Karel Svoboda. Europe-Asia Studies. Volume 71, Issue 10, December 2019.
States use their economic power to influence the political decisions of other countries, and Russia is no exception to the rule. Given Russia’s relative economic strength compared to other countries in the post-Soviet space, it is no surprise that Russia uses this advantage to get its own way. The use of economic statecraft, which aims at reaching political goals through the use of various economic tools, has been a key part of Moscow’s foreign policy strategy since the fall of the Soviet Union in 1991. When Vladimir Putin took over as President of the Russian Federation in 2000, Moscow gradually increased its pressure on post-Soviet countries to prevent them from forming closer relations with the West and to draw them deeper into the Russian orbit through Eurasian integration (Roberts & Moshes 2016; Smith 2016). Through economic and political tools, Moscow has focused on defending its position in the post-Soviet space vis-à-vis a perceived contender—the European Union (EU). Through such behaviour, Russia has attempted to revive its great power status. Given its strategic importance to the success of post-Soviet integration, Ukraine has been of particular interest to Russian policymakers (Hartwell 2013; Delcour 2017, p. 74).
This article argues that Russia has consistently followed a strategy of targeting the most vulnerable sectors of Ukrainian economy during the post-Soviet period, with a combination of incentives and sanctions. While incentives built upon Ukraine’s dependence, threats employed this dependence in support of Russia’s own aims. Nevertheless, until the accession to power of Victor Yanukovych, who drew his support primarily from the east of the country, Ukrainian leaders were able to withstand Russia’s pressure. The year 2013 represented a condensed form of previous policies and also showed their weakness. The apparent success of Russia’s heavy-handed economic statecraft, when Ukrainian President Victor Yanukovych refused to sign an Association Agreement with the EU, ultimately failed when public opposition, in the form of protests and public unrest known as the Euromaidan, led to Yanukovych’s removal. The article contributes to the understanding of Russia’s geoeconomic strategy in the post-Soviet world and, more generally, to an understanding of economic statecraft strategies and their weaknesses. The article examines how Russia has used economic means to force its political will, arguing that a narrow definition of economic statecraft is insufficient to explain Russia’s strategy in this particular case. Through a focused policy of threats and actual deeds, Moscow limited what decisions Yanukovych could make.
The article proceeds as follows. In the first part, it presents economic statecraft as pursued by the Russian Federation under President Boris Yel’tsin in the 1990s. Since Russia’s current policy has its roots in the previous era, this background cannot be omitted. At the time, relations were still mutual: Russia’s position towards Ukraine did not allow it to exert full pressure on the country, as this would have incurred losses for Russian companies as well. Furthermore, Moscow’s motivation was still weak due to the low degree of Ukraine’s cooperation with the EU. The second part of the article focuses on Russia’s policies towards Ukraine from the start of the first Putin presidency in 2000 up to the Maidan in 2013, showing that besides the use of economic tools against Ukraine, ‘pure’ trade wars and disputes were a significant feature in relations between the two states. The final part of the article deals with the pressure exerted by Russia on Ukraine in 2013 that led to President Yanukovych’s refusal to sign the Association Agreement with the EU.
Theoretical framework
International relations literature has always emphasised military force because of the realist assumption that military and political motives predominate over economic ones (Kahler & Kastner 2006; Blackwill & Harris 2016; Wigell & Vihma 2016, p. 606). However, the growing economic power of China and the sanctions imposed on Russia after it annexed Crimea in 2014 have recently inspired new literature on the topic (Winton 2014; Drezner 2015; Blackwill & Harris 2016; Connolly 2016).
Economic statecraft is a means of foreign policy, along with propaganda, diplomacy and military action (Baldwin 2011). Actual policy towards another state combines two or more of these methods, which may be used consecutively or concurrently: propaganda may precede economic or military actions, or economic actions may precede military operations, as happened in the case of Ukraine in 2014.
The effectiveness of economic statecraft and the reason why it succeeds or fails represents a central point in the academic discussion on economic statecraft (Hufbauer et al. 1990; Eyler 2007). Blanchard and Ripsman (2008, 2013) identify three schools of thought dealing with the question of sanctions and their effect: the realist school denies that economic sanctions have any value, as states give preference to military security; the idealist approach sees sanctions as effective; and the ‘domestic conditionalist’ approach sees sanctions as effective only under certain conditions. For instance, A. Cooper Drury (1998) underlines that politically and economically distressed states are more vulnerable to the effects of economic statecraft. Others, such as Crumm, conclude that economic statecraft and positive measures are more effective in relation to authoritarian regimes as they need to convince a smaller group of people (Crumm 1995).
Blanchard and Ripsman (2013) outline a three-tier model of ‘stateness’, based on autonomy, capacity and legitimacy. Autonomy represents the ability of a state’s leadership to adopt decisions independently of the opposition; capacity is the ability to perform state tasks; and legitimacy represents the degree to which the leader is accepted by the population and main stakeholders. These conditions together determine the target state’s ability to withstand the pressure of sanctions. Nevertheless, external conditions, such as the ability to re-orient the target state’s trade to other markets or to obtain funds from sources other than the ‘sender state’, represent a serious limitation as well. The sender state targets some, if not all, aspects of stateness in order to gain control over the ‘receiver’.
