Europe and the United States Need to Do What it Takes to Protect the Right of the Eastern Partnership Countries to Choose their Future DANIELA SCHWARZER AND CONSTANZE STELZENMLLER 2014 Te German Marshall Fund of the United States. All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without permission in writing from the German Marshall Fund of the United States (GMF). Please direct inquiries to: Te German Marshall Fund of the United States 1744 R Street, NW Washington, DC 20009 T 1 202 683 2650 F 1 202 265 1662 E info@gmfus.org Tis publication can be downloaded for free at http://www.gmfus.org/publications. About the Europe Program Te Europe Program aims to enhance understanding of the challenges facing the European Union and the potential implications for the transatlantic relationship. Analysis, research, and policy recommendations are designed to understand the dichotomy of disintegration and deepening of the EU and to help improve the political, economic, fnancial, and social stability of the EU and its member states. In 2014, the Europe Program focuses on integration and disintegration in the EU, the deepening of the euro area, the changing role of Germany in Europe and the world, as well as challenges in the EUs neighborhood. About GMF Te German Marshall Fund of the United States (GMF) strengthens transatlantic cooperation on regional, national, and global challenges and opportunities in the spirit of the Marshall Plan. GMF does this by supporting individuals and institu- tions working in the transatlantic sphere, by convening leaders and members of the policy and business communities, by contributing research and analysis on transatlantic topics, and by providing exchange opportunities to foster renewed commitment to the transatlantic relationship. In addition, GMF supports a number of initiatives to strengthen democra- cies. Founded in 1972 as a non-partisan, non-proft organization through a gif from Germany as a permanent memorial to Marshall Plan assistance, GMF maintains a strong presence on both sides of the Atlantic. In addition to its headquarters in Washington, DC, GMF has ofces in Berlin, Paris, Brussels, Belgrade, Ankara, Bucharest, Warsaw, and Tunis. GMF also has smaller representations in Bratislava, Turin, and Stockholm. On the cover: Ukrainian protestors continue to protest on Kyivs Independence Square on December 6, 2013. jon11/ istockphoto What is at Stake in Ukraine Europe and the United States Need to Do What it Takes to Protect the Right of the Eastern Partnership Countries to Choose their Future Europe Policy Paper March 2014 By Daniela Schwarzer and Constanze Stelzenmller 1 1 Daniela Schwarzer is the Director of GMFs Europe Program. Constanze Stelzenmller is a Senior Transatlantic Fellow and the Director of GMFs Transatlantic Trends. Both are based in Berlin. Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 A Flawed Balancing Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 The Stakes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Short-Term Responses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 The Medium Term: Two Scenarios. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 What is at Stake in Ukraine 1 Executive Summary 1 The Issue R ussias annexation of Crimea and its efforts to destabilize the transitional government in Kyiv have re-framed the relationship between Europe and Russia in Europes eastern neighborhood from an uneasy geopolitical balancing into full-on systemic conflict. The competition over Ukraine also puts the rest of the eastern neighborhood at significant risk. The EU together with the United States must now do what it takes to protect Ukraines right to choose its future path. The Europeans will have to pay a price for Ukraines transformation, and some EU member states will be more vulnerable than others to pressure from Russia. But the cost of not countering Russian attempts to destabilize Ukraine would be even higher. Germany will be a key player, given its economic and political power in the EU, its geographical location, and its special ties with Russia. Policy Priorities The immediate task is to stabilize the transition in Ukraine. This will mean incentives and support for Ukraine; effective, targeted sanctions against Russia; and protection for vulnerable states in the neighborhood and in the EU. For the medium- to-long term, the West should prepare for two possible scenarios for its relationship with Russia: a de-escalation scenario, and a Cold War II. In both cases, the EU should overhaul its Eastern Partnership policy, providing much stronger political and economic backing for democratic transformation and association with the West. In the latter scenario, the EU should reduce its own vulnerability to Russian action and increase its capacity to project soft and hard power in the region. The external threat has the potential to give decisive momentum to European integration, e.g. in the areas of energy and defense. The external threat has the potential to give decisive momentum to European integration. What is at Stake in Ukraine 3 A Flawed Balancing Approach 2 The crisis in Ukraine is a watershed moment for Europe, and for the European Union. The annexation of Crimea has reframed the EU- Russia relationship. T he crisis in Ukraine is a watershed moment for Europe, and for the European Union. The annexation of the Crimean peninsula by Russia after Ukrainian President Viktor Yanukovych was ousted by the Euromaidan movement, and Moscows efforts to destabilize the transitional government in Kyiv, have re-framed the relationship between Europe and Russia from an uneasy balancing of regional interests to a systemic competition between peaceful democracies and an aggressive authoritarian power. The EU and its Eastern Neighborhood The EUs attempts at establishing a policy framework for its eastern periphery after the breakup of the Soviet Union have had mixed success at best. Seen in retrospect, the integration of ten former Warsaw Pact countries into NATO and then into