Ukraine: Europe's Linchpin

John Edwin Mroz & Oleksandr Pavliuk. Foreign Affairs. Volume 75, Issue 3. May/June 1996.

Five years after independence, Ukraine watches the nationalist turn in neighboring Russia with unease bordering on alarm. Much of the Russian political spectrum, obsessed with reclaiming great power status and reuniting the former Soviet republics, recognizes that Ukraine is the key to its plans and openly espouses reabsorption. President Boris Yeltsin, instrumental in the 1991 dissolution of the Soviet Union, has, in his quest for votes, adopted much of the nationalist agenda; he has dismissed his Western-oriented foreign minister, Andrei Kozyrev, cracked down on the rebellion in Chechnya, and pursued formal union with Belarus. Continued progress in Ukraine toward democracy and free markets will be more difficult no matter who triumphs in Russia's presidential election in June. A victory for Gennadi Zyuganov, the Communist Party boss and the leading presidential contender, would give Ukraine's communists a second wind and could well throw Ukraine back into the instability that preceded reform.

With a landmass equal to France, a population of 52 million, a location at the crossroads of Europe and Asia, large agricultural and high-tech industries, and extensive natural resources, Ukraine is crucial for the stability of the continent, and uncertainty there would reverberate throughout Europe. An independent, democratic, and reform-oriented Ukraine can provide a model for Russia's development, prevent the emergence of the Commonwealth of Independent States (CIS) as a political and military alliance under Moscow's control, and promote stability in Central and Eastern Europe. The next year's events in Ukraine will determine whether the continent continues on its path toward integration or faces a new confrontational divide.

Regardless of the outcome of Russia's presidential contest, Ukraine has ample reason to suspect Moscow's long-term intentions. Russia has refused to negotiate the exact borders between the two states. The Duma has not annulled its 1993 resolution declaring Sevastopol a Russian city, nor has it canceled its order to review the 1954 transfer of Crimea from Russia to the Ukraine. Most recently, it proclaimed illegal the dissolution of the Soviet Union. In fact, many Russians believe that Ukraine's leaders, not its people, have been the impediment to closer relations, if not union, between the two countries.

But a majority of Ukrainians would not voluntarily agree to union with Russia. Ukrainians in the country's west have long associated domination by Moscow with political oppression and economic decline. Despite forces in eastern Ukraine that favor reintegration, nationalist sentiment has grown throughout the rest of the country. The prospect of again being a provincial outpost of Moscow does not appeal to Ukrainians, who contrast that scenario with improving conditions in neighboring countries like Poland, Hungary, and the Czech Republic. Ukrainians in the eastern, Russified areas have demonstrated in the two elections since independence that they will vote for the candidate best able to improve their economic situation. Thus in 1991 a majority of the eastern region voted to secede from the Soviet Union because an independent Ukraine seemed to offer better economic opportunities, but in 1994 a majority, judging that the Russian economy had improved and was clearly in better shape than their own, opted for a candidate who endorsed closer ties with Russia. With few exceptions, reintegration with Russia is in the interests of neither the new Ukrainian political elite nor much of the commercial class. In a recent set of interviews, Ukrainian entrepreneurs, many of whom are personally pro-Russian, argued that Ukrainian sovereignty protects the country's emerging business community from the rich, powerful capitalists of Russia.

Ukraine desires normal relations with Russia, but attempts to force it back under Moscow's thumb would further alienate its already suspicious population. Aggressive Russian efforts might lead to civil war in Ukraine, accompanied by an overwhelming refugee crisis and ecological disasters.

Missiles into Plows


Since winning election as president of Ukraine in 1994, Leonid D. Kuchma has focused on the single greatest security threat to Ukraine-the near-collapse of its economy. Kuchma has been surprisingly successful, and Ukraine now has a fighting chance of following the Central European countries' example and creating a viable market economy. He has also worked hard to bind Ukraine to Europe while maintaining normal relations with Russia. Kuchma's presidential campaign concentrated on closer ties with Russia and the introduction of Russian (his native language) as Ukraine's second official language, and thus his stress on economic reform and relations with Europe is astounding. Though a former director of the world's largest missile factory, Kuchma has convinced his countrymen to relinquish their nuclear weapons, creating goodwill with the West. Most important, he has turned out to be a staunch defender of Ukraine's independence and sovereignty.

Kuchma's persistence has brought financial stabilization within reach. Inflation in 1995 decreased to roughly 150 percent, an enormous improvement over the 4,000 percent hyperinflation of just two years before. Total trade volume in 1995 grew by 32 percent, as trade with the West rose by 40 percent. For the first time in 60 years, Ukraine exported grain, reminding the world that it once was, and can again become, the breadbasket of Europe.

