Economic statecraft
Ukrainian Crisis: Political Economy of Confrontation

The most realistic scenario for the near future is that the collective West “ties up” Moscow’s demands for European security in endless consultations and agreements. This tactic will be based on common sense: that war is not beneficial to Russia. A problem with this scenario may arise if the dynamics of the political process change, writes Valdai Club Programme Director Ivan Timofeev.

The aggravation of the situation around Ukraine has revived a long-standing dispute over the motives of great power politics.

This motive, among other things, can be survival, security, or the maximisation of influence (power). Moreover, any political process unfolds in a certain resource niche. That is, both security and power are costly. You can expand the boundaries of the resource niche through new technologies, organisational innovations or other means. However, resource limitations are a constant factor in foreign policy. On the other hand, both security and power, in and of themselves, can be a resource or a prerequisite for expanding the resource base in other areas. Security and power are both a burden and a resource in and of themselves. Contrary to the neo-realist opinion that international politics should be viewed in its pure form, without any unnecessary impurities like economics,    , the resource factor inevitably translates the issue of security and power into the category of political economy. The science of international relations can be thought of as political economy under conditions of anarchy.

In this case, the question arises: what are the modern “currency” or “currencies” of security and power? Military strength? Technologies? Territory? Minerals? Human capital? In the science of international relations, there have been many attempts to create indices of the influence potentials of modern states.   However, such attempts have often left open the question of what exactly drives the state. What kind of “currency” does it want to keep or acquire? At one time, the constructivist theory of international relations offered an original view: for different states, different “currencies” have different values. The perception of the value of “currency” and its usefulness is not always determined by universal rational motives. If each player has his own “currency”, he may also have his own rationality. Motivation for behaviour in the international arena turns out to be closely related to identities and strategic cultures.    This further complicates the forecasting task and encourages refuge in old and simple conceptual frameworks such as the theory of realism.

A misunderstanding of the value of a particular “currency” by an opponent at a given moment in time and his determination to invest his limited resources in this “currency” sometimes leads to catastrophic mistakes and miscalculations.

Today we can talk about two groups of “currencies”. Let’s conditionally call them hard and soft. Hard “currencies” are the traditional set of the era of imperialism: military power, territory, resources, infrastructure, industrial and technological potential. Soft “currencies” are more characteristic of the era of globalisation: human capital, attractiveness of ideas and lifestyles, information management, science intensity of the economy, including in such dimensions as the environment and climate, etc.

Modern powers have a different set of existing “currencies” and different aspirations to maximise them. Two superpowers stand out, whose baskets are highly diversified. The US “currency basket” is the most balanced. Washington possesses practically all of the aforementioned assets. Global resource flows associated with these “currencies” are also tied to the United States. China is catching up fast. It made a phenomenal breakthrough in the segment of hard currencies and retains high potential in the segment of soft currencies. China has its own ideology, its own way of life, its own information environment, and growing human capital. There are certainly differences between the two powers. For example, the United States does not seek formal territorial expansion. It is quite successfully solving this task with military presence on the territory of allied countries. In general, China does not seek such expansion either. But the latter is faced with the task of resolving the Taiwan issue, and the developments in the South China Sea give rise to suspicions among neighbours.

Against the background of the United States and China, two other players stand out, whose “currency baskets” are more asymmetric. The European Union has a whole range of soft currencies. But in the segment of hard assets, the situation is contradictory. The EU has a powerful economy, infrastructure and industrial base in its hands. The union includes at least one power that possesses all types of modern weapons, albeit on a much smaller scale than the United States and China. But the EU is not seeking open expansion. The power of standards in the economy and social organisation already attracts colossal economic and human resources, making expansion simply unnecessary. The EU is a postmodern democratic “empire” that effectively achieves its goals through the economy and soft power, without resorting to military might.

In Russia, the situation looks different. Moscow’s attributes include its serious military potential, vast territory and natural resources. Industry, meanwhile, has shrunk in comparison to the Soviet era. But it still keeps sufficient power to maintain its defence potential. The infrastructure requires development, but for defence purposes it is also sufficient for the time being. In the segment of soft currencies, the situation is worse. The country is experiencing a demographic crisis and a staff drain. Its ideology is indistinct. The attractiveness of lifestyles on offer and the effectiveness of its institutions are far from obvious. The economy suffers from backwardness in a number of sectors. At the same time, Russia is in a state of degrading relations with the West; it considers the growth of military threats from its side inevitable and strives to balance the perceived threats with all available means.

Hostages of Normandy Process: Ukraine as a Systemic International Problem
Andrei Tsygankov
There is no way out of this vicious circle. I repeat: Ukraine is a systemic problem. It reflects all the main contradictions between Russia and the West at the stage of world order transition. The problem of Ukraine can only be resolved if these contradictions are resolved.
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Against the background of its large neighbours, Ukraine’s position looks hard. The structure of its basket looks worse than that of Russia and much worse than that of the EU. Its social infrastructure is in decline, and its institutions are ineffective. Democratic institutions without strong statehood and with a smack of excessive nationalism did not create an attractive model. The “Moldovisation” of Ukraine, that is, the drain of labour resources to more developed markets, is accelerated against the background of the liberalisation of the visa regime with the EU. The economy is becoming more and more peripheral. The army recovered from the defeats of 2014-2015 but remains vulnerable despite foreign aid. Ukraine is faced with more territorial losses, a heated conflict in Donbass and a total security deficit. The US and the EU support Ukraine, but they are not ready to fight for it with Russia.

