Ukraine’s frozen war brings dramatic changes to world economy

December 12, 2014

Pro-Russian separatists from the Chechen "Death" battalion take part in a training exercise in the territory controlled by the self-proclaimed Donetsk People's Republic

The “day of silence” observed this week by the Ukrainian army and its pro-Russian rebel opponents was an event of enormous economic importance for global economics as well as geopolitics.

The cease-fire’s success confirmed that the truce in Ukraine, agreed to on Sept. 5, is mostly holding, despite some local fighting and Western pundits’ virtually unanimous predictions that the war would quickly resume. The durability of September’s truce suggests that relations between Kiev and Moscow are gradually reverting toward an uneasy form of peaceful coexistence.

If so, then last summer’s civil war in Ukraine will probably evolve into a broadly stable “frozen conflict,” similar to the stalemates that have prevailed for years, even decades, in Georgia, Moldova, Armenia, Azerbaijan, Kosovo, Cyprus and Israel, to name just the frozen conflicts closest to Europe.

Though nobody can be fully satisfied with this outcome, Ukraine, Russia and Europe should all heave sighs of relief. So should anyone concerned about the outlook of the global economy.

Let us begin with Ukraine. The loss of Crimea is irrelevant because much of that peninsula was already leased to Russia and was not even part of Ukrainian territory until 1954. Losing Donbas is more serious because it is one of the country’s main industrial regions. But normal economic relationships could soon be reestablished because Russia needs to sell Donbas’ coal and steel as much as Ukraine needs to buy it.

Because the profits from these activities were largely misappropriated by corrupt officials and oligarchs, it will make no great difference to Ukraine if they are stolen by pro-Russian rebels instead.

Meanwhile, Ukrainian national identity has been strengthened by the conflict. Although Ukraine is unlikely ever to be admitted to either the European Union or the North Atlantic Treaty Organization — given the opposition in Germany and France, as well as in Russia — an EU association agreement, similar to Turkey’s, could help reduce corruption and encourage economic reform. A dual trading relationship with both Europe and Russia could ultimately offer Ukraine the only possible route to economic viability. This sort of relationship should become possible once this year’s conflict is definitively “frozen.”

Now consider Russia. Assuming that Kiev and the West reluctantly accept the status quo in Crimea and Donbas — and nobody seems to have any ideas about how to wrest this territory back from Moscow — President Vladimir Putin seems unlikely to attempt any further territorial expansion, at least without some new geopolitical pretext. In that case, the EU sanctions against Russia may well expire automatically in March and July. They have been set for a one-year term, and a consensus to extend them will be hard to muster if the fighting in Ukraine dies down.

Whether or not the sanctions are lifted, Russia is already undergoing an economic transformation.

With oil prices and the ruble collapsing, Russia’s political and business leaders are realizing that the post-Soviet economic model of full-scale financial liberalization and integration with the global economy has condemned them to overdependence on energy exports and industrial imports from Western Europe. Partly as a result, Russia has succumbed to the classic symptoms of the “natural resource curse”: an overvalued currency, deindustrialization, conspicuous consumption, excessive government spending, weak domestic tax collection and extreme vulnerability to international capital flows.

In response, Russia is starting to restructure its economy. It is moving away from the classical free-trade model that it adopted in the 1990s, which encouraged Moscow to export raw materials and import industrial goods because that was implied by the Ricardian law of comparative advantage. The alternative development model, which Russia will now favor, is the one followed by other big emerging economies, including China, India and Brazil, and before them, South Korea and Japan.

This Asian model will mean more protection for domestic industries, more control over international capital flows and less reliance on imports — even if that means lower quality and higher prices for Russian consumers.

To the extent that Russia remains a major resource exporter, its trading and financial strategies, as well as its geopolitical alliances, will be redirected toward China and Asia. This strategic realignment will, over time, increase China’s economic dominance in Asia. It may also strengthen the influence of China’s authoritarian Confucian politics as a counterweight to the liberal democratic model promoted by the United States and the European Union, a philosophical shift that Putin would welcome.

What about the implications of a “frozen conflict” for Europe and the world? The good news is that a definitive end to the fighting in Ukraine would remove the biggest single obstacle to economic recovery in Europe. The threat of all-out war in Central Europe was probably the most important cause of last summer’s sudden slump in the eurozone, especially in Germany. If war were to break out again, the shock to business confidence would certainly overwhelm any stimulus efforts by the European Central Bank.

The bad news is that a frozen conflict in Ukraine will weaken the postwar assumption that European borders cannot be changed by force, as German Chancellor Angela Merkel lamented again this week. The fact is, however, that European borders have been violently redrawn throughout the past 25 years, after the breakup of the Soviet Union and Yugoslavia.

