1-A New Policy to Rescue Ukraine – George Soros
UKRAINE USA EU RUSSIA
The sanctions imposed on Russia by the US and Europe for its interventions in Ukraine have worked much faster and inflicted much more damage on the Russian economy than anybody could have expected.
The sanctions sought to deny Russian banks and companies access to the international capital markets. The increased damage is largely due to a sharp decline in the price of oil, without which the sanctions would have been much less effective. Russia needs oil prices to be around $100 a barrel in order to balance its budget. (It is now around $55 a barrel.) The combination of lower oil prices and sanctions has pushed Russia into a financial crisis that is by some measures already comparable to the one in 1998.
There is therefore an urgent need to reorient the current policies of the European Union toward Russia and Ukraine. I have been arguing for a two-pronged approach that balances the sanctions against Russia with assistance for Ukraine on a much larger scale. This rebalancing needs to be carried out in the first quarter of 2015 for reasons I shall try to explain.
Sanctions are a necessary evil. They are necessary because neither the EU nor the US is willing to risk war with Russia, and that leaves economic sanctions as the only way to resist Russian aggression. They are evil because they hurt not only the country on which they are imposed but also the countries that impose them. The harm has turned out to be much bigger than anybody anticipated. Russia is in the midst of a financial crisis, which is helping to turn the threat of deflation in the eurozone into a reality.
By contrast, all the consequences of helping Ukraine would be positive. By enabling Ukraine to defend itself, Europe would be indirectly also defending itself. Moreover, an injection of financial assistance to Ukraine would help stabilize its economy and indirectly also provide a much-needed stimulus to the European economy by encouraging exports and investment in Ukraine. Hopefully Russia’s troubles and Ukraine’s progress would persuade President Vladimir Putin to give up as a lost cause his attempts to destabilize Ukraine.
Unfortunately neither the European public nor the leadership seems to be moved by these considerations. Europe seems to be dangerously unaware of being indirectly under military attack from Russia and carries on business as usual. It treats Ukraine as just another country in need of financial assistance, and not even as one that is important to the stability of the euro, like Greece or Ireland.
Accordingly, Ukraine’s problems have been cast in conventional terms:
- Ukraine needs international assistance because it has experienced shocks that have produced a financial crisis. The shocks are transitory; once Ukraine recovers from the shocks it should be able to repay its creditors. This explains why the IMFwas put in charge of providing financial assistance to Ukraine.
- Since Ukraine is not yet a member of the EU, European institutions (like the European Commission and the European Central Bank) played only a secondary part in providing assistance to it. The IMF welcomed the opportunity to avoid the complications associated with the supervision by a troika consisting of the EU, the European Central Bank, and the IMF that was used to deal with Greece and others.
This new arrangement also explains why the IMF-led package was based on overly optimistic forecasts and why the IMF’s contribution of approximately $17 billion in cash to Ukraine is so much larger than the approximately $10 billion of various commitments associated with the EU, and even smaller amounts from the US.
- Since Ukraine has had a poor track record with previous IMF programs, the official lenders insisted that Ukraine should receive assistance only as a reward for clear evidence of deep structural reform, not as an inducement to undertake these reforms.
- From this conventional perspective, the successful resistance to the previous Yanokovych government on the Maidan and, later, the Russian annexation of Crimea and the establishment of separatist enclaves in eastern Ukraine are incidental. These events are seen as simply temporary external shocks.
The reformists in the new Ukrainian government are advocating a radical “big bang” reform program that is intended to have a dramatic impact. This program aims to break the stranglehold of corruption by shrinking the bureaucracy while paying the remaining civil servants better and by breaking up Naftogaz, the gas monopoly that is the main source of corruption and budget deficits in Ukraine.