Sunday, February 9, 2014

Should We Care About the Ukrainian Political Unrest? A Look at Ukrainian Politics and Its Economy

For the past couple of months, Ukraine endured tumult that it has not seen since the Orange Revolution.   When President Yanukovych backed out of a trade deal for greater integration of the Ukrainian economy into the European Union, the Ukrainian people protested not only because it was symbolic as a rejection of the Western world, but also because Yanukovych's political corruption reached a threshold. Ukraine is a relatively new country that is divided both ethno-linguistically and politically. Although the pro-EU support seems to be in the western half of the country, there have also been protests in the eastern half that have been supportive of Yanukovych. On January 16, the Ukrainian government enacted anti-protest laws, which were later repealed. As if it were a surprise, it put Standard and Poor's in a position where it had to downgrade Ukraine's credit rating to a CCC+, right down into junk bond territory.

Ukraine scored #155 on Heritage Foundation's Economic Freedom Index, and #126 on Fraser Institute's Economic Freedom Index, neither of which are flattering scores. Freedom House ranks Ukraine as only Partly Free. Even on the Corruption Perceptions Index, Ukraine scored 144 out of 177. What this scoring suggests to me is that Ukraine, much like its other Eastern European neighbors did in the past, are yearning for a free and democratic society. After the Cold War, we saw how countries such as Poland, Lithuania, Estonia, and Hungary become more free and better off in comparison to being part of the Soviet bloc. Bringing freedom and a better way of life to the second largest country in Europe [in terms of area] would certainly be the moral argument for why the international community should be interested in Ukraine.

There is also economics to consider, which are well beyond its robust agricultural sector. Ukraine's GDP reached $178B last year. In spite of having less than a $4K per capita GDP, Ukraine is geostrategically located as a key energy transit route, not to mention its natural gas reserves that are appealing to Russia. Putin's interest in Ukraine goes beyond the money he can make off of natural gas. He is looking to build a Eurasian in attempts to increase its sphere of influence and revive the glory that Mother Russia once had. Considering how repressive Russia had been of Ukrainian nationalism it would seem odd for Ukraine to acquiesce. If Russia succeeds in integrating Ukraine, a country with a large, military industrial complex, into the Russian empire, it could very well create a balance of politics scenario that we have not seen since the Cold War. Whether or not Russia acquires Ukraine, there is also the worry that Ukraine could fall into a civil war. I don't think the situation is that dire, but it is within the realm of possibility

Although I don't think Russia will fully recover its previous glory, they could still gain enough international clout to be a nuisance. So what can be done? Aside from some diplomatic pressure [for further trade integration], I am not sure that there is not much the West can do for Ukraine in this situation. Since the oligarchs of Ukraine have assets in the West, economic sanctions might put pressure on Yanukovych, but economic sanctions are not the most successful form of retaliation (e.g., Cuba, Iran). I would opine that since the impetus of the protests is due to domestic policy, the forces that will have the largest effects on the decision-making process of the Yanukovych regime will be domestic in nature. Even so, whatever pressures are put on the Ukrainian government, domestic or international, I hope they are enough to help integrate Ukraine further into the European Union.

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