Political risk insurance for FDI in Ukraine

shutterstock 254872330In 2014, two major events in post-Cold War European politics overlapped in Ukraine. First, the end of 2013 saw the onset of a sociopolitical revolution in Ukrainian society that continues to this date. Second, this was followed at the end of February 2014 by an initially covert and later increasingly open Russian military intervention in Crimea and Donbas (Mitrokhin 2015). Many observers have come to view these two lasting shifts in European politics as inexorably or even causally linked with one another. This misperception is partly attributable to the role the Russian mass media has had in shaping interpretations of the Russian-Ukrainian conflict (Fedor 2015).

 

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In many Western public debates, not least in Germany, the idea of Moscow merely reacting to domestic political developments in Ukraine during the winter of 2013-2014 is prominent. These interpretations are more often than not accompanied by expressions of at least partial understanding for Moscow’s unusual foreign policy conduct or even with concessions of its inevitability in 2014. Such apologetics are usually linked to an assertion of a dominant, if not decisive, Western role in provoking the events in Kyiv since November 2013. These fateful happenings supposedly drove, if not forced, Moscow into its erratic international behavior when Ukraine’s pro-Western insurgency approached its victorious end.

 

Domestic determinants of EuroMaidan

 

Despite its name, EuroMaidan (literally: “European Square”) was an event driven predominantly – though not exclusively – by Ukraine’s internal affairs and national history. In shaping the objectives, rhetoric and symbols of their upheaval, the Ukrainian revolutionaries permanently related back to proto-democratic points of reference in Ukrainian history. This concerned, for instance, Kyivan Rus’ medieval vicha (councils), i.e. local citizen assemblies, or the early modern era Cossacks’ republics in the Dnipro river region. Both of these traditions, it is noteworthy, are associated not only with Western-influenced right-bank Ukraine, but also with the Russophone left bank and partially with the territorial history of the present-day Russian Federation.

 

Moreover, EuroMaidan was both, in the perception of many Ukrainians and in terms of its leaders’ biographies, a continuation of Kyiv’s anti-Soviet student “Granite Revolution” in 1990 and the famous “Orange Revolution” electoral revolt of 2004. EuroMaidan, furthermore, followed the pattern of several lesser-known but also large protests on Kyiv’s Maidan Nezalezhnosti (Independence Square), such as the “Ukraine without Kuchma” 2000-2001 campaign and the “Tax Maidan” of 2010 (Otrichschenko 2015, p. 149). The first was the start of the pro-democratic and anti-oligarchic movement that eventually led to the Orange Revolution which ended the rule of former President Leonid Kuchma’s clan; the latter was a short-term protest by entrepreneurs against changes in Ukraine’s tax legislation under former President Viktor Yanukovych. During these earlier mass actions of civic disobedience, international issues, like Ukraine’s conclusion of an Association Agreement with the EU and possible future NATO membership, played an even smaller role than during EuroMaidan, or were completely absent. The earlier protests and other domestic impulses behind the escalating mass demonstrations held between November 21st 2013 and February 21st 2014 were more important than the role of the EU and/or NATO in the escalation of Ukraine’s political crisis – an overemphasised factor confusingly stressed by too many western commentators.

 

The interpretation of recent events in Kyiv as the sad story of a geopolitical object rather than as a fateful decision made by a self-determined subject is largely attributable to the European political and intellectual elite’s lack of elementary knowledge about Ukrainian history, culture, politics and society. The rudimentary academic community of Ukrainian affairs specialists does not represent a consolidated scholarly discipline in the European Union (for the case of Germany, see: Umland 2012). Hence, the fixation of most political observers in EU member countries on familiar geopolitical schemes from the Cold War, and not on contemporary insights from relevant area studies to explain EuroMaidan and the Russian-Ukrainian conflict is unfortunate, but unsurprising.

 

In contrast to North America, the EU does not have even a single significant academic research centre or influential scholarly publication organ with an exclusively Ukrainian focus. To be sure, some EU countries have relevant institutions and publication series. For instance, in Germany there are the biweekly Ukraine-Analysen published by the Bremen Research Center on Eastern Europe (Forschungsstelle Osteuropa), the Ukrainian Free University at Munich, the German Association of Ukrainianists (DAU e.V.), the Berlin-based NGO Kyiv Dialogue (Kiewer Gespräche e.V.), the “Ukrainicum” Summer School of the University of Greifswald and some others. These are, however, initiatives with so far only limited societal impact and fragile institutional foundations. Despite high-quality reporting on Ukraine by German premium newspapers, from the left-leaning Die Tageszeitung to the right-leaning Die Welt, there is still considerable ignorance among many German policy makers and opinion leaders regarding basic facts about the geographically largest country fully within Europe. The black box “Ukraine” is often conceptualised as a buffer state, tragic hybrid or involuntary pawn between predominant superpowers or geopolitical blocs instead of as a political nation with its own unique history, composition and culture.