While ‘domestic conditionalists’ concentrate their research on the situation in the target country, Baldwin (1985) discusses measures that represent a projection of state power over the target country, including trade, financial sanctions and threats of imposition of measures such as trade bans. Other experts in the field, such as Blackwill and Harris (2016), outline a division of economic statecraft measures into seven categories: trade policy, investment policy, economic and financial sanctions, cyber-attacks, development aid financial and monetary policies, and energy and commodities. This typology, however, needs some clarification, as, for instance, cyber-attacks are only indirectly part of economic statecraft while propaganda in economic matters is a tool of economic diplomacy.
In addition, the tools of economic statecraft are divided into two categories: positive (such as preferential trade provisions, overlooking non-compliance with the standards of the imposing country, loan provisions or preferential pricing) and negative (trade barriers, whether through norms or direct bans; a sudden lifting of trade preferences such as a customs-free regime, tightening of previously loose controls on the border or cancellation of promised investment projects) (Hirschman 1980; Baldwin 1985; Abdelal & Kirshner 1999).
Positive tools (also labelled as incentives, bribes or ‘carrots’) represent the means used by the stronger state to build ties with its weaker partner. They are represented through preferential prices and other advantages. On the other hand, such tools prevent the weaker state from diversifying its trade with other partners: the dependency of the weaker country on the stronger state in trade relations is aggravated by the fact that its industry exporting to the stronger state is concentrated in a particular field or region. This sector or region, if properly addressed, may form a sort of ‘commercial fifth column’ and, consequently, serve as a means for the imposing state’s preferences (Hirschman 1980, p. 28). Sanctions are more effective if they are imposed by a hitherto friendly state, since the target state’s exposure is much higher, through closer ties and interdependency (Drezner 1999). Consequently, if a larger state strengthens its economic ties with smaller states, it is in a better position to effectively use sanctions against them. As pointed out by Blanchard and Ripsman (2013), the autonomy of a smaller state’s leadership and its capacity to adopt independent decisions are reduced when the leadership’s legitimacy is conditioned by its relations with the hegemonic power. This, basically, happened to Yanukovych, whose legitimacy was based primarily on support from Russia.
Furthermore, the fact that the ultimate target is a state does not preclude the possibility that it may be targeted though. To quote Brooks: ‘sanctions have a more nuanced effect on the welfare of different groups and interests, and unless these groups are politically salient, aggregate costs may not be sufficient to induce change in policy’ (Brooks 2002, p. 12). Targeting of sanctions to only separate groups of the population or business community, such as elites or separate industries, received a higher popularity than general sanctions against the whole country (Drezner 2011; Ashford 2016). As Brooks argues:
sanctions, which target export-competitive firms or sector should be most effective when trade in these goods between the target and imposing state is large. These groups suffer when their markets dry up. Where political leaders rely on their support to stay in power these interests can exert pressure for policy change. (Brooks 2002, p. 28)
Threats and promises are an important and effective tool of economic statecraft (Mastanduno 1999; Hufbauer et al. 2007, p. 62; Drezner 2015). While the actual imposition of sanctions leaves the country with the task of accommodating itself to the new conditions, and, quite paradoxically, brings a sort of stability, threats keep the target country in a state of uncertainty. However, smaller scale actions may create the basis for perceived threat. A one-day blockade turns the attention of the target on the effects of a longer-term blockade and, when lifted, remains a feature in negotiations between the two states.
Based on this theoretical framework, several points should be particularly highlighted with regard to the topic of study. The success of economic statecraft is conditioned by the internal conditions reigning in the target country, tools of statecraft and also on the readiness of the imposing state to use these tools. Since 1991, Russia has built and fostered Ukrainian dependence on Russia’s economy. Nevertheless, Ukraine’s was relatively strong, as President Leonid Kuchma could draw on general support across Ukraine, combined with still only moderate pressure from the Russian side and Viktor Yushchenko on anti-Russian rhetoric. Yanukovych’s regime, which had already been weakened by the ongoing economic crisis and economic mismanagement, became particularly vulnerable due to its growing authoritarianism and its reliance on the support of industrial groups from the east of the country, dependent on Russia. Russia’s pressure provoked a backlash on the part of Ukrainian citizens, driven by pro-EU elements of the Ukrainian population. In the short term, Russian pressure resulted in a tactical victory, when Yanukovych refused to sign the Association Agreement. From a longer strategic perspective, however, it was a failure.
Ukraine’s dependence on Russia
Despite the gradual decrease during 1991–2013 in trade volumes between Ukraine and Russia and in the share of the Russian Federation in the foreign trade of Ukraine compared to Soviet levels, Russia still represented Ukraine’s biggest single trading partner in 2013, with a 23.8% share in Ukrainian exports. This was, however, lower than the EU’s 26.5% share (Ukrstat 2014). Ukraine depended on the Russian market in key commodities such as rolling stock or dairy products. Machines, locomotives and black metals represented the main part of Ukrainian exports heading to Russia, along with food exports, which comprised 12.7% of overall Ukrainian exports to Russia in 2013 and 9.4% in 2014. This dependency was by no means mutual: no Russian industry relied 100% on Ukraine, while exports of Ukrainian dairy products went almost exclusively to Russia in 2013.
Russia and Ukraine inherited their interdependence from the Soviet period. Ukraine, especially its eastern part, was an important provider of heavy industry products for Soviet production chains (Andronova 2010, p. 102). In fact, only around 8% of Ukrainian steel production went to countries outside the Soviet Union in 1990, while around 80% of export deliveries of steel went to the other Soviet republics (World Bank 2005, p. 93). Moreover, the republic held the position of a top Soviet producer of food products largely destined for the Russian market. In addition, the transit of 90% of Russian gas exports through Ukraine did not seem to be a threat to the transit flows because the republics were parts of the same state, the Soviet Union. However, this changed dramatically after the collapse of the USSR in 1991.
