Originally published in April, 2014
If you look at the population density map of Ukraine below, you can see that its inhabitants tend to live extremely close to the borders of the country. The largest city in western Ukraine, Lviv, is only 70 km from Poland. The central city of Kiev, which has twice the population of any other Ukrainian city, is just 85 km from Belarus. The largest city in eastern Ukraine, Kharkiv, is 60 km of Russia. And the largest city in the south, Odessa, is just 40 km from Moldova and directly borders the Black Sea.
Of the 18 largest cities in Ukraine, only three - Dnieproprovosk, Krivvy Rihy,and Zaporihziya - are located more than 100 km from any of the country's borders. This is pretty remarkable considering that Ukraine spans 1200 km from east to west and 800 km from north to south, encompassing a territory larger than that of any European country apart from France, Russia, or Turkey. It is indicative of the country's deep internal divisions. Indeed, as has been pointed out often of late, the name Ukraine literally means borderland.
From a geographical perspective, Ukraine can be roughly divided into four regions: a plateau in the west, hills and valleys in the east, the Dnieper River Valley in the centre, and the Black Sea coastal plain in the south (see map below). Ukraine's cultural, religious, and economic divisions generally reflect these geographical ones. In eastern and southern Ukraine, for instance, as many as 85% of people speak Russian, which is arguably around twice as much as in the centre of the country and 20 times as much as in some parts of the west of the country. Roughly forty percent of Ukraine's practising Christians are affiliated with the Kiev Patriarchy of Orthodox Christianity, while thirty percent (mostly in the east) are affiliated with the Moscow Patriarchy and fifteen percent (mostly in the west) with Catholicism. Southeastern Ukraine produces virtually all of the country's coal, which is significant given that Ukraine is the 11th largest producer of coal in the world, and coal generates about a third of all energy used worldwide.
With such divisions, it is no surprise that the country has a difficult time achieving political stability. The departure of President Yanukovych this week marks the third time since 2004 that a President has failed to complete his or her term.
From a purely economic perspective, Ukraine is tied together by its dependence on Russia. Even though the eastern half of Ukraine is far more integrated with Russia than western half of Ukraine, the country as a whole receives 36% of its imports from Russia, compared to just 9% for its next largest import source, Germany. It sends 27% of its exports to Russia, compared to just 6% to its next largest export destination, Turkey. Ukraine conducts a further 4.5% of its trade with Belarus and 3% of its trade with Kazakhstan, both of which remain deeply integrated with Russia themselves. Ukraine also maintains important financial relations with Russia in a variety of other ways, for example through remittances from the large number of Ukrainians living in Russia and in Kazakhstan.
Of course, Ukraine and Russia also share a long history. Kiev is actually thought to have been the birthplace of the Russian nation, during the tenth century AD. Ukraine was then a part of the Russian empire for close to four centuries prior to the collapse of the Soviet Union only 23 years ago. Even today, the Russian and Ukrainian languages share partial mutual intelligibility to a much greater extent than Ukrainian does with other Slavic languages, like Polish or Bulgarian. Many or most Russians still consider Ukraine to be an integral part of their country's sphere of influence, or even a part of Russia itself.
Ukraine has the sixth largest population in Europe (not including Russia, Turkey, or Egypt), and the largest territory. Thus, if Ukraine were to be controlled by Russia, Russia would be much closer to being the Great Power that it used to be- something that is probably appealing to many Russians. However, even apart from Russian nostalgia and nationalism there are a number of important reasons for Russia to care deeply about Ukraine.
Ukraine is the world's 11th largest producer of coal, 6th largest of iron ore, 5th largest of corn, 4th of barley, 5th of rye, and 9th largest of both wheat and soybeans. It is also the 10th largest exporter of weapons. Russia, meanwhile, is the world's 6th largest producer of coal, 5th largest of iron ore, 1st of both barley and rye, 4th of wheat, 10th of soybeans, 11th of corn, and 2nd or 3rd of weapons. Thus, Russia and Ukraine are in many ways direct economic competitors of one another. Russia might therefore benefit from being able to exert influence over Ukraine, in the same way that a business would benefit from exerting influence over a major competitor of theirs. In addition, approximately 80 percent of Russian gas and oil exports to Europe are shipped via pipelines that traverse Ukraine, and the Russian economy remains extremely dependent upon these exports.
The Russians also view Ukraine as an essential component of their geopolitical security. Eastern Ukraine is located only 440 km from Kazakhstan, and Russia relies on this relatively narrow corridor between Ukraine and Khazakstan in order to access its entire southern region in between the Black and Caspian Seas - an area roughly the size of France, which is a critical part of the Russian economy because it is warmer than any other part of Russia, has a very long coastline, and is where the Volga-Don river network flows into the Black Sea. The Volga-Don river system is where nine of Russia`s sixteen largest cities are located, including Moscow, and the rivers are themselves used to transport a significant portion of Russian industrial and agricultural goods to domestic and international markets.
