Why this Ukraine ceasefire will stick

September 19, 2014

A boy sits on an APC as he poses for a picture during a parade in Luhansk, eastern Ukraine

The war in eastern Ukraine, which has had more impact on the European economy than any news coming out of Frankfurt or Brussels, appears to be ending. Despite the sporadic attacks that have wrecked previous ceasefire attempts.

Investors have mostly assumed that the ceasefire would not hold, either because Russian President Vladimir Putin is deceitful and greedy for more territorial conquest, or because Ukraine’s President Petro Poroshenko would not accept the splintering of his country that Russia demands. But this fashionable pessimism is probably wrong.

The ceasefire no longer relies on good faith or benevolence but on a convergence of interests: Putin has achieved all his key objectives, and Poroshenko recognizes that trying to reverse militarily the Russian gains would be national suicide.

Admittedly, there is still a “party of war” in Kiev, seemingly led by Prime Minister Arsenyi Yatsenyuk, who has called on the North Atlantic Treaty Organization to back his country in an all-out war with Russia. But this week’s vote in the Ukrainian Parliament on temporary autonomy for the rebel regions suggests that most of the country’s politicians have abandoned hope of winning a war with Russia. They also understood that Western military assistance is not coming.

Ukraine President Poroshenko speaks after his meeting with Obama in WashingtonThis may sound like a grimly defeatist analysis. Yet a modest victory for Russia was actually the least bad outcome to be expected — given that there was never any chance of economic sanctions stopping Putin, for reasons explained here in March. There are several good reasons to welcome the incipient Ukraine deal:

First, this compromise is infinitely better for Ukraine, as well as for Europe, than a protracted war. Though Poroshenko has been forced to make major concessions by offering partial autonomy to the Donbas rebels, this was inevitable.

In fact, the compromise now under discussion seems close to the deal that Putin and Poroshenko were near reaching over the summer, partly in response to the German government’s appeal for a non-military resolution to the crisis. Unfortunately, potential progress was shattered when pro-Russian rebels shot down Malaysian Airlines Flight 17. This outrage forced German Chancellor Angela Merkel to abandon her role as an honest broker and simultaneously emboldened Ukrainian hopes of gaining Western military support.

Second, Putin shows no sign of wanting to extend Russia’s boundaries after absorbing Crimea and destabilizing the Donbas. Putin has proved that he will fight against any further encroachment onto Russia’s boundaries by the European Union and NATO, which he now views as an expansionist empire.

This does not mean, however, that Putin hopes to restore Russian control over countries already absorbed by the EU and NATO, such as Poland or Lithuania. Whatever Putin’s ambitions, he understands that Russia is too weak economically to compete directly against EU and NATO “imperialism.”

Ukraine's President Poroshenko shows a signed landmark association agreement with the European Union during a session of the parliament in KievRather than trying to reverse the territorial expansion achieved in the 1990s by the European Union and NATO, Putin’s record suggests a status quo leader trying to preserve existing spheres of influence.

Third, the precedent set by carving out parts of Ukraine is not necessarily catastrophic for international law in Europe. Russia’s annexation of Crimea was not, as is often claimed, the first attempt since 1945 to move European borders by military force. Borders were forcibly changed in the breakup of Yugoslavia, the Turkish invasion of Northern Cyprus and the “frozen conflicts” in Moldova, Georgia and Azerbaijan.

Finally, what about the economic consequences for Russia and Ukraine? For Ukraine, which could potentially challenge Poland as the dominant power in Central Europe and overtake France as Europe’s leading agricultural producer, the key question is how much help the EU will provide by way of financial support and technical assistance.

Ukraine’s population of 44 million is roughly equal to Romania, Bulgaria and the former Yugoslavia combined. Whether the EU is willing to devote the huge resources in money, time and manpower necessary to reform Ukraine is far more important to the country’s future than the precise terms of a Donbas autonomy deal.

For Russia, the long-term effects of the Ukraine crisis are equally ambiguous. Russia is certainly suffering from the economic sanctions. In the long run, however, it could reap economic benefits from them, while its politics become even more authoritarian.

Russia’s economy is based on exporting energy to finance the import of Western consumer and capital goods — a glaring example of the “natural resource curse” described by textbooks of development economics. Textbooks, however, often fail to mention that the resource curse is a logical consequence of David Ricardo’s theory of comparative advantage: the classical free-trade idea that every country should specialize in whatever it makes most efficiently and import other goods.

Overcoming the resource curse means counteracting comparative advantage. One obvious way to do that is trade protectionism.

