Ukraine votes for Russian security

Alasdair Macleod – 17 February 2010

The Ukrainian presidential election on Sunday has generated little interest in the West, but its importance should not be underestimated in the context of European and Russian politics, and the relationship between the two economic blocs. It is becoming clear that Viktor Yanokovych has narrowly beaten Yulia Tymoshenko, the current Prime Minister. There is no doubt that the Kremlin will be working behind the scenes to consolidate Yanokovych’s position, and to effectively move the western boundary of their sphere of influence firmly back to the southern half of the Polish border.

Western commentators debate the fate of the Orange Revolution, but the broader point they miss is that the Ukraine is sandwiched between the declining EU and a resurgent Russia. The electorate has now been fully exposed to the concept of European unity since the presidential elections in 2004, and its flirtation with Europe has ended with the Ukraine virtually bankrupt. Its plight has been ignored by Europe for practical purposes, which politically is a bad outcome. Now that the economic attractions have swung in favour of Russia, the Ukraine is likely to turn its back on the West, and with Russian protection can even walk away from her debts.

Russia under Putin has made a remarkable recovery. She has played to her strengths, which include key commodities such as energy, strategic minerals and timber. Furthermore, the privatisation of farming has transformed her food security, and Russia is now in food surplus exporting between a quarter and one third of her grain production.

Russia is not burdened by debt, which in the West is perhaps more oppressive than loss of personal freedom. All the countries in Central Europe to the north and west of the Ukraine are faced with financial ruin, and the capitalist banking system has shut them off from further credit, insisting instead on repayment. The new command economy is in Europe, and economic freedom is now to be found with Russia. Worse, there is no clear leadership from Europe for an electorate used to leadership.

The future of strategic power is, as ever, in economic strength, and not in military capability. This was the lesson Russia learned with the fall of communism and the end of her command economy. She has learned well, and by harnessing free markets now has more economic power than ever before. Meanwhile, Europe has driven herself into bankruptcy, with politicians obsessed with their personal importance and survival, and in the process missing the big strategic picture. Contrast Putin with Sarkozy, Berlusconi, Brown, or even Van Rompuy.

Therefore in the coming years it is likely that Russia will win back territory in Central Europe principally through its relative economic attraction, and there can be little doubt that this conforms with Putin’s ambitions for Russia. Poland must be terrified for her independence, and other EU members in Central Europe should be worried.

There are already political repercussions for the EU in the making. Germany, which is the most powerful European nation due to her economic strength, is emerging from her period of political deference. At the same time she is expected to bail out Greece and save the Euro. She continues to make the largest contribution to the EU project, and so she is the single largest source of European subsidies. These burdens are now a threat to the German nation and its banks, and a limitation on her economic potential.

These factors, combined with the rise of Russia and the relative decline of Europe, will fuel political stresses in Germany. If Angela Merkel and her fellow ministers are to respond to these pressures, they will become less European and more German, being careful not to undermine Germany’s existing interests in the process. But at some point, it will be apparent that the EU model with its currency is so out of date that both will eventually collapse, and so Germany should be planning its exit.

That Germany’s commitment to the EU cannot be taken for granted is a dramatic conclusion, not shared by many, but this is because other commentators take Germany for granted. The PIGS are visible problems, and everyone assumes that Germany will bear the cost of their resolution – as she always has before. But that was when being a committed European served her best interests. As the Ukraine drifts back into Russia’s embrace and the implications for other Central European states become evident, her priorities will change, and so will the importance of Germany’s role as an independant nation rather than an EU state.

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Alasdair started his career as a stockbroker in 1970 on the London Stock Exchange. In those days, trainees learned everything: from making the tea, to corporate finance, to evaluating and dealing in equities and bonds. They learned rapidly through experience about things as diverse as mining shares and general economics. It was excellent training, and within nine years Alasdair had risen to become senior partner of his firm. Subsequently, Alasdair held positions at director level in investment management, and worked as a mutual fund manager. He also worked at a bank in Guernsey as an executive director. For most of his 40 years in the finance industry, Alasdair has been de-mystifying macro-economic events for his investing clients. The accumulation of this experience has convinced him that unsound monetary policies are the most destructive weapon governments use against the common man. Accordingly, his mission is to educate and inform the public in layman’s terms what governments do with money and how to protect themselves from the consequences.

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