As a result of the breakup of the USSR, these strong interconnections—and energy relations in particular—became a matter of dispute, as the new republics followed their own, often conflicting interests (Abdelal 2001; Balmaceda 2007; Newnham 2011). The aviation industry was a typical example of a Soviet supply chain. The Ukrainian producer of aircraft engines, Motor Sich, was a monopoly supplier of helicopter engines to Russia. However, this did not mean that the dependence was one-sided, as it received around 80% of components from Russia (Tsvetkov 2009).
Russia’s efforts to use the economic vulnerability of the post-Soviet space for political purposes began right after the fall of the Soviet Union, under the Russian Federation’s first foreign policy minister, the pro-Western Andrei Kozyrev (1991–1996). The 1993 Foreign Policy Concept declared the post-Soviet area as being of primary interest to Russia. The region was intended as a sphere of influence for Russia in its re-emergence as a great power (Drezner 1997, p. 75; Trenin 2009, p. 7). Yevgeny Primakov, who replaced Kozyrev in 1996, put forward an idea of intensive economic diplomacy. In his view, Russia was to use its relative economic power towards the post-Soviet states to promote its political and economic aims (Lucas 2008; Skak 2010, p. 139; Maness & Valeriano 2015; Smith 2016; Tsygankov 2016, p. 122). A key aim was control or ownership of the pipeline systems of European CIS states (Drezner 1997). Given its economic importance, Ukraine was key to Russian plans to reintegrate the post-Soviet space by economic means (D’Anieri 1999, p. 4; Tsygankov 2015; Dragneva & Wolczuk 2016).
Under the leadership of the nationalistic president Leonid Kravchuk (1991–1994), Ukraine responded to Russia’s efforts to dominate it by decreasing its dependence. However, an economic crisis led to Kravchuk’s election loss in 1994. Leonid Kuchma’s victory was largely due to his promise to renew ties with Russia and to take a gradualist approach to reforms (Pirani 2007; Åslund 2015). Nevertheless, Kuchma found himself having to appease both nationalist and pro-Russian factions of Ukrainian society. Furthermore, lobby groups represented by oligarchs gradually took over the Ukrainian state and Kuchma had to balance their interests (Drezner 1999). Nevertheless, Kuchma managed to secure support from various strata of Ukrainian society and was therefore able to withstand external pressure from Russia.
The reliance of Ukrainian industry on cheap raw materials from Russia was a key vulnerability (D’Anieri 1999, p. 74). Moscow actively fought Kuchma’s efforts to decrease Ukrainian dependency on Russian gas and oil, while building the pipelines that would decrease Russia’s dependence on gas transit through Ukraine. The Ukraine– Turkey project of an oil pipeline from Samsun to Odesa was branded ‘economically harmful and politically wrong’ by Russian government authorities (Smolansky 1999). Nonetheless, Russia began to build a gas pipeline from the Yamall peninsula to Europe, which bypassed Ukraine. Such pressure had a mixed rationale. While the primary design was apparently economic—retaining the monopoly on the Ukrainian energy market and blocking European competitors—it also had political connotations—keeping Ukraine dependent on its eastern neighbour and decreasing Russia’s own dependency on Ukraine.
Russian gas, although beneficial for Ukraine from an economic point of view, represented a political liability (D’Anieri 1999, p. 70). But this is not the whole picture. Russia turned a blind eye to Ukraine’s persistent failure to pay for the gas it consumed, a pattern that emerged after the country gained independence and prevailed for the whole of the 1990s. In 1996, according to Gazprom estimates, these debts stood at US $1.2 billion (Smolansky 1999). In 2000, a Russian estimate put the debt at US$3.5 billion (Bekker 2000). Russia expected a return on this effective subsidy. As the Russian Deputy Prime Minister Viktor Shokhin said, as early as 1993: ‘if Russia is going to give subsidies, then there should be some weighty reason for doing this, in particular, possible concessions on other issues’ (Drezner 1997, p. 97). Similarly, President Kuchma baldly stated in December 1999: ‘economy determines politics. Russia provides 80 percent of our gas and 40 percent of our trade’.
Energy has played a dominant role in economic relations between Russia and Ukraine, but it has not been the only area of dispute between them. In October 1995, for instance, in order to coerce Kyiv to sell its energy infrastructure to Russian companies, Moscow withdrew 200 categories of goods from the free trade agreement signed between the two countries; later, it added tobacco, cars and alcohol. Russia ramped up its economic pressure with special measures targeting Ukrainian importers, which Kuchma labelled ‘a trade war’ (Smolansky 1999). In addition, Russian president Boris Yel’tsin imposed 20% VAT on Ukrainian goods in October 1996, demonstrating Ukraine’s vulnerability to its eastern neighbour (Drezner 1997). In May 1997, Russia imposed a 25% tariff on imports of sugar from Ukraine. Russia explained both actions as purely commercial, intended as anti-dumping measures (OECD 1999, p. 183). This official interpretation aside, the measures were in fact intended to draw Ukraine into a customs union, a Russian-led integration process (Smolansky 1999).
