James Greene

James Greene
21-01-2010
My first point is that risks of the actual crisis are diminishing. Markets are stabilising, and the financial crisis seems to be passing. The problem now is the risk of induced problems due to reactions. Unemployment is going to increase political pain. There will be continued credit defaults.  There may be new shocks and inflation risks, less in terms of consumer inflation than in asset inflation and asset bubbles. There are going to be challenges in converting from what has been public driven stimulus into a more private driven recovery.

For Ukraine, the situation seems to be compounded by the political realities: stimulus spending has continued on for political reasons. Ukraine has reserves.  It has currency reserves, and it has reserves on the shadow economy. They seem to have been largely squeezed out and have not been invested. This puts Ukraine in a dilemma: either allowing inflation or austerity. One of those is going to have security implications.
Another challenge is economic nationalism. Protectionism is increasingly attractive politically, due to large unemployment. The real beneficiaries of protectionism are not the workers, but usually the industrialists who own and run non-competitive businesses.

On the other side of protectionism there are various forms of market interventions. Here is an example with last year’s intervention in the bread and grain market. In order to keep bread prices at a certain level, Ukraine lost tremendous export opportunities and grain remained unharvested in the field.

Looking at this risk of economic nationalism, I’d like to highlight one important opportunity mentioned by Robert Zelik. Infrastructure is one of the key points as we look towards transitioning from stimulus spending to more private spending. Infrastructure is a great investment opportunity, an opportunity to create jobs and future growth. For Ukraine, Euro 2012 is a real opportunity. But what are the principle challenges? First comes corruption. There have to be assurances that the infrastructures will actually be built. Secondly, there is a need for regional approach. Three European transport corridors intersect in Ukraine.  There are a lot of different Black Sea transportation ideas and projects. Without international cooperation, and if the balance moves back to a national approach, these types of infrastructure projects are likely to be unrealised. It also gives opportunities for international institutions like BSEC and others kinds of regional approaches to try to address these issues in a specific area.

Looking at the security situation, I would agree that we have not seen major unrests. Security institutions in Ukraine were concerned about people in the streets; they were concerned about middle class unrest, about the kinds of unrest that would also affect the security system. In the longer run, the squeeze on public budgets, defence and security budgets, and development budgets from the West will have an impact on the government’s abilities to digest these continuing problems. Here, I would use again the example of missed opportunities in Ukraine. Generally speaking, times of economic difficulty are good for armed forces in terms of recruiting and, especially, in terms professionalisation. Due to the crisis in the 2009 budget, and despite the economic difficulties, fewer contract-soldiers signed up. These are the kinds of missed opportunities that are happening.

There is also a risk that economic nationalism will convert and transform into political nationalism. We even hear in Ukraine’s political discussions things about re-nuclearisation. This would be a tremendous investment in a project that would alienate international support and would likely be unsuccessful. It would hardly provide security guarantees and, in the end, would not address the security problems that Ukraine faces in terms of internal challenges, political crisis, economic crisis, the crisis of institutions, problems with inter-agency cooperation, etc. Support for internal reforms, judicial reforms, inter-agency coordination, crisis management, better political coordination are going to do far more to protect Ukraine against perceived regional threats than international assurances or guarantees. 

Finally, the importance of engaging with the international community is really a question of partnership. The IMF’s decision to suspend its support indicates that they believe that continued support would mean counter-productive internal actions. The same sense exists in the wider security community, as well. As much as Ukraine’s political elites would like to have Western security guarantees, counter-productive behaviour is likely to be perpetuated.

In early 2008, all the attention was on Bucharest. The attempt to get a statement out of Bucharest on the Membership Action Plan did not provide new practical tools and did not provide more political guarantees. It was a symbol of progress that was really looked for. However, no one knows that a few weeks after Bucharest, NATO had a major crisis management exercise, and a small group of Ukrainian security professionals, who wanted Ukraine to join, failed to get any attention from the senior leadership. There has to be an understanding by the national elites and national leaders that participation in this crisis management exercise would have meant integration much more than any symbol or statement. It is more important to be an equal partner rather than a demandeur, and direct the foreign support to internal reforms rather than the usual business.