WIIW The Vienna Institute for International Economic Studies - Wiener Institut für Internationale Wirtschaftsvergleiche

By Vladimir Gligorov and Michael Landesmann¹

There are three instruments, broadly conceived, to deal with the Ukrainian crisis and also further the political and economic transition in that country : One is the use of international community and rule of law to deal with territorial and constitutional issues. The other is reliance on democratic procedures to sustain the legitimacy of the reform (or transition) process. The third is the EU anchor to liberalise and regulate markets. All the three together should also lead to the dismantling of the oligarchic system and the widespread reliance on corruption.

Legal response to territorial threats

Given the precarious security situation in Ukraine, the first thing to look at is how to deal with territorial challenges? Basing ourselves on the experience of the Balkan conflicts, the institutions of the international community, including the International Court of Justice (ICJ) and the International Criminal Court (ICC) together with the multilateral institutions should be relied on.

Ukraine should file a complaint with the ICJ charging Russia with illegal annexation of Crimea or at the very least pose a question to ICJ about the legality of that annexation. On the basis of the Kosovo ruling, which was officially cited in the documents of secession and annexation of Crimea by Russia and by the Crimean authorities, it is highly unlikely that ICJ could come up with anything but the ruling that Russian annexation of Crimea was illegal. This is because, even setting aside the annexation part, Crimean secession was in violation of the Ukrainian constitution and was not, as in the case of Kosovo, guided by the international community, i.e. the Security Council of the United Nations. Though this ruling, if won, would be impossible to implement, it should help pacify the Ukrainian-Russian relations (as it did in the case of Serbia and Kosovo) and give legal in addition to political grounds for the actions of the international organisations and for the EU, or France and Germany, in their role as mediators. The legal process as well as the final verdict should be supportive of the peace-making process such as the Minsk one.

Similarly, with the same expectations, Ukraine should charge Russia with unlawful interference in its internal affairs in Eastern Ukraine, military and political, which again would be hard for the ICJ to pass over, given that noninterference is the corner stone of the UN Charter, and the ruling would give similar scope for international politics. Those and other legal actions, e.g. those in connection with the blow up of the civilian airplane, could provide grounds for criminal proceedings at the ICC even if those prove contentious. This resort to legal means would make the use of force illegitimate and provide support for the constitution building process in Ukraine.

Multilateral institutions should also be helpful by providing a framework for peace. In some cases in the Balkans, peace keeping missions were ultimately successful (Kosovo and Macedonia), while in others they were not or had mixed record (Croatia and Bosnia and Herzegovina). The case of Ukraine is different because a permanent member of the Security Council, Russia, is directly involved in the conflict. However, assuming a proper legal and political process, in which EU should play an essential role, and especially after the verdicts of the ICJ are handed down, successful peace keeping and institution building missions should prove feasible in Eastern Ukraine. The legal and political process can take at least two years (if the Kosovo case is an example to go on). Assuming that it succeeds to secure a prolonged and eventually, after the rulings are declared, a lasting cease-fire, these legal actions would be supportive of the democratic and constitutional process and help it to take hold.

Democratic legitimacy

The key characteristic of successful transitions in Central and Eastern Europe has been its legitimacy, which was secured through the reliance on democratic procedures (“democracy first, transition later”; the opposite process of no democratic political change with economic reforms proved unsuccessful in Soviet type systems in Europe since at least 1956). Less successful transitions have shunned democratic decision making and opted for authoritarian solutions (sometimes supported by arguments that democracy does not work in “these countries”, as in the case of the early years of transition in Russia, or nationalistic ones as is the case in Russia now and in some other countries, e.g. Hungary, where “liberal democracy” has been criticised to justify authoritarian ways of governing).

Ukraine has taken the first step towards full democratisation by delegitimising the oligarchic system with the Maidan uprising and the elections that followed. This gives legitimacy to the initial strategic decisions to turn toward closer ties with the EU and to implement far reaching institutional reforms. In that, Ukraine is at the beginning of the process that was followed by more successful transition countries. On the experience of the latter, two characteristics of democratic transitions should be singled out for special mention.

One is that the reform packages and measures have had the enduring support of the voters, as they were implemented on the basis of either an ex ante vote for reform programmes or with their ex post approval and most often with both. That has pushed transition through even in cases where initial transitional recession was very harsh, i.e. production, employment, and welfare declined dramatically as they are now in Ukraine. In cases where democratic legitimacy was lacking or is still lacking, political and social stability remained as systemic problems and risks. This is shown by the case of the Ukraine itself since the start of transition as well as the experience with transition in the Balkans.

Also characteristic of successful transitions is the preference for parliamentarian rather than presidential systems. There are few successful transitions with strong presidents. Indeed, in some cases, initial attempts at instituting a presidential system have met resistance for fear of the return of an authoritarian or a system of discretionary rule. Ukraine has now also rejected the presidential system. ²

The additional mechanism to secure the endurance of democracy is the process of constitution making. On the experience of transition countries, the successful as well as the unsuccessful ones, a legitimate process of writing and adopting the new constitution is supportive of the long-term legitimacy of the country and its legal and political institutions. Examples not to follow are those in the Balkans, i.e. in the successor states of Yugoslavia, where the process of constitution-making was not democratic and was heavily influenced by foreign and international interference (the case of Bosnia and Herzegovina being the worst one). Constitution is not a peace-making instrument, as it was often conceived by international actors in the Balkans, but a social contract, which requires proper deliberation and a large enough consensus to have a legitimate and enduring outcome. With that, of course, it also pacifies a country. It is wrongly argued that ethnic heterogeneity may prevent a country to have an enduring constitution. In fact, constitutions serve to bridge ethnic, cultural, and social heterogeneity which are characteristic of states in Europe, Russia and Ukraine among them.