By securing the support of many voters in western Ukraine who had originally been against him, Kuchma has bridged the gap between the country's Russian-populated eastern half and its more nationalist west, restoring unity to the country and dispelling the specter of instability. Any significant shift in the course of reform would ruin his coalition, restrain economic growth, and split the country once again. Mindful of such dangers, Kuchma and his able prime minister, Yevhen Marchuk, have pursued radical economic reforms vigorously, despite resistance from powerful groups more interested in accumulating personal power and wealth than nationbuilding. The forces of opposition-the post-Soviet bureaucracy, the leftist-dominated parliament, the industrial and agricultural lobbies-have relentlessly attacked Kuchma and Marchus policies. Group and corporate interests often prevail in economic decisions, and corruption remains a serious problem, though less daunting than in Russia.

In 1995, following a pattern common to East European economies in transition, Ukraine's GDP declined, although at a lower rate than in past years. Total industrial production decreased by 11.5 percent and the production of consumer goods by 19.1 percent. Perhaps most disquieting was the sluggishness of privatization; less than lo percent of the 8,000 targeted large and medium-size enterprises went into private hands in 1995. The government, which has been disappointingly indecisive in this regard, announced in March that it will speed up the privatization of 400 of these companies through international tender. Ukraine's difficulties in delivering on its commitments led the International Monetary Fund (IMF) in January to postpone the fourth tranche of a standby loan.

Despite its size, agricultural potential, and key location, Ukraine has failed to attract major investors. Kuchma claims that the economy requires about $40 billion in private investment, but it received only $750 million between 1992 and 1995. He told New York investors last October that in 1994 direct foreign investment per capita was $12 in Ukraine versus $670 in Hungary, $319 in the Czech Republic, $298 in Estonia, and even $27 in Russia. The country's confusing tax laws and its failure to allow private property have combined with its economic instability to scare away many investors. Meanwhile, internal sources of financing remain very limited. A significant portion of the new Ukrainian business elite is parasitic and reluctant to invest in the Ukrainian economy. If Ukraine is counting on increased Western financial assistance and investment, it must take the necessary steps, such as large-scale privatization, banking sector reform, and capital market development. Unless Western investors bring their capital to Ukraine, disappointment may lead ordinary Ukrainians-like their Russian fellows-to harbor anti-Western sentiments.

Ukraine's mixed economic performance has caused foreign investors to be cautious, but some remain optimistic because of the country's political stability and commitment to democracy. The international community has applauded Kiev for its handling of the Crimean secession, which for several years seemed sure to spark serious regional conflict. Kuchma and Yeltsin displayed true statesmanship in defusing a potentially violent eruption there last year. Similar leadership will be required to complete negotiations over the Black Sea fleet. While many CIS countries have retreated from democracy, Ukraine has compiled a solid track record, particularly in its treatment of its national minorities. It was the first member of the CIS to enjoy a peaceful, democratic transfer of presidential power. In its transition, Ukraine has avoided violence, and its army has not been dragged into domestic political quarrels, let alone projected its power beyond the country's borders. Despite heated debates and political tension, strong leadership and democratic compromise have characterized Ukraine's politics since Kuchma's election. The June 1995 Constitutional Agreement between the president and the parliament, for example, temporarily resolved a serious deadlock by regulating the division of power between the legislative and executive branches, while setting out a procedure for the adoption of a new constitution. Last fall Ukraine became the second CIS country, after Moldova, to be admitted to Europe's "democratic club," the Council of Europe.

Still, Ukraine is the only country in the former Soviet Union that has not adopted a new constitution since independence, and Kuchma's June deadline will prove tough to meet. Many observers expect him to prevail by the end of the year, but his constant battles with the leftist forces in parliament provide skeptics with enough evidence to adjudge the current political situation fragile. As coal miners strike and religious tensions fester, Kuchma's opponents can easily exploit social unrest. Most of Ukraine's domestic and foreign policy dilemmas stem from the nation's tenuous unity. Its size, cultural diversity, and weak tradition of statehood seriously complicate its transition.

Walking a Tightrope


Kuchma's foreign policy aims to balance gradual but steady integration into Europe's political and economic structures with constructive, friendly relations with Russia. While many other Central European countries have declared their desire for admission into NATO, Ukraine has firmly committed itself to nonalignment. It has participated in NATO'S Partnership for Peace program and now publicly seeks a special relationship with the alliance, parallel to that which Russia has demanded; it is a reluctant member of the CIS and has time and again refused to sign the 1992 Tashkent collective security agreement. Just as it has combated anti-Russian sentiment in its western region, the Ukrainian government has done its best to avoid anti-NATO paranoia, present in other CIS countries, in its eastern half.

