The Ukraine Crisis for Dummies and Why It Is Important - Part II
The flag of Ukraine

Russia under Putin has overcome the chaotic Yeltsin years and developed economically, but this has been largely due to rising energy prices and Russia  increasing international arms sales.  Strong business leaders (oligarchs) emerged, who were able to buy state assets at knock-down prices.

From 1994 Ukraine continued under the corrupt Kuchma regime but was slowly making reforms.  The ‘orange revolution’ in 2004/2005 – where thousands stood in the famous Maidan square in Kyiv in the freezing winter, was a spontaneous, grass-roots revolution that brought in President Viktor Yushchenko and Prime Minister Yulia Tymoshenko.  Yuschenko was seriously poisoned just before the election (clearly by the defeated Viktor Yanukovych) but recovered.   

The pace of reforms increased under Tymoshenko but the standard of living was still very low and support for the ‘Party of Regions’ (Viktor Yanukovych) was growing.  The graph below shows GDP per capita  in Ukraine and Poland from 1990 to 2012.

GDP Per Capita.jpg

GDP per Capita US $

In 1990 Poland had just emerged from the Warsaw Pact, through the Solidarity Trade Unions, but the economy was in a very poor shape following six years of martial law. There was almost no foreign investment as Poland had over $40 billion in foreign debt.  Its GDP was about the same as Ukraine’s and so was GDP per capita, at a very low $1,800. Reforms and liberalisation greatly developed the Polish economy and there was a further boost by membership of the EU and the single market in 2004.  Ukraine, on the other hand, faltered and living standards remained woefully low.  In 2012 GDP per capita in Poland was well over 3 times bigger than Ukraine and growing.  Poland is now rated as the seventh most attractive country for investment in the world.

The first big mistake the West made was the failure to support Tymoshenko sufficiently in the 2010 elections, and to allow Yanukovych to sneak in (Tymoshenko and Yushenko had fought throughout their Government and failed to come up with a united position for the election). Whilst Tymoshenko had clearly made a fortune from politics, she was far less corrupt than Yanukovych and was making some reforms.[1] 

Russia transformed itself from a closed economy to an expanding trading economy mainly based on commodities (oil and gas), Western capital flowed in to invest in Russia, and the Western financial centres accepted huge deposits and investments – almost entirely from very wealthy Russian individuals without any questions about the source of funds.  Half of the finance of Russian companies traded on stock exchanges comes from Western financial institutions.  This confirmed Putin’s view that only money drove the West and almost anyone could be bought and, of course, one of his first coups was to hire the former German Chancellor Gerhard Schroeder in Gazprom. Putin has stated that he considers the West to be corrupt, full of gays and paedophiles, whereas Russia is strong, straight and macho and this is precisely the image of him that is portrayed in the Russian media (which is highly controlled by the Kremlin).  It is important to understand the Kremlin view (even if we do not accept it).  Putin feels Russia was deeply offended (even wounded) by the loss of Poland, the Baltic States and other Central European countries and their accession to the EU and, even worse, membership of NATO over the last 10 years.  This makes their determination to ‘hang-on’ to Ukraine even stronger.  The Russian reaction to the Western sanctions has been that the Kremlin leadership sees this as a ‘test of strength’ so, in fact, more sanctions simply strengthen their resolve and, conversely, may result in Putin accelerating his efforts as he just as well get as much territory as he can.  He sees the West as weak and Russia has started a new type of war, which is unconventional – supports local ‘rebels’ (many of whom are actually from Russia), special Russian forces and a huge dis-information campaign. 

In Eastern Ukraine Russia has used a ‘slow escalation’ with some ‘clever’ pauses like the questionable humanitarian convoys and so-called ‘ceasefires’ but these are used to deflect attention from the conflict – and suggest that it may be possible to negotiate with Russia and to stimulate disagreements within the EU – which is already starting with many companies and some countries suggesting that sanctions be diminished.  The slow escalation also shows that the West,  more or less, has ‘accepted’ there are some Russian troops in Ukraine and so it means that Putin’s advisors are saying “ next week we can increase the troops”. 

[1] Ukrainian politics required huge campaign finances to be successful and with very little financial support from the electorate meant that only oligarchs could compete.