Ukrainian President Yanukovich has bad and worse options

By Ian Bremmer
December 13, 2013

Since the Ukrainian government’s November 21 decision to suspend free trade talks with the European Union, the country has descended into crisis. Hundreds of thousands of protestors have taken to the streets, angry with President Viktor Yanukovich’s choice and its implications. Violent clashes between law enforcement and protestors have stoked tensions even more; most recently, the government’s failed attempt to forcibly clear protestors out of Independence Square — their nexus of operation — has made the chance for compromise even bleaker.

So how did we get here? Ukraine is the perfect case study for what I’ve referred to in the past as a “shadow state”: it cannot free itself from Russia’s overwhelming influence, nor is it beneficial or domestically popular for it to give in and integrate with Russia further. So while Ukraine cannot leave Russia’s orbit, in recent years, Yanukovich’s government has managed to juggle between the competing spheres of influence of Russia and the European Union.

However, this fragile status quo has fallen apart thanks to a worsening economic situation and more pressure from Russia. Ukraine faces a three-prong predicament, starting with a struggling economy that is forcing Yanukovich to look for aid — or risk full-fledged economic crisis or default.  Second, the EU and Russia, the two major powers that could provide this assistance, have serious quid pro quos attached to any economic relief they might offer. Third, the two powers’ demands have become mutually exclusive: the EU won’t accept Ukraine if it gravitates toward Russian President Putin’s geopolitical pet project, the Eurasian Union, while Putin won’t accept Ukraine if it moves toward EU partnership.

All of this is taking place in a country that broadly favors tighter ties with the EU, but is economically dependent on Russia: defying its neighbor could lead Russia to engage in trade retaliations. The decision to veer away from the EU has led to unrest on a level we haven’t seen since the Orange Revolution of 2004. And for President Yanukovich, these tensions play out against the backdrop of the 2015 presidential election. Now Yanukovich has two challenges to address: the growing financial storm, as well as the fervent public protests and opposition. There is no good path forward — there are only bad and worse choices — but Yanukovich’s decisions could determine his political survival, and Ukraine’s future.

So what can Yanukovich do? For now, first and foremost, he needs to continue to move back toward Europe politically to appease protestors and opposition groups, while veering toward Russia for stopgap funding (to buttress financial support from domestic banks and oligarchs). Yanukovich also has to manage public anger, first by not cracking down on the protestors (like what we saw earlier this week), and second, by reshuffling the cabinet in some way — perhaps by jettisoning Prime Minister Mykola Azarov for a candidate more aligned with the interests of key oligarchs, and more favorably disposed to Europe.

Assuming he can survive those near-term hurdles, the economic situation will continue to deteriorate and Yanukovich needs a longer-term fix. Currency reserves fell to their lowest level in seven years in November ($18.8 billion), making the prospects for covering next year’s large external debt obligations much shakier.  Growing pressure on Ukraine’s currency, the hryvnia, will only exacerbate the chance of crisis. So where should Ukraine turn?

There have been reports that the EU may try and offer funding contingent on Ukraine signing the EU association agreement, but given the bleak financial situation across Europe, the notion that it would be willing to offer sufficient sums to alleviate Ukraine’s economic woes — as well as offset the economic fallout from potential Russian retaliation if they sign — is just unrealistic.

It’s clear that Russia is not the long-term answer. It’s a nonstarter domestically: if stepping away from EU free trade talks precipitated this much backlash, accepting Moscow’s condition that Ukraine join its Customs Union (a stepping stone towards the Eurasian Union) in return for aid is dead on arrival. On top of that, Russia isn’t looking like the best choice right now. Putin has record unpopularity domestically, and he is dissolving the state media to reorganize it under one of his friends. If Ukraine did go down this path, it would begin to resemble Belarus, a country with no EU outlet for the foreseeable future, operating completely within Russia’s shadow. Russia may feel less inclined to provide long-term support to Yanukovich’s Ukraine since there is no guarantee he will survive beyond the 2015 election — if he lasts that long. Why give aid on faith without locking Ukraine into tighter integration with Russia?

This uncertainty surrounding who will hold power in the long run likely contributed to outside powers’ reluctance to step in with significant aid as well.  China is another potential source of aid that is highly unlikely to bear fruit; Yanukovich learned this the hard way when he made the curious decision to go through with a trip to China even as protests continued back at home.  If you’re going to leave your country during massive demonstrations against your government, you better be going for a win. We saw some modest announcements of Chinese investment, but nothing to change the parlous financial situation.

Yanukovich could always choose to do nothing to adequately address Ukraine’s financial situation. As his position weakens, default could become a more appealing prospect for him personally, although the costs make it highly unlikely. Ukraine would lose legitimacy from investors as well as access to international capital markets for years. It would also deeply anger oligarchs who rely on international markets.

By process of elimination, locking in an IMF deal is the lesser evil for addressing Ukraine’s economic predicament. But it would come with severe consequences, given the IMF’s onerous lending conditions. A deal would be contingent on lifting the hryvnia peg. More importantly, it would require increasing household gas tariffs, making Ukrainians pay significantly for their own heating for the first time in the country’s history. If people took to the streets because Ukraine cut off talks with the EU, it’s not hard to imagine the severe fallout from a price hike for basic heating.

Yanukovich will probably reason that the IMF deal is the best among bad options — if he can stay in power that long. There is a slim, but growing chance that Yanukovich gets ousted or is forced to resign; his popularity will continue to plummet with further crackdowns on protestors. If Yanukovich goes, it would create a window of extreme political volatility in the lead-up to emergency elections, as various forces would jockey for votes and Ukraine would not address its economic situation. But the government that ultimately arises would likely be more inclined towards the IMF deal (and coming out of elections, perhaps have somewhat of a mandate to pursue it).

Yanukovich’s game plan should be to keep threading the needle between the EU and Russia, while keeping domestic opposition at a simmer rather than a boil.  If he can survive the near-term pressure, he can pick his longer-term poison — and the IMF deal seems least likely to prove lethal. But it poses enormous challenges in and of itself. Any way you slice it, the outlook for Yanukovich and Ukraine is grim.

PHOTO: Protesters hold up their mobile phones as they attend a demonstration in support of EU integration at Independence Square in Kiev November 29, 2013. REUTERS/Gleb Garanich 

 

 

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As well, one can doubt the appetite of the EU for Ukraine. There are already economic, political, social issues integrating Bulgaria and Romania, and Ukraine looks like more of the same uncompetitive industry and lower skilled and less productive workforce.
Whereas Russia is more used to running a “prisonhouse of peoples”, and extending a Russian hegemony to Ukraine and maybe Serbia may seem the natural way to go.
As the Ukraine population decreases due to high mortality of adults due to alcohol and drug abuse and depression.

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