Leadership: Russia Takes A Big Chance

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March 14, 2014:   Russia’s aggression against Ukraine is often described in military terms. That is not accurate because Russia knows that it has a far more potent weapon to use against Ukraine. It’s not what military forces Russia might send into Ukraine that is a threat, it’s what Russia is threatening not to send. Or, as the old saying goes; follow the money. Ukraine is broke, actually it is worse than broke. This is at the heart of the Ukrainian crises.

While most countries in Eastern Europe saw economic growth once their communist governments were deposed after 1989, Ukraine economy got worse. This was largely because Ukraine, unlike the former communist states to the west, was a part of the Soviet Union for 70 years and its economy was interlinked with that of Russia and the rest of the Soviet Union. When the Soviet Union collapsed those economic links were broken and there was a massive shrinking of the Ukrainian economy. Meanwhile not having been independent for centuries meant there was no tradition of independent government, much less democracy or working in a market economy. The result was massive corruption and mismanagement for the last two decades. Meanwhile Russia was trying to get Ukraine to rejoin the Russian Empire, something few Ukrainians were interested in.

What precipitated the current crises was an effort by many frustrated Ukrainians to forge economic relationships with European countries and the West in general. Russia saw this as a military threat, if only because many Russians felt that they were still threatened by NATO (which was formed to defend Western Europe from a very aggressive Soviet Union). Poland, long a victim of Russia aggression had already joined NATO as had the Baltic States. Ukraine wanted to join as well and Russia saw that as the last straw. So Russia attacked with its most effective weapon; money. The recently deposed president of Ukraine had gotten elected based on his pledge to establish the economic links with the EU (European Union). But as that was about to happen the Ukrainian president succumbed to Russian bribes and the threat of prosecution for corruption if Ukraine did become closely linked with Western Europe (and a business climate far more hostile to corruption).

The economic links with Europe may still be formed, but Russia has another economic weapon to use on Ukraine. Russia is the primary supplier of natural gas to Ukraine and that gas has become a mainstay of the Ukrainian economy. Cut off the gas and the Ukrainian economic problems become a lot worse. While West Europe can supply cash, they are in no position to supply gas because nearly a third of West Europe’s natural gas also comes from Russia.

Now if Russia did use the natural gas weapon, and cut off Europe as well as Ukraine a lot of damage would be caused. But it would hurt Russia more than Europe because Europe can find other, more expensive, gas sources. Russia takes a bigger hit building new pipelines to China, which is the only potential customer that could replace Europe. Worse for Russia would be the damage to its reputation (already shabby) as a business partner.

The problem here is that Russia, or at least its current leaders, are more willing to pull the trigger than their European adversaries and the Russians know it. It’s a colossal game of chicken the Russians feel they can win, at least in the short term.

 


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