What could be the motives of the key players on the Ukrainian issue? The United States does not want to allow the recognition of the status quo in Ukraine, in the form of the preservation of Russian sovereignty over Crimea and the smouldering conflict in Donbass. A Ukraine with a pro-Russian government is categorically unacceptable. The new territorial losses of Ukraine are also unacceptable. Strictly speaking, all these goals have been largely achieved. The events of recent years have radically altered Ukraine’s course, causing it to pivot towards the West. There is no alternative to this course within the country. The United States is doing quite well with the task of containing Russia, maintaining and increasing its influence in the region. Even if Ukraine does not become a NATO member, active military cooperation with it remains quite possible to the detriment of Moscow’s interests. The cost of resolving all of these issues for Washington is relatively small.

The main interest of the European Union is in the prevention of a military conflict. Brussels simply does not have sufficient political resources outside NATO to influence the military-political situation. The war is fraught with a humanitarian crisis, the consequences of which will hit the European Union. Without any war, the EU countries effectively work with the peripheral economy of Ukraine and use it as a demographic resource.

Peace in Ukraine allows the EU to use all of its instruments to the fullest. War devalues them.

In addition, the EU is not interested in excessive risks in relations with Moscow, especially in the energy sector. Brussels will unconditionally support Ukraine’s sovereignty. But if peace is preserved, it will not compromise its economic interests, as evidenced by the experience of Nord Stream 2.

Moscow is interested in a radical solution to the problem of military security in the western theatre. No matter how many statements NATO officials make that the bloc does not pose a threat to Russia, Moscow will perceive the alliance’s potential with great apprehension, especially considering how far the political confrontation has gone. In Russia’s perception, territory matters, including as a springboard for a possible military strike. The solution of the Crimean issue in 2014 fully fits into this logic: Crimea is critically important for the control of the Black Sea and the security of its southern borders. In light of these considerations, for Moscow the loss of human capital may be secondary. The possible drain of the population from the territories that have come under Russian control is not a critical factor in comparison with the issue of the military use of these territories both against Russia and by Russia itself. Moreover, the experience of the integration of Crimea suggests otherwise. The region has received large-scale investments and the level of its development, according to several parameters, is higher today, despite the existing sanctions. In other words, further territorial expansion can be viewed in Moscow as one of the scenarios. However, an open war with Ukraine will not solve the existing security problems, even if new territories are under control. The economic cost of the war may be simply unacceptable due to qualitatively new sanctions, including bans on the purchase of Russian oil. But Russia is more likely to benefit from the very possibility of such a scenario. It can serve as a signal to the West about the potentially high cost of ignoring Moscow’s security interests, as well as an incentive, at least in the short term, to avoid Ukraine’s military integration and military activity near Russian state borders. It is in Moscow’s interests not to allow the excessive overheating of relations with the West, while maintaining constant tension. However, such balancing, in all its likelihood, will not yield an intelligible solution to the security problem in the western theatre.

Global Governance
Ukraine’s Chance for Rational Behaviour
Timofei Bordachev
Vladimir Putin’s article attaches such great importance to the common historical experience of Russia and Ukraine because it is important for him personally. But those who were just starting their lives at the time of the collapse of the USSR are hardly likely to see things the same way. To sum up, as long as the aggregate power capabilities of Russia are maintained, our neighbours can expect unpleasant news, writes Valdai Club Programme Director Timofei Bordachev.
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Ukraine’s key interest is to consolidate state power, build effective state institutions and establish an acceptably functioning economy. Ukraine may well exist as a state without Crimea and even without the territories of the DPR-LPR. It is in Kiev’s interests to get a long-term respite and make integration into Western structures irreversible. The implementation of the Minsk agreements will mean fixing the problem on Moscow’s terms. At the same time, the current situation does not require excessive resources from Ukraine. Kiev is interested in freezing the conflict and minimising the costs associated with preserving it. This situation is optimal for Ukraine in the current conditions for both domestic and foreign policy. The escalation of the conflict with Moscow, on the contrary, is fraught with new losses. The West will continue to support Kiev. But if Brussels and Washington understand that Ukraine is provoking a conflict against the will of its partners, they may well freeze or cut off much-needed aid. The worst-case scenario for Ukraine is to turn into an Eastern European Somalia, the wild field of the 21st century. The vacuum of order will be filled either by Western influence (which is happening today) or by the iron hand of Moscow, with its own special view of the “currencies” of international relations.

The most realistic scenario for the near future is that the collective West “ties up” Moscow’s demands for European security in endless consultations and agreements. This tactic will be based on common sense: that war is not beneficial to Russia. A problem with this scenario may arise if the dynamics of the political process change. The events of 2014 became possible because there was a sudden crisis in connection with the internal political situation in Ukraine. It forced players to make quick decisions without looking back at losses. The rationality of 2013 was completely devalued in the winter of 2014. Something similar could happen today in the event of a significant incident or a chain of accidents that will change the “attractors” of the political process and devalue the rationality of today.

Election in Ukraine: Don’t Expect Warming in Relations with Russia
Mikhail Pogrebinsky
From the presidential election in Ukraine, one should not expect a significant warming in Russian-Ukrainian relations, writes Valdai Club expert Mikhail Pogrebinsky, Director of the Kiev Centre for Political Studies and Conflictology.
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Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.