Vladimir Putin and the tools of Russia’s economic statecraft
Vladimir Putin continued Boris Yel’tsin’s ambitions to draw Ukraine closer into the Russian orbit to buttress Russia’s ambitions for great power status. With the consolidation of the Russian economy in the 2000s, he was in a better position to do so than Yel’tsin. He continued to foster Ukraine’s dependence on Russia while decreasing Russia’s on Ukraine, trying to shift the balance from one of interdependence in the late 1990s to a one-sided dependency by 2013. The measures Putin adopted, however, reflected the new, systemic emphasis on economic means in pursuing Russia’s aims in the post-Soviet space—the economisation of Russian foreign policy (Malfliet et al. 2007, p. 25; Lo 2008, p. 70; Thorun 2008, p. 46; Tsygankov 2015). This concept, among other things, emphasised Russia’s economic interests rather than ‘paying’ for friendship with post-Soviet countries, such as, ‘through below-market energy prices’. To put it simply, Russia began to ask these states not for mere promises but for actual commitments, including full-scale political participation in its integration processes, and was ready to exert power on them (Bekker 2000; Roberts et al. 2018, p. 134). Moscow gradually pressured the countries of the postSoviet space to make a hard choice—between Russia or the EU—and this narrowed the room for manoeuvre of Ukrainian leaders. As President Kuchma stated in 2013: ‘we have been drawn to the East and we do not want to head there, we want to head to the West, but they do not want us’ (Ivanenko 2013).
Kuchma proceeded with the strategy of playing both the Russian and European cards without making a strong commitment to either side (Dragneva & Wolczuk 2016, p. 684). This led to numerous complaints from the EU side as well as to trade disputes with Russia up to the end of his presidency (World Bank 2005, p. 154). As a World Bank document concluded, ‘thus, in the longer term, simultaneous economic integration into the EU and the SES [Single Economic Space] does not represent a sustainable strategy. However, in the medium term, Ukraine could and should pursue its free trade agenda in both directions (EU and SES) in parallel’ (World Bank 2005, p. 156).
Oil and gas policies were key to the new economic turn in Russia’s foreign policy when Vladimir Putin came to power. Russia, through Gazprom, provided the post-Soviet states with discounted gas. Despite promises of gas at prices cheaper than European customers paid, Russia received negligible reward for its generosity. In the period 2004–2011, Moscow intensified pressure on these countries to gain control over their gas infrastructure using carrots such as gas price discounts and threats such as trade bans or gas price hikes (Tsygankov 2015). Such a policy hit not only relatively hostile states such as Ukraine or Georgia but also close friends, such as Armenia and Belarus (Balmaceda 2007, p. 4; Svoboda 2011; Abdelal 2013). Even if it is unclear whether the primary motivation for the price increase and subsequent negotiations was political or economic, the emphases put on political aims or economic aims were not in strict conflict. Through the exchange of cheap gas for the purchase of pipelines and other energy infrastructure, Russia succeeded in drawing into its orbit countries of the post-Soviet space such as Armenia or Belarus.
The incentives in the form of discounted prices for gas, together with the project of unified energy systems, accompanied all negotiations between Russia and Ukraine (Newnham 2013). Ukraine’s negotiating position, however, was one of attempting to maximise gains and minimise concessions. In November 2002, in an apparent effort to get as much as possible from playing Russia and Europe against each other, President Kuchma spoke for the first time about full membership of Ukraine in Russia’s proposed integration body, the Eurasian Economic Community. However, popular protest against EEC membership led to this idea being dropped. Despite these public sentiments, Kuchma went ahead and signed the treaty on the creation of the Russia-led Single Economic Space in 2004, preferring economic over political integration (Dragneva & Wolczuk 2016, p. 687). However, Kuchma still faced problems before the treaty in question in the Ukrainian parliament was finally ratified on 20 April 2004 (Balmaceda 2007, p. 31).
The Ukrainian presidential elections in 2004 and the subsequent Orange Revolution further exposed Ukraine’s vulnerability to Russian economic pressure. Vladimir Putin provided Viktor Yanukovych, Russia’s favoured candidate at the time, with personal support through participating in his pre-election campaign (Kuzio 2005). After the Orange Revolution and Yanukovych’s defeat in the second round of the election to Viktor Yushchenko, whose support basis was primarily the western and central part of the country, Putin took a less partisan approach, appealing to pragmatic reasons for sound Russian–Ukrainian relations. In 2005, new problems emerged in negotiations over Russian gas prices, when Russia demanded ‘European prices’ while Ukraine insisted on lower than world prices and Sergei Lavrov, the Russian Minister of Foreign Affairs, warned Ukrainians that they would pay a high price if they cut themselves off from Russia and refused to join the Single Economic Space (Nygren 2007, p. 53).
With the victory of Yushchenko, whose rhetoric was opposed to Russia, new trade wars emerged. Russia and Ukraine imposed bans on agricultural products; in December 2005, for example, Russia banned Ukrainian meat imports, a ban reciprocated by Ukraine in 2006 (Nygren 2007, p. 53). The Russian chief phytosanitary standards body, Rosselkhoz, emphasised that the dispute had nothing to do with politics, only with weak Ukrainian food health standards.3 Similarly, the energy disputes of 2006 and 2009 originated in actual trade problems, such as Ukraine’s outstanding debt for Russian gas and involvement of the interests of influential oligarchs such as Ukrainian entrepreneur Dmitro Firtash; the role played by politics remains a matter of academic discussion (Stern 2006; Balmaceda 2007; pp. 125–35; Pirani et al. 2009). Russia pushed for higher prices and debt repayments while Ukraine rejected such claims as political (Stern 2006). However, part of Russia’s negotiating position in these disputes was the purchase of Ukrainian gas infrastructure by Gazprom, which would increase Ukrainian dependence on Russia; thus, Moscow’s approach to resolving disputes was not purely economic.
