Monday, July 28, 2014
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Europe’s Ukrainian Lifeline

NEW YORK – Last weekend’s European Parliament election and presidential election in Ukraine produced sharply contrasting results. Europe’s voters expressed their dissatisfaction with the way that the European Union currently functions, while Ukraine’s people demonstrated their desire for association with the EU. European leaders and citizens should take this opportunity to consider what that means – and how helping Ukraine can also help Europe.

The EU was originally conceived to be an ever-closer association of sovereign states willing to pool a gradually increasing share of their sovereignty for the common good. It was a bold experiment in international governance and the rule of law, aimed at replacing nationalism and the use of force.

Unfortunately the euro crisis transformed the EU into something radically different: a relationship of creditors and debtors in which the creditor countries impose conditions that perpetuate their dominance. Given low turnout for the European Parliament election, and if support for Italian Prime Minister Matteo Renzi were added to the anti-EU vote on the left and the right, it could be argued that the majority of citizens are opposed to current conditions.

Meanwhile, just as Europe’s bold experiment in international governance is faltering, Russia is emerging as a dangerous rival to the EU, one that has global geopolitical ambitions and is willing to use force. Putin is exploiting an ethnic national ideology (and support from the Orthodox Church) to bolster his regime. Indeed, speaking on the Russian radio program Direct Line last month, he extolled the genetic virtues of the Russian people. The annexation of Crimea has made him popular at home, and his effort to weaken America’s global dominance, in part by seeking an alliance with China, has resonated favorably in the rest of the world.

But the Putin regime’s self-interest is at odds with Russia’s strategic interests; Russia would benefit more from closer cooperation with the EU and the United States. And resorting to repression in Russia and Ukraine is directly counterproductive. The Russian economy is weakening, despite the high price of oil, owing to the flight of capital and talent. Using violence in Kyiv’s Maidan has led to the birth of a new Ukraine that is determined not to become part of a new Russian empire.

The success of the new Ukraine would constitute an existential threat to Putin’s rule in Russia. That is why he has tried so hard to destabilize Ukraine by fostering self-declared separatist republics in eastern Ukraine.

With the Donbas region’s largest employer mobilizing protests against the separatists, Putin’s plan may not work, and he is now likely to accept the results of the presidential election, thereby avoiding additional sanctions. But Russia is likely to seek other avenues to destabilize the new Ukraine, which should not be too difficult, given that the security forces, having served the corrupt regime of former President Viktor Yanukovych, are demoralized and not necessarily loyal to the new leadership.

All of this has happened very fast and very recently. Both the EU and the US are preoccupied with their internal problems and remain largely unaware of the geopolitical and ideological threat that Putin’s Russia poses. How should they respond?

The first task is to counteract Russia’s efforts to destabilize Ukraine. With the EU’s “fiscal compact” and other rules limiting the scope of government assistance, innovative thinking is needed. The single most effective measure would be to offer free political risk insurance to those who invest in or do business with Ukraine. This would keep the economy running, despite the political turmoil, and it would signal to Ukrainians that the EU and the US – governments and private investors alike – are committed to them. Businesses would flock to a newly open and promising market if they were fully compensated for losses caused by political events beyond their control.

Political risk insurance may sound too complex to deploy quickly. In fact, insurance of this type already exists. Private insurers and reinsurers like Germany’s Euler Hermes have offered it for years. So have government institutions, like the World Bank’s Multilateral Investment Guarantee Agency and the US government’s Overseas Private Investment Corporation. They must, however, charge substantial premiums to cover the cost of reinsurance.

Faced with high premiums, most businesses would simply opt to wait on the sidelines until the storm passed. That is why the governments concerned must take over the reinsurance function and use their agencies only to administer the insurance policies.

They could guarantee the losses in the same way as they underwrite the World Bank: each government would provide a modest pro-rata capital infusion and commit the rest in the form of callable capital that would be available if and when losses are actually paid out. The EU would have to modify the fiscal compact to exempt the callable capital and allow actual losses to be amortized over a number of years. Guarantees of this kind have a peculiar feature: the more convincing they are, the less likely they are to be invoked; the reinsurance is likely to turn out to be largely costless. The World Bank is a living example.

