Developments in Ukraine, and between Crimea and Russia, have been causing great anxiety among international observers. To learn more about this situation, CIGI presents a two-part interview. This week, we speak to CIGI Research Associate Skylar Brooks on the global economic dimensions of this situation. This follows last week’s analysis, in which Research Assistant Simon Palamar discussed the main security aspects of the situation.
CIGI: Cases of secession and annexation can present challenges for our international economic governance frameworks. What are the economic governance implications from the developments in Crimea and the relationship between Russia and Ukraine?
Skylar Brooks: One of the interesting potential implications of these developments is that the annexation of Crimea could alter Ukraine’s external debt obligations. In the process of determining those obligations, it could indirectly help to shape the international legal framework for allocating the debts of a previously unified state that breaks apart. Right now, the legal principles in this area are unclear and inconsistent. It’s pretty clear that the central government in Kiev will refuse to bear the burden of servicing any debt that was used to finance a project in Crimea, but, as international legal experts point out, there are a number of more complicated questions regarding, for example, how central government budget deficits will be allocated.
Another interesting question concerns how Russia’s annexation of Ukrainian territory, a move that has been broadly perceived as illegal, will impact Ukraine’s legal obligation to repay loans from the Russian state. Does the first illegal act justify a counteractive breach of legal contracts between Russia and Ukraine? What is the price tag attached to Crimea? Some have suggested that at the very least the current government in Kiev will refuse to repay the US$3 billion loan that Russia extended to former Ukrainian President Viktor Yanukovych’s regime last December. Mitu Gulati, a law professor at Duke University, recently suggested that Ukraine may have an argument for escaping liability on that US$3 billion (and probably more) by appealing to the doctrine of Odious Debts. That is, in this case, if Ukraine’s lawyers can make a compelling argument that Russia knew or should have known that the money it was lending was going not to the Ukrainian state but into the pockets of Yanukovych.
These questions will ultimately be resolved through international political and legal processes. But, in the end, the political and legal outcomes will affect the frameworks we use to govern economic relationships.
CIGI: Given the immediate impact these events had at the G7/8 level, do you expect the Russia-Ukraine issue to also make its way onto the G20 agenda for its leaders’ summit in November?
Brooks: I think there’s a real possibility that the Ukrainian crisis and its broader political ramifications could spill over onto the unofficial agenda at the upcoming G20 summit in Brisbane, Australia. This would not bode well for the G20’s ability to advance meaningful international cooperation on the world’s most pressing economic challenges. Recall that at the last G20 gathering in St. Petersburg, Russia, economic issues were largely overshadowed by events in Syria and by the political divisions they created — or aggravated — between the United States and Russia. Partly as a result of this, no concrete deliverables, no action plans and no real sense of progress came out of that summit — it was by far the most disappointing G20 summit to date. The whole experience led informed commentators to conclude that the G20 may be becoming “forgettable” as a forum to provide global economic leadership and that not much is left of the G20’s original vision of being the premier forum for international economic cooperation.
Contrast the G20’s recent track record with its performance during 2009, at the height of the global financial crisis. At that point in time, the G20 was facing a specific challenge requiring immediate action, for which a relatively well-known and tested set of macroeconomic policy tools could be used. G20 members engaged in coordinated macroeconomic stimulus and were credited with staving off a global depression. Since then, the G20’s role has become more amorphous. It is hailed as the main body for international economic cooperation, but its agenda has come to include disparate issues, such as climate change and tax evasion, for which there is less consensus on the right way forward and fewer well-tested policy tools at governments’ disposal. This lack of focus on specific and manageable tasks has challenged the G20’s ability to get things done.
Thomas A. Bernes, a CIGI distinguished fellow, notes that the Australian presidency of the G20 faces “a huge challenge in trying to bring focus to the G20 work program and agenda, and reverse the sense of drift that exists today.” The priority items for the upcoming Brisbane summit — boosting global growth and strengthening the resilience of the global economy to future shocks — suggest that the Australian leadership has indeed tried to refocus the G20’s attention on core economic objectives closer to its original goals. The concern, of course, is that events transpiring in eastern Europe and, more importantly, their geopolitical ripple effects will create tensions within the G20 and will derail its core economic agenda in Brisbane — similar to how Syria-related politics came to dominate the last G20 gathering.
