Ukraine: Goodbye Cold War, hello globalised economy

The days of the ‘iron curtain’ are behind us; the West can’t intervene in Ukraine due to global economic dynamics.

Russia and Europe have developed very strong economic relations and would both suffer from a trade war, writes Piet [AFP]

While most observers claim that the current conflict over Ukraine is reminiscent of the Cold War, a political economy analysis of the last three days would au contraire underline how liberal economic interdependence has modified the rules of the game.

If the sound of boots on the ground is still very real in Crimea, the Ukrainian conflict proved the incapacity of countries to engage in military conflict without being vulnerable to exogenous economic forces or having to suffer the consequences of capital flight and currency exchange rate fluctuations.

The reaction from oligarchs in Ukraine as well as the impact that the prospect of war had on both the Russian stock exchange and currency are solid proof that countries cannot operate bluntly as they did during the Cold War without closely monitoring global economic dynamics.

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While the prospect of targeted economic sanctions such as asset freezing or visa restrictions had been inoffensive in Belarus and mostly inefficient in Syria, it has modified the forces on the exchequer in Ukraine. Viktor Yanukovich did not leave Kiev in the middle of the night because of a military invasion of his country, nor because the few armed militants in Maidan represented such a threat to his security that he had to abandon his lavish lifestyle.

No, he fled because the powerful Ukrainian oligarchs turned their back on him in fear of economic sanctions from Europe that would have meant the end of their industrial empire and freedom of movement.

Oligarchs like these

Liberal-minded Victor Pinchuk – the billionaire son-in-law of the first Ukrainian president and Russian ally, Leonid Kuchma – and Petro Poroshenko were the first to defect, signing a letter of support to the demonstrators and stating that the European path was the “way to modernise the country, to fight corruption, the way to have a fair court, freedom of press, democracy”.

Rinat Akhmetov, commonly considered one of the 40 wealthiest men in the world, put the deepest nail in the newly impeached Ukrainian president’s coffin by asking for balanced agreements with Russia and Europe, which meant reopening economic negotiations with Brussels.

Even Eastern Ukrainian billionaires Igor Kolomoyski and Sergey Taruta, once close to Yanukovich, quickly followed suit when they pledged allegiance to the new Ukrainian prime minister, by accepting governor positions in Donetsk and Dnipropetrovsk.

They claimed to do so to “protect the homeland in danger”. Yet the decision from EU-member Austria and Switzerland – which currently faces its own share of EU pressure after last month’s immigration referendum – to freeze financial assets, the perspective of not being able to vacation in Nice or Courchevel or meet potential investors in London and Paris, as well as the risk of seeing German car manufacturers turn away from their steel production were surely equally as strong an argument to call for closer European ties.

The days of the “iron curtain” and of the Council for Mutual Economic Assistance (COMECON) which economically isolated the former Soviet Union states from the rest of the world are far behind us.

Economic sanctions

As real as the Russian military power is, it was no match last week for the economic retaliation that Europe was promising under the security umbrella of NATO. If Russia is still today the first economic partner of Ukraine, its share in the country’s balance of trade has steadily declined and the European Union has resolutely become the economic future of Ukraine and its main oligarchs.

The same economic sanctions that were inefficient in a Syria whose industrial development was too weak to turn the European market into a crucial element of its economic security or in a Belarus where Lukashenko’s centralised grip has prevented the openness of his country at the expense of its population, those very sanctions have changed the domestic balance of power in Kiev and scared Yanukovich away, much to the distress of Putin who always criticised him as a weak leader.

When the Kremlin is still trying to foment defection among Ukrainian armed forces in Crimea, the European Union had already secured more coveted assets in a 21st century conflict. The $20 bn conglomerate System Capital Management, owned by Akhmetov, is much more exposed to the European markets than to the East and its investments opportunities are much greater in England, France and Germany than in a centralised and corrupted Russia.

Russia cannot win this conflict in the short term since the Putin administration has too much to lose in a globalised economy that it does not control. The realist days of the Cold War are over.

The lack of reforms in the Russian economy, which favoured the appropriation of enormous wealth by the very few, prevents the entry of new companies and limits their growth potential. The allegiance of Ukrainian economic forces to the EU-supported Yatsenyuk government simply makes more “business sense”. It is on this exchequer that post-Cold War conflicts are won, a very different battle field than the proxy war of the 1970s.

Russia’s vulnerability

What we have learned from the last two days is also the incredible vulnerability of the Russian economy itself both domestically and internationally. Domestically, in the wake of Putin’s annexation of Crimea, the Moscow stock exchange lost 12 percent of its capitalisation in a single day, while the exchange rate of the ruble collapsed. Analysts estimate that the country lost the equivalent of $58 bn on Monday.

With the structure of the Russian economic power, being distributed in a limited number of hands as in Ukraine, it is easy to imagine the reactions from Russian oligarchs when the European Union and the United States warned of similar sanctions. The days when Vladimir Putin could afford to single-handedly jail a rich opponent such as Mikhail Khodorkovsky are behind us.

However, the capacity of European power to maintain a front of unity has its limit. It started suffering from internal defection as shown by the lukewarm and cautious positions from the Cameron administration highlighting the City‘s dependence on Russian capital. Indeed, Russian economic retaliation would also have strong impact on some of the largest American companies, including Exxon and PepsiCo.

But the past week events confirmed  this is not a zero-sum game, but rather an economic interdependence where former partners can grow together or lose together, at the expense of their domestic stability.

Alternatives suppliers

What has been coined as a European dependency on Russian energy is largely erroneous. Russian dependency on European markets is just as strong, if not more. Russia and Europe have developed very strong economic relations and would both suffer from a trade war. In the field of energy security, Russia has also much to lose especially with the development of the harvesting of environmentally harmful shale gas deposits.

For the first time, Kerry confirmed that the US could soon supply European energy markets. Azerbaijan and Qatar are other options. Even the threats from Russia to cancel the gas price rebate enjoyed by Kiev are of limited impact. The 2009-2010 Ukrainian gas crisis has shown that the Russian economy would suffer dearly if the Ukrainian government decided to disrupt Russian gas transit through its territory in retaliation.

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The Russian economy is also structurally vulnerable along with other emerging markets. Economic growth rates have decreased and the diversification of the economy has been disappointing – at best. Whether Moscow likes it or not, global economic growth is artificially maintained by the very lenient monetary policy implemented by the US federal bank, issuing $75 bn a month to increase liquidities in the global market.

The panic in economic circles during last year’s G20 summit in St Petersburg – when the Fed warned it would decrease its then $85 bn per month economic stimulus – is representative of the fact that supporters of the hegemonic stability theory have a point.

The Indian rupee plummeted, the Russian ruble suffered, the BRICS scrambled to put together a $100bn reserve fund and weak swap lines. If the Fed pulls the plug, the global economy crumbles, starting with emerging markets such as Russia. The first decrease of $10 bn of the Fed’s impulse caused the ruble to lose more than 11 percent of its value since January 1, 2014.

Putin is well aware of his limitations. His best options today are two-fold. First, he could bet on an Abkhazia-like scenario if the Crimea population supported the presence of Russian troops. His other option is to pull out of Crimea, having “protected the security of Russian nationals in Crimea”.

The Kremlin has always left this option open offering an honourable exit from the conflict. In any case, Russia cannot win this conflict in the short term since the Putin administration has too much to lose in a globalised economy that it does not control. The realist days of the Cold War are over.

Remi Piet is Assistant Professor of Public Policy, Diplomacy and International Political Economy Department of International Affairs College of Arts and Sciences Qatar University, Doha, Qatar