The principle of national sovereignty has been breached repeatedly — not least by the United States, Britain and France in Afghanistan, Iraq, Libya and Syria, as well as in Israel and Cyprus. Such breaches will doubtless continue from time to time, whether or not the sanctions against Russia continue.

More worrying to the West than the diplomatic precedents set by a frozen conflict in Ukraine should be the global implications of Russia moving into the Chinese geopolitical and economic orbit. But given the intensity of Western interactions with China, peaceful coexistence and economic cooperation should also be possible with a Russia that decides to follow the Chinese models of economic management, business transparency and nondemocratic government.

PHOTO: Pro-Russian separatists from the Chechen “Death” battalion take part in a training exercise in the territory controlled by the self-proclaimed Donetsk People’s Republic, eastern Ukraine, Dec. 8, 2014. REUTERS/Maxim Shemetov

24 comments

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Many errors and double speak in this article make it clear the author supports Russia’s invasion:
1) “durability of September’s truce”
>explain this ‘durability’ to the hundreds of citizens and Ukrainian troops who have continually been fired on by Russian troops and the local ‘pro-Russians’
2) “loss of Crimea is irrelevant”, “much of the peninsula was already leased to Russia”
>incorrect on both counts. Who has declared Crimea fait accompli? Why should the government of Ukraine and Ukrainian business owners accept the outright theft of their property and resources? Should this not be compensable at the very least?
3) “Crimea not even part of Ukrainian territory until 1954″
>is 60 years of it being Ukrainian less meaningful than Russia only controlling it for 171 years? The Tatar population controlled for much longer, shouldn’t they have a say? What about previous occupying Turks and Greeks?
>>>using this logic, when is Russia giving the Kuril Islands back to Japan and Konigsberg back to Germany?
4) “President Putin seems unlikely to attempt any further territorial expansion”
>Seriously? After Trans-dneister? After Georgia? After “Donbas”? After “Novorossiya” which encompasses Kharkiv through Odessa? After the noises about the Baltics and his early December speech defending his illegal invasions and Russia’s interests and perceived being wronged by the West, can you seriously believe he will not continue invading other countries?
5) “principle of sovereignty breached repeatedly….by United States, Britain and France”
>why do Putin pologists continually bring these up? Afghanistan was invaded because it harbored Al Qaeda terrorists and the Taliban had a few human rights issues with how they treated their people. Libya and Syria were civil wars where dictators were attacking their own people. Iraq…yes, I agree it was a major U.S. faux pas, BUT WHICH OF THESE COUNTRIES HAD PART OF THEIR SOVEREIGN TERRITORY STOLEN BY the the U.S. Britain or France? Are not all of their borders intact?
6) “Russia moving into the Chinese geopolitical and economic orbit”
>yes the ‘bear’ jumps into the jaws of the ‘dragon’ willingly…just don’t come running to the West for help when Siberia is invaded by China. Russia has set itself up nicely for Chinese expansion and loss of its most valuable resource base.

This article is disturbing because it subliminally suggests rewarding Russia for its illegal invasion of Ukraine and that the West should just learn to live with it. The author is clearly biased to Russian interests and is just another naive ‘useful idiot’.

Posted by Canrock | Report as abusive

“The loss of Crimea is irrelevant because much of that peninsula was already leased to Russia and was not even part of Ukrainian territory until 1954.”??!??! “Much” of that peninsula was already leased to Russia? WRONG. That is like saying that much of Cuba is rented to the US; only a tiny part of Crimea was leased to Russia. And while the “loss” of Crimea (de facto, but not de jure) may be “irrelevant” to Anatole Kaletsky, it is not to millions of Ukrainians, and to the 45% + of the Crimean population that is not of ethnic Russian origin. It is certainly not irrelevant to the Tatars who are currently being terrorized and persecuted by Putin’s criminal puppets. Do the math: 1954 – 2014 = 60 years. There are plenty of areas of Europe that have not been part of their current jurisdictions for not much longer than that, so according to the author’s logic military invasion and annexation of these areas by various irredentist powers would be “irrelevant”.

The rest of this article is tripe. Example: “Russia needs to sell Donbas’ coal and steel as much as Ukraine needs to buy it”. How/why would RUSSIA be selling Donbas’ coal and steel unless Russia annexes and nationalizes the Donbass? And NEWSFLASH: Ukraine does not buy Donbas steel, and Kyiv has been subsizing Donbass coal for years. The article is rife with unjustified and ungrounded predictions (“Ukraine will never joint the EU/NATO; Russia will diversity its economy…..actually Ukraine’s chances of joining EU and NATO are much greater than a diversified economy in a Putin-led Russia).