Economic liberalisation and integration

In successful transitions and reforms, the European Union has tended to provide the additional anchor. Here, the instruments of trade liberalisation and the appropriate regulation of the markets are crucial for dealing with oligarchic structures and persistent market distortions inter alia. Countries that have signed Europe Agreements early on and have succeeded in developing an open economy have had less of a problem with the dominant influence of big business and with systemic corruption. The Europe Agreements have been primarily about trade liberalisation, but then also about institutional harmonisation with the EU. Both have proved essential in Central Europe and their lack certainly contributes to the different state of affairs in the Balkans or in Eastern Europe. Ukraine has signed a version of such an agreement, a deep and comprehensive trade liberalisation agreement (DCFTA), and it is important that it is implemented. The agreement provides for immediate unilateral lifting of tariff barriers for Ukrainian exports to the EU and gradual lifting of tariffs on reverse exports. It also, as is the case with similar agreements with Balkan candidate countries, deals with liberalisation of cross-border investments and with market regulation that increases competition and promotes entrepreneurship.

The main obstacle to the consistent and timely implementation of the approved and signed free trade agreement between Ukraine and the EU is Russian opposition. It is important to understand the argument involved. Russia worries that if Ukraine implements this deep and comprehensive free trade agreement with the EU it will have to face a flood of goods produced in the EU due to the existence of the free trade agreement, zero tariffs trade, between Russia and Ukraine. As it stands, the argument is not valid given that there are rules of origin that are designed to protect Russia from such import competition from third countries. ³ However, Russia fears, that it could happen that Ukraine would become an attractive place to invest in order to produce goods to export to Russia. That would certainly be one argument for Ukraine to seek such an agreement with the EU and it speaks in favour of Ukraine forging closer ties with the EU.

The Russian argument, then, boils down to the demand that Ukraine pays the price for competitiveness problems of Russia’s economy by foregoing the free trade agreement with the EU. This is obviously unfair to Ukraine: it should keep tariffs in trade with EU in order to protect Russian enterprises and businesses. Russia could choose to protect itself, if that is what she wants, or could also liberalise and follow on the example of Ukraine. An absolutely inappropriate response is to threaten Ukraine with sanctions, which was Russia’s initial reaction and is still the declared policy should the DCFTA be implemented in its present form by the end of this year.

Trade liberalisation should be complemented with market regulation that should encourage investments and also increase competition for resources in Ukraine. The oligarchic structure of Ukraine is in part the result of the privatisation process but also of the regime of trade distortions, which sustains inefficiencies and increases rents. Increased competition via new entrants with better access to markets should help improve efficiency and erode rents, especially if the adopted regulation and the legal system are supportive of that.

Clearly, the EU can provide an institutional anchor and stability for Ukraine as it has for other countries in transition. In the case of Central European countries in transition that joined the EU, market integration with the EU played a role in keeping business influence at least some distance from legal and political decisions due to increased competition and improved regulation. This is not sufficient to limit sufficiently oligarchic tendencies, but it has proved to be a necessary condition.

The EU should also set aside significant resources to help the reconstruction of the country. Even though eventual closer integration with EU is a distant prospect for Ukraine, some of the instruments of financial support and transfers could certainly be made available to it. Those include infrastructure investments, restructuring funds for industry, and means to support modernisation of agriculture. If growth were to return to Ukraine, that would not be of insignificant benefit for the EU too.

Hence all three instruments are needed: legal response to territorial threats, democratic legitimacy, and economic liberalisation and integration. These should be important to deal with security risks and to overcoming oligarchic capture. This is a long term process, however. It lasted at least a decade in the more successful transition countries. Thus, persistence is the issue but these are the instruments that have worked.

Footnotes:

¹  We rely here in particular on our reading of the successful transitions in Central Europe and the lessons learned from the dissolution of Yugoslavia. 

² The parliamentary system has also more often than not meant relying on a proportionate rather than majoritarian voting system, as it ensures broader participation in the decision making and decreases the potential for polarisation. The important thing is that the coalition governments did not tend to stay in power by reshuffling the governing coalitions, but by checking with the voters whenever the need to renew legitimacy occurred. The added benefit of such practicing of democracy is that the voters start to value the power of the vote, because they can throw out governments and elect new ones. This is especially important in a case like that in Ukraine where security may trump the transitional agenda

³ There is an additional argument which legitimately requires some consideration: the DCFTA implies the switch to EU standards and this would imply – potentially high – adjustment costs in Ukraine-Russia trade and production relationships. Such an argument could in trade negotiations be dealt with by means of offering transition periods and technical assistance.