the EU was a strategic and transformational achievement. Slovakia, Slovenia, Estonia, and Latvia have even joined the eurozone. Still, it must be acknowledged that the necessary adaptation processes were often painful, even before they were exacerbated by the global financial crisis; and for a few countries such as Romania and Bulgaria, political and economic stability still remains a goal to be achieved. The EUs subsequent efforts to define its relationship with the six remaining countries of its eastern periphery have been far more fraught. In an attempt to balance legitimate European and Russian interests in the region, a membership perspective was deliberately excluded. Deprived of this incentive, the EU has struggled to encourage economic and political transformation in its eastern neighborhood. The European Neighborhood Policy (ENP), launched after the 2004 EU enlargement, was soon widely criticized, in particular because it lumped together without a persuasive overall policy framework or sufficient funding Europes southern and eastern neighborhoods, encompassing very disparate countries ranging from Algeria to Ukraine. 1 In an attempt to make the approach more coherent through greater regionalization, the states of the southern neighborhood were regrouped in the Union for the Mediterranean 2007, pushed by Frances President Nicolas Sarkozy. Its counterpart, the Eastern Partnership (EaP), was initiated by Poland and Sweden (with German backing), and came into force in 2009. The Eastern Partnerships objective was to stabilize the six post-Soviet states on the EUs eastern border (Armenia, Azerbaijan, Georgia, Moldova, Belarus, and Ukraine) politically and economically by promoting free trade agreements, visa liberalization, and strategic partnership agreements, as well as regional cooperation and institution- building. The Eastern Partnership Civil Society Forum, meanwhile, monitors efforts at building democratic governance. Although the Eastern Partnership was an improvement on the ENP, it failed to differentiate appropriately between the six EaP countries and their specific domestic and geostrategic situations. As the Ukrainian case illustrates, the association agreement approach puts too great a burden on countries with fragile and dysfunctional political economies. Without a clear membership perspective, incentives for adaptation remained low. Moreover, the EU failed to use its Common Foreign and Security Policy (CFSP) as a framework for engaging with the six EaP countries on regional security issues. It did not provide sufficient and sustained support for civil society actors, or effective instruments and political backing from 1 The ENP included Algeria, Morocco, Egypt, Israel, Jordan, Lebanon, Libya, the Palestinian Authority, Syria, and Tunisia in the south, and Armenia, Azerbaijan, Belarus, Georgia, Moldova, and Ukraine in the east. The German Marshall Fund of the United States 4 The EUs balancing approach assumed that stability would be good for the entire region, including Russia. Brussels for promoting democratic transformation. Its initial funding of only 600 million over four years was half-hearted. But there were partial successes, too. The association negotiations with Moldova advanced well, as did those with Georgia. And the EU has been willing to learn from its mistakes: it has undertaken a review of the Eastern Partnerships comparatively weak performance, and in 2011 agreed on a new European Neighborhood Instrument (ENI), which will be in effect from 2014 to 2020. With a substantially higher budget of 15.4 billion, the ENI attempts to remedy some of the EaPs flaws by providing incentives and rewarding best performers, as well as offering funds in a faster and more flexible manner. 2 Russia: Countering the EU The EUs balancing approach in its eastern neighborhood was based on the assumption that promoting economic stabilization and good governance on the lines of the European model would be beneficial to the entire region, including Russia. It was certainly not set up to pursue an aggressive expansion of European influence to the detriment of Russia. In fact, a majority of the EUs members were against offering an EU or NATO membership perspective to the EaP states as a matter of principle, so as not to antagonize Russia. Moscow, however, saw EU policies toward the six post-Soviet states as an attempt to create a European sphere of influence that was deliberately designed to undermine Russian interests; in other words, as a zero-sum game set up by the EU. In response, it began to systematically counter the potential transformative impact of the Eastern Partnership. In 2008, Russian forces occupied and annexed the Georgian provinces of Abkhazia 2 ENI applies to the southern and eastern neighborhoods. European Commission, Memo 11/878, December 7, 2011. and South Ossetia, effectively ending Georgias plans to join NATO (and, by implication, those of Ukraine). Moscow has continued to foment the frozen conflicts (Transnistria, Nagorno-Karabakh, Abkhazia, and South Ossetia) in the region. It has deployed gas embargos and import boycotts against pro-EU governments in Moldova and Georgia; it likewise countered the EUs offer of an association agreement to Armenia by pressuring it to join Russian President Vladimir Putins planned Eurasian Union 3 instead. In Ukraine, too, Moscow tried to deter Yanukovych from the association agreement with the EU. But when Yanukovych succumbed and announced that Ukraine would join the Eurasian Union instead, that was the last straw, which precipitated his ouster by the Euromaidan movement. Ukraine: The Tipping Point Neither the frozen conflicts, nor the Russo- Georgian war of 2008, nor even the brutal repression of popular protests in Belarus in 2010, were able to pit the European Union directly against Russia. Nor was the pressure Russia brought down on governments in Moldova and Georgia seeking association agreements with the EU (with encouragement from Germany) important enough to fundamentally affect Moscows relations with Brussels and Berlin. Ukraine is an entirely different matter, as it is located squarely on the Eurasian continents West- East fault line, with a population of 46 million, a sizable ethnic Russian minority, 4 and a history 3 The Eurasian Union is a customs union that is planned to enter into force in 2015, and to include Russia, Belarus, Kazakhstan, and now Armenia. 