Show Russia Crimea doesn’t pay

Poor Ukraine. As if its own politics aren’t murky enough, it’s been dragged through the muck of U.S. politics with both Democrats and Republicans allegedly making ominous threats. Although there are hopes for Ukraine’s new administration, the country’s corruption is so deeply rooted, they have problems enough of their own without the U.S. compounding them.

Beyond political difficulties, Ukraine’s economy has been rocked by Russia’s 2014 invasion of Crimea and eastern provinces. The country’s GDP per capita plunged 47 percent, from $4,030 before the invasion to $2,125 afterwards. Comparison with the United States’ 3 percent decline in per capita GDP from $48,401 during the 2008 Great Recession highlights Ukraine’s difficulties. More seriously, Russia’s invasion has taken the lives of an estimated 13,000 Ukrainians and Russians.

Almost all these deaths have occurred during a futile, seemingly endless effort at European-led peacemaking with a vacuum of U.S. leadership. The European-led talks have dragged on since June 2014, either with heads of Germany and France joining those from Ukraine and Russia or with lower level representatives including the Organization for Security and Co-operation in Europe, which monitors security issues between Russia and the West on the continent. These talks have produced several  ceasefire agreements, a Minsk Protocol, subsequent Memorandum, and, following their failure, a Minsk II Package, which also has failed.

Most recently, on December 9, leaders from Germany, France, Ukraine and Russia met in Paris. Prisoner exchanges and yet another ceasefire were agreed to, on the same day that three more Ukrainian soldiers were killed. Talks centered on a bizarre construct called the “Steinmeier Formula,” named for a German politician. It involves Ukraine surrendering some of its sovereignty over Russia-occupied provinces and for a sequence of confidence-building measures to ensure free elections in those provinces. This formula is opposed by a majority of Ukrainians and was subject to protests in Paris and Ukraine during the December meeting.

Russia has shown no willingness to make a fair peace that might involve recognition of Russian sovereignty over Crimea and full Ukrainian sovereignty in its Russian-occupied eastern provinces, the end of sanctions and Ukraine’s entry into NATO. 

Both Europe and the U.S. have let Ukraine down. Europe’s participation in settlement talks has been ineffectual. The U.S. originally “largely outsourced policy to Europe for many months, before deciding too late that it was going wrong,” and then dragged Ukraine into its messy political spillover.

European Union sanctions, along with the drop of oil prices, have hit Russia hard, with a 33 percent decrease in GDP per capita. But, as with most sanctions, they seem to have a limited half-life as targeted economies adjust and special interests complain. Renewal every six months requiring unanimous EU nation consent is an uncertain foundation for policy which must confront Russia’s long-term position. 

At the same time, the U.S. Congress has just passed a bill to sanction the Nord Stream 2 gas pipeline from Russia to Germany. The pipeline is selfish, shortchanging Ukraine gas transit; foolish, increasing European dependence on Russian energy; and corrupt, with a high-paying job for a German politician who influences one of the ruling coalition parties. But the pipeline also is a done deal. It has received the last needed approval from Denmark, and Russian gas company Gazprom can complete the pipeline itself.  Sanctions will aggravate U.S.-Germany relations and ultimately prove fruitless as have all previous attempts by the U.S. to block Russia-Europe pipelines.

It is time for the U.S. and EU to work together for Ukraine and for themselves. The EU should replace its shaky sanctions regime with a Russian import tariff, and the U.S. should waive sanctions. The EU imports primarily energy from Russia, especially natural gas, which has fallen in price by 35 percent in the last year in Europe. A 35 percent tariff on 2018 Russian imports  of $186.8 billion would raise $65 billion for European governments, which could catch up on NATO obligations and provide generous aid to Ukraine. Just 20 percent of the tariffs could provide a 10 percent boost to Ukraine’s GDP, although strict corruption safeguards are necessary. The tariffs would encourage energy conservation and development of alternative energy sources for Europe in the Mediterranean, Central Asia and the Americas. 

Surely, with over six times the people and ten times the economic strength, the West can bring its superiority to bear to end the long Ukrainian nightmare. It was solidarity between America and Europe with U.S. leadership that allowed the West to prevail in the Cold War, and that is the prescription for preventing another such confrontation to arise from the Ukrainian standoff.

Douglas Carr is president of Carr Capital Co., a financial and economic advisory firm. He formerly taught finance at Quinnipiac University.