Ukraine: precedents for economic intervention

For the last thirty years Eastern Europe has been in a continuous state of upheaval. Be it the collapse  of communism, the fall of the Berlin wall, or the wars in the Balkans, instability remains a constant and enduring feature in the region.

The uprising in Ukraine has been given a number of labels ranging from ‘revolution’ as used by the locals, ‘crisis’ as preferred by the international community, and Vladimir Putin’s preferred term ‘armed mutiny’. And while there does not appear to be an appetite for war in the nation, there is a continuing sense of tension.

There is an internal conflict, but it remains politically driven. The intensity of the situation should not be downplayed – indicated quite clearly by President Putin’s pre-emptive decision to station troops near to the country’s borders, in Crimea and to carry out exercises in near by territorial waters.

In an official statement issued on February 23rd, the White House deemed it necessary to offer a precautionary statement calling for Russia not to instigate a militarised intervention, indicating the strain that is still prevalent between the two world powers.

William Hague’s stance has as yet been one of diplomacy and dialogue, in contrast to the more heavy handed, though precautionary nonetheless, warnings from Washington.

The low death toll and the economic significance of the nation are not the circumstances that are likely to lead to extended combat, as the bulk of the public unrest and dissatisfaction has passed, however; the need to resettle the country, the political dissonance, and the calls for an intervention of sorts cannot be ignored. Those of a pro European disposition hold out for a coherent solution to emerge from Brussels, but the chances of this happening any time soon, what with the length of the bureaucratic process, seems implausibly low.

The Ukrainian republic operates under a system of constitutional democracy. It is Europe’s largest nation by land mass, with a population of approximately forty five million people. There remains a tangible divide between the Europe oriented West and the more Russian oriented East. Political support is also divided along geographical lines.

The rate of poverty is still high by European standards, one of the many causes for contention in the troubled nation. Claims of government waste  and corruption are rife, though unsubstantiated, one of the many reasons the Ukrainian public are in favour of an intervention of sorts.

An economic intervention is a process whereby mechanisms are put in place so market forces are allowed to operate freely and could well include some kind of stimulus package. From a political philosophy perspective there is something of an ideological clash in the nation, as communism still holds a level of grip on political decision making.

The progressive libertarian or capitalist style of intervention would entail less centralised spending than that envisioned by those of a more Marxist persuasion. The stimulus would need to be targeted in a manner that is not seen as favouring any one industry at the expense of the public as a whole, though it should be noted that by stimulating key industrial areas tax revenue can be redistributed to society’s most impoverished. Handouts  and welfare can only last legitimately for a finite length of time and job creation is preferable by far, meaning the economy’s structure needs the proverbial scaffolding put in place if any improvement is to be sustained.

The long term goal of an economic intervention is to ensure the continued and efficient provision of the freedom to provide and receive goods and services. This can be through European routes, from Russia or via the Black Sea. If an economy is to be sustainable it is essential that the legal and financial industries in particular are allowed to operate freely.

Directive 2006/123/EC on Services in the Internal Market sets out the focus for the free movement of services relating to the proper functioning of the internal market, however, the extent to which these provisions are implemented in what is still a developing and somewhat confused nation in terms of political cohesion remains unclear.

Article 62 of the Treaty for the European Union permits ‘special treatment for foreign nationals on grounds of public policy (and) public security’.  In a matter-of-fact sense this provision is favourable to Western organisations over those from outside the EU, though the language barrier may serve as a limitation which favours Russian industry. It is worth emphasising that the provision only affects services, not goods, however in ensuring the longer term delivery of goods to the nation it is first essential to ensure its service sector is functioning to a suitable degree.

What it is that constitutes a service has historically been given a broad interpretation so as to facilitate a functioning modern day economy underpinned by capitalistic thinking. Article 56 of the Treaty for the European Union has been expanded so as to aid integration in the fields of literature, education and e-commerce to name but a few, alongside its primary functioning of allowing the freedom to provide economic services.

