How the EU Lost the Ukraine Deal and the Chinese Solution That Will Never Happen

by lizard

Spiegel International put out a great analysis of How the EU Lost the Ukraine deal to Russia last November. Here’s an excerpt:

“I believe the unprecedented pressure from the Russians was the decisive factor,” says former Polish Prime Minister and intermediary Aleksander Kwasniewski. “The Russians used everything in their arsenal.” Elmar Brok, chairman of the foreign affairs committee in the European Parliament, says: “Yanukovych kept all options open until the end, so as to get the best possible deal.”

The official reason for the agreement’s failure is Yulia Tymoshenko, the opposition politician who has been in prison for the last two years. The EU had made her release a condition of the agreement. Yanukovych was unwilling to release his former rival, and last week the parliament in Kiev failed to approve a bill that would have secured her release.

But then there are the financial incentives. In the end, the Russian president seems to have promised his Ukrainian counterpart several billion euros in the form of subsidies, debt forgiveness and duty-free imports. The EU, for its part, had offered Ukraine loans worth €610 million ($827 million), which it had increased at the last moment, along with the vague prospect of a €1 billion loan from the International Monetary Fund (IMF). Yanukovych chose Putin’s billions instead.

The EU had been banking on its radiant appeal, and on its great promise of prosperity, freedom and democracy, but now Brussels must confront the fact that, for the first time, an attempt at rapprochement was rebuffed because the price was wrong. “If Yanukovych doesn’t want to make a deal, then he simply doesn’t want to,” says Brok.

But that was November.

Now it’s March and Ian Welsh presents an interesting alliance for Ukraine that will never happen: China. I’m going to include Welsh’s piece in full below the fold.



The Ukraine was a mess even before the crisis:

  • Massively in debt. 35 billion needed over the next two years.
  • Aging industrial sector, located primarily in the east, which produces steel goods that no one but Russia is willing to buy.
  • Massive inequality, and a private sector controlled almost entirely by oligarchs.
  • A genuinely split population, politically.
  • Vast corruption.
  • Unable to provide enough energy for its own industries and citizens.
  • Not able to sell enough to foreigners to pay for what it needs to import.

The IMF had offered 4 billion dollars, contingent on ending energy subsidies and opening the economy up. Ending energy subsidies would double price of energy, which would mean that the aging industries would go out of business and many Ukrainians would freeze next winter, because they can’t afford the higher prices. The EU trade deal was nothing special either: they don’t want Ukraine’s steel or lousy, Soviet era goods.

The Ukraine has almost nothing going for it. But it does have one thing: it’s a breadbasket. The Ukraine exports a ton of wheat.

There are growing food shortages, and food prices have been rising faster than inflation for years. They will continue to do so.

The country which has expressed the most interest in Ukraine’s wheat is China. They offered, at one point, to rent fully 5% of the Ukraine’s land to farm.

China is the country in the world throwing off the most money right now, their money creation dwarfs even the United States. They cannot grow enough grain to feed their own population. China is also the only great power which still offers development to its partners: the Chinese have built roads, ports, airports and factories in Africa and Asia. Further, so long as deals are kept with them, the Chinese do not care what is done internally: they don’t consider it any of their business. Their money is not contingent on other countries engaging in the sort of austerity that the IMF, Europe and the US like to force on anyone who goes to them for money.

China is also willing to lock into long term deals, and to pay somewhat more than the market rate to insure a guaranteed supply of whatever commodity they need, whether that be oil or food.

The Ukraine has two problems which cannot be tackled under the West’s aegis: inequality, and debt. The West simply will not allow a massive restructuring or default of debt and still give the Ukraine money. Does not happen: oligarchs are sacred in the West. But what the Ukraine needs to do is restructure its debt: turn it all into 100 year bonds at 1% and tell investors to take it or leave it. And they need to expropriate the oligarchs: take away their money, power and holdings.

Neither of these things, again, can be done under the West. And once done, the West will generally refuse to trade the Ukraine what it needs.

So the obvious play is to expropriate the land needed to make a deal with China. Cut a deal with China to take virtually all of the Ukraine’s grain exports, to develop the Ukraine’s land and make its farming even more productive, and to sell the Ukraine the goods the West will stop selling them.

Meanwhile, since Russia and China are on great terms, you don’t take the Western/IMF deal, you take the Russian offer, because in addition to food the one thing you MUST have is oil and natural gas, and Russia will give you a discount on those. The only people whose debts you don’t roll over into 100 year bonds are the Russians (though you do renegotiate with them, and yeah, you can probably get great terms if you swing back into their sphere of influence and join their trade area.)

The odds of this happening, are, of course, exactly zero. The Ukraine’s west, and the current government are caught in this weird delusion where they think that, like Poland, they can get prosperity by orienting to Europe. They can’t, those days have passed, and Poland is not the Ukraine (among other things, it has very low inequality.) And the current government is in bed with the oligarchs: they turned on the last government at the right time, and the new government is appointing them to key posts.

However, things change: Europe and the IMF will wreck the Ukraine (that’s what they do), and things will get worse for ordinary people (there may be a hiatus where things get better due to a land bubble, we’ll see). When it does, Ukrainians will have another chance to realize that Western nations aren’t their friends, and only care about them as a took to screw with the Russians, or to the extent there is something of value left to loot.

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