Everyone Loses: The Ukraine Crisis and the Ruinous Contest for Post-Soviet Eurasia

Imagine that all the people who opposed your politics for twenty years – all the most backward, poorest, least successful people in the country – got together in one place, declared an independent republic, and took up arms?… All the enemies of progress in one place, all the losers and has-beens: wouldn’t it be better just to solve the problem once and for all? Wouldn’t it be a better long-term solution just to kill as many as you could and scare the shit out of the rest of them, forever? This is what I heard from respectable people in Kiev. Not from the nationalists, but from liberals, from professionals and journalists. All the bad people were in one place – why not kill them all?[23]

Such sentiments are stoked by political leaders, including Poroshenko, who in one statement compared the rebel territories with Mordor, the seat of evil in J.R.R. Tolkien’s fantasy novels.[24]

The Ukraine crisis has had a major impact on Russia as well. An economic downturn that began in 2014 has been the longest in its post-Soviet history.[25] After only 0.7% growth in 2014, and a 3.7% drop in 2015, the Russian economy is forecast to contract by 1.2% in 2016. Households have been hit hard; in 2015, real wages decreased by 9.5%.[26] In late 2016 the rouble’s exchange rate with the dollar was half what it was in January 2014.

Russia’s economic miseries can be traced back to Putin’s avoidance of structural reform and the threefold collapse of oil prices in 2014–15. The role of the Ukraine crisis at the margin is thus hard to quantify. One econometric study suggests that Western sanctions cost an average of 2% in quarter-on-quarter drop in GDP between mid-2014 and mid-2015.[27] But the indirect and long-term consequences of the sanctions and the conflict dwarf these direct, short-term ones.[28] Examples include an increase in capital flight that hit the Russian economy’s pre-existing weak spot, anaemic levels of investment – the primary threat to long-term growth prospects. Net capital outflows reached approximately 8% of GDP in 2014, before dropping to 3% of GDP in 2015, a relatively normal level for Russia, but still a near-insurmountable challenge to long-term growth. The effective closure of international capital markets to Russian governmental debt prevented the kind of pump-priming used in 2008–09 to stave off a deeper recession. It also forced the authorities to tap reserve funds established during the years of bullish oil prices in order to cover budget shortfalls. The Russian government’s long-standing ambition to modernise and diversify the economy away from oil and gas will now be much more difficult to realise because technology transfer from the West via direct investment, co-production and trade has been curtailed. Even if the sanctions are lifted, reputational and political risk will restrain Western firms from returning to the Russian market at pre-crisis levels.

The influence of the Ukraine crisis on Russian domestic politics is every bit as noteworthy. As of the winter of 2013–14, pluralism and democratic institutions were at their lowest ebb since the Soviet collapse. The Maidan Revolution, the annexation of Crimea and the war in the Donbas made a bad situation much worse. The crisis galvanised domestic support for President Putin, sending his approval rating above 80% in March 2014, and keeping it there for 31 months at the time of writing.[29] The Western sanctions, rather than turning Russians against their rulers, educed a defensive reaction, creating the perception of an external threat that the government leveraged to boost popular support.[30] The country’s war footing marginalised what remained by way of dissenting voices, since opposition to government policy became akin to treason.