A country that wants to become less dependent on exporting resources must take steps to reduce its imports and support domestic production of the goods and services it wants to consume. While policies of self-reliance have sometimes proved disastrous — as in India, Argentina and the old Soviet Union — protection of domestic industries has been crucial for economic development in Japan, South Korea, China and Brazil. It also was key to the United States and Germany in their early stages of industrialisation.

Russia, in its two decades of post-Communist development since 1992, has zealously applied the theory of comparative advantage and become one of the most open large economies outside the Organization for Economic Cooperation and Development. Its trade-to-gross domestic product ratio of 52 percent is equal to China’s, far higher than Indonesia’s or India’s and almost double Brazil’s

If sanctions push Russia onto a path of greater self-reliance, its manufacturing and service industries will surely grow faster, even if their quality falls further behind Western standards. If Putin wants to strengthen domestic industries, he will have to improve business and strengthen the rule of law.

The Ukraine confrontation and subsequent sanctions could help transform Russia from a petro-dollar society addicted to imports of Western luxury into a poorer economy that is less flashy — but better balanced and ultimately stronger.


PHOTO (TOP): A boy sits on an armored personnel carrier as he poses for a picture during a parade in Luhansk, eastern Ukraine, September 14, 2014. REUTERS/Marko Djurica

PHOTO (INSERT 1): Ukraine President Petro Poroshenko speaks to reporters following his meeting with President Barack Obama at the White House in Washington, September 18, 2014. REUTERS/Kevin Lamarque

PHOTO (INSERT 2): Ukraine’s President Petro Poroshenko shows a signed landmark association agreement with the European Union during a session of the parliament in Kiev, September 16, 2014. REUTERS/Valentyn Ogirenko


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I have a question. Generally not a bad article – not bad at all, but on which grounds respectable author believes that ‘pro-Russian rebels shot down Malaysian Airlines Flight 17’?

Posted by Tokarev | Report as abusive

Another possible import substitution for Russia might be weapons. It may be true that no country can win a major, protracted war without manufacturing its own weapons. Still during Soviet times, Russia had outsourced much of this capability to — of all countries — Ukraine.

And the sanctions may be having a long-term planning effect on Russia. Russia needs to maintain its stream of gas and oil to Europe and has been exploring the Arctic. Russia is heavily reliant on exploration technology, which the West is far better at. The sanctions have shut down a number of joint exploration deals. Putin HAS to look at the future.

And finally, the writer seems to have bought into the idea that Putin sees himself as surrounded by a hostile NATO and EU encroachment. This is pure disinformatsia which KGB colonels specialize in. NATO didn’t expand as much as Eastern Europeans begged to be let in to protect themselves against feared Russian aggression. Putin, the aggressor, is presenting himself as a victim.

But otherwise, a great, insightful article!

Posted by Ko63ap | Report as abusive

Great article, except for the totally unsubstantiated presumption that rebels shot down MH17. The investigative commission completely avoided addressing any questions pertaining to where the explosives that downed the airliner were fired from or by whom. They didn’t even announce whether any evidence showed that they had been launched from the ground or the air.
Most incredibly, the media silently accepted the announcement that no further information would be released before the final report that won’t be published until a full year from now — and apparently no reporter bothered to ask why the report would be withheld for so long.

Posted by AlKinda | Report as abusive

Unfortunately, there’s no real ceasefire on the ground.

Posted by UauS | Report as abusive

An absurdly sunny analysis.
“the precedent set by carving out parts of Ukraine is not necessarily catastrophic for international law in Europe…Borders were forcibly changed in the breakup of Yugoslavia, the Turkish invasion of Northern Cyprus and the “frozen conflicts” in Moldova, Georgia and Azerbaijan.”
Perhaps not “catastrophic” for law, but certainly for economies as these examples show.
The Russian-occupied (for that is what is truly is, despite all talk of “rebels” or “insurgents”) of Donetsk and Luhansk will continue to wither and decay, just like the other criminal-run enclaves in Moldova and Georgia.
“If Putin wants to strengthen domestic industries, he will have to improve business and strengthen the rule of law.”
This sentence is simultaneously hilarious and tragic and Kaletsky seems to miss Reuters reports on what can happen to the most powerful oligarchs and businessmen in Russia, who are at the mercy of the parasitic gang of national security thugs running the Kremlin.

Posted by bluepanther | Report as abusive

Let us summarize Putin has all the cards. Ukraine has no choice. What the long run outcome for Russia or Ukraine is cannot be known. As for the EU the balanced budget, Neo Con mantras etc, mean that the huge transfer of resources required by Ukraine from the EU will not be forth coming. This Kyiv coup is likely just the first of many.

