Ukraine has recently become the new battleground in the ongoing Russia vs the West influence war. Ukraine is has been facing economic troubles since the latter end of 2013 which saw the Government of President Viktor Yanukovych reject an EU association agreement that would see Ukrainian exports head to the EU and accept a Russian deal that offered Ukraine $15 billion bailout that would tie Ukraine economically and politically to Russia. The Ukrainian government’s approval of the Russian deal, which forces Ukraine to import a set amount of natural gas from Russia, is what led to the ongoing political unrest and protests that have plagued Kiev. In response to the protests, the Ukrainian President dissolved his cabinet, which consisted of many pro-Russian politicians, in hopes of stemming the unrest. Unfortunately, Russia this past week decided to withhold the rest of the bailout money due to Yanukovych removing the pro-Russian Prime Minister. The US and EU have come forward with a new plan that would require Ukraine to enact political and economic reforms. The economic reforms that Ukraine would have to face are a devaluing of its currency, and rising natural gas prices and signing the association pact with the EU that would open up the EU to Ukrainian exports.
While I do believe that the Russian bailout pact restricts Ukraine’s sovereignty, the US and EU plan may be too painful to implement with such low political stability. The further devaluation of the hryvnia, Ukraine’s currency, would harm the Ukrainian public and reduce their ability to consume. Though top US officials believe that the Ukrainian public’s problem with devaluation may not be as large as believed. Due to recent Fed tapering and the flight of investors out of emerging markets, the Ukrainian hryvnia has already become substantially devalued. This would mean that it would be less of a shock to the Ukrainian public if the devaluation continued a little bit longer. The raising gas prices are also a sticking point when it comes to public sentiment. As the weather begins to heat up in the spring though, the falling demand for gas would allow the Ukrainian government to increase the price of natural gas without causing the public to feel the pain of the increase. Unfortunately for Ukraine, while the US and EU plan is the best in the long run, because it has Ukraine’s long run economic benefits in mind, the plan hinges on political reforms that are too difficult to implement.
With the recent crisis in Ukraine, I thought it would be a good time to revisit Ukraine. Since Ukraine ousted the pro-Russian prime minister for a pro-Western prime minister, Russia has intervened in the Crimean province of Ukraine. The Crimean province is predominantly Russian ethnicity but was gifted to Ukraine back in 1994. The Russian presence in Crimea has caused ripples around the EU and world markets. NATO members and EU member states worry about how to respond to Russia’s show of force. The United States is in a tight position because they need to show NATO and EU that they can protect the other members. The crisis in Ukraine has caused EU stock prices to drop because investors believe the crisis will go on for a long time. Russia has used its Gazprom ties to apply pressure on Ukraine by stating that they may shut off their energy due to unpaid bills. To combat Russia’s mounting pressure,
the EU plans to provide an 11 billion-euro ($15.3 billion) aid package and is prepared to drop tariffs on about 85 percent of the bloc’s imports of Ukrainian goods, according to EU Trade Commissioner Karel De Gucht. Ukraine wants as much as $15 billion from the International Monetary Fund.
I believe Ukraine needs this package otherwise they face a repeat of 2009 when Russia shut off energy and caused the world economy to stutter. It looks as of now, the only thing the US can do without causing direct conflict, is to support Ukraine through economic and monetary funds. The US doesn’t want to directly confront Russia but they are pushing for the IMF to agree on a bailout package. The next few weeks will be crucial to see what happens in this resurrection of Cold War politics.