UKRAINE: WHY OH WHY?

I apologise to anyone following this blog for the long silence - Real world stuff kept me away but I hope to now be able to resume my average of roughly a post a week. And, to return, I decided to write about what is for me a pretty personal and important matter, ill-covered by most economic blogs I follow: Ukraine and its refusal to pursue talks to sign an Association Agreement with the EU. Not to mention that the manifestations on the European Square and the Kreshchatyk in Kyiv (see pictures above) are literally a stone throw away from our flat.


In case you haven't heard, a few days ago, Ukraine unilaterally announced it would no longer negotiate its signature to an agreement with the EU that, while technically about tariffs and trade certifications and norms, was also widely seen as a first step towards eventual accession talks.

The news shocked the Europeans officials: Not only the talks had been progressing, albeit slowly but the manner of the rupture was seen as unnecessarily abrupt and rude.

As a EU citizen living in Ukraine, my sentiment is mostly one of sadness mixed with fatalism. This is a missed opportunity for Ukraine and for regular Ukrainians but I cannot say I am entirely surprised.

After all, this association with the EU had few short term benefits (a slightly easier access to an IMF loan was about the extent of it) but quite a few short term inconveniences.

First, Russia was none too pleased about this European interference in what it sees not just as its natural sphere of influence, its near-abroad but as an integral component to its national and civilisational identity. And Putin had not been shy about letting everyone knows that he would be doing its level-best to hurt Ukraine if they chose to proceed, though in later weeks, his tone had actually cooled down (maybe because he already knew he had won that battle? Who knows? Conspiracy theorising is second-nature to people in the ex-Communist bloc)

Second, the EU had, wrongly or rightly, made 'a gesture' from Yanukovych about the case of Tymoshenko a sine qua none to the signature of the EU deal. I say 'rightly or wrongly' because, although trying to bring Ukrainian political practices more in line with that of functioning democracies is laudable, it is not clear at all that the Tymoshenko case represented democracies' best hill on which to die, so to speak.

There is no doubt that the charges against Tymoshenko were politically motivated but, for all we know, they might also have been utterly true. There is no doubt whatsoever she was corrupt because 99% of the politicians and business elites (often the same people as getting elected is one of the surest way to protect and expand your businesses) are corrupt.

I will slightly digress for a few paragraphs to explain that, in my opinion, corrupt is an inappropriate descriptor. As in many emerging economies with little experience of democracy and the rule of law, in Ukraine, there are too many rules to hope to comply with them all and, in any case, too little enforcement to make bothering to do so efficient or worthwhile.

Laws are full of self-contradictions, administrations are often chaotic, populated by unhelpful public servants who seem to delight in being as unfriendly and obstructionist as they can, if you ever make the mistake of wanting them to perform their duties.

(NB: This is an illustration of Baba Yaga, a Slavic folklore figure of evil. But it works pretty well as a descriptor of most civil servants - more often than not, middle aged women - I have had to interact with)

If you want a more objective criteria, Ukraine is 112 out of 189 economies on the "ease of doing business" index of the World Bank (for 2014). And that's significantly up, from 140 in 2013... 

Thus, the application of the regulations becomes a tool for the powerful who are commandeering the various administrations. In principle, it is comparable to ordering endless IRS investigations of your political opponents or business competitors. Except that it can be far more ruthless and crippling: I haven't heard of the IRS being used to force a businessman to sell 50% of its business to a family member of an elected official. I guess it's better than outright murders and shootings and kidnappings as is happening elsewhere or as was happening in the 90s but, in both cases, it is not a conducive atmosphere for legitimate businesses to prosper.

So the EU might have chosen other ways to express its desire to see Ukraine normalise than that of asking for the release or exile (a rumoured half-way solution, in principle acceptable to both the EU and Yanukovych) of the corrupt previous political leader.

To get back on topic, various reasons have been given as to why Ukraine broke off talks with the EU but the most common are the ones I mentioned: The EU deal isn't that sweet (Mykola Azarov, the Prime Minister, declared that "the IMF position was the last straw") and the Russian threats look pretty serious.

But, in my humble opinion, the most likely reason is that the EU decided to be wilfully naive. Ukrainian elites, starting with the President, do not care one iota whether the Association Agreement is the better option in the long term for ordinary Ukrainians or whether the Custom Union represents much-needed short term economic relief (Ukraine is under severe economic strains, a matter for another blog post). They care only about preserving their own power and their own wealth, without even nationalistic ambitions like China or Russia (or India, 'helped' by its struggle with Pakistan) to nudge them towards the provision of 'common goods' and mobilisation of national resources for something more than personal enrichment.

It is not entirely clear whether releasing Tymoshenko ahead of the March 2015 Presidential elections would really have been an issue - she wasn't all that popular before being imprisoned and even martyrdom failed to truly boost her appeal - but Yanukovych was not interested in gambling on that.

And this is why I was saddened but not surprised by Ukraine's refusal to sign; The EU wanted Yanukovych's signature but refused to consider the special case of Yanukovych's future. So he chose what was best for him, Ukraine and Ukrainians be damned. Economists should be proud to see rational choice theory so well illustrated.