By Stephanie Petrella*
(FPRI) — As Ukraine’s March 2019 presidential election nears, the Kremlin has not masked its interest in the outcome. Indeed, in November, nearly five years after Kyiv sanctioned Russia for the annexation of Crimea, Moscow finally decided to respond with retaliatory restrictions on Ukraine’s political and business elite. Weeks later, Russian coast guard vessels sparked the first-ever direct clash between the two countries’ militaries by firing on a group of Ukrainian ships off the coast of Crimea. As Russia’s annexation of Crimea and the proxy war in the Donbas remain the largest political issue among Ukrainian voters, the timing of Moscow’s escalations is not a coincidence.
Over the past several years, the Kremlin has upped its efforts to influence democratic politics abroad. Backing Eurosceptic, anti-immigrant, and isolationist parties, Moscow has supported candidates of uncertainty—the party or individual promising to upturn politics by rejecting the status quo. In Ukraine’s presidential election, former Prime Minister and current frontrunner Yulia Tymoshenko fits the mold. Campaigning on a “new course” for Ukraine, Tymoshenko proffers uncertainty that may well jeopardize Ukraine’s interests and benefit its hostile neighbor to the east.
Ukraine’s Obstacles Ahead
The Kremlin’s ideal outcome in the Ukrainian presidential election is the one that advances its primary interest in the country: hindering Ukraine’s further Western integration. Currently, two obstacles stand in the way of Ukraine’s Euro-Atlantic path: economic reforms and the separatist war in the country’s east.
Over the next two years, Ukraine faces $17 billion in debt repayments. The country’s current lifeline is a $3.9 billion agreement with the International Monetary Fund (IMF), which, in turn, unlocks conditional financing from the European Union and the World Bank. To receive IMF funds, however, Ukraine must implement reforms to improve macroeconomic stability. The IMF’s terms include tightening contribution requirements for pensioners, increasing heavily subsidized consumer gas prices, approving a budget with less than a 2.3 percent deficit, creating a credible anti-corruption court, and legalizing the sale of farmland. The first three have seen progress, while the latter two remain at a standstill.
Although politically unpopular, the IMF-mandated reforms are critical to keeping Ukraine solvent. Indeed, Ukraine’s previous $17.5 billion IMF package ran its course with only $8.7 billion disbursed due to sluggish reform progress. Without cooperation with the IMF, Ukraine would also not have received 3.3 billion euros in financial assistance from the EU—the most EU aid ever offered to a non-member state—and $5.5 billion from the World Bank since 2014. The Fund’s support, an implicit guarantee that Ukraine will not default on its debts, further enabled Kyiv to tap global capital markets, raising $5 billion in Eurobond issuances since 2014.
Beyond preventing a default, reforms would also deepen relations with the EU. To join the bloc, Ukraine must become a functioning market economy with stable macro-economic fundamentals, a welcoming business environment, and strong labor and financial markets. The EU will not lend to Ukraine absent Kyiv’s cooperation with the IMF, let alone seriously consider a path toward accession.
Regarding the war in the east, Ukraine will struggle to join Western military or political-economic institutions while a secessionist conflict simmers in the Donbas and Crimea remains occupied by Russia. Article 5 of the North Atlantic Treaty Organization requires member states come to an Ally’s aid in the event of an attack. It would not be wise for the Alliance to accept a new member already at war with one of the world’s largest militaries. As the experience of Georgia—promised a path to membership over ten years ago—shows, Russian involvement in a country’s frozen conflicts is a non-starter for NATO accession.
The EU’s concept of the four freedoms—free movement of goods, capital, services, and labor within a common market—is similarly troubled by disputed borders. EU accession is ultimately possible for Ukraine if the war in the Donbas freezes. Cyprus’ accession as a divided island demonstrated such. However, effectively surrendering Crimea and the Donbas is not a viable option for Kyiv. To do so would not only be an act of domestic political suicide, but would capitulate long-established international norms in the face of aggression. Reintegrating the territories as part of a federal state is similarly disadvantageous. Federalism is the Kremlin’s preferred solution. It would allow Moscow to end the increasingly unpopular war in the Donbas, win sanctions relief, and ease the financial burden of supporting two self-proclaimed republics. Of course, a federal Ukraine would also grant the Kremlin an avenue to influence its neighbor’s politics on a national level. There is no doubt that the Kremlin would use this influence to advance its primary goal of preventing Ukraine’s Western integration.
