European Jitters Over Ukraine

Among European governments there is widespread sympathy for Ukraine as a smaller country being bullied by a bigger one, as well as a sense of but-for-the-grace-of-God in many of its neighbors in the region. But there is also growing anxiety over how the crisis is impacting Europe’s economic recovery.

For one thing, the Ukrainian confrontation could jeopardize Russian energy supplies to EU countries just when Europe is seeing glimmers of improvement. More than a quarter of the European Union’s total natural gas needs are supplied by Russia, and more than 50 percent of it passes through pipelines in Ukraine, making the transit country a linchpin in the EU’s energy security. In the past, when Russia has cut off supplies to Ukraine in disputes over pricing the impact was felt in Austria, Germany, Italy, Poland, Hungary, and Slovakia.

That the European Union failed to take decisive action to reduce its vulnerability in the energy sector by further diversifying its supply sources in the face of Russia’s use of its gas as a potent economic and diplomatic weapon seems remarkable. Now, that failure is coming home to roost as President Vladimir Putin is again putting the price squeeze on Ukraine, and supplies through Ukraine could once more be in danger.

When Ukraine’s now ousted, pro-Moscow president Viktor Yanukovych was in power, Russia gave the Ukrainians a 30 percent discount on gas deliveries. But in April, Gazprom, Russia’s state-controlled energy giant, raised the price from $268 to $385 per 1,000 cubic meters, a jump of about 44 percent. $385 is a European benchmark for Russian gas, but the Ukrainians see it as punitive. Moscow says it’s because the Ukrainians have a $$14.9 billion outstanding debt for past supplies.

The Russians have given Kiev until the end of June to start paying its debt or face a supply cutoff, which would have consequences for Europe. Unlike the other two previous occasions when Russia turned off the spigot, EU countries this time have some reserves thanks largely to a mild winter; Germany, the biggest importer, has shifted to using more coal, imported from the United States, and Polish lignite in an attempt to limit its Russian gas imports.

But a Russian cutoff would soon begin to bite, and at a meeting last week of the energy heads from Ukraine, the European Union, and Russia, the EU urged the Ukrainians to restructure the Russian debt.

In December, Moody’s said Ukraine would need $24 billion to cover its budget deficit, debt repayments, natural gas bills, and pension support for 2014; the Ukrainian provisional government upped the ante to $35 billion over two years. In May, the IMF and EU financial institutions made bailout commitments totally $32 billion, while the US Congress approved another $1 billion.

Hence the second concern of some European countries, that the $15 billion Brussels bailout to Ukraine was being siphoned off from money originally earmarked to help recovery of the EU’s weaker economies. For example, in April, EU ministers signed off on the next $11.4 billion bailout to Greece in response to financial reforms imposed by Brussels. Athens is no longer the economic basket case it was two years ago, but still needs at least one more infusion of financial aid after this one, and some in Athens are nervous about Ukraine—not an EU member—becoming a bigger priority for Brussels to the detriment of its own members’ economic recovery. But the aid to the Ukrainians comes with strings attached, which if enforced, will surely test Kyiv’s ability to throw off the bad habits of the past—corruption, cronyism, and inefficiency that helped create the present shambles in the first place.

Christine Lagarde, head of the IMF, said that the fund’s contribution of $17 billion would be doled out accompanied by frequent reviews of how the money was being used. And José Manuel Barroso, the president of the European Commission, said the EU bailout was “designed to assist a committed, inclusive, and reforms-oriented government on rebuilding a stable and prosperous future for Ukraine.” (Ironically, the language recalls conditions the EU imposed on Greece.)

So a lot depends on whether the May 25th presidential elections produce a president capable of preventing politicians and oligarchs from continuing to steal.

A third issue of concern to Europeans is the imposition of so-called third-stage economic sanctions that would target key sections of the economy (the first two stages were aimed at oligarchs who are close to Putin). One outcome of German Chancellor Angela Merkel’s recent meeting with President Obama in Washington has been an agreement to impose sector-specific sanctions if Moscow attempts to disrupt the elections.

German support is crucial because at the start of the Ukraine crisis “German politicians were among the most reluctant to impose sanctions on Russia,” according to Jakob Mischke and Andreas Umland, two German scholars writing in the French paper Le Monde Diplomatique in March. But “as the earlier policy of rapprochement failed to produce any tangible moderation of Russia’s domestic and foreign policies, [German Foreign Minister Frank-Walter Steinmeier] now seems ready to take a more confrontational stand towards Moscow while upgrading his engagement with the new Ukrainian leadership.”  

Possible targets mentioned included Russia’s high-tech engineering sector, energy, and defense. Such a move would pinch the EU economy considerably more than it would the American: US-Russian bilateral trade was $38 billion in 2013, but EU trade with Russia was a record $330 billion in 2012. Still, with Germany agreeing, however reluctantly, to follow the White House lead, the rest of Europe would be expected to follow suit.

The more determined German position was reflected earlier this month in a Der Spiegel editorial. The magazine called for postponing for three months both the May 11th referendum on secession in the eastern part of the country and the May 25th presidential election, and using the time for a negotiated settlement of the crisis. “If Putin doesn’t fulfill his obligations, if he torpedoes the process, tough economic sanctions must follow immediately,” the editorial concluded. “They will be painful to Russia, but also to Germany and its partners. Complaints, though, should be ignored. Political order on the continent and the containment of an aggressor must take precedence over gross national product.”

Another concern centers on how worsening relations with Moscow could affect NATO’s pullout of forces from Afghanistan by December 2014. When the Pakistan’s North West Passage became too dangerous to use as a supply route to Afghanistan because of Taliban attacks, Russia began to play a vital role in moving troops and supplies into Afghanistan. The Northern Distribution Network was set up using Russia’s railroad network to deliver nonlethal supplies from the Latvian port of Riga to Afghanistan, while US and allied transport planes airlifted troops and military hardware, using Russian airspace. Since October 2009, according to US Transportation Command, 739,000 US personnel, along with their equipment and bags to or from Afghanistan, transited through Russian airspace in 3,900 flights.

Russia still has a role to play in the drawdown, but a lesser one. This is because the United States has lost the use of the air base in Kyrgyzstan that was its main hub. Late last year, the Kyrgyz Parliament voted not to renew the contract allowing US use of the base. Instead, the US is using a base in Romania as the new hub, and this does not require flying over Russia. The Russians also have a large military base in Kyrgyzstan, and exert considerable influence over the Kyrgyz government.

But as what was once called Operation Enduring Freedom comes full circle, Russian freight trains are still transporting an enormous quantity of retrograde (the US term for withdrawing) cargo to the port of Riga, where some of it had landed in the first place. 

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