Given recent events, the strategic location of the Crimean Peninsula should in particular be understood. As can be seen from the map above, Crimea has the potential to block the movement of Russian ships out of the Azov Sea, the part of the Black Sea that both the Volga-Don network and the Black Sea-Caspian Sea canal empty into. Moreover, Russia's Black Sea coastline to the south of Crimea is lined with mountains (see map below), potentially making it difficult for Russia to access any other part of the Black Sea if a foreign power were ever to take control of Crimea, as historically nations like the Turks, British, and Germans have done.
Finally, possession of Crimea might allow Russia to to influence southern Ukrainian cities which have relatively large Russian populations, most notably the southwestern city of Odessa. Odessa is Ukraine's fourth largest city, by far the largest port in Ukraine, and has a population that is perhaps one-fifth "ethnic Russian". Odessa is also only 170 km from Crimea, and is just 40 km away from Transnistria, a Russian-supported and partially Russian-inhabited secessionist province of the Romanian-speaking country of Moldova.
The Black Sea is very important to European countries. The region surrounding the sea, comprising Ukraine, Moldova, southern Russia, Turkey, Georgia, Romania, and Bulgaria, have a combined population of over 200 million, a population that includes much of the most cheaply employable labour in Europe. The Black sea basin stretches inland as far as Germany (see map above). The Black Sea also connects to the Mediterranean, and by extension to the Atlantic and Indian Oceans. Finally, for countries that do not want to rely too heavily on Russia or Iran, the Black Sea is the only economic route from Europe to the vast, resource-rich region of Central Asia (via Georgia, Azerbaijan, and the Caspian; see map below).
Ukraine has a width of 700-1300 km and borders both the Black Sea and the Carpathian Mountains. As a result, when Ukraine, Belarus, Moldova, and the Baltics are all a part of Russia's sphere of influence, as to varying degrees they all are today, Russia's effective land border within Europe becomes about 12 percent shorter than its official border, its non-mountainous land border within Europe becomes about 40 percent shorter and divides into two separate parts, and the limits of its influence reach more than twice as far to the west of Moscow as they otherwise would. If Russia believes that it needs this strategic depth, shorter land border, and mountainous buffer, it will see Ukraine as being indispensable to its national security.
And remember, Russia is an extremely suspicious country. It is a country that has been invaded many times, that had 20-30 million of its Soviet citizens killed during WW2 (compared to less than 2 million casualties for the United States, Britain, France, and Italy combined, and less than 11 million for Germany and Japan combined*), and that was traumatized during the 1990's when its post-Soviet economy and political system was in a state of chaos and decline prior to the ascendency of Putin in 2000 and the rapid rise of natural resource prices that began in 2003. Russia is currently very worried about the possible military emergence of countries like China, Japan, Turkey, Iran, Pakistan, and India to its east and south, in addition to its usual concerns over the long-term intentions of European countries, militancy and separatism in its Caucuses Mountains territories like Chechnya and Dagestan, and the possibility of instability in Afghanistan spilling over into parts of Central Asia.
*(WW2 casualty numbers vary pretty widely depending on which sources you look at, and, where the Soviet Union is concerned, it can also be difficult to determine what share of the casualties were "ethnic Russians")
There has been a lot of talk about the possibility of dividing Ukraine into two countries. While this is not totally inconceivable, it does beg a number of questions, such as whether the Russians are prepared to live with a Western Ukraine that is formally integrated into Europe, and whether Kiev and the other central Ukrainian cities would be drawn toward Eastern Ukraine or Western Ukraine.
Regardless of what happens to it in the immediate future, Ukraine will continue to evolve over time as a result of economic developments at home and in the countries around it. From an economic standpoint, Ukraine not only has significant mineral and agricultural potential, but also, perhaps, some of the most affordable prices anywhere in the vicinity of Europe. Ukraine is thought to have a per capita income that is only around 27% as high as Russia's, 36% as high as Turkey's, 49% as high as Romania's, 56% as high as Bulgaria's, and 57% as high as Belarus's. The only nearby countries poorer than Ukraine are Morocco, Egypt, Syria, Palestine, Georgia, and Moldova, which together are estimated to have a per capita income around 80% as high as Ukraine's. With the exception of Egypt, Ukraine has a much larger population than any of these countries.
Finally, Ukraine enjoys easy access to the sea itself, not only because of its ports along the Black Sea, which unlike most of Russia's do not freeze in the winter, but also because of its numerous navigable rivers. Three of Europe's four longest rivers run through Ukraine. One of these rivers, the Dnieper, is also one of the two widest rivers in Europe, and deep, and as such allows large ships - up to 270 meters long by 18 meters wide, approximately - to travel all the way inland to Kiev and the border with Belarus. In the future, moreover, a canal linking the Dnieper to Belarus' Bug river could become usable if Belarus gives the go-ahead for a relatively small amount of construction work on a new lock system. According to Wikipedia,this might allow ships of up to around 110 meters by 12 meters to go all the way from the Black Sea to the Baltic Sea and Atlantic Ocean.