The Status Quo
Over the past five years, Ukraine has steadily bucked the Kremlin’s interests in these two areas. The Ukrainian government has been slow to implement economic reforms, but it has made enough progress to keep an IMF agreement alive and to negotiate a new aid package for 2019. Despite fast-approaching elections, President Petro Poroshenko and his allies have pushed through several unpopular fiscal policies, committing in September to a 23.5 percent increase in household gas prices and controversially voting in December to end the moratorium on agricultural land sales. Preventing a sovereign default by maintaining relations with the IMF has been a key achievement of Poroshenko’s presidency. Once the political cycle ends in October 2019 following parliamentary elections, the current administration will likely up the pace on the IMF’s long-demanded reforms. While Ukraine’s Western backers have their frustrations with the Poroshenko administration, they know that with patience and stern phone calls from IMF Chairwoman Christine Lagarde, Kyiv will eventually push ahead.
In the Donbas, Kyiv has given the Kremlin little opening. Since the conclusion of the Minsk II agreements in February 2015, neither Ukraine nor Russia-backed separatists have observed a ceasefire and withdrawn troops, a necessary precondition for Kyiv to pardon the leaders of the Lugansk and Donetsk People’s Republics, support local elections, and recognize the region’s de facto autonomy in the Ukrainian constitution. While 2018 did see fresh discussion of deploying a UN peacekeeping force to the Donbas as an avenue to end the stalemate, the proposal has led nowhere. Moscow wants to deploy a mission to the contact line (unless Kyiv obtains permission from the leaders of the Donbas’ de jure illegitimate republics), while Kyiv insists that the force extend to the entire region, including the Ukrainian-Russian border. Ukraine’s February 2018 integration law makes Kyiv’s current stance on the war clear: Russia is an aggressor, and the Donbas is an illegally occupied territory. So long as the status quo continues, there will be little room for the Kremlin to extract beneficial concessions.
On both the economic and security fronts, Tymoshenko offers uncertainty. Her populist campaign, launched in June, comprises two pillars: a “new course for Ukraine” and a “new strategy for peace and security.” In some areas, such as Western-oriented economic reforms, Tymoshenko’s predisposition for change will likely play into the Kremlin’s hands. In others, such as the war in the Donbas, it remains to be seen. Either way, the uncertainty presented by Tymoshenko’s anti-establishment proposals offers the Kremlin an opening to change the unfavorable status quo.
Economically, Tymoshenko’s “new course” means a departure from Ukraine’s IMF program as currently conceived. Despite the former prime minister’s strong pro-EU and pro-NATO orientation, anti-IMF sentiment has become cornerstone of her campaign. She railed against the pension reform passed last October, calling it a “cynical, ruthless deception of Ukrainians,” and arguing that the minimum pension should be 100 euros, rather than the current 42. In October, she called the government’s hike in household gas prices a “genocide against the Ukrainian people.” She promises gas prices will be three times lower if she is elected.
These tirades are popular, but they spell trouble. Without committing to reforms, Ukraine will lose the support of the IMF—the organization keeping the country solvent. Of course, Tymoshenko’s anti-reform rhetoric may simply be political. Opposition candidates criticize the government. They make promises to improve socio-economic conditions and resist unpopular austerity measures. Indeed, Tymoshenko’s 400-page economic plan does pay lip service to the need for continued cooperation with the IMF. However, Tymoshenko’s track record shows a genuine disregard for measures intended to decentralize the Ukrainian economy, secure energy independence, and boost government revenues. Not only has she consistently voted against the Western-oriented reform agenda over the past four years—ranking 330 out of 423 Ukrainian MPs for her voting record—but her time as prime minister revealed a willingness to flout IMF demands to the detriment of the program. In 2009, Tymoshenko’s government promised to hike gas prices by 20 percent to receive a $3.3 billion aid tranche. Months later, she canceled the hike and effectively ended the IMF’s financial support.