4 Ethnic Russians make up about 17 percent of Ukraines population, but Russian is widely spoken. Ethnic Ukrainians and ethnic Russians have lived together in Ukraine peaceably for more than half a century, and speak or at least understand each others languages. See Mykola Riabchuk, Ukraine, not ready for divorce, The New York Times, March 5, 2014; and Chrystia Freeland, Russia has already lost the war, The New York Times, March 7, 2014. What is at Stake in Ukraine 5 Ukraine is Russias main asset in its claim to be an European power, rather than an Asian one. profoundly rooted in both Europe and Russia. For all these reasons, the country was always destined to be the potential tipping point in the uneasy regional balance of interests between the EU and the Russian Federation. Contrary to the assertions of conspiracy theorists in the Kremlin and elsewhere, the EU held back from encouraging Ukraine on a westward course for a long time. European policymakers were nervously aware of the significance Ukraine holds for Russia. They were also put off by the sheer magnitude of the countrys economic and political problems, its dysfunctionality, poverty, and endemic corruption. It was Yanukovych, not EU leaders, who sought the association agreement with the EU for his country a ploy that was at least as much about keeping Putin at bay as about rapprochement with the West. And he abandoned the EU in favor of the Eurasian Union at least as much because of the burdens imposed by the EU as because of the incentives and pressure deployed by Putin. Finally, the EU never perceived the association agreement as excluding economic ties with Russia. It was Putins proposal of a Eurasian Union that forced Ukraine to choose between the two. The reasons for Russias intransigence are many. Ukraines strategic importance not least for pipelines transporting Russian gas, Moscows most vital source of leverage with Europe makes it Russias main asset in its claim to be an European power, rather than an Asian one. Moreover, Ukraine is the Kremlins key to influence in the other Eastern Partnership countries, as well as in the Central Asian countries whose allegiance it needs for the Eurasian Union. It is also crucial for Russias claim to respect as a major power, on a par with the EU, the United States, and others. Even more fundamentally, the specter of Ukrainian society opting for the European model of modernization is a debilitating blow to the ideological framing Putin has given to his attempts to reestablish Russian power: in Ukraine, reducing the social tensions in a complex country to a battle of symbols about the past; 5 and in Russia, alignment with Russias imperial past, set against a counter-narrative of Europe and the West as post-modern, decaying, and decadent cultures. In this context, Putins occupation of Crimea is not realpolitik, it is kulturkampf. 6 Western Diplomacy, Interests, and Challenges The illegal occupation and annexation of Crimea by Russia, combined with blatant propaganda and bullying of the new transitional govern ment in Kyiv, require a firm and coordinated Western response. Compromise with Russia may still be possible but not at the price of a settlement that sacrifices fundamental values of the EU, such as national sovereignty, the inviolability of borders, democratic self-determination, the protection of ethnic minorities, and the right of countries to choose their alliances as well as their future development path. Indeed, Europe and the United States must now do what it takes to protect Ukraines right to choose its future path if necessary, by standing up to Russia. The Europeans will have to pay a price for Ukraines choice; and some EU member states will be more vulnerable than others to pressure from Russia. Moreover, the conflict over Ukraine puts at risk not just the rest of the eastern neighborhood, but Russia itself. Still, the cost of inaction or failure would be even higher. So the struggle that lies ahead will decide not just the future of Ukraine, its neighbors, and Russia, but also that of Europe and possibly of the transatlantic alliance. 5 Timothy Snyder, Fascism, Russia, and Ukraine, The New York Review of Books, March 20, 2014. 6 Ivan Krastev, What does Russia want and why? Prospect, March 4, 2014. What is at Stake in Ukraine 7 The test posed by Ukraine is of a magnitude Europe has not seen in more than 20 years. Europe U kraines choice of a pro-European path raises opportunities and challenges for realists and idealists in Europe alike. In either case, the test is of a magnitude Europe has not seen in more than 20 years. From a realist perspective, the transformation of Ukraine would be a boon to the EU: it would encourage the other five states in the EUs eastern neigh bor hood to follow a similar path toward good governance, stabilizing the entire region, and boosting trade as well as security. This, in turn, might encourage reform-minded elements in Russia. Conversely, its failure would jeopardize the pro-European governments of Moldova and Georgia, discourage civil societies elsewhere, and lead to protracted instability and conflict east- wards of the EU. The consequences for Europe would likely include a rise in outflows of migrants and refugees, the sex trade, arms, and narcotics, as well as cybercrime, resulting in the EU having to massively fortify its eastern borders. Ukraine could become a huge festering sore on Europes frontiers, capable of undermining the political health of the entire region, including the eastern reaches of the EU itself. Accepting this course of events would also mean recognition of Putins claim of a Russian sphere of