Phytosanitary norms continued to be used as barriers in trade relations between Russia and Ukraine. The introduction of limits on the import of dairy products from several Ukrainian producers in 2009 was regarded in Ukraine as a protective measure brought about by Russian lobby groups, which was under pressure from the fall of demand for milk in Russia (Karlova & Serova 2010, p. 105). Ukrainian products were not well-regarded by Russian consumers, so claims by the authorities that animal fat had been replaced with palm oil were generally believed and did not come as a surprise. This was in contrast with the Russian ban on imports of dairy products from Belarus that same year, where the interest of Russian companies in the privatisation of the Belarusian food industry clearly shaped the policies of the Federal Service for Surveillance on Consumer Rights Protection and Human Wellbeing (Rospotrebnadzor). However, although the motivation was not primarily political, it does not mean that politics was missing entirely from particular decisions.
The road to 2013
The world financial crisis of 2008 increased the vulnerability of Ukraine to Russia. In 2010, when Yanukovych assumed the presidency, he inherited an economy suffering from the consequences of world recession. Ukraine’s GDP had fallen by a staggering 15% the previous year, with heavy industry in the eastern part of the country the hardest hit (OECD 2014, p. 39). Leading Ukraine out of the crisis through deeper cooperation with Russia was one of Yanukovych’s key electoral promises (Kropatcheva 2011) and a source of his legitimacy. Despite his assurances that he would undertake comprehensive reforms in order to improve the economy and the overall functioning of the state, Yanukovych failed to adopt such measures. In particular, his failure to reform the energy sector undermined his support from important oligarchic groups (Dragneva & Wolczuk 2015, p. 57). In spite of a slight recovery in the two years following Yanukovych’s accession to power, from 2012 growth slowed to zero owing to stagnating coal prices. The country ran a budget deficit of 4.8% of GDP and a high current account deficit of 9.2% of GDP. Yanukovych’s policies of subsidising gas prices for population only deepened Ukraine’s crisis, effectively depleting it of foreign currency reserves (World Bank 2013), and the country needed foreign loans to help stabilise its economy.
The gas accords of 2009, signed by then Prime Minister Yulia Tymoshenko and Vladimir Putin, only added to the country’s difficult situation. The contract stipulated that Ukraine was obliged to import a minimum of 40 billion cubic metres (bcm) of natural gas (52 bcm minus 20%), which exceeded the country’s actual needs. Furthermore, it was obliged to pay higher prices than other countries. In 2013, Ukraine imported only 27 bcm (down from 36 bcm in 2010), which was against the contract stipulations (Pirani 2014). Yanukovych asked to renegotiate the deal in order to decrease the price for gas; while Russia did not want to change the contract, which was commercially beneficial, it proposed some relaxations. Although Gazprom sent occasional reminders about the debt for the undelivered gas that Ukraine was obliged to pay under the ‘take or pay’ clause of the 2009 agreement, it did not push this matter forward. Instead, it kept it back as a trump card for possible disputes in future. In 2010, Moscow offered to reduce the price by a further 30% or US$100 per bcm in exchange for allowing the Russian Black Sea Fleet to remain in Crimea until 2042 (Pirani et al. 2010). The Kharkov accords of 2010, which openly mixed politics and economics, were critically received in the West (Pirani et al. 2010, p. 18). The Ukrainian president failed to achieve his aim of renegotiating the 2009 treaty, in particular, prices and volumes. Signing the accords with Russia, however, did not stop Yanukovych from pursuing negotiations with the EU about a possible Association Agreement.
Diplomacy and propaganda
Vladimir Putin invited Ukraine to join the Customs Union in 2011, with the promise that he would decrease the price of gas (Tsygankov 2015). Along with this promise was a warning: that if Ukraine created a free trade zone with the EU, Russia would have to build physical borders with the country (Saivetz 2012). In 2013, Yanukovych signed a memorandum on Ukraine’s cooperation with the Russian-led Eurasian Economic Community (EEC). Ukraine also received observer status in the organisation. However, officials in Moscow rejected the Ukrainian idea of a 3 plus 1 partnership, which Yanukovych proposed as a way of enabling Ukraine to participate in customs free area programmes without becoming a full EEC member (Kalachova 2013; Krickovic 2014). At the same time, Yanukovych was pressed towards closer integration with the West by the Ukrainian opposition and Ukraine’s oligarchs, who held assets in the West. Despite Russian demands, he continued negotiations on the EU for an Association Agreement (Åslund 2015, p. 95). This came as a surprise to Moscow, which regarded Yanukovych’s behaviour as a betrayal. After the arrest of former Prime Minister Yulia Tymoshenko in 2011, Yanukovych had assured the Kremlin that there would be no talks on an Association Agreement with the EU. The Ukrainian president obviously tried to pursue Kuchma-style policies of keeping the options of both EU and Russian-led integration open. This met with resistance from the Russian side.
