EUROPE POLICY PAPER 1/2014

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
DANIELA SCHWARZER AND CONSTANZE STELZENMÜLLER
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On the cover: Ukrainian protestors continue to protest on Kyiv’s 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 Stelzenmüller
1
1
Daniela Schwarzer is the Director of GMF’s Europe Program. Constanze Stelzenmüller is a Senior Transatlantic Fellow
and the Director of GMF’s 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
ussia’s annexation of Crimea and its efforts
to destabilize the transitional government
in Kyiv have re-framed the relationship
between Europe and Russia in Europe’s 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 Ukraine’s right to choose
its future path. The Europeans will have to pay
a price for Ukraine’s 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 Moscow’s 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 EU’s 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 EU’s 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 —
Europe’s 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 France’s 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 Partnership’s objective was to stabilize
the six post-Soviet states on the EU’s 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 EU’s 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 Partnership’s
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
EaP’s 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 EU’s 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 EU’s
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 Georgia’s
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 EU’s offer of an
association agreement to Armenia by pressuring it
to join Russian President Vladimir Putin’s 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 Moscow’s relations with
Brussels and Berlin.
Ukraine is an entirely different matter, as it is
located squarely on the Eurasian continent’s 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 Ukraine’s
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
other’s 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 Russia’s
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 country’s 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 Putin’s proposal
of a Eurasian Union that forced Ukraine to choose
between the two.
The reasons for Russia’s intransigence are many.
Ukraine’s strategic importance — not least for
pipelines transporting Russian gas, Moscow’s most
vital source of leverage with Europe — makes it
Russia’s main asset in its claim to be an European
power, rather than an Asian one. Moreover,
Ukraine is the Kremlin’s 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
Russia’s 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 Russia’s imperial past, set against
a counter-narrative of Europe and the West as
post-modern, decaying, and decadent cultures. In
this context, Putin’s 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
Ukraine’s right to choose its future path — if
necessary, by standing up to Russia.
The Europeans will have to pay a price for Ukraine’s
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
kraine’s 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 EU’s 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 Europe’s 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 Putin’s 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 Europe’s 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 Union’s 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 EU’s 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 Radosław Sikorski of Poland).
Russia’s 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 François 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
Europe’s 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 EU’s 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 Kingdom’s 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 Russia’s
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 Ukraine’s
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 Europe’s 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
country’s 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
Germany’s 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 Germany’s neighborhood, but Berlin’s
foreign policy credibility, which has suffered over
the last few years. After German reunification in
1989, the German Question focused for 20 years on
Berlin’s 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. Berlin’s
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. Russia’s obduracy, however, has angered
many policymakers, and stiffened the German
government’s 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 Germany’s bilateral trade partners,
9
Angela Merkel, Appeal to Russia’s 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 Germany’s 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 Germany’s
willingness to engage itself financially for the EU –
in this case for the EU’s 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 country’s
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 Europe’s 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 Europe’s 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 Russia’s 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 country’s
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 regime’s 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: Russia’s 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 Russia’s 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 Ukraine’s 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 Europe’s
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 Ukraine’s 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 Putin’s narrative by making it clear
to Russians everywhere that the West is not Russia’s
“enemy,” or engaged on aggressive expansionism.
Prime Minister Arseniy Yatseniuk’s 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 Ukraine’s 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 Kyiv’s 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, Europe’s 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 Europe’s greater
vulnerability to
sanctions and
escalation.
What is at Stake in Ukraine 15
W
estern policy in the medium term
depends on Russia’s 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 Ukraine’s 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, Russia’s
actions would broadly reshape Europe’s 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 Europe’s eastern neighborhood without some
visa liberalization; one key option is “mobility
partnerships,” access for a country’s citizens to
the EU in exchange for cooperation in combating
illegal immigration.
The most sensitive issue of all is whether any
country in the EU’s 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 Ukraine’s 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 EU’s
core, and reducing Europe’s 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
EU’s 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 policy’s
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 EU’s neighborhood.
At the same time, the EU and the United States
should invest all possible effort to reach out to
Russia’s 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 Dröge, “Integration der
europäischen Energiemärkte: Notwendige Voraussetzung für
eine effektive Energieaußenpolitik,” 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 Ashton’s
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 EU’s 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

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