Both Russia and the West have hailed Kuchma's success in persuading his country to abandon nuclear arms, even though many Ukrainians still view the decision as harmful to the country's long-term national security. Once the third-largest nuclear power and owner of the third-largest conventional force in Europe, Ukraine voluntarily transferred its tactical nuclear stocks to Russia in 1992 and started to remove and destroy its strategic nuclear weapons in 1994. Ukraine has already reduced its conventional forces from 800,000 to 500,000.

Internal economic weakness makes Ukraine susceptible to outside pressures and has complicated Kuchma's foreign policy. The prime example of this vulnerability is Ukraine's dependence on Russia for energy. Russia supplies 80 percent of Ukraine's gas, and Ukraine has accumulated an energy debt of $4 billion, making energy Russia's most effective lever over the country. Gazprom, Russia's gas monopoly and a powerful lobby, has threatened to close the pipeline to Ukraine unless it pays its bill. At one point, in exchange for debt relief, Gazprom unsuccessfully maneuvered for stakes of between 35 and 50 percent in 15 of Ukraine's most profitable and strategic national enterprises.

Reducing this dependence on Moscow has become Ukraine's top priority. It has made some progress toward this goal by commercializing its oil import business, restructuring its debt, and using IMF standby loans to pay its gas bills. But the energy problem still awaits a comprehensive solution, and Russia has objected to some of Ukraine's stopgap measures. Last February, for instance, Ukraine found itself on the edge of an energy collapse: coal miners' strikes coincided with Gazprom's decision to stop dealing with Ukraine's commercial gas importers and with Moscow's decision to disconnect Ukraine from its electricity system. Until the energy problem is addressed, Ukraine will remain a weak state, vulnerable to Russian pressure.

Opposed to Ukraine's independence in 1991 and preoccupied with Russia in 1992 and 1993, the West has since become a significant supporter of Ukraine and its transition to a market economy. While serving briefly as prime minister three years ago, Kuchma criticized Western policy, saying that "on the map of world leaders, Ukraine does not even exist. They are indifferent [to] whether Ukraine is independent or not." Ignored by the West, Ukrainian policymakers lacked the confidence to pursue difficult decisions on nuclear disarmament and economic reform, and the West's focus on Russia further aggravated Kiev's sense of insecurity and made Ukrainian-Russian relations even more tense. That initial delay in formulating a clear Western policy has been responsible in part for Ukraine's tortoise-like progress toward capitalism.

A discernible Western policy first emerged in 1994. Vladimir Zhirinovsky's strong showing in the Duma elections of December 1993 and Russia's subsequent great power posturing sent the first warning signals to the West. The election of Kuchma, then deemed pro-Russian, shocked the West out of its lethargy. Relations between the West and Ukraine have since improved substantially. Last summer British Foreign Secretary Malcolm Rifkind called Ukraine "a strategic pivot in Europe" that would determine the future prosperity and security of the continent. Even Russophile France has started to pay more attention to Ukraine. And American officials have stated that a free and independent Ukraine is "a vital strategic interest of the United States." Ukraine's accession to the Nuclear Nonproliferation Treaty and its launching of economic reforms prompted security assurances and financial support from Western governments and international institutions. Western assistance, pushed largely by Canada, the United States, and Germany, made possible Kuchma's macroeconomic reforms.

The latest figures show that since Kuchma began his reform program in late 1994, the World Bank and the IMF have committed a total of $3.4 billion in loans, $1.5 billion of which is slated for 1996. This year the European Union (EU) will provide $250 million, the European Bank for Reconstruction and Development $80 million, the United States $170 million, and the Export-Import Bank of Japan $180 million. Russia's rescheduling of $3 billion of Ukraine's energy arrears is another reason for the improvement in Ukraine's economic situation.

Since 1992 American and German firms have invested the most in Ukraine, $202.8 million and $129.6 million respectively. The EU'S support strategy for the country, adopted in November 1994, marked an important step. It included trade concessions, accelerated political dialogue, and a framework for industrial, financial, and scientific cooperation. Particularly important was the signing and implementation of the interim agreement that gave Ukraine most-favored-nation trading status with the EU. Significantly increasing Ukrainian exports to the EU, the agreement helps Ukraine avoid becoming shackled to the CIS, which accounted in 1995 for 55 percent of Ukraine's exports and 57 percent of its imports. Current plans would admit Ukraine to the EU's single market after 1998.

