George Soros: there is an urgent need to reorient the current policies of the European Union toward Russia and Ukraine

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There is an urgent need to reorient the current policies of the European Union toward Russia and Ukraine. I have been arguing for a two-pronged approach that balances the sanctions against Russia with assistance for Ukraine on a much larger scale.  

Sanctions are a necessary evil. They are necessary because neither the EU nor the US is willing to risk war with Russia and that leaves economic sanctions as the only way to resist Russian aggression.  But they are evil because they hurt not only the country on which they are imposed but also the countries that impose them. The harm has turned out to be much bigger than anybody anticipated. Russia is in the midst of a financial crisis, which is helping to turn the threat of deflation in the eurozone into a reality.

By contrast, all the consequences of helping Ukraine would be positive. By enabling Ukraine to defend itself, Europe would be indirectly also defending itself. Moreover, an injection of financial assistance to Ukraine would help stabilize its economy and indirectly also provide a much-needed stimulus to the European economy by encouraging exports and investment in Ukraine.  

Unfortunately neither the European public nor the leadership seems to be moved by these considerations. Europe seems to be dangerously unaware of being indirectly under military attack from Russia and carries on business as usual. It treats Ukraine as just another country in need of financial assistance, and not even as one that is important to the stability of the euro, like Greece or Ireland. According to prevailing perceptions, Ukraine is suffering from a more or less classical balance of payments crisis that morphed into a public debt and banking crisis.  From this conventional perspective, the successful resistance to the previous Yanokovych government on the Maidan and, later, the Russian annexation of Crimea and the establishment of separatist enclaves in eastern Ukraine are incidental. These events are seen as simply temporary external shocks.

This perspective needs to be altered. The birth of a new Ukraine and the Russian aggression are not merely temporary shocks but historic events. Instead of facing the remnants of a moribund Soviet Union, the European Union is confronted by a resurgent Russia that has turned from strategic partner into strategic rival. To replace communism, President Putin has developed a nationalist ideology based on ethnic grounds, social conservatism, and religious faith—the brotherhood of the Slavic race, homophobia, and holy Russia. He has cast what he calls Anglo-Saxon world domination as the enemy of Russia—and of the rest of the world.  

The reformists in the new Ukrainian government are advocating a radical «big bang» reform program that is intended to have a dramatic impact. This program aims to break the stranglehold of corruption by shrinking the bureaucracy while paying the remaining civil servants better and by breaking up Naftogaz, the gas monopoly that is the main source of corruption and budget deficits in Ukraine.

Advocates of radical reform claim that it would be both possible and desirable to shrink the ministries to a fraction of their current size, provided that the general population would not be subjected to severe cuts to their living standards. That would allow the discharged civil servants to find jobs in the private sector and the employees retained on the payroll to be paid higher salaries. Many obstacles to doing business would be removed, but that would require substantial financial and technical support from the EU.

Until now, the Europeans kept Ukraine on a short leash and the Arseniy Yatseniuk government did not dare to embark on radical structural reforms. The former minister of the economy, Pavlo Sheremeta, a radical reformer, proposed reducing the size of his ministry from 1,200 to 300 but met such resistance from the bureaucracy that he resigned. No further attempts at administrative reform were made but the public is clamoring for it.

By offering financial and technical assistance commensurate with the magnitude of the reforms, the EU could influence the Ukrainian government to embark on radical reforms and give them a chance to succeed. Unfortunately the European authorities are hampered by the budgetary rules that constrain the EU and its member states.  

In order to shift the emphasis to assisting Ukraine, the negotiations have to be moved from the bureaucratic to the political level. As it stands, the European Union could find only 2 billion euro in its Macro-Financial Assistance program, and individual member states are reluctant to contribute directly.  

European political leaders must tap into the large unused borrowing capacity of the EU itself and find other unorthodox sources to be able to offer Ukraine a larger financial package than the one currently contemplated. That would enable the Ukrainian government to embark on radical reform. I have identified several such sources. For example, the Balance of Payments Assistance facility (used for Hungary and Romania) has unused funds of $47.5 billion and the European Financial Stability Mechanism (used for Portugal and Ireland) has about $15.8 billion of unused funds.

European Investment Bank project bonds could yield 10 billion euro or more. These funds would be used to connect Ukraine to a unified European gas market and to break up Naftogaz, the Ukrainian gas monopoly. These changes would greatly improve Ukraine’s energy efficiency and produce very high returns on investment. It would help create a unified European gas market and reduce not only Ukraine’s but also Europe’s dependence on Russian gas.  

The additional sources of financing I have identified, only two of which I mention here, would be sufficient to produce a new financial package of $50 billion or more.  Instead of scraping together the minimum, the official lenders would hold out the promise of the maximum. Ukraine would embark on radical reforms and, instead of hovering on the edge of bankruptcy, it would turn into a land of promise that would attract private investment.

Assisting Ukraine should also be considered as defense expenditure by the EU countries. Framed this way, the amounts currently contemplated shrink into insignificance. If the international authorities fail to come up with an impressive assistance program in response to an aggressive Ukrainian reform program, the new Ukraine will probably fail, Europe will be left on its own to defend itself against Russian aggression, and Europe will have abandoned the values and principles on which the European Union was founded. That would be an irreparable loss.

By contrast, if Europe rose to the challenge and helped Ukraine not only to defend itself but to become a land of promise, Putin could not blame Russia’s troubles on the Western powers. He would be clearly responsible and he would either have to change course or try to stay in power by brutal repression that will cow people into submission. Either way, Putin’s Russia would cease to be a potent threat to Europe. By helping Ukraine, Europe may be able to recapture the values and principles on which the European Union was originally founded. That is why I am arguing so passionately that Europe needs to undergo a change of heart. The time to do it is right now. The Board of the IMF is scheduled to make its fateful decision on Ukraine on January 18.    

George Soros is a financier and philanthropist. This is an extract from an essay published in the New York Review of Books (www.nybooks.com)