For all of these reasons, Ukraine`s economic growth potential could be enormous. Ukraine's economic progress has, however, typically been hampered by Russian domination. Russia generally lacks the navigable rivers, long coastlines that don't freeze in the winter, and proximity to Europe that Ukraine possesses. Russia has historically also posed a military threat to Europe, which has often led Europe (and the United States) to shun Russia economically, hampering Russia's development. Russia's absorption of Ukraine hurt Ukraine's economic growth, therefore. Indeed, Russia's per capita income is only so much higher than Ukraine's today because of the incredible rise of oil and gas prices over the past decade, and because of Ukrainian political dysfunction.
During much of the twentieth century energy prices were not nearly so high, even adjusting for inflation. Russia was very poor, therefore, and kept Ukraine poor with it in a number of ways, ranging from the infamous forced collectivization of Ukrainian farms under Stalin, to the fact that Ukraine's railway network still cannot connect directly to Europe's because railroads throughout the Soviet Union were constructed to use a different gauge than European ones used. The question of Russia's influence in Ukraine could therefore determine not only Ukraine's political future, but also its economic future. This is obviously a big part of the reason that many Ukrainians would rather their country be closer to Europe than to Russia.
If we assume for a moment that natural resource prices will not continue to rise rapidly as they have in the past decade, and that future economic growth will depend instead upon other factors such as demographic trends, labour costs, and the accessibility of external trade and investment, then we can guess that Ukrainian neighbours like Turkey and Romania will outgrow the Russian economy in the years ahead, while Germany and Western European countries will probably grow slower than Russia will.
How might such changes affect Ukraine? One way to get a very rough idea of this is to think about which countries trade the most with Ukraine as a percentage of their gdp. A country like Moldova, for example, may only account for only 1% of Ukraine's trade today, but it also has one of the smallest economies in the world, so that relative to the size of its gdp it probably trades more with Ukraine than any other country does. As a result, if Moldova's income were to become significantly larger than it is today, Ukraine's economic relationships could be affected to a meaningful degree.
By contrast, Germany may be Ukraine's fourth largest trade partner today, but it is also the world's fourth largest economy, so as a share of its gdp its trade with Ukraine ranks fairly low - more than 50 times lower than Moldova, in fact. Further economic growth in Germany might not affect Ukraine as much as growth in a number of other countries would, in other words. The following is a chart of Ukraine's biggest trade partners that shows approximately how much they trade with Ukraine as a share of their gdp (in comparative terms only: ignore the numbers on the left-hand side of the graph, they are incorrect in absolute terms):
If we take this line of thinking a step further and imagine that in future decades every country will have the same per capita income as one another (in other words, that developing countries will all catch up to developed countries over time), and that all will continue to trade with Ukraine the exact same amount relative to the size of their gdp as they do today, then we can make a rough prediction as to what Ukraine's trade patterns will look like in the future. This is, of course, just a thought experiment, not to be taken very seriously. That being said, it may prove useful in giving us a tiny glimpse of what Ukraine's future could look like.
(the graph above also shows countries' trade with Ukraine only in comparative terms, not absolute terms. For all countries, absolute trade values with Ukraine are arguably more likely to grow than to shrink over time).
This scenario would see Russia, the West, and China lose much of their commerical grip on Ukraine to Belarus and Moldova. Russia, however, would remain a major trade partner of Ukraine in spite of this decrease, as, to a lesser extent, would the the easternmost countries of both the European Union and the Mediterranean.
This raises a number of questions. First, to what extent will Belarus remain under the influence of Russia in the future? Second, given that Moldova could conceivably become a province of its large European neighbour Romania because of Moldova's tiny size and the fact that Romanian and Moldovan are the same language, what role will Romania seek to play with regard to Ukraine?
Finally, given that most of Ukraine's trade with the Middle East and Asia will probably continue to pass through the Turkish Straits in order to reach the Mediterranean and Indian Ocean, and that southern Ukraine was controlled by the Turkish Ottoman Empire from the 1450's until the 1780's, and that there are still about a quarter of a million Turkic (related to Turkish) Muslim people living in the Crimean Peninsula, plus an estimated 50-75 million other Turkic Muslim peoples living in Russia or in areas within Russia's political sphere of influence in the other countries of the former Soviet Union, what role will Turkey seek to play with regard to Ukraine?
Of course, it would not be a surprise to anybody if Turkey, Romania, or Belarus never match Russia's influence in Ukraine. Still, this thought experiment arguably helps to show that Russia's influence in Ukraine might eventually be challenged, and that the challengers might not be the countries most people would expect, such as the United States or Germany. This is useful to keep in mind, as Ukraine's size, location, natural resources, and internal divisions may continue to make it a conflict zone in Europe during the decades ahead.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.