The Chernobyl nuclear reactor remains an irritant in relations between Ukraine and the Group of Seven industrialized nations. Ukraine's leaders believe that Western demands to close the plant ignore the social and political consequences of doing so without addressing Ukraine's overall energy situation. Nobody wishes to shut Chernobyl more than the Ukrainians, who will continue to suffer from the 1986 meltdown for many years to come. Yet by producing 40 percent of the country's energy, instead of their usual 25 percent, Chernobyl and the five other Ukrainian nuclear power plants prevented an energy crisis last winter. The recent memorandum of understanding between Ukraine and the Group of Seven may have diminished some of these misunderstandings; the memorandum stipulated the terms for decommissioning the Chernobyl nuclear station by 2000 but unfortunately did not discuss its funding.

Staying the Course


Ukraine's future lies within European structures, and the West should not slow this process. The West should adopt a double staircase approach-one for market reforms and one for political and security issues. Each Ukrainian step upward would be met by an appropriate and symmetrical step by the West. For example, were Ukraine to accelerate privatization and agricultural reform and further strengthen financial stabilization, Western institutions would expand assistance. Similarly, on the political level, Ukraine needs to resolve its constitutional stalemate. In return, the West would increase technical and financial support to the Ukrainian parliament and train larger numbers of Ukrainians for public administration and the judiciary.

The West can bolster Ukraine's security through strong, sustained economic support, with particular assistance in the energy sector. Under the leadership of the World Bank and the EU, Western and Ukrainian experts should develop an expanded energy strategy, beyond the EU'S useful 1994 action plan for Chernobyl, which offered Ukraine a large aid package in exchange for timely closure of the flawed nuclear plant. Rationalizing Ukraine's oil refining capacity would by itself dramatically decrease the country's consumption; Ukraine loses some 40 percent of its crude during refining, but that figure can easily be cut to as low as 2 percent. The construction of an oil port at Odessa, currently blocked by hard-line local officials, would open Ukraine to Middle Eastern oil. Technologies that convert coal into gas would also make a significant difference. Western experts could help Ukraine develop a contingency plan in case of an energy crisis. As Ukraine transforms its agriculture industry, converting its large state-run farms into a cooperative farming system, the West can make sure Ukraine avoids Bulgaria's error of splitting such farms into units too small for international marketing.

On the security side, while encouraging Kiev to cooperate extensively within the Partnership for Peace, NATO should negotiate a treaty that would guarantee Ukraine's neutrality. Given Ukraine's location and history, it must be a bridge, not a buffer, between Russia and Europe. Its market economy and democratic system could become a positive model for, and the single greatest influence on, Russia. Despite some antagonism, Russians regard Ukrainians as closer to them than any other nationality, except the Belarusans. Ukraine's failure would strengthen Russia's authoritarian tendencies and leave Europe substantially less secure.

Moscow must overcome its ambivalence about Ukraine and recognize how much the country can contribute to Russia's own development as well as to the stability of Europe. The economic and cultural ties between Ukraine and Russia are strong; the two countries enjoy a natural interdependence. Forty-six percent of Russian trade within the CIS goes to Ukraine, which is also the world's largest importer of Russian gas and oil. As democratic, free-market societies, these neighbors would soon enjoy a prosperity long denied their people. If Russia learns to live with Ukraine as an independent state, it will have overcome the most critical element behind several centuries of imperialism.

As for the rest of the former Soviet world, Ukraine increasingly determines whether the CIS remains a loose economic association or becomes a tight political and military confederation under Moscow's control. Ukraine leads the CIS nonaligned group, which also includes Moldova and Azerbaijan, in opposition to the creation of any supranational bodies or military and political mechanisms, and the CIS countries know that without Ukraine, a new Soviet Union is impossible. As Belarus merges with Russia, Ukraine's position becomes even more significant. While avoiding the institutionalization of the CIS as a security arrangement, Ukraine should pursue economic cooperation with Russia and the other states of the former Soviet Union.

The independence of Ukraine has fundamentally altered the status of the other Central and East European countries. For the first time in modern history, these countries find themselves separated from Russia. An independent and democratic Ukraine between Russia and the Czech Republic, Poland, and Hungary lays the groundwork for stability in Eastern Europe by fostering lower perceptions of threat and a greater sense of security in Prague, Warsaw, and Budapest. A new iron curtain in Europe is impossible if Ukraine enjoys a positive relationship with both the West and Russia. The West should encourage Ukraine to cooperate more extensively with the Central and East European states and urge it to join the Central European Free Trade Agreement.

Support that treats Ukraine as important in its own right will bolster reform-minded decision-makers and political forces there. It will help assure the success of reform in Ukraine and make Ukraine a model for Russia and the rest of the CIS. Given its strategic position, an independent and healthy Ukraine will indeed be the linchpin of stability in post-communist Europe.