 

To be sure, the recent political escalation was linked to one of Kyiv’s most important foreign affairs as it followed the Yanukovich regime’s abrupt halt of Ukraine’s European integration process in November 2013. Yet, Kyiv’s rejection of Brussels’ association offer was then only a repeat action by an Eastern Partnership country. Armenia, a country with a different geopolitical position, population structure and international significance, several weeks earlier also unexpectedly cancelled its parallel preparations for Yerevan’s own EU Association Agreement under obvious pressure from Russia. This suggests that Ukraine’s presumptively fateful geographic setting and demographic composition played a less relevant role than sometimes claimed.  

 

Furthermore, the character of the Ukrainian demonstrations quickly transformed already, during the first weeks, from a small pro-European protest of Kyiv intellectuals to a trans-class, inter-regional mass movement with more widely defined goals. For many Ukrainians, “Europe” represented more of a guiding metaphor during EuroMaidan than a concrete action plan (Chebotariova 2015, pp. 163-176). Their focus was less on bureaucratic steps to prepare Ukraine for EU accession than on the exemplary function of “Europe” as a visionary and mythologised model for a better and renewed Ukraine. For this reason, the palingenetic formula of a “Revolution of Dignity” rather than the internationally connoted term “EuroMaidan” has become dominant in Ukraine to describe the three-month-long uprising. The term connotes that the Ukrainian people rose up not to follow some foreign advice. Instead, Ukrainians re-asserted themselves, in their Revolution of Dignity, as citizens who would no longer tolerate the disregard, insolence and abuse that Yanukovych’s regime had been showing them for more than three years.

 

Misunderstanding post-revolutionary Ukraine

 

A combination of the (a) complexity of the post-Soviet situation, (b) effects of Russia’s disinformation campaign and (c) underdevelopment of Ukrainian studies in Europe also has had consequences for the West’s comprehension of Ukraine since the Revolution of Dignity’s victory. Until a couple of years ago, Ukraine was no more than a “white speck” or “hallucination in reverse” on many Europeans’ mental map. It is thus not surprising that, in spite of last year’s rapid developments, numerous current Western public debates focus on pre-revolutionary rather than actually topical problems the Ukrainian state has been facing since the start of Russia’s invasion in late February 2014.

 

Just as before EuroMaidan, many observers today still view post-revolutionary Ukraine through the lenses of political transitology and EU neighborhood policies. In spite of the obvious drama, social depth and implications for European security the 2014 events had, the categories and criteria for evaluating Ukraine’s challenges have thus far changed only little. As before the Revolution of Dignity, issues like corruption, oligarchy, reform resistance and general distrust of the Ukrainian elite shape much of western media coverage and public debates on post-Soviet affairs. Sometimes the new Ukrainian president, Petro Poroshenko, is presented as only a slightly improved remake of kleptocrat Yanukovych, who is nowadays wanted by Interpol.

 

To be sure, Ukraine’s older pre-revolutionary challenges have hardly become second or third-rate issues. Insufficiently decisive reforms cannot be offset against the military threat posed by Russia. President-turned-oligarch Poroshenko is certainly no angel, and has yet to sell his various assets as he promised during his election campaign. Nonetheless, the serious international changes around and within Ukraine during 2014 have transformed the context and rank of Kyiv’s challenges. The circumstances for an implementation of the still much-needed reforms as well as their wider political context are fundamentally different today than before 2014.

 

On the one hand, EuroMaidan’s victory and the signing of the Association Agreement with the EU in 2014 have improved the preconditions for reforms in Ukraine. The weight of pro-European parties, Ukrainian civil society, international governmental institutions (the EU, IMF, OSCE, etc.), foreign non-governmental organisations (foundations, watchdogs, think tanks, etc.), Ukrainian and European media outlets and the global Ukrainian diaspora (particularly in North America and Europe) within Ukraine’s political process has significantly increased. The growing involvement of Ukrainian civic activists, the EU Delegation and Mission in Kyiv, well-educated Ukrainian repatriates and other new actors in the transition efforts increase their success chances. Even the war in eastern Ukraine has, apart from corrosive effects, a disciplining and consolidating impact on Ukrainian society.

