Project Syndicate: Soros proposed a winning strategy for Ukraine

The American site Project Syndicate published an article by George Soros, in which he expressed his opinion on the current situation in Ukraine and gave some tips.

“At the beginning of this year, I proposed a strategy for Ukraine, which was based on the fact that sanctions against Russia are not enough. They need to be coupled with a political decision by Ukraine's allies to do whatever is necessary not only for the country's survival, but also for its successful implementation of large-scale political and economic reforms, despite fierce resistance from Russian President Vladimir Putin.

Sanctions, although they are necessary, harm not only Russia, but also the European economy. On the contrary, to ensure the prosperity of the Ukrainian economy would be useful for both Ukraine and Europe.

More importantly, the sanctions, in themselves, confirm Putin’s thesis that Russia was the victim of either a Western or Anglo-Saxon plot to deprive it of its legitimate status as a great power equal to the United States. According to the Kremlin propaganda machine, all the economic and political difficulties of Russia are caused by the hostility of the West.

The only way to refute this thesis is to combine sanctions with effective support from Ukraine. If the decline in Russia is accompanied by the prosperity of Ukraine, no propaganda can hide the fact that Putin’s policy is to blame for this.

Unfortunately, the leaders of Europe have chosen a different course. They perceive Ukraine as another Greece, as if it’s just a country in financial difficulties, and, moreover, not even a member of the European Union.

This is mistake. Ukraine is undergoing a process of revolutionary transformation, and the current government is probably most capable of bringing about radical changes.

Indeed, there are significant similarities between “old Ukraine” and Greece. Both countries suffered from corrupt bureaucracies and oligarchic economies. However, the “new” Ukraine is determined to be different. Europe is jeopardizing Ukraine's progress by keeping it on a short financial leash.

In a sense, Europe’s refusal to recognize the birth of a new Ukraine is not surprising. Spontaneous popular uprisings occur frequently; for example, the “Arab Spring” swept across North Africa and the Middle East.

However, uprisings are most often short-lived. Their energy is quickly exhausted - as happened with the Ukrainian Orange Revolution ten years ago. However, today's Ukraine represents one of those rare cases where protest is transformed into a constructive nation-building project. Although I participated in this transformation process, I must admit that even I underestimated the resilience of the new Ukraine. Putin made the same mistake, but on a much larger scale. He manipulated public opinion so successfully that he was unable to believe in spontaneous human action. This turned out to be his Achilles heel.

Putin twice ordered the former Ukrainian president, Viktor Yanukovych, to use force against the protesters on the Maidan. But people did not scatter, but on the contrary, fled to Maidan, ready to give their lives for their country. The second time, in February, 2014, when the protesters were shot from a firearm, they fought back and put the police to flight. Such an event can become a myth that forms the nation.

Putin knows that it was he who turned Ukraine from a compliant ally into an implacable enemy. Since then, his main priority has been the destabilization of the new Ukraine. On this front, he really managed to achieve significant - albeit purely temporary - success. His rush is also explained by the understanding that with oil prices well below one hundred dollars per barrel, Putin’s regime may not be able to stretch for two or three years.

His success - the measure of which can be assessed by comparing the first and second Minsk agreement on a cease-fire - can be attributed in part to the skill of the Putin tactic. But more importantly, the allies of Ukraine, in response to Putin’s belligerence, clearly demonstrated their inability to respond quickly and their unwillingness to take the risk of direct military confrontation with Russia. This gave Putin the advantage of the first move: now he can, at his discretion, move from a hybrid world to a hybrid war and back. It is possible that the allies of Ukraine cannot surpass Russia in a military escalation; however, they certainly can outperform Russia financially.

European leaders, in particular, failed to properly appreciate the importance of Ukraine. Protecting itself, Ukraine also protects the EU. If Putin succeeds in destabilizing Ukraine, he can then use the same combination of hybrid war and hybrid peace to divide the EU and conquer some of its members.

If Ukraine fails, the EU will have to defend itself. The cost of such protection in financial and human terms will far exceed the price of assistance to Ukraine. That is why, instead of feeding Ukraine crumbs, the EU and its members should consider helping Ukraine as defense spending. In this light, the funds currently allocated to Ukraine are very insignificant.

The problem is that the EU and its members are too burdened by fiscal restrictions to support Ukraine in the amount necessary for its survival and prosperity. However, this restriction can be removed if the EU’s macro-financial assistance program is revised for this purpose. This program has already been used to provide moderate assistance to Ukraine; however, a new framework agreement is needed to unlock its full potential.

The Macro-Financial Assistance Program (PMP) is an attractive financial tool, since it does not require the allocation of funds from the EU budget. Instead, the EU borrows funds from the markets (based on its almost unused credit rating at AAA), and lends these funds to non-EU governments. The allocation of funds from the EU budget may be required only if and when the country that borrowed the funds declares a default. According to the current rules, the current budget accounts for just 9% of the total loan amount, in the form of non-cash costs as a guarantee for the case of such a risk.