By acting promptly and convincingly, the EU could save Ukraine – and itself. What I propose for Ukraine could also be implemented at home. As long as there are so many productive resources lying idle, it would make sense to exempt from the fiscal compact investments that would eventually pay for themselves. Renzi, for one, is advocating precisely this course of action.

Putin plans to turn Crimea into a showcase by lavishing more than €50 billion on it in the next few years. With European support, Ukraine could compare favorably. And, if such an initiative marks the beginning of a growth policy that Europe so badly needs, by saving Ukraine Europe would also be saving itself.

Read more from "Europe's Ever-Closer Disunion"

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  1. CommentedJoel Hollander

    Stayed tuned for my series, "La Put[a]in du Guerre", which, by offer a range of appropriated visual imagery from various media outlets, emphasizes the farcical tone of this unfolding political and military conflict.

  2. CommentedAlarik Skarstrom

    If I understand the check boxes below, and how they are checked, everyone who is a user is also an expert. I must have it wrong; such a conclusion is scarcely tenable. Indeed, it's kind of funny, as it points up the essential flaw such commentary, especially so much on-line commentary.

    As for the ad hominem comments directed at Soros, they are very distasteful. That they are mostly wrong is almost beside the point. One can only imagine that their actual ambition is merely to negate or tear down. Tant pis!










  3. Commentedslightly optimistic

    A fundamental point being argued is there are no enforceable rules to protect international property. Russia's case seems to be that property rights are secondary - the Kremlin has a new foreign-policy principle to defend the undefined rights of Russian speakers wherever they live [in Alaska and China, for example] .
    This surely spells chaos.

  4. CommentedPaul Lookman

    This article is flawed in every respect. Just a few examples:

    “... while Ukraine’s people demonstrated their desire for association with the EU”. I beg your pardon? Large parts of “Ukraine’s people” did not participate in the elections. The puppet preferred by Washington who made it can be bought by the highest bidder.

    “... the euro crisis transformed the EU into something radically different”. I beg your pardon? People are sick and tired of the bureaucracy and EU’s expansionism.

    “... Russia is emerging as a dangerous rival to the EU, one that has global geopolitical ambitions and is willing to use force”. I beg your pardon? The West has reneged on its word not to expand NATO to Russia’s borders, it staged a coup in Ukraine, installed a fascist regime. Who would not react?

    “... [Putin’s] effort to weaken America’s global dominance, in part by seeking an alliance with China, has resonated favorably in the rest of the world.” I beg your pardon? The West has belittled the Russian Federation, insulted it, encircled it... Putin is resisting being bullied by Uncle Sam, and rightly so!

    “Using violence in Kyiv’s Maidan”. I beg your pardon? You are not implying that it was Russia who used violence, are you? The snipers were fascists, that has been established beyond any doubt.

    “a new Ukraine that is determined not to become part of a new Russian empire...”. I beg your pardon? Where are your sources? What the heck are you implying? A “new Ukraine” wants to become an EU-member, a NATO-member? Get real, please. Don’t take your readers for fools...

    “...the security forces ... are demoralized and not necessarily loyal to the new leadership.” That says it all. They do not recognize the new “leadership’s” legitimacy! Why should they kill compatriots?

  5. CommentedShawn Andrew

    "Guarantees of this kind have a peculiar feature: the more convincing they are, the less likely they are to be invoked" ... and there again asymmetry shows up again in design. Seems any design of value must have an underlying asymmetry to it.

  6. CommentedBohdan Chomiak

    Other Mr. Rebentisch and Mr. Daley who commented on the substance of the argument presented, the remaining comments are typical for Russian trolls. My guess is that they make a few cents per post. It would be nice if instead of making money they made sense.

  7. CommentedAndré Rebentisch

    I would argue that what you describe as "a relationship of creditors and debtors in which the creditor countries impose conditions that perpetuate their dominance" is a misinterpretation of the backers of political union. It turns those politicians who undermined a) the Maastricht conditions and undermined their b) national ratings for bond market-based solutions into victims of external creditors willing to "perpetuate their dominance".

  8. CommentedPaul Daley

    So, the public sector should take the risk and the private sector the returns from doing business in Ukraine. Isn't that a model that we've seen once or twice before?

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