 

On the other hand, successful reforms are no longer sufficient for improving the Ukrainian population’s living standards or even for securing the continued existence of Ukraine as a country. Ukrainians’ primary concerns at the moment center less on the quality of their democracy, rule of law or public administration. Instead, they are first of all concerned about the basic chances for the Ukrainian state to survive the Kremlin’s ongoing hybrid war against their country. The West’s frequent referral to the contribution of successful Ukrainian reforms to achieving victory in the conflict against the Kremlin is not incorrect. Yet this assertion can also function as window dressing for a far more serious challenge. Even if Ukraine tomorrow became an East European Switzerland, it would not stand a chance against a superior neighbour inclined to and capable of sabotaging Ukrainian nation building and Europeanisation or even driving the Ukrainian state into ruin.

 

The primacy of state security

 

The most pressing current issue for Ukraine appears sometimes only on the sidelines of even major Western political announcements and opinion pieces. To what extent is the government in Kyiv in a position to carry out its principal function as guarantor of the state’s territorial basic security in, at least, present-day rump-Ukraine? Many commentators assume that a comprehensive Europeanisation as a result of implementing the EU Association Agreement represents Ukraine’s royal road to succeed and follow the Polish, Slovak, etc. examples. This laudable hope proceeds from the unspoken assumption that the Ukrainian state can sustainably control its territory as well as secure its infrastructure. It presumes Kyiv will be trusted by its people and foreign partners to plausibly protect law and order in the future. Europeanising the Ukrainian state through the association process will obviously only succeed if the government can fulfill its primary function as guarantor of basic security.

 

One of the current reforms’ currently undertaken main goals is to stimulate the Ukrainian economy. Deepening association with the EU should enable better economic management and freer trade. A precondition for this is that domestic business people and foreign investors feel sufficiently motivated to expend their money, time and energy to utilise, renew and create Ukrainian production facilities. Putin’s strategy in Ukraine aims to deprive the Ukrainian state of its ability to offer credible physical and legal protection for private property and social stability. The two so-called “people’s republics” in Donbas have little value for the Kremlin in themselves. Instead, they are instruments for preventing a definitive calming of Ukrainian society and a sustainable improvement in the business climate of Ukraine.

 

The government in Kyiv is too weak, the Ukrainian military too ill-equipped, the Ukrainian security apparatus still too fragile and, finally, the Russian-Ukrainian border too long and porous for Kyiv to prevent Russia’s continuing subversion of Ukrainian national sovereignty. This Ukrainian dilemma will probably continue for years – a recognition that is already commonplace in Kyiv. Ukraine’s state of limbo would only be brought to an end by a fundamental redefinition of Russia’s national interests towards Ukraine. A foreign policy reorientation in the Kremlin will, however, only be possible after a regime change in Moscow. The West will hardly dare to officially speculate about this and even less work towards it.

 

The West cannot fundamentally solve this new principal quandary for the government in Kyiv. The Western community can nonetheless offer assistance for self-help, in order to at least limit the economic consequences of Putin’s subversive tactics. This support should encompass not only continued sanctions against Russia, technical advice for ongoing reforms in Ukraine, support for the reconstruction of Ukrainian security institutions, delivery of defensive weaponry to Ukraine’s armed forces and macroeconomic financial assistance for Kyiv. In a May 2014 article in The Guardian, influential donor and magnate George Soros identified a principal strategic task for the West regarding Ukraine: the creation of an insurance mechanism that would partially neutralise the current poisoning of Ukraine’s business climate via international coverage of foreign direct investment in the Ukrainian economy.

 

Asset guarantees as help for self-help

 

To be sure, the West cannot and does not want to protect Ukraine militarily and in its entirety from Moscow. It can, however, partially compensate for Russia’s targeted subversion of basic preconditions for doing business in Ukraine with a guarantee fund to insure FDI against political risks. Now an especially fragile destination for foreign economic engagement, Ukraine could thereby at least be relieved of a few fundamental risks in the conduct of business activities. This concerns above all those Ukrainian regions threatened by military destruction (as has occurred in the combat zones), arbitrary expropriation (as has occurred in Crimea) and coercive measures enforced by threat of force (as has occurred in the separatist-controlled Donbas areas). The local impact, model function and signal effect of increasing foreign investment in Ukraine’s hinterlands would accelerate the country’s modernisation and integration into the global economy.

 

For instance, the US government has, since the beginning of the “Ukrainian Crisis”, significantly increased the guarantees and help available for investment in Ukraine from its Overseas Private Investment Corporation (OPIC). Yet, OPIC still collects premiums for its insurance and other services, and these additional expenditures enter the costs vs. profits calculations of potential investors. While schemes like OPIC are thus helpful, they reduce the war-related disadvantages of post-Maidan Ukraine as an investment destination to an insufficient degree. What Kyiv needs is instead a comprehensive, uncomplicated, transparent and unconditional insurance scheme that would guarantee all foreign investment against all risks related to Russia’s hybrid war against Ukraine.