influence in the entire arc from Belarus to the Caucasus in effect, accepting a new Iron Curtain from the Baltic to the Black Sea. For idealists, at a time when Europeans have been doubting the legitimacy and viability of their integrationist approach for the modern age, the lesson from the Euromaidan uprising is blunt. The West as a community of free democracies retains its aspirational power; Europe, despite its flaws, remains a model for its neighbors. Responding to the Ukrainian uprising is a challenge for European foreign and security policy the greatest in over two decades. But, as Europes reaction to the fall of the Berlin Wall and the Yugoslav Wars shows, Europeans can come together in times of crisis. On the other hand, if the EU and its member states fail to react adequately, this could be a fatal blow for the credibility not just of its neighborhood policies, but of the EU as a foreign policy actor on the global stage. The European Unions high representative for foreign and security policy, Catherine Ashton, has been deeply engaged in nuclear negotiations with Iran, while Ukrainian crisis management has been mostly in the hands of the EUs major member states notably the Weimar Triangle, despite the overthrow of the transition deal brokered in February by its three foreign ministers (Laurent Fabius of France, Frank Walter Steinmeier of Germany, and Radosaw Sikorski of Poland). Russias actions have made resolve and unity in Europe run high. Nonetheless, many European countries face quite specific challenges and costs for standing up to Moscow. In France, President Franois Hollande has sided with Washington (and initially against Berlin) on the need for harsher sanctions against Russia. France is less vulnerable to Russian economic pressure, but it is engaged in what is currently Europes biggest (1.2 billion) arms sale to Russia. And it is concerned that escalating or protracted tension in the east might draw political and financial resources away from the EUs southern neighborhood and from the task of repairing and integrating a Europe marked by deep divides in the wake of the global financial crisis. These fears are shared by other southern EU member states that remain at risk in economic terms, such as Italy, Spain, Portugal, Greece, or Bulgaria. It is further compounded by the fact that several of these The Stakes 3 The German Marshall Fund of the United States 8 periphery states are highly dependent on Russian energy imports. 7 The United Kingdoms position is similarly ambiguous. Its prime minister, David Cameron, and foreign minister, William Hague, have been vocal on the need for a strong response to Russias actions. But Britain was burned by the experience of a prolonged and damaging freeze in U.K.- Russian relations after the the killing of the former KGB-spy Litvinenko in London. It has been careful not to demand any sanctions that would damage the U.K.s standing as a major haven for Russian capital and wealthy Russian expats, as well as their children attending British schools and universities. In contrast, Poland and the three Baltic states of Estonia, Latvia, and Lithuania (supported by Sweden) have left no uncertainty as to where they stand on Ukraine, and on Russia. Historical connections, geographic proximity, and size give them a major stake in the success of Ukraines political transformation and make them highly vulnerable to its failure. They joined NATO and the European Union precisely because of what 7 Arno Behrens, Julian Wieczorkiewicz, Is Europe vulnerable to Russian gas cuts? CEPS commentary, March 12, 2014. they perceive as an enduring threat from Moscow. All four have substantially modernized their economies, after difficult adaptation processes to EU member status, and the Baltic republics having undergone additional painful austerity programs in the course of the global financial crisis. But the impact of any further destabilization of the situation in Ukraine for example, though outflows of refugees will hit them first. At the same time, they are also existentially dependent on Russian gas: Poland imported more than 50 percent of its domestic gas consumption from Russia, whereas for the three Baltic countries the rate was 100 percent (see Figure 1). Germany is Europes pivotal power in the Ukrainian crisis. The reasons: its economic strength and potential political clout; key German leaders who have recently declared they want to shift the countrys strategic posture from self-restraint to one of greater respon sibility; 8 its geographical location; its historic special relationship with Russia; and its newly close bonds with Poland and the Baltic states. Of all the EU member states, it has 8 Germanys president, Joachim Gauck, called for a new German foreign policy at the Munich Security Conference on February 5, closely echoed by Foreign Minister Frank Walter Steinmeier, and Defense Minister Ursula von der Leyen. The speeches can be found here. Figure 1: Share of Russian gas in total EU-28 consumption (aggregated 2012 data, in bcm) Source: Behrens/Wieczorkiewicz (2014, p. 3), based on data from BP (2013), EIA (2013 and 2014) 0 10 20 30 40 50 60 70 80 90 ES PT DK UK EI CY MT NL FR IT RO LU HR DE BE HU AU PL EL SI SK CZ BG EE FI LV LT SE Annual gas consumption Russian gas imports What is at Stake in Ukraine 9 the greatest stake in its successful resolution. What is at stake is not only the economic and political stability in Germanys neighborhood, but Berlins foreign policy credibility, which has suffered over the last few years. After German reunification in 1989, the German Question focused for 20 years on Berlins willingness to use force particularly in the genocidal wars of the Balkans. The 21 st century version of the German Question is: will Germany use its considerable political and economic power to stand up to Russia? For now, the answer appears to be yes. Berlins relationship with Moscow had already cooled in the wake of the 2008 Russo-Georgian war. Both Chancellor Angela Merkel and Foreign Minister Stein meier have few, if any, illusions about Vladimir Putin. Still, Berlin (and Steinmeier in particular) initially preferred diplomacy and engagement, and resisted harder institutional and economic sanctions. Russias obduracy, however, has angered many policymakers, and stiffened the German governments resolve. 