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Ukraine: A Trillion Here – A Trillion There

(…and pretty soon you are talking about real money)

This post first appeared on Russia Insider

As the military situation in Ukraine grinds to a stalemate, the still more desperate economic plight comes to the fore, laying bare the culpable folly of European diplomacy.

In an earlier posting we had suggested that the unification of Germany could serve as a benchmark for the potential cost of any attempt to keep the implicit promise to Ukraine of EU accession, tossing out a guesstimate of one-half trillion Euros – an obviously impossible sum in the context of a European continent sliding into renewed recession.

<figcaption>What do I care if Ukraine never pays us back?  The German taxpayer is my ATM.</figcaption>
What do I care if Ukraine never pays us back? The German taxpayer is my ATM.

In a recent paper, Carnegie’s always incisive Dmitri Trenin has suggested that the actual cost of the reunification of Germany was closer to E1.5 trillion, albeit over a period of 23 years. While this latter number is almost certainly closer to the mark, given the realities it is no more than a substantial rounding error; Mr Poroshenko’s trip to Washington – from which he returned with a generous $52 million – suggests that the likelihood of Ukraine receiving anything like either number is identical – precisely nil.

That's $50 mmm...million, with an "M"

Since independence modern Ukraine has been at best a semi-functional state, stumbling along on legacy assets while no government, whether nominally pro-Russian (Yanukovich) or pro-western (Timoshenko/Yushchenko) made any meaningful attempt at real reform.

This is hardly surprising – the various governments represented nothing more than the coalesced interests of one or the other oligarchic faction, themselves the ultimate beneficiaries of systematised corruption and inefficiency, which they have no conceivable interest in combatting.

Neither Russia nor the West chose to (or were able to) impose reform from without. Western spin management certainly prepared the ground for the policy blunders which followed - the former darling of the Western media (now thankfully largely forgotten) Yulia Timoshenko built her multi-billion dollar fortune by stealing gas, consolidating control with the same brutal tactics employed in Russia by Mikhail Khodorkovsky in the mid-90s.

Of course Ukraine can join the EU, right after Turkey and Albania!

In recent weeks, the Western media have finally begun to deviate from the party line. The New York Times carried a piece on the Kiev Regime’s use of illegal cluster munitions to depopulate its former Eastern provinces. Bloomberg has started to run pieces on the total failure of the government in Kiev to carry out meaningful reform or anti-corruption campaigns. Are they preparing a retreat?

The only thing we find surprising is that anyone should be remotely surprised – a government of oligarchs kept in power in part thanks to small, heavily armed fascist factions is certainly a most unlikely candidate to carry out sweeping reforms.

Waiter – check please!

As Winter draws nigh, the European Union finds itself embarrassed. It is dependent upon Russia for 30% of its gas – half of which still transits through Ukraine.  Were Ukraine to resume stealing gas intended for the EU and were Russia to cut supplies in response, Europe most certainly would not freeze, but a substantial part of its industrial plant would shut down, sending the EU sliding from its current slow grind towards recession into outright economic collapse. As a result, the recent discussions in Milan were centred about a single pertinent question: how, precisely, is Europe going to pay Ukraine’s gas bills? A bridge loan is being cobbled together, with the likelihood of repayment in fine vanishingly slim.

Needless to say – this is only the beginning. As Mr Trenin correctly notes, to keep Ukraine going as a functional, unitary state is going to require massive capital outlays; we need add only that such outlays will not encumber Washington – which will typically wash its hands of the entire matter and blame “the Russians” – but rather the EU.

Brussels/Berlin shall be left to support the rump Ukraine – 40 million people, with some good agricultural assets (which alas, Europe is not short of) while Russia is compelled to support Novorossia – 2 million people in a largely devastated province, although with some operable industry and mines.

Regardless of Mr Putin’s stated preference for the preservation of a unitary Ukraine, it seems most unlikely that, given the appalling violence visited upon them, the Eastern provinces will again accept any sovereignty of Kiev, instead coalescing into a mini-state under Russian protection -  similar to South Ossetia or Abkhazia.

Tacit a sudden and unforeseen outbreak of enlightened self-interest and skilled diplomacy in Germany, this de facto secession will remain an open ulcer, poisoning relations between Europe and Russia for years to come – and yes, greatly advancing the geostrategic interests of China.

Blindfolded – at night

What is most extraordinary is that this outcome was not only predictable, but indeed, that there was no other scenario imaginable. Led by Germany, European diplomacy stumbled into the Ukrainian imbroglio with nary a hint of a viable exit strategy. By allowing the Kiev regime a free hand to attempt ethnic cleansing of Lugansk/Donetsk - something which Russia would obviously never allow – they stood by as the Ukrainian State was damaged beyond repair, while the industrial economy collapsed.

Reminiscent of the US invasion of Iraq – based upon little more than a profound faith that matters would somehow “work themselves out” (they have…though not quite as intended: enter ISIS) Europe has contributed to a geopolitical catastrophe for which it will most likely be paying for generations to come.

As regards Russia, anyone wishing to spin this as a great geopolitical victory is delusional; Russia has been forced to respond to a crisis of other people’s making. President Putin was dealt a poor hand, though he has played it remarkably well. The political split with the West was not intended, but was forced upon him by aggressive Western diplomacy which allowed only the stark choice between submission and resistance; it shall have a profound impact upon Russia’s future geopolitical orientation – one which, whether or not it is ideal for Russia, shall certainly not prove remotely beneficial to the interests of the West.

As regards Ukraine, at least in retrospect, his plan was obvious – play for time while the economic realities made themselves felt. Not just the arrival of General Winter rendering the situation suddenly acute, but also, the inability of the Poroshenko regime to satisfy an increasingly restive and angry populace and its radical right-wing nationalist factions.

It was always a matter of time before the Kiev regime faced economic collapse and/or violent overthrow. The war in the East bought Poroshenko time by distracting from the looming economic collapse, while providing a convenient fig-leaf for the inability to reform. That time is now running out.

Neither Europe nor the US have either the means or the willingness to step in to support Ukraine to the extent required. Loans (which will certainly never be repaid) shall be provided ad hoc by the EU, as required to stave off imminent catastrophe - while the usual suspects continue to divert whatever is available of their accustomed cashflows.

At some point, as their personal situations become stressed, the Ukrainian oligarchy may well solicit a new offer from Russia – similar to Yanukovich’ ill-fated appeal to the Kremlin; given the amount of bad blood and violence seen, an Eastward turn by the rump Ukraine seems most unlikely. Instead, Ukraine is doomed to remain a perpetual accession candidate, peering longingly through the European shop window – more Albania than the Czech Republic.

None of the options are palatable, and the present author is hard-pressed to imagine a blue-sky scenario. But the sheer incompetence of European diplomacy has been startling - In a world not remotely starved for crises, the present crisis appears as a unique failure, as Europe has allowed its vital CIS policy to be hijacked for the furtherance of the geopolitical agenda of militant Washington factions. 

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