This thing smells like just another Kremlin or at least Russian chauvanist attempt to get the west to stop reacting to Putin’s outrages. Kiselev (and others) do the “do not react or attempt to stop us or you will have nuclear war”; this author is doing “stop and all you economic woes will be over”.

Posted by caaps02 | Report as abusive

The dragon will eat the bear.
China is ruthless and does whats best for china, unlike what the media tells you, they are not the best of friends. Everything from border disputes, witch will intensify as the Russian the population is dying from old age, and from cigarettes and booze. Soon they will be looking west again, but by then its too late.Putin sold out Russia to the lowest bidder in an attempt to save face, as he built his carer hating the west. We are making a big mistake, in not helping Ukraine into Nato and the EU, expecting them to prosper with a dying Russia is stupid. This can only help Russia, keep the status quo

Posted by perkunast | Report as abusive

Writer forgot to mention US and NATO bombed Serbia until it was forced to give up its Kosovo territory.

The few remaining Christians in Kosovo live in fortified enclaves – else they would be attacked by Kosovo-Albanian-Islamic terrorists.

So much for “territorial integrity.”

Posted by fairbro_plus | Report as abusive

” Anatole Kaletsky” – how in the world did you come up with this tripe of an “analysis”? Are you a Kremlin shill?

“The loss of Crimea is irrelevant because much of that peninsula was already leased to Russia and was not even part of Ukrainian territory until 1954.” – irrelevant? If so, then why is Russia so intent to take it?

Your “analysis” assumes it is irrelevant to allow one country to summarily seize another sovereign nations territory?

“The fact is, however, that European borders have been violently redrawn throughout the past 25 years, after the breakup of the Soviet Union and Yugoslavia.”

The breakup of the Soviet Union merely RESTORED borders of nations seized by Stalin at the end of WWII. Yugoslavia was simply inevitable after the iron hand of forced “unity” by Tito was removed. Yugoslavia was essentially “redrawn” by its own internal people.

“More worrying to the West than the diplomatic precedents set by a frozen conflict in Ukraine should be the global implications of Russia moving into the Chinese geopolitical and economic orbit.”

Your “thesis” here being that somehow China will forge some economic and military alliance with Russia/Putin? Do you think China is that stupid? China simply sees a bargain in the making – Russia has no where else to turn for much needed hard cash and you can bet your booties China will drive some hard bargains.

Or perhaps you speak of the “landmark” deal for the 2,500 mile pipeline that not one meter currently exists which will pump gas from eastern Siberian gas fields that have not yet even been drilled?

“But given the intensity of Western interactions with China, peaceful coexistence and economic cooperation should also be possible with a Russia that decides to follow the Chinese models of economic management, business transparency and nondemocratic government.”

You cannot compare the two – Russia and China – situations with the rest of the world. China plays hard, but they play fair. China does not seize other country’s land by fomenting discord with dirty tricks and then seizing with overt military intervention. China does not “cut off” the supply taps of previously promised raw material delivery based on politics.

“Anatole Kaletsky” should present this blog with its very misguided “conclusions” for publication at RT.com or “Pravda” – it certainly has no place at Reuters.

Posted by klapa | Report as abusive

///The loss of Crimea is irrelevant because much of that peninsula was already leased to Russia///
The guy is tripping

Posted by blacknite | Report as abusive

Ukraine need a kind of Marshall Plan – such support would be a wery smart investment as the money will come back many times. Ukraine need everything!

1 Make a kind of insurance for companies that invest in Ukraine to start production there and give grants for this as well as other incentives.
2 Promote companies that can buy something from Ukraine – advertice
3 Relieve Ukraine of the mousetrap loans that Janokovych made with Russia !
(if Ukraine debt pass 60 % of GPD Russia can demand all loans to be paid at once, this would lead to an emmidiate default) The problem here is that the lack of export to Russia – the cost of fugitives and war and the demands from IMF reduce GPD a lot probably more than 10 %. If Ukraine could then they would shop alot in US and EU and that would boost the economy with a very short delay. They need everything! Many greetings Jacob Schonberg , Danish citizen living half my time in Ukraine

Posted by jacobsch | Report as abusive

What?! Good sense?!… Presented in a western media outlet?!!
Sorry, Mister Kaletsky, but if I were you I would start looking for another venue. I can’t imagine the editors at Reuters tolerating such radically sensible and well-balanced ideas as you present here. Anyway, I applaud this piece, the first of its kind that I’ve read in the western media this entire year. I hope that you’ll have the opportunity to keep up this good work.

