If I Were the West, I'd Let Russia 'Have' Ukraine

Gazprom-sponsored German star offers opinion on an EU rescue of Ukraine?

Ukraine is a poisoned chalice insofar as it resembles Russia: corrupt and inefficient. Yes, there are geopolitical advantages in being Ukraine's ally. Yet, the list of advantages Russia retains from keeping it within its sphere far exceed those of the West taking it. For Russia:

Russia, which straddles Europe and Asia, has sought a role in the rest of Europe since the reign of Peter the Great in the early 18th century. An alliance with Ukraine preserves that. “Without Ukraine, Russia ceases to be a Eurasian empire,” the American political scientist Zbigniew Brzezinski wrote in 1998. Russian President Vladimir Putin wants Ukraine to join his Eurasian Union trade bloc, not the European Union. Russia’s Black Sea naval fleet is headquartered in Sevastopol, a formerly Russian city that now belongs to Ukraine. Last year Russia’s state-controlled Gazprom (OGZPY) sold about 160 billion cubic meters of natural gas to Europe—a quarter of European demand—and half of that traveled through a maze of Ukrainian pipelines. Those pipelines also supply Ukrainian factories that produce steel, petrochemicals, and other industrial goods for sale to Mother Russia. “Ukraine is probably more integrated than any other former Soviet republic with the Russian economy,” says Edward Chow, a senior fellow at the Center for Strategic and International Studies in Washington.

For the EU--the US largely delegates the matter to it--all the article offers is a one-liner:

Western nations want to keep Ukraine from becoming a failed state and to discourage Putin from retaking the nation by force.  

Nobody doubts Ukraine is hemorrhaging cash at a prodigious rate--even more so during this prolonged political crisis. At first I thought its claim of needing $35B was ridiculous. Then, less biased sources actually said that was not far off the mark:

On Feb. 26, Secretary of State John Kerry said the U.S. was organizing a stopgap $1 billion loan guarantee—far short of the $35 billion in aid Ukraine is seeking. The Institute of International Finance, which represents big banks, estimates that with no change in policy Ukraine would need $30 billion in foreign assistance this year alone. The IIF predicts that the International Monetary Fund will insist as a condition for aid that Ukraine cut natural gas subsidies to consumers and industry, and allow its currency, the hryvnia, to fall further, shrinking the trade deficit. The problem: Those measures will be so unpopular that they will jeopardize any new government.

Speaking of which, the IMF has been futile in attempting to structurally adjust Ukraine from unsustainable deficits:

As IMF Managing Director Christine Lagarde announced a team would travel to Kiev in coming days to assess the economic needs, fund spokesman Gerry Rice told reporters yesterday that Ukraine’s leadership is pledging “wide-ranging reforms.” Rice said he didn’t wish to “make comparisons between different governments.”

“I will be probably the most unpopular prime minister in the whole history,” Yatsenyuk told Parliament before being approved yesterday, heralding decisions on cuts in subsidies and welfare payments and later calling his job a “political kamikaze” mission. “But we will do everything possible to avoid default.”

The IMF has heard such promises before. In loans dating back to 1994, “usually the IMF had made two quarterly disbursements and then stopped because the Ukrainian government has refused to comply with the IMF conditions,” said Anders Aslund, a senior fellow at the Peterson Institute for International Economics in Washington...

Under a $16.4 billion loan in November 2008, when Yulia Timoshenko was prime minister, Ukraine pledged to let its currency float and to balance its budget, in part by raising energy prices. The fund froze the loan after a year, ultimately canceling and replacing it with a $15.2 billion package in July 2010 with similar prescriptions under Yanukovych, who defeated Timoshenko in presidential elections. Disbursements on that program stopped the following year as the country again failed to meet conditions. 

Some takeaways:

1. Regardless of leader, "pro-Western" or "pro-Russian," Ukraine ultimately shies away from unpopular, leadership-threatening reform and continues on its way towards inevitable balance-of-payments crisis;
2. Russia has much more to lose than the West has to gain in keeping Ukraine in its corner;
3. In the sense that reforming Ukraine has proven near-impossible and even more hugely expensive at the current time due to business-as-usual, rescuing the country will be an immense money drain;
4. What's more, IMF reforms--if implemented--will only make the West massively vilified and cause another round of massive discontent;
5. Russia is not going to shut down pipelines supplying natural gas to Western Europe anyway, so there is no real economic threat on the energy front. 

All in all, I'd advise the West to let Russia try and get Ukraine out of its sorry situation. In all honesty Russia can't because its shortcomings are nearly identical. Good governance? Getouttahere! For a realist, making others throw away good money after bad on futile endeavors is welcome in making them financially worse off. The EU looks foolhardy enough to believe it can turn around Ukraine. Well, good luck with that. Me? I'd hang a big "TAKE ME" sign at the border with Russia to show the would-be invaders and be done with it. This isn't Russian "irredentism"; it's a Russian gift. Unlike with Cyprus, Greece, Italy, Portugal and Spain, there is no obligation here for self-inflicted masochism.

Ukraine, pardon the language, is FUBAR.