Martin Hutchinson’s latest offering at Prudent Bear revisits the geopolitics of Ukraine.  It is a subject we have covered only once, quite early on in the Orange Revolution.

GW

The apparent revival of the Cold War by Vladimir Putin causes those of us nostalgic for the unpleasant certainties of a bipolar world to ponder whether the Domino Theory should also be revived. Indeed it should, and the domino currently wobbling most vigorously, magnificent in its precariousness, is Ukraine. Ukraine gets limited press in the West, but its fate over this long summer may well determine the geo-strategic and economic outlook for the next generation.

Contrary to most Western reporting on Ukraine, the struggle there is not bipolar but tripolar. Favoring an economy dominated by publicly owned behemoths of heavy industry is the current prime minister Viktor Yanukovych, strong in the ethnically Russian eastern areas of the country and proponent of closer ties with Moscow.

Vladimir Putin regarded Yanukovych as the natural successor to Ukraine’s previous corrupt and economically stagnant president Leonid Kuchma, so when in 2004 his election was opposed by the “Orange Revolution” of pro-Western forces he was furious, believing that the West had no business interfering in an election so close to the Russian heartland.

He need not have worried. The Orange Revolution candidate for President Viktor Yushchenko, in spite of having married an American wife and during the campaign suffering a mysterious poisoning that would foreshadow the unexpected demise of so many of Russia’s opponents in years to come, was a weak social democrat, also favoring a group of big corporate oligarchs, those of ethnically Ukrainian nationality from western Ukraine. 

Essentially, like so many East European leaders from Mikhail Gorbachev through the socialists currently running Hungary, Yushchenko believed in an a non-existent “Third Way” under which a nominally capitalist economy would avoid the disruption of rapid change and preserve existing business structures. He was thus favored by the EU, the Financial Times and the Ukrainian Chamber of Commerce and Industry, all of whom tend to like social democrat compromisers who won’t rock the boat. Nevertheless, when the Orange Revolution won the election re-run in December 2004, the world outside the Kremlin rejoiced.

It quickly became obvious that the Orange Revolution forces were far from united. Yushchenko appointed as prime minister his main ally, Julia Tymoshenko, but within a year had fallen out with her, to the extent that he dismissed her and called new elections in early 2006. These resulted in the revival of Yanukovych as leader of the largest party in parliament, with Tymoshenko second and Yushchenko’s forces reduced to third. Even though Yushchenko and Tymoshenko still had a parliamentary majority if their forces combined, Yushchenko chose to throw in his lot with Yanukovych.

Yanukovych pursued coalition in the traditional Russian fashion, by bribing Yushchenko supporters to obtain a parliamentary majority, thus removing the need for compromise. No doubt Russian gold was very helpful in this endeavor. Yushchenko responded by calling yet another election, and after competing riots in the streets of Kyiv, an election has now apparently been agreed for September 30. The stakes could hardly be higher, for Ukraine and for the world.

The FT, the EU and the Chamber of Commerce now back a coalition between Yushchenko and Yanukovych to govern after the election, although the last year should surely have proved that any coalition between the weak Yushchenko and the sinister Yanukovych must inevitably lead to Ukraine being effectively absorbed by the expansionist Russia.

Julia Tymoshenko is the wild card. Incomparably the most glamorous major politician currently active (sorry, Angela Merkel and Hillary Clinton, but check out the lady’s website) Tymoshenko made a large fortune in the 1990s in the oil business, doubtless by methods that would not pass close inspection but were inevitable for survival in the Ukraine of those years. (Before Transparency International issues a fatwa against Bear’s Lair, I would ask them who they would currently prefer as President of Russia, the ex-KGB bureaucrat Vladimir Putin or the corrupt but capable liberal former Yukos chairman/oligarch Mikhail Khodorkovsky, now languishing in a Siberian prison camp.)

In spite of being a billionaire with proven business skills, Tymoshenko is now running as the anti-oligarch candidate, for two reasons: it’s likely to win her votes, and she is in any case opposed by the Chamber of Commerce (as well as by the EU and the FT, but those are doubtless of less current concern). Since she is a strong enough personality to stand up to the Kremlin, and is presumably careful not to ingest any Polonium 210, she thus represents Ukraine’s best hope of breaking away into something resembling free market prosperity.

