Monday, 29 August 2016 17:04


Dalibor Rohac, The Financial Times, 23.08.2016   


When it comes to containing Vladimir Putin’s aggressive posture in Eastern Europe, the conventional wisdom advises strengthening NATO, diversifying Europe’s energy sources, and combating the Kremlin’s propaganda.  


There is nothing wrong with any of these recommendations. Yet few things would be as effective in weakening Mr Putin as positive examples of countries in Russia’s immediate neighborhood that have liberated themselves from the shackles of domestic oligarchy and the Kremlin’s influence, and become a success story.  


At the moment, only one country has the potential to do that: Ukraine. That is why its economic and political success is not just a matter of a “far-away country” and “people of whom we know nothing,” as Neville Chamberlain used to say about Czechoslovakia. Instead, Ukraine’s success is in the West’s immediate interest.  


Can the Ukrainians pull it off? The picture is decidedly mixed. On the one hand, Ivan Mikloš, author of Slovakia’s economic reforms in the 2000s and an advisor to the Ukrainian government, notes that the country has seen more progress with economic reforms in the two years since the Maidan than in the two decades that preceded it.  


Since last year, Ukraine climbed 40 places on the World Bank’s measure of the ease of starting a business by dramatically reducing the time required for VAT registration and eliminating unnecessary business registration fees. The government has been also successful in reducing unsustainable energy subsidies – most recently by unifying the household and industrial gas tariffs. Inflation, out of control until recently, is down to single digits.  


However, Ukraine has undergone a substantial economic downturn – its economy contracted by 6.6 per cent in 2014 and by 9.8 per cent last year and the recovery projected for this year is likely to be very modest, if it materializes at all. The financial sector, with almost a quarter of all loans non-performing, remains vulnerable.  


By any metric, Ukraine counts amongst the most corrupt countries in the world, with rampant petty bribery and with disproportionate economic and political power wielded by a small number of oligarchs, such as Ihor Kolomoyskyi, who served briefly as governor of the Dnipropetrovsk Oblast. Mr. Kolomoyskyi controls the largest commercial bank in the country, Privatbank, which holds a large portion of the bad assets in Ukraine’s financial industry. It is not tough to see the possible conflicts of interest involved in, say, recapitalising the banking sector using public funds.  


On top of its domestic problems, the country continues to face Russia’s aggression. The UN Human Rights Office recorded 69 civilian casualties in Eastern Ukraine in June – the highest figure since August last year.  


In the meantime, Western resolve to confront Russia over Ukraine is weakening. The recent shambolic statements about Crimea and Russia’s presence in Ukraine, made by the Republican presidential nominee Donald Trump and his campaign chairman, Paul Manafort, are only the tip of the iceberg. A deeper problem is the growing constituency in Europe, which calls for a return to business as usual.  


Miloš Zeman, the Czech president, and Robert Fico, the Slovak prime minister, have criticized the EU-imposed sanctions since their inception. Hungary’s Foreign Minister Péter Szijjártó doesn’t “think Russia would pose an existential threat to us,” while his German counterpart, Frank-Walter Steinmeier, wants the sanction regime to be phased out. Even the EC president, Jean Claude Juncker, who visited St. Petersburg in June, wants to “treat Russia decently.”  


These attitudes reflect a complacency and a shortsightedness that will come back to haunt Europe. Removing or easing the sanctions regime without evidence of compliance with the Minsk agreements – which the EU seems increasingly likely to do early next year – amounts to rewarding Putin’s aggression and encouraging him to do more, in Ukraine and elsewhere.  


Instead, the West should be providing the assistance that Ukraine needs to defend itself, including lethal aid. The EU ought to proceed with the much-delayed liberalisation of its visa regime with Ukraine and Georgia.  


Most importantly, Western engagement in Ukraine cannot be just transactional. While the ongoing IMF program and the technical assistance provided from the outside are delivering both on the front of macroeconomic stabilisation and policy change, the EU and the United States have to make sure that they are winning both the hearts and minds of Ukrainians. Otherwise, the vacuum can be filled with decidedly unsavory forces, as the recent revival of the nostalgia for wartime Ukrainian nationalism indicates.  


Yes, Ukraine is, and will likely remain, a deeply flawed country. But that does not make its success any less critical, both for the advancement of democratic capitalism and for keeping Europe whole, free, and at peace.  


Dalibor Rohac is a research fellow at the American Enterprise Institute. 


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