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Reviving the Cold War

Dr. Strangelove Over Ukraine

by JEFFREY SOMMERS

Events in Ukraine are providing plenty of theater, but little economic change. Since the USSR’s collapse the ‘set’ has been changed many times over several acts of our long-running Ukrainian ‘play.’ Rotating oligarchs shift in and out looting the ‘set,’ but without a shift in plot. One set of oligarchs merely replaces another, with the periodic display of  ‘color revolutions’ as wardrobe changes to re-animate the tired theme with a sense of novelty. Russian and Ukrainian nationalist continue to spar in a Spy vs. Spy fashion, while Ukraine’s economy continues to unravel and its people continue their exodus on an Old Testament scale to the ‘promised land’ of the EU.

The scene for the original plot was set in the closing stages of the Cold War. George Bush (the elder) promised Gorbachev that if the Soviets let the Warsaw Pact go, Russia would never have to worry about the expansion of NATO. The US responded to this deal by immediately taking the former Warsaw Pact into NATO and then moving into the former USSR territory itself by taking in the Baltics. Nobody could blame the new entrants for wishing NATO entry, given their Soviet occupation past. But, neither could anyone blame the Russians for feeling utterly betrayed by the US and NATO for breaking their word.

Thereafter, Eurasionists in the US State Department wanted more. For them, the goal was the further break-up of Russia and its ‘near abroad’ and remaking it in the image of a neoliberal periphery. For Russia, the ‘game’ has had an existential character. Russia was imploding (whether by their own actions, pressure from the West, or a combination of the two are all points for debate). For Russia, NATO’s moves into Georgia cut too close to the bone and Russia responded, yet the threat of NATO taking Ukraine represented taking Russia’s ‘heart’: the very ancestral home where ‘Russia’ was founded.

Meanwhile, the EU has thought it could reprise its earlier eastward expansion into the former Warsaw Pact that delivered a consumer goods export windfall. This alleviated West European unemployment resulting from the Maastricht Treaty’s punishing fiscal and monetary requirements to create its currency union. Ukraine’s purchasing potential, however, is less than the countries that bordered Germany who were integrated into West European markets. An export boom is unlikely to occur with the proposed Association Agreement. Indeed, the possible damage to Ukrainian markets from poorly executed trade liberalization and non-visa regimes could flood the EU with cheap labor. This outcome would work to further erode Europe’s historically unique (and largely successful) ‘Social Market.’

Ukraine has suffered in this Big Powers crossfire that has left them indebted to both Russia & the EU. Meanwhile, ethnic Ukrainians see the EU as a ‘savior.’ What they fail to recognize is that they are only seeing the last vestiges of a ‘Social Europe’ that in the main has been sacrificed on the alter of neoliberalism. In short, Ukraine’s ‘savior’ is a phantom that no longer exists.

Victor Yanukovych is a crook, yet the reappearance of Yulia Tymeshenko merely represents the return of ethnic Ukrainian oligarchs. It also means nothing little will change on economic policy. Yanukovych resisted the imposition of “structural adjustment” designed to ensure foreign bondholders get paid. The new Ukrainian government will ensure bondholders get paid through an IMF and/or ECB stabilization program. Yet, nothing will be done to address national economic development. There will be no consideration of Modern Monetary Theory or Land Value Tax alternatives. The US/EU plan would be to continue loading down Ukraine with debt and through this means control assume control over their economic policy. A ‘structural adjustment’ policy (today fashionably rebranded ‘austerity’) will be imposed and its young people would continue streaming out. Meanwhile, Russia has only offered debt relief (or at least more loans) without development.

Ironically, Russia and Ukraine, again now at odds, would both benefit from similar economic policies. Both need regional economic development. Russia and Ukraine both need to halt the capital flight of their oligarchs and to keep that money for domestic investment. Such moves, of course, would be poorly received by the epicenters of ‘tax dumping’ offshore finance (London & New York, along with regional centers like Riga). Their respective high-end properties should be highly taxed, while reducing income taxes on labor.

The Sochi Olympics represents precisely the kind of development that should take place all across Russia and Ukraine.  Russia should not waste money on sovereign wealth funds and holding hard currency (both of which can be wiped out by economic crisis). Instead, the money should be spent on infrastructure that will transform Russia’s economy and boost living standards for its people. It’s not only much of Russia’s infrastructure that has collapsed the past 2 decades, but its middle class as well. Nothing would go further toward rebuilding Russia’s middle class than a national program to transform the country’s infrastructure. Russia has the means to implement this strategy right now. In short, Sochi shows the way forward. Russia could extend the same help to Ukraine. Russia and Ukraine need a development model that looks much more like post-WW II West Europe than that of 1989/1991.

It’s time to euthanize the Cold War and shut down the old theater and stage an altogether new play….

Jeffrey Sommers is Associate Professor of Political Economy & Public Policy in, and Senior Fellow at the Institute of World Affairs at the University of Wisconsin-Milwaukee. He is also Visiting Faculty at the Stockholm School of Economics in Riga. He is co-editor & contributing author to The Contradictions of Austerity: the Socio-Economic Costs of the Neoliberal Baltic Model.