9 Yet Germany too would have to pay a price for worsened relations with Russia. Its dependency on Russia has often been overstated. With a share of less than four percent of total German exports (see Figure 2), Russia only occupies 11 th place in the ranking of Germanys bilateral trade partners, 9 Angela Merkel, Appeal to Russias Political Reason, Govern- ment Statement on Ukraine, March 13, 2014. Figure 2: EU member states exports to Russia (as share of total exports) Source: Own calculations based on Eurostat (2014) 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% AT BE BG CY CZ DE DK EE ES FI FR UK EL HR HU IE IT LT LU LV MT NL PL PT RO SE SI SK The German Marshall Fund of the United States 10 What will Russian cooperation elsewhere look like if the U.S. concedes parts of Europe to Russia? after Belgium and Poland. And while 35 percent of Germanys natural gas imports come from Russia, Moscow has never managed to turn that into political leverage. According to German industry, however, 6,200 German companies work in Russia, accounting for 300,000 jobs. 10 On the other hand, respondents in a recent German survey express deep distrust of the Russian president, with majorities wanting a tougher line on Russia, and more help for Ukraine. 11 But it is not only Ukraine that will need support, or other EaP countries seeking association with the EU, such as Moldova and Georgia. The Southern European crisis economies, as well as those EU member states most vulnerable to Russian pressure, or a break down of trade with Russia (see Figure 2), may need economic and political help as well. Germany, which is currently still the economic power house of the EU and the largest guarantor to crisis-stricken euro area member states, will have to shoulder a substantial share of these costs. The case of Ukraine can become a severe test for Germanys willingness to engage itself financially for the EU in this case for the EUs ability to stand up for the rights and freedom of other countries. The United States In the United States, President Barack Obama has been focused on the rise of an assertive China, and preoccupied with recalibrating his countrys strategic posture by matching its policies to resources depleted by two wars. After a failed reset attempt with Russia, his administration has chosen to engage with Moscow coolly and selectively. It has also and rightly asked 10 Ostausschuss der Deutschen Wirtschaft, Ostausschuss warnt vor Wirtschaftskonflikt, press statement, March 5, 2014. 11 Eighty-one percent of respondents agree that Putin will use any means to pursue Russian interests; 58 percent say the EU and Germany should support Ukraine; 56 percent say the German government should oppose Russia with more deter- mination. See Infratest Dimap, ARD Deutschlandtrend, March 2014. Europe to take on greater security responsibilities in its own neighborhood. Finally, the United States is far less vulnerable to economic pressure than Europe, because its bilateral trade with Russia is much smaller (see Figure 3), and because of its huge domestic shale gas reserves. Yet the United States cannot afford to let Europe be weakened and undermined by Russia. That would deprive the United States of its key ally and source of leverage in the region, and hollow out the transatlantic alliance, as well as NATO, putting an end to the notion of the West as a community of democracies based on a shared belief in universal human rights and freedoms, and constitutional governance. Nor can the United States accept a Russia that changes European borders by force, and stakes a unilateral claim to dominance in its western neighbor hood by dint of bullying and military intimidation. The United States needs Russia, of course, for diplomacy and conflict management in Iran, Syria, Afghanistan, and the Middle East. Some warn 12 that the price for the United States standing up to Russia in Europes east may be a freeze in cooperation on other issues of even greater concern. But what will Russian cooperation elsewhere look like if the United States concedes parts of Europe to Russia? Russia Of all the actors in Europes east, Russia probably has the greatest stake of all in the outcome of the Ukrainian crisis. The best-case scenario for Ukraine and its neighbors a successful stabilization and transformation is likely to be a worst-case scenario for Russias president. If Moscow does not achieve its goal of destabilizing the new transitional government in Kyiv, that is likely to be the beginning of the end for Putin and his regime. The 12 See John Mearsheimer, Getting Ukraine Wrong, The New York Times, March 13, 2014. What is at Stake in Ukraine 11 possible outcomes and consequences of a power shift in Russia are at this point incalculable. They present an enormous opportunity for Russian civil society, but an even greater likelihood of massive disruptions for the region, and for the EU. If Putin has his way, and the failure of the Orange Revolution in 2004 repeats itself, the authority of his regime will be cemented, and any transfor- mation of Russia itself will be postponed for decades. However, that is no guarantee of stability either. Successive governments in Moscow have failed egregiously to diversify the countrys economy, to wean the government budget off its dependency on rents from fossil energy extraction, to repair its crumbling infrastructure, and to put an end to rampant and pervasive corruption, up to the highest levels of government. Already now, without severe sanctions in place, the Ukraine crisis is taking its toll on Russia economically: the ruble has plummeted and so has the Moscow stock market. The effects on the real economy are considerable: Russian companies rely strongly