What is Ukraine’s Game Plan?

Even a few months ago, it looked as if Ukraine had taken a significant step towards Eurasian integration by signing up as an observer to the Customs Union between Russia, Kazakhstan, and Belarus. However, in the past month, evidence is emerging that it was but a temporary ploy to appease Russia while in reality speeding up the Deep and Comprehensive Free Trade Agreement (DCFTA) with the European Union. This is scheduled to be signed in Vilnius late this November.

The Ukrainians say that that does not preclude further integration within the framework of the Customs Union. However, it is difficult to see how it could simultaneously have free trade with Europe while simultaneously being a part of strategic protectionist bloc. Although it is entirely possible that in the Customs Union will eventually be gradually merged with and into the European economic area – Putin himself has hinted as much – any such scenario will likely be decades in the making.

Putting aside for the moment geopolitical (Atlanticism vs. Eurasianism) and cultural (European civilization vs. Orthodox-Slavic brotherhood) considerations for the moment – which have been overdiscussed anyway both on this blog and Leos Tomicek’s and many others, with the result that there is now little left to add – I would like to frame the debate in economic terms.

The EU Path

As Mark Adomanis points out in his blog, most Russian claims regarding the disadvantages of DCFTA ratification at the recent Yalta summit were in fact based on technical considerations (the Russian negotiator Sergei Glazeyev’s comments on irredentism and ostensible blackmail that have dominated media coverage appear to have been offhand and taken out of context anyway).

The free trade area will make imports cheaper, but at the cost of an even greater current account deficit – Ukrainian factories aren’t likely to compete well with German (or even Czech) ones on equal terms. This current account deficit will be financed by external borrowing, which is short-term and limited due to Ukraine’s poor credit status. This means that either it will have to do a default or devaluation of some kind, so the Russian argument goes, or seek a bailout.

And who is going to provide that bailout? Russia? Of course not. As for the EU states, many of them are strained themselves, and have quite enough pasta and paella on their plates anyway. For the same reason, the generous transfers that eased the Med’s convergence with the European core in previous decades are now a thing of the past; if the Ukrainians expect freebies, they will probably be in for a disappointment. In any case, actual membership of the EU is extremely remote. In any case, the advantages conferred by the supposed “transparency” and “rule of law” that European integration brings are oft-overstated, as we have witnessed many times.

Fortunately, unemployment will be contained, if free trade is accompanied by an easing of visa restrictions; but not so much in terms of demographics, which will take a hit just as they show tentative signs of recovering somewhat. A positive side is that there might be more European investments and technology transfers, especially in western Ukraine, since countries like the Czech Republic and Poland start to become too rich to be attractive as sources of cheap, educated labor.

The EEU Path

This would integrate Ukraine with the Russian economic sphere of modest protectionism coupled with an industrial policy aimed at reviving Soviet mainstays such as the aircraft indistry as well as delving into new spheres like nanotechnology. The technological level of Russian industry isn’t substantially higher than Ukraine’s, and furthermore, the latter’s will receive a boost in the form of lower energy prices; as such, there will presumably be no big threat of many factory closures or unemployment spikes. As such, in the short-term and medium-term, it is clearly preferable to the EU path.

In the long-term, that depends on your view of whether Russia’s own modernization path is sustainable or not, and also perhaps on whether the Customs Union / EEU is destined to merge with the EU in some way. But those are entire debates on their own.

Sitting on the fence?

It’s interesting to note that that the DCFTA is pushed for by a government whose electoral support is rooted in the Russophone east and south – indeed, one which is frequently accused of being a stooge of Russian imperialism.

The Party of Regions isn’t a stooge of Russian imperialism. If it is a stooge of anyone, it is of the Donbass heavy industrial oligarchs. The interests of those oligarchs are clearly mixed. On the one hand, many of their factories will no longer be profitable under conditions of free trade and regulatory convergence with Europe. On the other hand, they will get a chance to increase their status and long-term security by merging with the transnational oligarchy based around London and New York. As for electoral strategy, the choice to pursue the European vector is… downright curious. For it is its own electoral heartlands that free trade with Europe will hammer the most, especially in the short and medium term. Are they hoping that their voter base wouldn’t connect the dots?

This is why it’s difficult to say right now whether the Ukrainian elites as a group (including the oligarchs who fund PoR) have made a definitive choice to integrate with Europe – or whether it is merely continuing its very old game of playing off both sides against the other in return for concessions. Still, if I had to guess, I’d go with the former. The “civilized” West has a ineluctable charm to many overly idealistic citizens in the former Soviet Union that is not often appreciated by Westerners themselves. This charm transcends both reason and the realistic observation that many civilized Westerners themselves don’t reciprocate those warm feelings, and certainly don’t consider Ukrainians (or Russians – though at least Russians don’t tend to have quite as big an inferiority complex on this) to be civilized Europeans. What else could explain PoR taking a course that will probably end up majorly shafting their own electoral base *and* (at least in part) the oligarchs who fund them?

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