The Chamber of Commerce’s role here needs to be explained. Most communist societies had Chambers of Commerce, as they had trades unions. Post-Communist Croatia for example had an active one when I was a banker there in the late 1990s. I quickly discovered, however, that far from being a force for privatization and free markets, the Croatian Chamber of Commerce was a bastion of the most corrupt, overmanned and backward heavy industries, favoring policies that left as much as possible unchanged except for gigantic government subsidies financed by heavy taxation. I had some difficulty persuading my young local colleagues that this “business” lobby opposed capitalism, but I eventually found that christening it the “Chamber of Commies” worked just fine, and was a pretty accurate description of the institution’s outlook and methods. (It was an immensely disillusioning moment in my transition from banker to Washington journalist when I discovered that the US Chamber of Commerce had many though not all of the same attitudes and policies!)

If this was true in the relatively Westernized economy of Croatia, how much more is it true in the less open behemoth-dominated economy of the impoverished and unreformed Ukraine. While the Orange Revolution moved Ukraine for the first time in the direction of a true free market, to the extent that the country’s economic growth in 2006 was a healthy 7.1%, it remains far poorer than by resources and education level it should be, with a GDP per capita (purchasing power parity basis) of $7,800 compared with Russia’s $12,200 and Poland’s $14,300.

To develop into the prosperous middle-income free market society it deserves to be, Ukraine needs small business above all, for which it needs a stable and nurtured base of middle class family savings. Western investment will be important also, to reform Ukraine’s heavy industries. Tymoshenko showed the way here as prime minister by selling the steel giant Kryvorizhstal to Mittal Steel for $4.8 billion.  Just as US Steel produced a world class steel company remarkably quickly in Slovakia; so Mittal can do it in Ukraine too, and should reap enormous and well deserved profits by doing so.

The current regime of high taxes (around 50% of GDP) frequent banking crises and domination by industrial behemoths has not achieved an environment of middle class security and encouragement to foreign investment and isn’t going to. Tymoshenko’s populist yet market-oriented approach promises to achieve this, if she is given a decent period of power in which to reform the system.

That’s the stakes for Ukraine; very high indeed. The stakes for the West may at first sight appear less—after all Ukraine has a GDP of only $82 billion and isn’t a major exporter of strategic materials. Yet with a population of 46 million, Ukraine’s worth taking some trouble over; if it was able to achieve near-Western living standards it would have a GDP close to Spain’s, well within the world’s top 20 countries.

More important to the outside world than the upside of a successful Tymoshenko government is the downside of a weak Yushchenko/Yanukovych coalition or an outright Yanukovych majority. In that case, assuming that either Putin succeeds himself or his successor has similar ruthlessness and ambitions, a Ukraine that drifted back towards Russia would go far to restoring the Soviet Union in all its awful Evil Empire majesty.

Other former Soviet satellites would be dragged back into compliance, whether willingly, as with Belarus, Armenia and some of the central Asian states, or desperately unwillingly, as with Georgia. They would have little choice; with Russia and Ukraine working together they would be small, mostly surrounded and far from any viable help. Only the Baltic states, tiny but absorbed into the EU, would be likely to escape, although conversely much of the Balkans, not members of the old Soviet Union, might be drawn in to the new one.

This time, however, the Soviet Union would not be held back by an idiotic economic system. Rather than an economically hopeless and eventually doomed Communist state, it would be an economically efficient, resources-rich and strategically ruthless Nazi one, in its economic and foreign policy resembling the Third Reich more than anything we’ve seen since. With Europe strategically hobbled by dependence on its gas, its coffers filled by its reserves of oil, and an obvious powerful natural ally in China, it would present a huge political and economic danger to the West, even if open war could be avoided. Only its population, limited and ageing, would restrict its strength, but alliance with China and some of the high-population countries of the Middle East might well shore up that weakness. As in the 1930s, the emergence of such a powerful and ruthless bloc would devastate prosperity worldwide, causing trade to collapse and wasteful expenditures on armaments to soar.

So vote early and vote often, freedom-loving Ukrainians; the safety and prosperity of the world depends on your domino not falling!

Martin Hutchinson is the author of “Great Conservatives” (Academica Press, 2005) - details can be found here.