on Western banks, and the decline of the ruble pushes up their debt service and refinancing costs for foreign currency denominated debt. At the same time, borrowing on the markets is becoming more expensive. Companies with reduced market capitalization due to the sharp decline of the Russian stock market face considerably higher borrowing costs. In the context of a looming emerging market crisis, investors are likely to show a great degree of prudence with regard to Russia, Ukraine, and neighboring states. A hardening of the Russian regimes authority, combined with a walling-off from Europe and the West, is unlikely to turn this situation around; if anything, it may speed up the downward decline into a self-reinforcing vicious spiral. This could mean the end of the Russian social contract, under which Russians gave unquestioning support to the regime, and in return got security and non- interference by the government in their private Figure 3: Russias main trading partners (share of total Russian trade) Source: Eurostat (2014) 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% The German Marshall Fund of the United States 12 lives. It would exacerbate the ongoing flight of capital and the frustrated middle class. With time, Russia could become a failing state. This, compared with eventual trade sanctions of Russias main trading partner, the EU (see Figure 3), may in fact considerably damage Russian economic prospects with severe risks for political and social stability in the country. What is at Stake in Ukraine 13 Reforming Ukraine will cost billions, last a generation, and require a concerted effort by the West. T he immediate challenge for Europe and the United States after the annexation of Crimea is threefold: stabilizing the Ukrainian transition, deterring Russia from further destabilizing Ukraine, and shoring up the region. Stabilize Ukraine The task of reforming Ukraines deeply dysfunctional economy, helping it to combat endemic corruption and to build decent institutions that can provide good governance to the country, will cost billions, last a generation, and require the combined efforts of all the forums, institutions, and instruments the West possesses: the EU, the IMF, and the OSCE, as well as NATO and Europes political foundations and NGOs. That makes it all the more important that the West should get its messaging right at home and abroad. It should signal swiftly and in no uncertain terms that it understands the magnitude of the challenge that Ukraine presents, that it will do what it takes to protect Ukraines chosen path and that it will prevent it from straying. It needs to persuade worried or reluctant domestic publics in Europe and the United States that this is worth doing, and that inaction would be disastrous. Not least, it should counter Putins narrative by making it clear to Russians everywhere that the West is not Russias enemy, or engaged on aggressive expansionism. Prime Minister Arseniy Yatseniuks transitional government in Kyiv has mostly been behaving with moderation and restraint. It has set a date for elections on May 25, formed a cabinet that includes some of the more nationalist factions (thus giving them responsibility for the transformation), focused on institution-building, and resisted temptation to react to Russian provocations in kind. Europe, in response, should continue to combine vigilance with support for all moderate political forces in Ukraine. It should insist that the Yatseniuk government must be broadly inclusive in regional and ethnic terms, and that it must apply European standards in the protection of minority rights especially those of ethnic Russians. It may be necessary for the transitional government to give nationalists and extremists a stake in the outcome of Ukraines transformation, but it must not let them take it hostage. Kyiv must establish some sort of control over the streets. Finally, it must continue to resist provocation the mobilization of the armed forces in response to the occupation of Crimea is a disquieting sign of jittery nerves. The EU has so far rewarded Kyivs prudence. It has offered trade concessions, 11 billion in aid, and a swift signature of the political chapters of the Association Agreement. The International Monetary Fund has meanwhile started working on a rescue package with Ukraine. But the EU should now start deploying its entire transformational instrumentarium, including bilateral cooperation (on national, regional, or local levels) to exchange best practices and expertise. 13 Deter Russia The annexation of Crimea as a Russian protectorate, and the prospect of further instability in other parts of Ukraine, is already breathing a new sense of purpose into NATO, which has deployed Awacs surveillance planes to its eastern borders, at the same time that the United States has sent F-16s to Poland. Still, Western policymakers currently do not want military action. But that gives economic sanctions against Russia such as the asset freezes and visa bans following the annexation of Crimea real meaning. Sanctions work, as the Iranian example shows. And their psychological impact is at least as significant as their impact on 13 The twinning approach used by the European Commis- sion ahead of the 2004 EU enlargement is an example of a very successful approach. See http://ec.europa.eu/enlargement/ tenders/twinning/index_en.htm. Short-Term Responses 4 The German Marshall Fund of the United States 14 the actual mobility of Russians and their access to the assets they have stored abroad. Moscow does possess options for retaliation that might be painful for some countries in Europe. But these too are limited: due to a mild winter, Europes current gas reserves are unusually large; and Russia, too, is dependent on its trade and energy revenues from Europe. If the situation in Crimea or the rest of Ukraine escalates, further sanctions may become necessary. Economic sanctions could be widened and extended to the top leadership in Moscow. Europe and the United States should