Ukrainians continued to be subjected to pro-Russian economic propaganda. Throughout 2013, the pro-Russian politician Viktor Medvedchuk, in cooperation with an organisation called ‘Association of the Suppliers of the Customs Union’, organised roundtables and discussions supporting the claim that Eurasian integration was more profitable for Ukraine than the Association Agreement with the EU. The arguments of the pro-Russian discussants did not differ from arguments presented in speeches by Putin’s aide Sergei Glaz’ev (Dragneva & Wolczuk 2015, p. 80). They included the danger of a rupture in trade relations between Russia and Ukraine if the agreement was signed, a ‘new European colonialism’, the high costs for Ukraine of meeting European standards, and the absolute dependency of the country on the EU set against the possibility of participating in the creation of rules of the Russian-led customs union (Medvedchuk 2013). President Putin, who happens to be the godfather of Medvedchuk’s daughter, attended one of the association’s meetings in July 2013, where he gave a speech about the advantages of the customs union for Ukraine, and how Russians and Ukrainians were in fact one nation (Popescu 2014, p. 27). There was speculation in the Ukrainian media that his visit indicated a preference for Medvedchuk over Yanukovych as Ukrainian president (Bologov 2013).
That year, Russia launched a massive diplomatic offensive against Ukraine. Yanukovych met Putin during the meeting of the heads of the CIS states in Minsk in late October 2013 and was warned by the Russian president that Russia had the right to adopt various measures in order to defend its market if Ukraine signed the Association Agreement with the EU. Only a few days later, on 27 October 2013, Yanukovych visited Putin in Sochi. Although neither side made their topics of discussion public, according to observers, Yanukovych received another warning about his plan to sign the Association Agreement with the EU. Putin had added that it was impossible to enter both the Eurasian Economic Union and sign the Association Agreement. Putin offered a significant discount on gas prices if Yanukovych did not sign the Association Agreement. Yanukovych and Putin met again on 9 November 2013. This time, according to the words of Putin’s spokesperson, Dmitry Peskov, the two leaders ‘comprehensively evaluated’ trade and economic relations between the two countries. The succession of meetings between the two presidents underlined the importance of the issue for Russia and the seriousness of the situation.
Regulation issues
Russia’s warnings against any Ukrainian attempt to get closer to the EU were backed up by actions. Russian food safety organs started to adopt measures against Ukrainian producers. The announcement of a ban on Ukrainian cheese imports in February 2012 came as the first warning to Yanukovych. The sector was particularly vulnerable to Russian pressure as 90% of Ukrainian cheese exports went to Russia. Although the Russian side denied any political motivation behind its actions, the circumstances suggested otherwise. Initially, Rospotrebnadzor banned Ukrainian-made cheese because of the high vegetable fat content, the same reason given for the 2009 ban. After an examination in April 2012 found no traces of such fats in Ukrainian cheese, Rospotrebnadzor raised concerns over production procedures (Chernovalov 2012). Later, in October that year, Rosselkhoznadzor blocked Ukrainian meat and dairy producers from the Russian market altogether. The companies affected did not receive any official announcement that they fell under the restrictions regime, and only found out from media reports. The balance of lobby pressuring, genuine phytosanitary concerns and political motivations is impossible to quantify but all were clearly present.
In July 2013, Rospotrebnadzor imposed a ban on the import of confectionery produced by the Roshen Company belonging to Petro Poroshenko, one of the supporters of integrating Ukraine with the EU. As Russian political scientist Alexei Makarkin put it: ‘as soon as Ukraine expressed reluctance to join the Customs Union, some problems were found with Ukrainian confectionery. Now that a Russian corporation’s chief executive has been arrested in Belarus, Onishchenko [Arkady Onishchenko, the chief of Rospotrebnadzor] is expressing displeasure with Belarusian dairy products’ (Kuzmenko et al. 2013, pp. 1–2). Russian explanations were contradictory. According to Mikhail Zurabov, the Russian ambassador to Ukraine, the ban was based not on political considerations or safety matters but for ‘other’ reasons. On the other hand, Rospotrebnadzor stated in its press release that the chocolate milk in question contained materials that could cause cancer. The official Russian denial of any political motivation behind the ban was widely disbelieved in Ukraine. The crisis also revealed some holes in the unity of the Customs Union: both Belarus and Kazakhstan refused to stop importing Roshen confectionery, going as far as to state publicly that, after a close examination, no trace of dangerous substances had been found in the sweets.
The pressure peaked in summer 2013. In August, the Russian Federal Customs Service tightened customs controls over Ukrainian freight to Russia. This particularly affected industrial products (such as locomotives and steel pipes) and food products. All trucks, including those bringing fruit, vegetables or meat, had to be unloaded, checked and reloaded at the Russian border. The controls themselves came as a surprise as the Russian side had issued no warnings. As a result, around 1,000 Ukrainian trucks and railway wagons remained backed up on the Russian–Ukrainian border, a catastrophic delay for the fresh produce. According to the representatives of the Russian Federal Customs Service, the controls were ‘nothing dramatic’—two days instead of the usual several hours. Russian representatives added that the reason for the delays was the fact that Ukraine was not a member of the customs union (Åslund 2013). Nonetheless, according to Vladimir Zharikhin, deputy director of the Institute of CIS Countries, ‘what is now happening at the Russian–Ukrainian border is not a technical problem or a misunderstanding, but a protective measure used by Russia and the Customs Union’.
These border controls set off another round of accusations from the Ukrainian side, which prompted Russia to ramp up its opposition to Ukraine’s association with the EU. As one Russian senior official stated, ‘the ban was not only politically motivated, as there were also real cases of misconduct on the Ukrainian side’ (Tovkaylo 2013). Furthermore, the official said that the decision had been taken by Putin, as the customs service would not make such a move on its own initiative (Tovkaylo 2013). According to Onishchenko, the chief of Rospotrebnadzor, there was a long list of concerns about the quality of Ukrainian goods flowing to Russia; however, he did not explain the timing of the bans.
