lit­i­cal risk in­sur­ance to those who in­vest in or do busi­ness with Ukraine. This would keep the econ­omy run­ning, de­spite the po­lit­i­cal tur­moil, and it would sig­nal to Ukraini­ans that the EU and the US – gov­ern­ments and pri­vate in­vestors alike – are com­mit­ted to them. Businesses would flock to a newly open and promis­ing mar­ket if they were fully com­pen­sated for losses caused by po­lit­i­cal events be­yond their con­trol.

Po­lit­i­cal risk in­sur­ance may sound too com­plex to de­ploy quickly. In fact, in­sur­ance of this type al­ready ex­ists. Pri­vate

mo­bil­is­ing in­sur­ers and rein­sur­ers like Ger­many’s Euler Her­mes have of­fered it for years. So have govern­ment in­sti­tu­tions, like the World Bank’s Mul­ti­lat­eral In­vest­ment Guar­an­tee Agency and the US govern­ment’s Over­seas Pri­vate In­vest­ment Cor­po­ra­tion. They must, how­ever, charge sub­stan­tial pre­mi­ums to cover the cost of rein­sur­ance.

Faced with high pre­mi­ums, most businesses would sim­ply opt to wait on the side­lines un­til the storm passed. That is why the gov­ern­ments con­cerned must take over the rein­sur­ance func­tion and use their agencies only to ad­min­is­ter the in­sur­ance poli­cies.

They could guar­an­tee the losses in the same way as they un­der­write the World Bank: each govern­ment would pro­vide a mod­est pro-rata cap­i­tal in­fu­sion and com­mit the rest in the form of callable cap­i­tal that would be avail­able if and when losses are ac­tu­ally paid out.

The EU would have to mod­ify the fis­cal com­pact to ex­empt the callable cap­i­tal and al­low ac­tual losses to be amor­tised over a num­ber of years. Guar­an­tees of this kind have a pe­cu­liar fea­ture: the more con­vinc­ing they are, the less likely they are to be in­voked; the rein­sur­ance is likely to turn out to be largely cost­less. The World Bank is a liv­ing ex­am­ple.

By act­ing promptly and con­vinc­ingly, the EU could save Ukraine – and it­self. What I pro­pose for Ukraine could also be im­ple­mented at home.

As long as there are so many pro­duc­tive re­sources ly­ing idle, it would make sense to ex­empt from the fis­cal com­pact in­vest­ments that would even­tu­ally pay for them­selves. Renzi, for one, is ad­vo­cat­ing pre­cisely this course of ac­tion.

Putin plans to turn Crimea into a show­case by lav­ish­ing more than 50 bln eu­ros on it in the next few years. With Euro­pean sup­port, Ukraine could com­pare fa­vor­ably. And, if such an ini­tia­tive marks the be­gin­ning of a growth pol­icy that Europe so badly needs, by sav­ing Ukraine Europe would also be sav­ing it­self.

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