The new framework agreement would allow the use of the PMP in a larger and more flexible manner. At present, the PMP can be used to support the budget, but not as an insurance against political risks, and not for stimulating investment in the non-state sector. Moreover, each allocation of funds must be approved by the European Commission, the Council of Europe, the European Parliament, and all EU member states. The EU’s contribution to the February aid package for Ukraine from the IMF was finalized until May.

The aid strategy for Ukraine, which I proposed at the beginning of this year, came across three obstacles. First, the restructuring of public debt, which should have amounted to 15,3 billion dollars from the second aid package to Ukraine under the leadership of the IMF (total amount of 41 billion dollars), progressed only slightly. Secondly, the EU has not even started preparing a new framework agreement for the program of macro-financial assistance. Third, the EU leaders did not show the slightest sign that they were ready to "do everything necessary" to help Ukraine.

German Chancellor Angela Merkel and French President Francois Hollande are striving to ensure the success of the second Minsk Agreement, which is signed by them. The problem is that the Ukrainian side concluded this agreement under pressure, and the Russian side deliberately made it ambiguous.

This agreement calls for negotiations between the Ukrainian government and representatives of the Donbass region, but does not specify who these representatives are. The Ukrainian government wants to negotiate with representatives elected under Ukrainian law. Putin, on the other hand, wants the Ukrainian government to negotiate with the separatists who seized power by force.

European authorities are seeking to get out of this stalemate. However, taking a neutral position on the ambiguity of the second Minsk agreement, and keeping Ukraine on a short leash, the European leaders unwittingly help Putin achieve his goal: to provoke a general Ukrainian financial and political crisis (instead of seizing territories in the east of the country). Tossing financial crumbs to Ukraine has put its economy on the verge of collapse. The fragile financial stability is now achieved by accelerating the recession. Although political and economic reforms are still ongoing, they may lose momentum.

During a recent visit, I noticed an alarming contrast between the clear deterioration of the real situation and the reformist zeal of the “new” Ukraine. When President Petro Poroshenko and Prime Minister Arseniy Yatsenyuk work together, they can convince parliament to follow them. (This usually happens on the threshold of receiving some kind of external financing: for example, when the conditions for receiving assistance from the IMF were fulfilled in two days). However, such opportunities are becoming less. Moreover, Poroshenko and Yatsenyuk will be rivals in the local elections in October, in which, according to recent polls, opposition parties supported by oligarchs can get strong support.

This would be a step back against the background of significant successes in recent months, when it was possible to prevent the oligarchs from stealing large sums of money from the state budget. The government won in a sharp confrontation with its worst and strongest opponent, Igor Kolomoisky. And although the Austrian court did not consent to the extradition of Dmitry Firtash to the US, the Ukrainian authorities are now confiscating some of his assets and taking control of his gas distribution monopoly.

Moreover, although the Ukrainian banking system has not yet completed recapitalization and remains vulnerable, the National Bank of Ukraine has achieved effective control over the situation. There is some progress in introducing e-government and ensuring transparency of public procurement. Unfortunately, efforts to reform the judicial system and implement effective anti-corruption mechanisms are disappointing.

The cornerstone of Ukrainian economic reforms is the gas sector, a radical transformation of which can ensure energy independence from Russia, eradicate the most widespread forms of corruption, close the largest gap in the budget and make a significant contribution to the development of a single gas market in Europe.

All reformers are determined to get as close as possible to market prices for gas. This requires the introduction of direct subsidies to needy families before the next heating season. Mistakes and delays in registering needy families can cause an outburst of indignation and undermine the chances of the government coalition in the upcoming local elections.

This danger can be eliminated by reassuring the population that during one heating season all requests for subsidies will be automatically satisfied; however, this may require additional budget support. Worse, many in the government are now hesitating about introducing market prices for gas - not to mention the oligarchs who benefit from the current state of affairs. Poroshenko and Yatsenyuk have yet to work together to take personal responsibility and overcome any opposition to reform. Otherwise, the reformist fuse of Ukraine may weaken.

Given the deterioration of external economic reality, while the EU preserves its current course, Ukrainian reforms may well run out. A radical reform of the gas sector may fail, after which it will be difficult to avoid a new wave of financial crisis, and the government coalition may lose public support.

Moreover, in the worst case scenario, even the prospect of armed rebellion, the possibility of which was openly discussed, cannot be ruled out. In Ukraine today there are more than 1,4 million internally displaced persons, and more than two million Ukrainian refugees can flood Europe.

On the other hand, the “new” Ukraine has repeatedly surprised everyone with its stability; she may surprise us again. However, Ukraine's allies - in particular the EU - can do better. By reconsidering their policies, they can guarantee the success of the new Ukraine.”