also consider excluding Russia from the G8, and cancel bilateral meetings such as the German-Russian summit planned for April. The Obama administration should continue to coordinate shoulder to shoulder with Europe on the diplomatic effort against Russia. At the same time, it will have to make allowances for Europeans greater vulnerability to sanctions and escalation. So it should resist calls by some in the United States for faster and more punitive action, for a more demonstra tive show of military strength, or for fast-tracking EaP countries into NATO. Future Russian behavior may make a harsher Western response inevitable. But for now, strategic patience, flexibility, and balance are required from Washington as well as close coordination with Europe. and Reassure the Region Pro-European countries in the Eastern Partnership, such as Moldova and Georgia, will need special support; the same is true of some of the more vulnerable and exposed new EU member states, like Slovakia or Bulgaria. Visits by top European and U.S. leaders such as the recent trips to Poland and the Baltics by Merkel and Steinmeier show an understanding that the eastern European member states need reassurance. Yet there is much to be done beyond that. The EU needs to make clear that its commitment to signing association agreements with Chisinau and Tbilisi is rock- solid, and that it is willing to counter Russian intimidation with increased economic and political support both in the EU and beyond it. Washington, again, could help by coordinating messages and financial support with the EU, as well as military support in the context of NATO. It should also set in motion policy changes to help Europeans reduce their dependence on Russian fossil energy. The U.S. will have to make allowances for Europes greater vulnerability to sanctions and escalation. What is at Stake in Ukraine 15 W estern policy in the medium term depends on Russias next steps. Will it decide to de-escalate, or escalate? Scenario I: Russia De-Escalates If Russia de-escalates, Crimea might remain under Russian influence for the time being. But Moscow would decide not to expand its influence in Ukraines east and south, given the costliness of such an effort and the sanctions this would entail on the side of the EU and the United States. In this case, it might be possible to establish a contact group that would ensure protection of ethnic minorities in Crimea and the rest of Ukraine, access to Crimea and Ukraine for OSCE monitors, and a gradual rollback of sanctions. Nonetheless, even in this scenario, Russias actions would broadly reshape Europes policies, domestically as well as externally. The EU should reset its Eastern Neighborhood Policy, and develop stronger tools and incentives to encourage stability and transformation to the east of the EU. That would mean tailoring its policies much more to the specific political, socio-economic, and administrative situation of each country. Ambitions, concrete objectives, and timelines: all these would be lightened, so as to prevent the overburdening that happened in the case of Ukraine. Enlargement methodology (fine- tuned action plans and progress reports) should only be used with those countries that have a declared interest and a high chance of developing close relations with the EU without this causing internal destabilization or frustration. 14 The EU, for its part, should be able and willing to adapt its neighborhood programs flexibly to rapidly changing environments. Mobility has become a highly sensitive issue in Europe because of large recent movements of labor and welfare migration 14 Stefan Lehne, Time to reset the European Neighborhood Policy, Carnegie Europe Paper, February 4, 2014. within the EU, as well as inflows of refugees. But there can be no successful transformation of Europes eastern neighborhood without some visa liberalization; one key option is mobility partnerships, access for a countrys citizens to the EU in exchange for cooperation in combating illegal immigration. The most sensitive issue of all is whether any country in the EUs eastern neighborhood should be granted a membership perspective, given how the economic crisis has reinforced enlargement fatigue across Europe. On the other hand, the countervailing trend toward differentiated integration with a more deeply integrated euro area and a looser periphery may make it easier in the future to frame policies by which neighboring countries could be brought very close to the EU but remain at a level just below full membership. Scenario II: Russia Escalates If Russia decides to escalate further, for example by expanding its influence in Ukraines south and east, or by attempting to destabilize the transitional government in Kyiv and refusing to negotiate with either the United States, the EU, or Kyiv, the fronts between the West and Russia will harden, locking the standoff into a Cold War II for many years to come. 15
Escalation by Moscow should result in a fundamental rethink of European external affairs in general, and the EU-Russia relationship in particular: from foreign, security, and defense policies to energy and neighborhood policies. New security concerns should also lead Central and Eastern European member states to rethink their attitude to European integration, and to joining the euro as steps toward further hardening the EUs core, and reducing Europes vulnerability. 