Last chance for Ukraine and Europe

Financial Mirror (Cyprus) - - FRONT PAGE - By Ge­orge Soros

The Euro­pean Union stands at a cross­roads. The shape it takes five years from now will be de­cided in the com­ing 3-5 months.

Year af­ter year, the EU has suc­cess­fully mud­dled through its dif­fi­cul­ties. But now it has to deal with two sources of ex­is­ten­tial cri­sis: Greece and Ukraine. That may prove too much.

Greece’s long-fes­ter­ing cri­sis has been mis­han­dled by all par­ties from the out­set. Emo­tions now are run­ning so high that mud­dling through is the only con­struc­tive al­ter­na­tive.

But Ukraine is dif­fer­ent. It is a black-and­white case. Vladimir Putin’s Rus­sia is the ag­gres­sor, and Ukraine, in de­fend­ing it­self, is de­fend­ing the val­ues and prin­ci­ples on which the EU was built.

Yet Europe treats Ukraine like an­other Greece. That is the wrong ap­proach, and it is pro­duc­ing the wrong re­sults. Putin is gain­ing ground in Ukraine, and Europe is so pre­oc­cu­pied with Greece that it hardly pays any at­ten­tion.

Putin’s pre­ferred out­come in Ukraine is to en­gi­neer a fi­nan­cial and po­lit­i­cal col­lapse that desta­bilises the coun­try, and for which he can dis­claim re­spon­si­bil­ity, rather than a mil­i­tary victory that leaves him in pos­ses­sion of – and re­spon­si­ble for – part of Ukraine. He has shown this by twice con­vert­ing a mil­i­tary victory into a cease­fire.

The de­te­ri­o­ra­tion in Ukraine’s po­si­tion be­tween the two cease­fire agree­ments – Minsk I, ne­go­ti­ated last Septem­ber, and Minsk II, com­pleted in Fe­bru­ary – shows the ex­tent of Putin’s suc­cess. But that suc­cess is tem­po­rary, and Ukraine is too valu­able an ally for the EU to aban­don.

There is some­thing fun­da­men­tally wrong with EU pol­icy. How else could Putin’s Rus­sia have out­ma­neu­vered Ukraine’s al­lies, which used to lead the free world?

The trou­ble is that Europe has been dripfeed­ing Ukraine, just as it has Greece. As a re­sult, Ukraine barely sur­vives, while Putin has the first-mover ad­van­tage. He can choose be­tween hy­brid war and hy­brid peace, and Ukraine and its al­lies are strug­gling to re­spond.

The de­te­ri­o­ra­tion of Ukraine’s sit­u­a­tion is ac­cel­er­at­ing. The fi­nan­cial col­lapse of which I had been warn­ing for months oc­curred in Fe­bru­ary, when the hryv­nia’s value plum­meted 50% in a few days, and the Na­tional Bank of Ukraine had to in­ject large amounts of money to res­cue the bank­ing sys­tem. The cli­max was reached on Fe­bru­ary 25, when the cen­tral bank in­tro­duced im­port con­trols and raised in­ter­est rates to 30%.

Since then, Pres­i­dent Petro Poroshenko’s jaw­bon­ing has brought the ex­change rate back close to the level on which Ukraine’s 2015 bud­get was based. But the im­prove­ment is ex­tremely pre­car­i­ous.

This tem­po­rary col­lapse has shaken public con­fi­dence and en­dan­gered the bal­ance sheets of Ukrainian banks and com­pa­nies that have hard-cur­rency debts. It has also un­der­mined the cal­cu­la­tions on which Ukraine’s pro­grammes with the In­ter­na­tional Mon­e­tary Fund are based. The IMF’s Ex­tended Fund Fa­cil­ity be­came in­suf­fi­cient even be­fore it was ap­proved.

But EU mem­ber states, fac­ing their own fis­cal con­straints, have shown no will­ing­ness to con­sider ad­di­tional bi­lat­eral aid. So Ukraine con­tin­ues to teeter on the edge of the abyss.

At the same time, a rad­i­cal re­form pro­gram within Ukraine is gain­ing mo­men­tum, and slowly be­com­ing vis­i­ble to both the Ukrainian public and the Euro­pean au­thor­i­ties. There is a stark con­trast be­tween the de­te­ri­o­rat­ing ex­ter­nal sit­u­a­tion and the con­tin­u­ing progress in in­ter­nal re­forms. This gives the sit­u­a­tion in Kyiv an air of un­re­al­ity.

One plau­si­ble sce­nario is that Putin achieves his op­ti­mal ob­jec­tive and Ukraine’s re­sis­tance crum­bles. Europe would be flooded with refugees – two mil­lion seems to be a re­al­is­tic es­ti­mate. Many peo­ple ex­pect that this would mark the be­gin­ning of Cold War II. The like­lier out­come is that a vic­to­ri­ous Putin would have many friends in Europe, and that the sanc­tions on Rus­sia would be al­lowed to lapse.

That is the worst pos­si­ble out­come for Europe, which would be­come even more di­vided, turn­ing into a bat­tle­ground for in­flu­ence be­tween Putin’s Rus­sia and the United States. The EU would cease to be a func­tion­ing po­lit­i­cal force in the world (es­pe­cially if Greece also left the eu­ro­zone).

A more likely sce­nario is that Europe muddles through by drip-feed­ing Ukraine. Ukraine does not col­lapse, but the oli­garchs re­assert them­selves and the new Ukraine be­gins to re­sem­ble the old Ukraine.

Putin would find this al­most as sat­is­fac­tory as a com­plete col­lapse. But his victory would be less se­cure, as it would lead to a sec­ond Cold War that Rus­sia would lose, just as the Soviet Union lost the first. Putin’s Rus­sia needs oil at $100 a bar­rel and will start run­ning out of cur­rency re­serves in 2-3 years.

The lat­est chap­ter in what I call the “Tragedy of the Euro­pean Union” is that the EU will lose the new Ukraine. The prin­ci­ples that Ukraine is de­fend­ing – the very prin­ci­ples on which the EU is based – will be aban­doned, and the EU will have to spend a lot more money on de­fend­ing it­self than it would need to spend help­ing the new Ukraine suc­ceed.

There is also a more hope­ful sce­nario. The new Ukraine is still alive and determined to de­fend it­self. Though Ukraine, on its own, is no match for Rus­sia’s mil­i­tary might, its al­lies could de­cide to do “what­ever it takes” to help, short of be­com­ing in­volved in a di­rect mil­i­tary con­fronta­tion with Rus­sia or vi­o­lat­ing the Minsk agree­ment. Do­ing so would not only help Ukraine; it would also help the EU to re­cap­ture the val­ues and prin­ci­ples that it seems to have lost. Need­less to say, this is the sce­nario I ad­vo­cate.

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