Ukraine Crisis: A Decision That May Have Sealed The Fate Of The EU

by: Zoltan Ban

When an EU partnership for the Ukraine, Georgia and Republic of Moldova was offered, the Europeans were clearly not ready to deal with any of the possible scenarios for negative fallout. Looking back, the EU was not exactly the right entity to deal with the complex realities of countries such as the Ukraine to begin with. Ukraine has a large Russian ethnic minority, which it inherited mainly as the result of Soviet policies, including a re-drawing of the inner map of the Union by giving members like Ukraine territories, which historically had little connection to Ukrainians. The end result is that roughly one in four Ukrainian citizens speaks Russian as their mother language. Given that these people were there before an independent state of Ukraine emerged, they are what is considered an historic minority.

There are many EU member states that offer a high degree of protection for their historic minorities, where in feasible cases these minority groups have local autonomy and official language status. Finland offered this to the Swedish minority, Spain for the Basques and Catalans, Italy for the ethnic German minority. On the other hand, there are countries such as France and Greece where historical minorities are not recognized and their right to preserve their language and culture are not viewed as a priority, to say the least. Out of the need to accommodate these countries, EU ideology evolved as one that places little value on offering EU citizens that belong to a historical ethnic minority within nation states that make up the Union protection from the majority potentially abusing its power over the minority.

The EU's attitude in this matter is very obvious in the case of the ethnic Hungarian minority living in Slovakia and Romania, where, for instance, Slovakia got away with introducing its language law in 2009, which effectively criminalized the use of Hungarian and other minority languages. Within certain situations through that law, which they deliberately left vague and up to interpretation so they could use punitive law as desired, ethnic Hungarians and others face the potential of being fined as much as 5,000 euros, which is the equivalent of a year's salary. The EU's response was simply to say that it is in line with EU laws and regulations.

Given EU's ideological development on this issue, it should come as no surprise then that there was never much concern on the side of the EU that ultranationalist Ukrainian groups such as Svoboda were at the forefront of the protests that started in November, aimed at Ukraine's president opting out of the EU deal and making a deal with the Russians instead. As Ukrainian president Yanukovic was finally ousted by months of protests, which eventually turned bloody through actions taken on both sides of the barricades, it should have come as no surprise that the new power apparatus would not be very kind to historical minorities in Ukraine. In fact, a law that gave historical minorities some local official language status was the first target of the parliament, and it was revoked the day after Yanukovic was dismissed (link).

Even when the Ukrainian nationalists made it clear that they would take aim at historical minorities, the EU made no attempt to persuade the pro-EU factions in Kiev, which now have the power, that it is not a good idea to do so. Unfortunately, by ignoring the potential for internal conflict as a result of Ukrainian nationalist forces, they also set themselves on a path that may easily lead both the EU and Russia to resort to actions that will lead to mutual economic destruction. One side does have the resources to recover, the other does not. The side that does not is the one that should now be taking a step back, but it is the one that is sticking to its guns, insisting that it is right and it's the other side that should back down.

At this point there is no other way than for one side to back down, which will in turn allow the other side to do so as well. It is true what the mainstream media and officials in the West have been saying - that for Russia, this is a matter of strategic interest. However, it is false to assume at this point that satisfying Russia's strategic concerns will be sufficient to defuse the conflict. This is where I see Western diplomacy failing in effectively dealing with the tense situation. Given the aggressive move to hit the Russian minority just a day after Yanukovic was deposed, it will be very hard to convince the Russian speaking areas in Eastern Ukraine that they should step back from their current calls for separation from Ukraine. Given the EU's poor record of protecting historical minority rights, nothing aside from a return to a more pro-Russian government will appease them. The EU and Kiev promise that they will be treated with respect are very convincing. As long as they are not appeased, Russia will not be able to back down from giving them full support, either.

EU not prepared for fallout

The current situation we are in has the potential to transform Ukraine, Russia's main transit route for natural gas to EU into a major conflict zone for an undetermined time period. The EU depends on Russian natural gas to a great extent. Out of the roughly 14 trillion cubic feet it consumes per year, about 5 trillion cubic feet come from Russia, and a large volume still flows through Ukraine, with no prospect of this changing for some years to come.

Source: IEA WEO-2011

Currently, roughly 2.8 trillion cubic feet flow through Ukraine even though dependence on it as a transit route has declined since the Nord Stream pipeline to Germany became operational. That is the equivalent of roughly 20% of EU total natural gas consumption, according to EIA data. What makes the situation even worse is the fact that many countries have a dependence on this gas that is much higher than the EU average, therefore, entire countries can be paralyzed if the gas stops flowing for a prolonged period. There are no new projects meant to further lessen EU dependence on gas transiting through Ukraine coming on line for the next few years, and there are few viable alternatives to replace such a large volume of gas. The only option that remains if and when this gas flow is lost is to suffer the consequences. Given the EU's fragile economy, the consequences of taking another major hit would be disastrous.

The European Union only exited recession two quarters ago. Since 2008, much damage was inflicted by the global financial crisis as well as the rotten apples found within the Union, especially within the eurozone. It is expected that 2014 will be the year when the EU economy will finally return to sustained steady growth. It is not much, but given the economic environment of the past few years, growth in the 1-2% per year became something to be celebrated. Such a fragile economy cannot hope to withstand even minor energy supply disruptions.

Things could further escalate, and a tit for tat economic war can easily take shape between Russia and the West. What this means for the global economy is potentially the loss of as much as 6 mb/d of Russian liquid fuels. Russia will be hurt by it for sure, but so will the global economy, because current global spare capacity is almost nonexistent, despite official claims such as those made by the EIA of 3.8 mb/d (link).

The EU would be affected more than anyone in this case, because it is the direct recipient of Russian oil. It would be hard to replace the roughly 5 mb/d imported from Russia. That is the equivalent of losing about one-third of its oil supplies. Even if the EU were able to go on the open market and divert some of the exports that would otherwise go to other countries, there is no way that a significant portion of the lost oil supplies would be replaced if Russia stays out of the global market altogether.

It is true that Russia would face hard times as well. However, the reality is that it sits on many scarce resources that it can rely on in order to recover. Russia would be unlikely to fall apart either, because the military seems to be in tight control, and the population is kept on a short leash as well. Historically speaking, Russians know how to suffer and survive.

The same cannot be said about the EU. The economic crisis of the past years is already leading to a surge of the far right, which is forecast to do rather well during this year's EU elections (link). The mutual economic destruction that the EU is likely to engage in with Russia over the Ukraine situation will have far deeper consequences on the continent that is already suffering. If there is no backing down from current course, the EU risks tearing itself apart. It's ironic that a nationalist decision made by a pro-EU Ukrainian government is now threatening the very existence of the Union they want to join.

Only one way out (I hope they will take it)

For the reasons I already pointed out, there is at this point only one solution that will not lead to disaster. The EU has to announce the withdrawal of the offer of partnership to Ukraine. That would open the way for a return to a political balance in Ukraine that the Russian minority will be able to accept as well. The risk of being drawn closer to a political entity that puts little value on protection of historical minority rights will be removed, thus everyone can gradually move away from the barricades. Given the self-confident nature of the Western world in its own ideological values, I don't believe this will happen. Therefore, it is time to brace for conflict and the consequences.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.