Ukraine on Brink of Financial Collapse

Ukraine

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Will Europe allow a bankrupt Ukraine to fall back under Russian domination?

Ukraine is on the brink of financial collapse. The country is unable to meet interest payments. Its gross domestic product (GDP) fell by 6.8% in 2014 and is expected to fall by an even greater extent this year. Meanwhile, it has to defend itself against a neighbor that guaranteed its borders as recently as 1994.

Instead of stepping forward to help Ukraine financially, the European Union (EU) and the United States are both leaving the job to the International Monetary Fund (IMF). The IMF is offering Ukraine $40 billion, whereas the EU says it can only manage $2 billion.

The European Union has already extended 40 times as much credit to Greece as it has given to Ukraine, whose population is four times that of Greece. If this ratio reflects the EU’s real priority, it is unbalanced. GDP per head in Greece is about three times that of Ukraine.

Like Greece, Ukraine has a lot to do in order to create a functioning and efficient legal and administrative system, stamp out corruption and collect taxes fully and fairly. But Ukraine has to do this while recovering from the effects of a communist system that was imposed on it from outside since 1919, whereas Greece has been the democratic shaper of its own policies for many years.

Of course, Greece is in the EU and the euro and Ukraine is not, but both countries are in Europe and aspire to a democratic European future.

Furthermore Ukraine had it borders guaranteed in the Budapest Declaration of 1994 by EU countries, Russia and the US, in return for giving up nuclear weapons. Despite this, Ukraine was invaded and a portion of its territory was annexed in 2014 by Russia, because Kiev wanted to make a modest cooperation agreement with the EU. Notwithstanding this, the EU is now being stingy in helping Ukraine manage its financial crisis, while instead being fixated on the drama in Athens.

Ukrainians believe they have a European destiny and are prepared to die for it. The Russian leadership, on the other hand, believes that Ukraine, with its Russian-speaking minority, is in their sphere of influence. Moscow sees a link up of Ukraine with the European Union as a form of foreign interference in its own backyard.

One would have to respond that this view is not in accordance with Russia’s guarantee to Ukraine in 1994, nor with international law. The entire post-World War II European security order rests on acceptance of international law. Similarly, any prospect of voluntary nuclear disarmament in the future depends on solemn obligations—like the 1994 Budapest Declaration—being honored.

In Ukraine’s case, all the EU is expected to do is provide financial assistance. But if Ukraine falls, the Russian threat may move on to other countries with Russian-speaking minorities such as Latvia and Estonia, which are NATO members and to whom most EU countries have a solemn treaty-based obligation to provide military help if their territory is threatened.

Waiting for Ukraine to Fall Back

Meanwhile, the Greek government, while looking for new loans and debt write offs from the European Union, is ostentatiously aligning itself to the very country that has invaded Ukraine: Russia. It is looking for more credit from the EU, without implementing reforms that would generate the long-term growth that would enable those loans to be repaid.

In contrast, the new Ukrainian government is implementing painful reforms to increase the growth potential of its economy; for example, by eliminating inefficient consumption subsidies, which have quadrupled gas prices paid by Ukrainian households. Parts of its reform program are being delayed in parliament by opposition figures like Yulia Tymoshenko, who was once the darling of Western media and is still part of the European People’s Party (EPP) family—to which Fine Gael and the Christian Democratic Union of Germany (CDU) belong.

Ukraine’s financial situation is so critical that Russian President Vladimir Putin believes all he has to do is sit and wait until the Ukrainians fall back into Russian control when they run out of cash, due to the absence of large Western credits.

If this happens—and if the EU continues to do little or nothing to stop it beyond talk—it will be a huge blow to confidence in the European Union’s ability to defend its values and help its friends. Other countries on Russia’s perimeter will feel they have to make a deal with Putin rather than rely on the EU.

In Ukraine’s case, European countries do not have a treaty obligation to give military assistance. But, in their own interests, they should give generous financial help to ensure that a success in Ukraine does not embolden Russia to undermine countries like Latvia and Estonia.

When questioned in a recent Pew poll as to whether they would be willing to use force to defend a neighboring NATO country that found itself in conflict with Russia, 51% of Italians, 53% of French and 58% of Germans answered that they would not.

If that frightful dilemma is to be avoided, it would be wise for Europeans to draw the line in Ukraine now by providing the country with enough financial assistance to build a functioning state that can pay its way and be capable of resisting intimidation by its big Russian neighbor.

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.

Photo Credit: Drop of Light / Shutterstock.com


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