The position on whether or not a service that is provided without remuneration is an applicable service as defined by the Article is in dispute. The European Court of Justice has issued a number of rulings in this area. Though remuneration is not usually a bone of contention it may arise as one if the delivery of humanitarian aid is warranted without a war footing being in effect.

Article 18 of the Treaty for the European Union prohibits discrimination with regards to the provision of services on the grounds of nationality, however its scope only applies to countries within the European Union, which may cause tension when Russian and other non EU nations’ competing interests are taken into account. What with the suggestion that there may be a separation of Ukraine along historic lines this is a point worth making note of. Support in the East of the country remains relatively in favour of the ousted President Timoschenko, whose Russian ties are strong, but who was only recently released from prison, indicating the strain  in the political environment in former Soviet block states.

The overlap between the law of war and economic laws is minimal yet complicated. The most common application is the utilisation of sanctions. These have been ruled out in no uncertain terms by Downing Street. Despite the military positioning Number 10 does not recognise the crisis as being militarily motivated, a position in keeping with President Putin’s statement that troop deployment is only intended as a safeguard to prevent human rights abuses, specifically against the Russian speaking minority in the country.

Revolutionaries who took to the streets did so both peacefully and with a level of hostility; both armed and unarmed. At one point the revolution it did seem like there may have been a need to implement the powers granted by law to a protecting power, however as it is an EU member state how appropriate Russia would be as the protecting power is very much rife for disagreement. Despite President Putin’s stated goal this protecting power cannot take effect in one clearly defined part of a nation but not another, an underdeveloped principle somewhere between humanitarian law and the law of war.

These practices are normally implemented when two states are warring, however, in the event of civil war or a referendum on the country’s division, a state such as Russia may be nominated to protect its nationals. This is normally in the way of the recognition of foreign diplomats rather than the sanctioning of troop deployment. As the revolution is predominantly political ,with  uncorroborated claims of corruption, the main protecting power necessary in this instance is in the field of ensuring transparency and fairness in detention and trial, however without an official war footing being declared this is inapplicable, however human rights watchdogs do of course maintain an unimpeded right of access.

Ukraine in its Soviet days was an industrial powerhouse, but has faced economic decline in recent years, being badly affected by the 2008 financial crisis and continuous fluctuating gas prices. It is still seen as a developing economy with high potential for future success. As centralised state directed industry was such a prevalent feature in communist ideology, avoiding steps towards monopolization is broadly seen as favourable. Close ties between government and industry is beneficial in a fully functioning state, however with such a high proportion of the country getting by on the equivalent  to minimum wage it is integral that this is not perceived as corruption.

The reasons for Ukraine’s economic turmoil are numerous, with a heavy dependence on the energy and heavy metals markets, it is currently ranked nineteenth in the Emerging Market Energy Security Growth Prosperity Index. Over dependence on any one industry as opposed to a mixed economy is a danger for any nation. Since the European Economic Community’s early days competition policy has been a key factor in Union law, essentially protecting and ensuring the ‘competition laws necessary for the functioning of the internal market.’

Ukraine is no stranger to interventions, receiving money from the IMF in 1998, 1999, 2008 and again in 2010. Many Ukrainians argue that the harsh terms imposed repeatedly by the IMF and historically by Russia have led to increased unemployment and household expenditure. A viable alternative may come in the form of foreign direct investment, as state aid can have an effect on competition, though in unstable climes this may be hard to attract.

Ensuring stability, made easier as a result of Article 62, is the first step in making Ukraine the successful economy it ought to be and is very much compatible with direct investment. On the one hand, it is well understood that by separating the political state from the economic state sustained growth is more of a possibility, however on the other, with such a deep political divide this process is likely to be drawn out.

Article 102 of the Treaty for the European Union prohibits the abuse of a company’s dominant position, defined as one which prevents effective competition being maintained in a relevant market, but how relevant this is in Ukraine is not yet evident. It is argued by some of the revolutionaries that close ties between major corporations and government insiders equates to corruption, with large amounts of money in the black economy this may not be entirely unsubstantiated, however much of this money comes from human trafficking and black market or counterfeit goods, making it incredibly difficult to put any meaningful figure to this claim.

