Vladislav Inozemtsev is director of the Centre for Post-Industrial Studies in Moscow and a visiting fellow at the Center for Strategic and International Studies.
The Kremlin appears to have bought into the tale it produced for domestic consumption: the notion that Ukraine’s eastern regions drive the country’s economy while its western areas are essentially free riders. But the data show a somewhat different picture.
The Ukrainian government reports that the eastern Donetsk oblast, or region, accounted for 12.4 percent of the country’s gross domestic product in 2013, while five western oblasts (Transcarpathian, Ivano-Frankivsk, Volyn, Ternopil and Lviv) collectively provided only 12.1 percent. Yet Donetsk received about 31 percent of all direct transfers that the central government dispersed among the regions. Last year, companies operating in that region were reimbursed 129 percent of the value-added tax they had paid.
For years, the government has heavily subsidized natural gas imported from Russia; for most of 2013, Kiev paid almost $410 per 1,000 cubic meters of gas, which it resold to industrialists for $220 to $240 per thousand “cubes.” Last year, under the Yanukovych government, distributions from Kiev to the Donetsk, Luhansk and Kharkiv oblasts — the three easternmost oblasts — amounted to 14 percent of gross regional product. Subsidies, which were 7.5 percent of Ukraine’s GDP in 2012, accounted for 63 percent of Crimea’s regional budget in 2013.
Elements of Ukraine’s power system have reinforced the policy of redistributing financial flows — and avoiding technological progress. Ukraine’s metallurgical and chemical enterprises require four to five times more energy than do those in the European Union. For more than 20 years, Ukrainian metal-processing companies faced little to no competition and did not upgrade to less energy-intensive systems. ArcelorMittal, the new owner of Ukraine’s largest steel company, Krivoy Rog, reduced its workforce by more than 20,000, to 34,000 employees, but managers have said that only about 7,000 workers would be needed to meet E.U. productivity standards. Without the customary substantial subsidies, many Ukrainian enterprises could go bankrupt should gas prices rise or metal prices fall.
Consider also that Russia’s “friends” have proved expensive. Moscow’s closest ally, Alexander Lukashenko’s Belarus, gets about $7 billion a year in fuel subsidies and as much as $2 billion a year in Russian loans and grants. The two tiny client states that Russia took from Georgia after the August 2008 war, Abkhazia and South Ossetia, have received more than $1.8 billion in Russian direct investment and $800 million in “private” investment from Russian state-controlled companies. Add in eastern Ukrainian provinces and allied Central Asian states, and Russia could be on the hook for $12 billion in annual subsidies.
That’s not terribly more than what has been typical in Ukraine. Last year, Kiev spent at least $6.5 billion on regional and fuel subsidies. If Moscow were to formally annex parts of eastern Ukraine, however, pressure to show new investment and a rapid improvement in residents’ quality of life could triple that figure. Last week, Russian officials talked about $1 billion in urgent economic aid to Crimea, with $5 billion for the region to be released throughout the year. Such proposals resemble Russia’s policy toward South Ossetia and Belarus: consciously wasting huge sums.
If Ukraine were to align with Russia, it could maintain subsidies, but there would be no prospects for growth. Driving toward Europe, however, could rejuvenate Ukraine. Kiev must follow the path of Poland, the Czech Republic and Slovakia.
By 1990, at the end of the Soviet era, the per-capita regional product of the Ukrainian Soviet Republic was 6 percent higher than that of socialist Poland. International Monetary Fund data from last fall show that Poland’s regional per-capita product is three times larger than Ukraine’s. Ukraine is the only post-Soviet nation that has not returned to the standard of living of the Soviet period, and it borders countries that live two to three times better than they did in socialist times. It is natural that Ukrainians see their future with Europe — not just because democracy is better than authoritarianism and the rule of law is superior to arbitrary rulings but also because E.U. investment and technologies could boost Ukraine’s economic development and make people more prosperous.
In seeking Ukraine’s eastern regions, Russia is fighting for an unjust cause in political terms — and a wrong one in economic terms. Lenin wrote that politics is the most concentrated expression of economics. If Vladimir Putin were to heed Lenin, he would see that integrating eastern Ukraine and Crimea into Russia, or their emergence as quasi-autonomous client states, would cost Moscow tens of billions each year in subsidies and create competition with Russian metal-processing, chemical, tourist and other businesses.
Russia has no economic growth, and its population is declining. It is losing about $70 billion a year in capital flight. Little wonder it is seeking to expand. Yet no matter how successful Putin’s military exercises may look, annexing Ukraine could hasten the end of his empire.
Audacious as it may seem, a European Ukraine without Crimea would do much better economically than a Ukraine that maintains its current borders and totters between Europe and Russia. In claiming eastern Ukraine, Russia is fighting for financially insolvent economies that resemble its own. Even if part of Ukraine votes to integrate into Russia, the losers would be area residents and Russians — not the Ukrainian nation.
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