Posted by MWA33 | Report as abusive

The author of the article is doing a good job for his Kremlin masters. How much did they pay you for these blatant lies?
Example: “. The loss of Crimea is irrelevant because much of that peninsula was already leased to Russia and was not even part of Ukrainian territory until 1954.”
About 1% of the territory of Crimea was leased (only a part of the Sevastopol harbor) . Crimea has for centuries belonged to the Tatars, whom the Russians have and continue to oppress.

When will Reuters stop publishing unverified and biased (pro-Russian) articles?

Posted by Ilya_Kiev | Report as abusive

FREEDOM FOR UKRAINE BEGINS AT HOME

And to wit like my predecessor at 7:58 pm UTC I am amazed to see such an insightful and well balanced article in the American press. Apparently the NSA computers are down for a weekend cleaning. I was only surprised to hear the author say that Germany and France are against Ukrainian accession to the EU. Given the EU and US eagerness to provoke the crisis this would represent a wisdom that heretofore has been totally absent. As for Ukrainian “freedom,” it will be a long time in coming. I might refer the reader to the comments of renowned international investor, the expatriate American Jimmy Rogers, who in a recent also well balanced and informed interview called Ukraine the most corrupt place he has visited around the world. From the author of “Investment Biker” who has traveled around the world more than once, this is indeed saying something. It is also my humble impression after working in the country. Whether or not they will be “free” before the US is of course another question. If articles like this continue we do indeed have some chance of beating them in the unmanaged news category but it is touch and go at this point.

Posted by St.Juste | Report as abusive

Comrade Kaletsky said: “The loss of Crimea is irrelevant”

Did I navigate to Pravda by accident?

I get a kick out of these geopolitical Machiavellians who dissect world issues without an iota of morality, principle, or justice. They literally do not get it.

Putin conquered Crimea, using Russian troops dressed in anonymous uniforms. Then he lied and claimed the troops were actually local ‘partisans’ fighting for independence. Later he admitted they were in fact Russian troops.

The same modus operandi was in effect in the Eastern Ukraine. The lies keep coming, and one suspects that even the liars are believing their own whoppers.

The problem with dealing with liars is: How do you know when they are telling the truth?

Posted by MaskOfZero | Report as abusive

Yes – such “sensible” arguments as allowing Putin and Russia to get away with seizing lands from sovereign nations and calling such “irrelevant”.

Putin – and the Russian people that support him – MUST be met with total isolation and a BRICK WALL to prevent any such idea that Crimea is any part of Russia – and the actions of the Putin Kleptocracy have any standing at all with “reasonable” norms.

Russia and Russian’s MUST be made to suffer.

Posted by klapa | Report as abusive

An interesting realistic analysis. Less “US edition” bubble world and more like an international website from the days when staffed by English intellectuals. How about an “English language International edition” ? A big audience across the planet.
Another point is that Russia is also building it’s relationships with India including pushing for India in the Shanghai Cooperation Organisation, and with Turkey. So the “unwestern bloc” is more a federation of interests, rather than some sort of Chinese empire.

Posted by Neurochuck | Report as abusive

Ukraine possibly becomes the trigger of new hotwar between Russia and West if West can not stop the more prospective expansion of Mr.Putin .We can predict the prospect of our global economy and geopolitics in the coming years .In pace with the ambitious inveterate invasion of Russian ,the next victim will emerge soon and other vicinity of Russia will quiver due to their previous example –Ukraine ,is it deja vu ? is it like the early stage of 1939 German doing in Czech-Slovakia ?Most of the Western people argue this possibility and they believe that it is impossible for Russia to challenge the EU and US .If history is guide for future ,we can not ignore the fact in history -all the catastrophes were kindled by some ambitious demagogues .so ,It is time for the democratic world stand up together to cut the criminal hand of googeyman for protecting our peaceful homeland.

Posted by 6652911636 | Report as abusive

Generally optimistic and rather unbiased article. Realistic assessment of Crimean issue, perhaps, could have been amended by mentioning that this Russian province has been reassigned to Ukraine by the USSR’s communist government, but while the USSR was intact, this reassignment was nominal and inconsequential. The present debacle is the continuation of the USSR’s disintegration – Crimea turned out to continue being Russian de facto, as it was in the USSR, hosting one of the largest Russian army/navy groups, but Ukrainian on paper. The legitimacy issue has never been settled. Russian current annexation just formalizes facts on the ground.