Posted by babeouf12 | Report as abusive

Very good. Very sensible. Very few Western biased readers will appreciate your words. You clearly understand the character of Putin.
Obama dislikes Putin almost as much as he does Netanyahu. Much of the problem in That region stems originally from that premise. Obama keeps trying to humiliate Putin by egging countries surrounding Russia to ally with the West.
He must let that alliance occur spontaneously in their own good time. Not so blatantly.
Obama despite his high minded ideas has sunk to a new low in international politics.
Unfortunately this is nothing new in American politics. Look at Bush and Sadam.
This kind of leadership must stop. It is very damaging to world order.

Posted by pharoah | Report as abusive

Protectionism would further damage the Russian economy as they have shown little capability to promote indigenous innovation and high-tech industries.Russians would end up paying more for inferior parts and products, further exacerbating their economic situation. Putin is dreaming when he talks about substituting Russian goods for those produced in the global economy. Russia can barely make a quality car let alone a commercial jet. And foreign multinationals will have little incentive to invest in Russia if protectionism reigns and imports are restricted. Protectionism also provides rents for those government officials and Putin cronies who make the rules and red tape, further amplifying the well documented corruption in the Putin government.

Posted by Cassiopian | Report as abusive

I will not tell what Putin c.s. has to do, that’s up to our celebrated polticians in the EU who were surprised by Putin’s actions. Anyhow they showed that at tv. It is a conflict arosen after and within the WOII and the Stalin doctrine of how to rule economy causing 5-7 millions were killed in Ukrain and of course the economical collapse of USSR in 1991. Herr Glauck said that Russia still can join Europe. What is that meaning? Europe is different from the EU and still EU politicians are always talking about Europe. So expansion of the EU which is supported by NAVO and without extending borders? It is to be remarked that the media overhere are always talking about corruption, human rights in the Russian Federation as if geopolitics consists of human rights? Take a look at the history of the ‘Middle East’ full of war initiated by west-eu and the USA/UK for oil revenues and Syria which seems to be a geopolitical war as well just to deliver gas through Syria to the EU. Hello, if that is true the EU/USA/UK has to be blamed.

Posted by henkkorbee | Report as abusive

Whap wonderful prospects. Except…
Nuclear weapons will be on the table for a number of countries, since apparently they are the only thing that can keep one safe. The only way to defend yourself from a bully is to become a bigger bully, as recent events have shown.
Europe, of course, will stay dependent on russia in more than one way.
We,ukrainians, will disappear as a people under the onslaught of the russian horde. No, putin does not stop. He destroys anything he is allowed to. And now his appetites are bigger than they were during the Georgian war.
Of course, poroshenko will keep lying and stealing for aslong as he has the means to stay in power.
And democracy, having proven itself impotent in the face of a tyrant with a bomb, will start losing appeal for more and more people. Gradually. Perhaps this generation will still be civilized enough. Next one? Who knows.

Posted by Ratatoskr | Report as abusive

Putin is right NATO and the EU are expansionist empires with no sense of limits.

Posted by WCTopp | Report as abusive

“Putin is right NATO and the EU are expansionist empires with no sense of limits.”
Amen to that..

Posted by lub | Report as abusive

Anatole Kaletsky: “Putin has achieved all his key objectives”???

What total drivel.

Posted by DLNY | Report as abusive

Fascist junta produces the genocide of the Russian population in the Donbas. For the sake of US elites. Fascism goes back to Europe, to the US elite has improved their health in the blood of the peoples of Europe.

Posted by Jagger | Report as abusive

Ukraine sunk 8 billion dollars into this war,they already bury their soldiers in tranches in Dnepropetrovsk. All moving military hardware is either transferred to rebels or destroyed.

War is suicide for Ukraine, but peace even worse, because of economics, its a ticking bomb for Kiev- and time is working on rebels.

Posted by kommy | Report as abusive

What do you expect from an article written by a Muscovite?

Posted by putinhuylo | Report as abusive

[…] Kaletsky uważa, że wojna na wschodzie Ukrainy ma większy wpływ na sytuację gospodarczą Europy niż […]

Posted by Francja, USA i Polska niekonkurencyjne podatkowo | Report as abusive

Wow! a sane voice. That looks at both sides, and offers a realistic appraisal of the situation. Bravo. What clarity, you will be attacked immediately by others, which usually happens when one pushes a unbiased view. Especially when using intelligent reason. Good article.

Posted by americangrizzly | Report as abusive