The Brisbane summit is in November, so there’s a chance that the situation in Ukraine will calm down by then and that geopolitical tensions will dissipate. But there’s also a chance that conflict will escalate. Either way, the current geopolitical fallout between Russia and the West — as evinced by the effective dissolution of the G8 and the G7’s sanctions and strong condemnation of Russia’s actions — is more severe than that caused by disputes surrounding the Syrian crisis, and its effect on global politics will be more long-lasting. In this sense, the politics of the Ukrainian crisis will still be fresh in the air come November. Without the G8 in place, the G20 may become the most convenient forum for the United States and its NATO allies to air their grievances with Russia. This would have a detrimental effect on the ability of the G20 to fulfill its core mission of advancing international economic cooperation. Coming on the heels of the botched failed St. Petersburg summit, an unproductive summit in Brisbane could have broader implications for the future trajectory of the G20. It could further contribute to the prevailing pessimism surrounding the G20’s effectiveness in global economic governance, undermining the support and political capital that it takes to make the G20 work or even take place.
After a recent meeting in The Hague, the loosely organized BRICS (Brazil, Russia, India, China and South Africa) coalition issued a joint statement rejecting the use of sanctions on Russia and criticizing the suggestion that Vladimir Putin might be banned from attending the Brisbane summit (an idea the Australian government has apparently raised). On the surface, the stage looks set for a fracturing of the G20 into two camps organized on one side around the G7, and the BRICS on the other. But a deeper look at the situation suggests that there are many areas in which the interests of BRICS countries conflict with one another, that the rest of the BRICS will not be willing to go against their own interests to side with an increasingly isolated Russia, and that there are several areas in which BRICS and G7 countries stand to benefit from cooperating with each other. The BRICS is a pragmatic grouping, not an ideological one. For this reason, I don’t think that the G20 will turn into a standoff between two camps. The G20 won’t break apart. But if it fails to do what it was designed to do, it may very well break down.
CIGI: The IMF recently announced an agreement to lend Ukraine US$14–18 billion, in exchange for economic reforms. What do you the implications of this will be for the IMF going forward?
Brooks: IMF lending is already controversial in many ways. But lending into a financial crisis is not the same thing as lending into a full-blown political crisis and regional conflict, and the recently announced IMF loan to Ukraine will be much more controversial than most. Because IMF support will have a clear impact on the political balance of power within Ukraine — that is, it will help to further solidify the position of the pro-Western government that recently came to power — its decision to lend will be seen as having clear political motivations. In addition to supporting a pro-Western government, IMF lending will (through the conditions attached to the loan) prompt pro-market reforms and pull Ukraine into closer orbit with western Europe economically.
The IMF has made efforts in recent years to distance itself from the popular perception that it is simply a tool of Western, and more specifically American, power. But these efforts could be undermined if IMF lending is viewed as an instrument to help win the Cold War-style tug-of-war over Ukraine — a symbolic gateway between Russia and the West. For these reasons, IMF lending to Ukraine could become deeply politicized, exacerbating existing tensions within the Fund’s membership and damaging its reputation and legitimacy at a time when the world economy is still in a precarious situation.
On the other hand, the structural adjustment measures attached to the loan could be destabilizing at a time when stabilizing forces are most needed. IMF programs can often be seen as a form of shock therapy: necessary in the long run, but painful and dislocating in the short run. The IMF has found what appears to be a credible interlocutor in Ukrainian Prime Minister Arseniy Yatsenyuk, and his comments (that he will probably be the country’s most hated prime minister ever) suggest that he is committed to fiscal consolidation and implementing structural reforms. But austerity and structural adjustment will likely breed resentment toward the IMF and the national government within Ukrainian society.
The outcome of this IMF program could thus be a contradictory one. On one hand, it could draw Ukraine closer to the West in terms of market structure and economic integration. The reforms entailed in the IMF program will bring it closer to the Western model of a liberal market economy and will open up opportunities for closer integration with Western economies. On the other hand, harsh austerity measures in Ukraine could produce a major social backlash against the IMF, its principal shareholders and the pro-Western government in Kiev, pushing the Ukrainian public further away from the West in terms of social attitudes and identities.