Posted by BraveNewWrld | Report as abusive

I see a clear agenda in this article. Remember: ukrainians dont want to live in a buffer state where EU bites a piece and Russia bites another. They want a normal and progressive country. Why can other former soviet baltic states reach it and not ukrainians?

Posted by daniel_d | Report as abusive

At last an article that is un biased and outlines the financial implications of the actions of all major powers not just Russia. The US led coalitions have invaded borders constantly without any complaint or financial cost (other than military)Yet still on the comments below someone has again missed the point and is so entrenched in the propaganda by the West that there believe all the worlds problems can be laid at the door of Russia and Putin.

Posted by Moties001 | Report as abusive

Interesting that half of the “frozen” conflicts you identify were created, and are maintained by Russia. I agree that eastern Ukraine will likely end up like that.
The difference, though, is that the US and and EU will not ignore it, like they ignore the others.
Putin has mismanaged the Russian economy.
Russia should have a strong industrial economy. But, it doesn’t.
Being only a petro-state, it will suffer greatly with the fall in oil prices. Moreover, the lower oil prices look like they will be long term, maybe permanent.
The Russian economy is a shambles.
Will the Russian people tolerate their new found poverty?
Will they continue to support Putin’s expansionist policies?
Do the Russian people want to go back to the Cold War?

Posted by ckd1358 | Report as abusive

“In response, Russia is starting to restructure its economy. It is moving away from the classical free-trade model that it adopted in the 1990s”

What? You seriously think Russia was following a “classical free-trade model”? Just more proof financial journalists have no idea what free trade actually means.

Posted by evilhippo | Report as abusive

Come on, klapa, it is the United States of Aggression that ought to be isolated… along with the EU perhaps.

When the bitch Mogherini spoke at her inauguration (?) of conflicts all around Europe, she forgot to add that it was the EU, its member states and their allies which either directly created the conflicts, or at least strongly fomented them.

Just consider Libya, where EU cuntries were blocking any peaceful resolution and were aggressively bombing the country for several months, even violating the U.N.S.C.-mandated arms embargo, which greatly overstepped and violated any U.N.S.C. mandate, the Charter of the U.N. and therefore the international law. They created another hotbed of terrorism, which then poured arms (and terrorists) to Syria, which even the United Nations acknowledged.

On to Syria… in yet another stark violation of the Charter of the United Nations, the Western cuntries engaged in a campaign of terror against Syria. Supplying arms, training the so-called rebels, supplying them with arms and sending them to the Syrian territory to fight there amounts to a crime of aggression against Syria, which is a war crime in itself. Furthermore, they provide the so-called rebels with diplomatic cover and financial, logistical and military support. They still act in defiance of the U.N.S.C. resolution 2170.

Posted by Antikapitalista | Report as abusive

In Ukraine, the West sponsored a violent Nazi-like coup and (in Western parlance) “supported a bloody dictator in butchering his own people”. Despite overt calls for a diplomatic solution, they the Western goons took great pride in shaking their hands with and the oligarch Waltzman who stubbornly refused to negotiate, let alone attempt for a diplomatic solution, arrogantly pursuing a military one, for which the West celebrated him a beacon of democracy an human rights and lavished him with promises of their unabated support.

Of course, not to mention Yugoslavia, Iraq, etc. If Russia adhered to the “Westerns standard” of observance of international law, it would now have the humanitarian right to bomb *all of Ukraine*, bridges all over the country, Ukrainian TV broadcasters (under the pretext of being possible command and control centres for the Ukrainian army), etc.
Fortunately, Russia’s steps were only to secure what the West had demanded all along – a diplomatic solution, preventing the murderous Kievan junta from “killing their own people” in the southeast of Ukraine.

Posted by Antikapitalista | Report as abusive

“Yet still on the comments below someone has again missed the point and is so entrenched in the propaganda by the West that there believe all the worlds problems can be laid at the door of Russia and Putin.”

Did not see at all where ANYONE believes the WORLDS problems are due to Russia – only Ukraine and Crimea problems due to not incursions – but due to outright invasions and “annexation” which means the Russian’s, just like in Eastern Europe, do not ever plan on leaving.

Financial problems aside – the world must show that such “land grabs” will NEVER be tolerated, and regardless of supposed financial fallout for the West, Russia must remain isolated until they GET OUT OF CRIMEA.

Posted by klapa | Report as abusive

No one ever imagined that a small country like Ukraine could make the whole world upside down! Politicians are playing with the blood of innocent people.

Posted by gentalman | Report as abusive

very courageous exposition ofthe current affairs of Ukraine crisis.More so in western media!Wether the crisis solved or not,one thing is clear,Eu
will think twice to co.opertate with US in future.

Posted by gentalman | Report as abusive