Ukraine is a nation still struggling to find its identity, having only had independence for twenty three years. Between 2004 and 2010 the legitimacy of the Ukrainian constitution has often been called into question, with the main criticism arising in 2010, when the Constitutional Court found certain amendments which created a more presidential style of governance to be void.

On February 21, President Yanukovych accepted the calls from revolutionaries and opposition figures to return to the 2004 model of constitutional governance. How a Ukrainian resolution is reached will have an enduring effect on relations between the East and West. Russia has not had significant objections to the European Union’s formation or functioning, however opening up and maintaining trade routes remains a shared priority. There are public interest grounds that can be used in justification to limit the freedom to provide services set out in Article 56, by removing unnecessary restrictions and replacing them with high quality legislation, a sustained stronger economy can be formed without the need for yet another overzealous and undirected financial stimulus.

The militarised aspect of the Ukrainian revolution is undoubtedly cause for concern. With only a slight thaw in tensions from Russia in recent years how to perceive President Putin’s manoeuvrings is difficult. Russia’s historic ties with Ukraine are regarded by modernisers as having moved into the fields of trade and shared culture, though to Russian hard-liners it is still seen as part of the Russian Empire; if not in practice in principle.

The term ‘armed mutiny’ does not suggest an appetite for military intervention in the country, in diplomatic terms if nothing else, however this is contrasted by the accompanying military posturing. The interim Ukrainian Prime Minister has gone as far as to say that Russia has started a war in the country despite the fact that there has been no declaration of war and no overt aggression. President Obama’s criticism is of “use force as a means of exerting influence inside of (a) state”, however there has ultimately been no breach of Article 2(7) of the Charter of the United Nations, and there is obviously no intention from the Kremlin to see an internal conflict arise like those in Bosnia, Serbia or Croatia.

President Putin has stated that he does not recognise the government of Ukraine, however with elections scheduled for the end of May, this is of little significance. With the violence so fresh in mind, the Kremlin may argue this is an instance of national liberation putting it on a partial war footing. From a diplomatic standpoint, the Kremlin have reasonable grounds to be sceptical of the European Union’s capacity to intervene in such situations, as has been seen from 2008 onwards at various public displays across the EU; Spain in 2011 and 2012for example.

US Secretary of State John Kerry has warned that no options are off the table, referring specifically to the use of sanctions as reprisal. Without a certainty as to the war footing these sanctions may themselves lack legal legitimacy and hinder the tensely negotiated US – EU trade deal that has been years in the making. Whether or not scepticism is grounds for the manoeuvring of significant numbers of troops is a matter of debate, however the passive and lumbering EU does have a lot to answer for in scenarios such as these.

What is obligatory here is a structured financial plan, incorporating the wants of both the Western and Eastern persuasions of Ukrainian society alongside the large number of outside stakeholders. David Cameron has made calls for a non military intervention, favouring a free market solution. His Euroscepticism is well known, however  it is futile not to make use of the mechanisms already in place which facilitate trade.

The domestic manufacturing industry’s resurgence has been a key goal of the Conservative wing of the Coalition government, meaning keeping trade routes open and supplies abundant is a high priority, and one shared with European counterparts with a significant dependence on either the manufacturing or energy sectors. Ensuring a fair result for both industrial interests and the Ukrainian public appears to be the direction envisioned by the West, an outcome that is likely to meet Russian endorsement if it can be enshrined by treaty recognition, summit or trade agreement.

As has been proven, pecuniary stimulus alone does not lead to sustained betterment, instead it leads to instability, deflation and allusions to corruption. The values of free market mechanisms that are so well established in Western Europe ought to be shared and implemented with a degree of equality throughout Europe, into states like Ukraine and other similar periphery nations, if they are going to be successful long term trading partners in the years to come.