It is not just Tymoshenko’s resistance to IMF-mandated reforms that worries Western economic organizations. At the heart of her economic plan are populist policies that threaten macroeconomic stability. While reducing taxes for ordinary Ukrainians by replacing income tax with a profit tax, Tymoshenko wants to increase public expenditures to develop industry, infrastructure, agriculture, and high-tech innovation centers. She foresees fiscal stimulus deriving from cheap domestic credit and increased lending from multilateral development banks such as the International Bank for Reconstruction and Development, the International Finance Corporation, the European Investment Bank, and the European Bank for Reconstruction and Development. Analysts have noted that Tymoshenko’s economic plan is heavily borrowed and contains numerous contradictions. It is clear that she does not have a thought-out plan for how she will finance the government or implement populist promises while maintaining macroeconomic stability. This uncertainty is a detriment to Ukraine’s relationship with Western economic institutions, and thus will advance the Kremlin’s interests.
Regarding the war in the East, Tymoshenko promises to overhaul the current diplomatic process. As an opposition candidate, her best argument for election is that Poroshenko has failed to deliver on his promise to end the war. Recognizing that the Minsk peace agreements helped limit the scope and intensity of the conflict, Tymoshenko asserts that it is time for Ukraine to discuss new strategies. At the center of Tymoshenko’s “new strategy for peace and security” is a proposal to revisit the 1994 Budapest Memorandum, in which the United States, United Kingdom, and Russia offered Ukraine security assurances in exchange for relinquishing the world’s third largest stockpile of nuclear weapons. The former prime minister proposes to renew discussions on the war within a broadened version of this diplomatic format to also include German, French, Chinese, and EU representatives. Through this arrangement, Tymoshenko believes she will not only be able to secure a peace deal, but also restore relations with Russia.
Tymoshenko’s peace plan otherwise lacks detail. She is adamant that federalism is not an option for Ukraine, as it will only engender separatism, and she insists that she will not accept peace on Putin’s terms. However, Ukrainians are wary that Tymoshenko may be too willing to cut a deal with the Kremlin. As a member of parliament since 2014, she did not vote to declare Russia an “aggressor country,” to demand the de-occupation of the Donbas, or to revoke the 1997 Russia-Ukraine friendship treaty. Similarly, while prime minister in 2008, she refrained from commenting on the Russo-Georgian war, as the West uniformly condemned Russian aggression.
Tymoshenko is keeping her options open to play the role of an agile dealmaker. And an agile dealmaker may be just what Ukraine needs. The war is becoming a frozen conflict. While that is not the Kremlin’s ideal scenario, it is a vastly better outcome for Russia than for Ukraine. However, renewing negotiations with Moscow has major risks. Indeed, Tymoshenko has cut unfavorable deals with the Kremlin before, most notably the 2009 gas deal that led Ukraine to pay more for gas than any other country in Europe. To end the war, in order to get something from Moscow, Kyiv must give something. Whatever that may be, it could jeopardize the future of Ukraine’s Western integration.
A Tymoshenko presidency, and the potential benefit to the Kremlin, is a danger to both Ukraine’s IMF program and the war in the east; it is hard to say what Tymoshenko will do once elected. Kyiv has little bargaining power vis-à-vis the IMF or the Kremlin. Fresh ideas are, of course, essential for Ukraine’s political and economic modernization, but it will be challenging for a Tymoshenko administration to negotiate a better settlement on either. And if things go poorly, the downside risks—the loss of Western economic support, or selling out Ukraine’s interests to Russia—are huge.
When asked if she will win the presidential election, Tymoshenko recently declared, “I will win, and Ukraine will be in the E.U. and in NATO, and will be strong and prosperous.” Her proposed policies, however, say something very different.
*About the author: Stephanie Petrella is a Research Associate in Eurasia Program at the Foreign Policy Research Institute and a Deputy Editor of the daily political economy news brief BMB Russia.
Source: This article was published by FPRI