The Ukrainian Cabinet of Ministers approved the Association Agreement with the EU on 13 September 2013. Consequently, Russia intensified its warnings towards the country about the future of its economy. Putin’s aide, Sergei Glaz’ev, warned in an interview with the radio programme Ekho Moskvy that Ukraine was on the brink of economic catastrophe and the only way to avoid such an outcome was to reject the Association Agreement with the EU and join Russia’s integrational projects. Glaz’ev refuted accusations that Russia was blackmailing neighbouring states: ‘we are simply and fairly explaining what will follow [if Ukraine signs the Association Agreement]’. He expressed his disappointment with Ukrainian representatives who had signed a memorandum of understanding with the Eurasian Economic Community in which they had promised consultations in the case of Ukraine’s signing a FTA with another entity; no such consultations had occurred. Glaz’ev said that Ukraine would lose its sovereignty to the EU and hand all its powers in trade policy to Brussels.
Yanukovych was not given any room to manoeuvre. Putin confirmed in October 2013 that signing the Association Agreement on the part of Ukraine would mean the inevitable breaking of trade ties between Ukraine and Russia. After meeting Ukrainian prime minister, Mykola Azarov, in October 2013, Russian Prime Minister Dmitry Medvedev warned that if Ukraine signed the Association Agreement with the EU, Russia would adopt protective measures, such as the introduction of a customs regime. Furthermore, Medvedev once again rejected the Ukrainian idea of associate membership of the Customs Union in the form of 3 plus 1. He gave the Ukrainians a choice: full membership or nothing. Although Putin’s and Medvedev’s statements were accompanied by statements to the effect that Ukraine had the right to choose its own foreign policy orientation, the warning was clear. According to the Russian vice prime minister, Igor Shuvalov, Russia’s pressure, while tough, was fully legal under international law and the protective measures were a foretaste for Ukraine of what would happen if it signed the Accession Agreement with the EU.
Besides these warnings of the consequences to Ukraine as a country, Russian representatives did not hesitate to explain the political consequences of the situation for Yanukovych personally. In his next interview for Ekho Moskvy in October 2013, Glaz’ev openly stated that the party currently in power, the Party of Regions (Partiia rehioniv) had won the elections as a result of Russian support. Glaz’ev also stressed that in signing the Association Agreement, Yanukovych was contravening Ukraine’s constitution and questioned the motivations of Ukrainian negotiators, hinting that they had been bribed. Beside these warnings and accusations, Glaz’ev added the incentives of a gas price discount and an immediate loan. According to Glaz’ev, Russian firms would postpone investment projects in fields such as nuclear energy, the arms industry and aviation, with the overall loss to Ukraine of billions of dollars.
Rosselkhoznadzor, together with Rospotrebnadzor, warned Ukraine in October 2013 that signing the Association Agreement with the EU would lead to a change in import rules for Ukrainian meat to Russia. The head of Rosselkhoznadzor, Sergei Dankvert, said that the quality of food product control in the EU was insufficient, and therefore Russia would have no choice other than to react to the adoption of European rules by Ukraine. In January 2014, Rosselkhoznadzor introduced a ban on the import of Ukrainian meat. The official reason given for this was that Ukrainian chicken contained listeria. Although under World Trade Organization rules such accusations must be backed by scientific evidence, Russia provided none.
Technical standards were also used as a pretext to raise barriers to imports from Ukraine to Russia. The Russian Federal Budgetary Organization ‘Register of Certification on the Federal Railway Transport’ (FBO ‘RC FRT’) introduced a ban on the import of rolling stock from Ukraine in late September 2013. The ban seriously affected four Ukrainian enterprises that represented around 80% of Ukrainian production of the items in question. Furthermore, around 90% of Ukrainian exports of rolling stock go to Russia. Although the ban was officially lifted several days later, Russia continued to apply it unofficially, citing noncompliance with Russian technical regulations (Snezhko 2013).
Financial situation
In 2013 Ukraine was in a grave financial situation. The country’s foreign currency reserves were almost exhausted. The country had received a massive loan of US$16 billion from the IMF in 2008, and an additional US$15.5 billion in 2010. Such loans, as usual, were tied to the implementation of reforms, including raising domestic energy prices (IMF 2014, p. 22). Most of the conditions were not fulfilled and the Ukrainian leadership, contrary to its commitments towards the IMF, took steps to increase old age pensions and salaries. As a result, negotiations during autumn 2013 on a further loan from the IMF were extremely tense, with Ukrainian representatives refusing to make any concessions. In December 2013, Prime Minister Azarov publicly denounced the IMF conditions as unacceptable, claiming that Ukraine had been promised ‘small change’ in exchange for the ‘destruction’ of the country’s economy (Dragneva & Wolczuk 2015, p. 86). Russia promised the loan Ukraine desperately needed without imposing conditions that would carry political costs for the ruling elite, such as the structural reforms demanded by the IMF.
The gas sector represented another of Yanukovych’s weak points, as he relied mostly on the support of the highly gas-dependent eastern part of the country. A significant part of the debt to Russia was incurred by the Ukrainian gas company Naftohaz Ukrainy. In October 2013 Gazprom presented Naftohaz Ukrainy with a demand for payment of debts totalling US$882 million. Experts from both sides affirmed that the matter of repayment would have not been so urgent had the Ukrainian leadership not been leaning towards signing the Association Agreement with the EU (Bulin 2013). Russia was entitled to demand the payment according to the Russian–Ukrainian Gas Agreement of 2009, as Ukraine had accumulated the debt as a result of chaos and corruption in its gas industry (Bulin 2013). Clearly, the failing Ukrainian economy was incapable of making such a payment. Yanukovych’s freedom of action in deciding his country’s direction was therefore further limited.