15 See Dmitri Trenin, Welcome to Cold War II, Foreign Policy, March 4, 2014. The Medium Term: Two Scenarios 5 Escalation by Moscow should result in a fundamental rethink of European external affairs. The German Marshall Fund of the United States 16 European leaders should seize the political margin of maneuver resulting from a severe external crisis in order to strengthen the EU internally, and most particularly its foreign and security policy. The member states should engage in a review of the EUs common defense and security policy, in order to strengthen joint capabilities and effectiveness all coordinated with NATO. Joint EU-NATO border and regional security exercises should become a regular feature. Faced with a hardened territorial standoff between Russia and Europe, an EU membership perspective for Ukraine and possibly Moldova and Georgia would become a possibility, as would fast-tracking NATO membership. Association policies for the other EaP countries should be reinforced. Sweden and Finland, currently members of the EU but not of NATO, should reconsider alliance membership; meanwhile, Denmark might review its opt-out out of CSDP. Closer intelligence cooperation between Europe and the United States with regard to Russia would be desirable, perhaps enabling them to overcome the current U.S. National Security Agency standoff. The EU would also do well to strengthen its internal strategic foresight and planning capability. The EU and its member states should also do more to reduce their dependence on oil and gas imports from Russia with help from the United States. EU imports of natural gas as the cleanest fossil fuel have risen in the last decade as a consequence of the EU energy policys emphasis on environmental objectives and open markets. The strategic consequences of this import dependency, notably from Russia, have been pointed out for years. 16 At the same time, external dependency varies strongly across EU member states. Relaunching the internal energy market 16 See for instance Eurostat: Panorama of energy, Energy statis- tics to support EU policies and institutions, 2009. (which, contrary to Brussels rhetoric, is far from being accomplished in 2014) would be a first step. If the barriers to cross-border energy trade were abolished and storage capacities improved, member states could help each other out swiftly in cases of scarcity, and would reduce dependency on external supplies. 17 The EU should also build strategic gas reserves for Ukraine and other EaP countries, which could benefit the Central and Eastern European countries as well. In addition to creating a truly European energy supply structure, the EU should invest more in the strengthening of alternative energies in order to reduce import shares in total consumption. But energy self-sufficiency for the EU and its neighborhood is a very long-term goal; so external suppliers should be reviewed at the same time. If the conflict with Russia continues, the construction of the South Stream Pipeline, which directly transports Russian gas into the EU, should be abandoned for relationships with other supplying countries in the EUs neighborhood. At the same time, the EU and the United States should invest all possible effort to reach out to Russias civil society and opposition politicians particularly the younger ones. That would leave the door open for the next generation of Russian leaders to find a face-saving exit from the standoff created by Putin. Two Visions of Modernity Whichever way the conflict with Russia over Ukraine turns, only two months before the change of leadership in the EU, it has proved once more how important European unity and resolve are 17 Oliver Geden and Susanne Drge, Integration der europischen Energiemrkte: Notwendige Voraussetzung fr eine effektive Energieauenpolitik, SWP-Studie S13, May 2010. The key task the EU would have to tackle is the regulation of network access, as this de facto remains controlled by the strongest players in national markets, and the strengthening of so-called interconnectors, which link national gas networks. Europeans must do more to reduce their dependence on oil and gas imports from Russia with help from the United States. What is at Stake in Ukraine 17 when faced with an aggressive external challenge. Capitals remain important, as the first response to the Ukraine crisis by the foreign ministers of Germany, France, and Poland showed. But subsequent events made it clear that a few big states alone cannot bring the EU together and lead it for the long term. And for the EU to act as one effectively, it needs joint strategic analysis, a common position, and the closest possible coordination. This crisis is an opportunity for the EU to strengthen itself internally, and to enhance its capacity to project soft and hard power in its neighborhood. An impending test of its determination will be the nomination of the next high representative, following Catherine Ashtons departure after the next European elections. The events in Ukraine should urge the member states to choose a candidate who has the political clout and experience to get member states to close ranks in times of crisis, and to bridge conflicting national positions. He or she should also be able to ensure that the internal analytical and strategic capacity of the office is improved. All this could help to substantially strengthen the EUs external representation. Likewise, the crisis is an opening to review and reinforce not just EU-NATO relations, but the transatlantic alliance in general. It proves the strategic relevance of the Transatlantic Trade and Investment Partnership trade negotiations, and the need for overcoming the current impasse about intelligence competition. Finally, it is a powerful argument for Europe and the United States to do more together to keep the international order peaceful and free because Russia, and other powers like it, will not. What the world is now witnessing in Ukraine is a political struggle between two different visions of modernity, good governance, and a decent society. It is an echo, 20 years later, of what happened in 1989 and thereafter in many Warsaw Pact countries. They are now mostly members of the European Union and of NATO, living proof that history is not destiny. There is no reason why it could not happen now in Ukraine, in Russia and elsewhere. The choice is for Ukrainians, Russians, and others to make. But Europe and the United States should be there to help. The EU must enhance its capacity to project soft and hard power in its neighborhood. OF F I CE S Washington Berlin Paris Brussels Belgrade Ankara Bucharest Warsaw Tunis www.gmfus.org