As a result of Russia’s direct threats and incentives, the Ukrainian president changed his mind about closer cooperation with the West. During the Eastern Partnership summit in Vilnius in November 2013, he refused to sign the Association Agreement under the pretext that the Ukrainian government needed to study the document in greater detail. He also demanded the EU compensate Ukraine for the negative consequences of signing the Association Agreement, mainly the loss of the Russian market for Ukrainian exporters (Wilson 2014, pp. 63–4). Yanukovych made no secret of the fact that this decision had been forced upon him. During his meeting with German Chancellor Angela Merkel in November 2013, he complained that, since his election in 2010, he had been left by the West to face Russian pressure alone. In addition, the Ukrainian government declared that it planned to resume talks with Russia and other CIS states about the restoration of economic ties between these countries and Ukraine. Finally, Yanukovych, in full accord with Putin’s previous suggestion of trilateral talks on Ukraine’s future cooperation with both Russia and the EU, proposed the three parties discuss how to help Ukraine to offset the losses stemming from signing the EU Association Agreement.
Thus, trade and financial issues played a decisive role in Yanukovych’s turn away from the EU. Shortly after Yanukovych refused to sign the Association Agreement, Russia provided Ukraine with the credit of US$15 billion previously promised by Glaz’ev. This took the form of purchasing state obligations in several tranches. Moscow also gave Kyiv preferential prices for Russian natural gas, and Ukrainians working in Russia received the right to stay in one place without registration for up to 90 days. The deal was clearly aimed at supporting Yanukovych: national bankruptcy would have led to his downfall and the accession of pro-Western parties to the Ukrainian government. Moscow provided the loan to Yanukovych without any official conditions attached, whereas the IMF and the EU had demanded that Ukraine increase internal gas prices to the market level and decrease budget deficits. These measures, which the two bodies regarded as vital to restoring Ukraine’s economy, would have effectively ended Yanukovych’s hold on power, because they would have hit the Ukrainian population and also Ukrainian heavy industry, particularly in Donbas. To underline the difference between the Russian and the EU approaches, Vladimir Putin stated that the package of treaties signed by Russia and Ukraine on 17 December 2013 did not require Ukraine’s accession to the Eurasian Economic Community (Yermenko et al. 2013; Silina 2013). Nevertheless, Moscow provided its loan to Ukraine in US$3 billion tranches. The sum of US$15 billion was sufficient for Yanukovych to survive 2014, but no longer. Ukraine received the first tranche on 23 December 2013, with other money to be released in the future. This was clearly Moscow’s insurance against any further unpredictable actions by Yanukovych, such as pushing ahead with the signature of the EU Association Agreement.
Conclusion
Russian commentators celebrated the change in Ukraine’s political orientation as a geopolitical victory for Vladimir Putin (Krickovic 2014). However, Moscow’s policies aimed at persuading the corrupt and unpopular Ukrainian leadership provoked a reaction by pro-European forces. A significant part of the population preferred closer ties with the EU in the hope that this would encourage adherence to the rule of law in Ukraine. Nonetheless, these heavy-handed policies did not improve Moscow’s popularity even among states such as Belarus and Kazakhstan, which were usually supportive (Smith 2016, p. 180). The leaders of both states increasingly insisted on a lower level of Eurasian integration, limited to economic affairs (Roberts & Moshes 2016, p. 554).
By Yanukovych’s own account, he had only submitted to Russian pressure in order to stay in power. Nevertheless, he did not become an enthusiastic supporter of Eurasian integration. Instead, he reassured EU representatives that the delay in signing the Association Agreement was only temporary and that after ‘the problems [with Russia’s attitude towards Ukraine signing the Association Agreement]’ were resolved, Ukraine would resume the process of signing of the Association Agreement (Dragneva & Wolczuk 2015, p. 86).
The situation of Ukraine leading up to the Maidan in 2013 offers new insights for the existing theories of economic statecraft. Over the period 1992–2013, Russia exerted pressure on Ukraine in order to draw it into Moscow’s integration efforts, but Ukraine held back. On the other hand, multi-layered policies that combined diplomacy, propaganda, economic pressure and even the threat of military action—evident with regard to the status of the Black Sea Fleet stationed in Sevastopol in 1997 or the situation around the signing of the Association Agreement between Ukraine and the EU in 2013—resulted in success, albeit short-lived, for Russia.
To conclude, the Russian use of economic statecraft confirms the validity of theoretical assumptions. Russia made use of the weak stateness of Yanukovych’s regime, which, compared to Kuchma’s regime, lacked the all three vital aspects of autonomy, capacity and legitimacy. While his autonomy was weakened by Russia increasing the costs of turning towards the EU, through imposing the import bans, his capacity to act was also hampered by the parlous state of the Ukrainian economy. As Yanukovych based his legitimacy on cooperation with Russia, Moscow could exploit this to Russia’s advantage. The disruption of relations had an enormous impact not only on the economic situation but also on Yanukovych’s political legitimacy. The regime was further undermined by its inability to obtain credit from sources other than Russia. Therefore, both internal and external conditions contributed to the success of Russia’s pressure on Ukraine. Ironically, it was Russia’s success in preventing Yanukovych signing the Association Agreement that destroyed the president’s legitimacy altogether, when pro-European forces in Ukraine gathered on the Maidan in November 2013. The resulting civil unrest ultimately led to Yanukovych’s downfall.