 

This would particularly help those eastern and southern regions of rump-Ukraine located near the Russian border, the separatist Luhansk and Donetsk “people’s republics” or occupied Crimea. They are in the vicinity of Russian regular forces, irregular commandos and secret service units that by their mere presence – not to mention their covert or overt activities – are scaring investors away. An example is the city of Mariupol in southeastern Ukraine near the Azov Sea. This Russian-speaking town is not only strategically critical for Kyiv, as it occupies a possible land corridor between the Kremlin-controlled Donbas territories and Crimean peninsula. Mariupol’s chemical and heavy industries are of larger economic importance to Ukraine. Because of nearby Moscow invasion troops, as well as heavily armed Russian mercenaries and extremists, those regions of rump-Ukraine with relatively high proportions of ethnic Russians, like Mariupol, will have particular difficulty attracting and retaining foreign investors. Resulting continued economic depression in these regions will create an increasingly explosive social situation which is presumably the Kremlin’s exact goal.

 

The provision of foreign investment guarantees by public actors is, as OPIC illustrates, not an unknown instrument in international development. One of the World Bank’s five subdivisions, the Multilateral Investment Guarantee Agency, focuses primarily on this issue. Berlin’s so-called Hermes Cover export credit guarantees play an important role in Germany’s economic relations with partners in politically instable world regions, including the post-Soviet space. The European Union should be interested in both the direct results of investment in Ukraine like the creation of local jobs, as well as its indirect results like higher government tax receipts. Without these investments, the flow of illegal immigrants from Ukraine to the EU will increase, and the Ukrainian state may remain reliant on fresh financial support from the West for many years to come.

 

Foreign direct investment guaranteed by Western states and institutions would also function as a protective mechanism for the Ukrainian state; it would constitute for some an alternative and for others an addition to supplying defensive weapons to Kyiv. Publicly insured direct investments, particularly in southern and eastern Ukraine, would create a close link between Western financial interests and future destabilising activity by Russia – a connection that should have a calming influence on the Russian-Ukrainian conflict. The documentation, by Western governmental and non-governmental observers, of the Russian state’s deep involvement in the conflict in eastern Ukraine is continually improving (e.g. Czuperski, Herbst, Higgins, Polyakova & Wilson 2015). More numerous Western assets and ventures located in Ukraine – particularly in the potential conflict areas in the Russophone East and South – would create new interdependence.

 

Moscow would run the risk that investors, owners or insurers affected by Russian military activity, paramilitary actions or secret service operations in eastern Ukraine would attempt to recover financial losses incurred as a result of the Kremlin’s covert operations via international courts. Russian governmental companies’ or organisations’ foreign real estate and valuables in aggrieved corporations’ or affected guarantee funds’ home countries would be threatened with seizure. Future reimbursement operations could follow the example of currently ongoing attempts to restitute, via court orders, the losses incurred by the shareholders of Mikhail Khodorkhovsky’s YUKOS corporation which was fraudulently broken up and seized by the Kremlin in 2003.

 

From a conflict zone to an emerging market

 

Insuring FDI political risks could beneficially interact with other developments that should improve Ukraine’s business climate. By January 1st 2016, the Association Agreement should be fully ratified, and the Deep and Comprehensive Free Trade Zone between Ukraine and the EU will start operating. This would accelerate Ukraine’s ongoing gradual inclusion into the European Union’s economic, legal, political, social and normative space. Hopefully, by 2016, Kyiv will also have met all conditions of the Visa Liberalisation Action Plan, and thus secure free travel of Ukrainian citizens to the Schengen Zone. Ideally, at its 2017 Eastern Partnership summit, the EU would offer Ukraine, along with Moldova and Georgia, a conditional and long-term but unambiguous and official possibility of future accession to full Union membership (a measures package proposed before in: Fedorenko & Umland 2014). The resulting increasingly active involvement by foreign investors in Ukraine would be both economically important for the war-torn country and beneficial from domestic political and socio-psychological perspectives. Local and international confidence in the future existence and prospects of the Ukrainian state would grow with each additional foreign investor arriving in the country. This would create cumulative effects extending beyond the guaranteed investments, stimulate further business activity and curb the brain-drain Ukraine is suffering.

 

Western support for Kyiv that is strategic instead of situational would have larger repercussions in light of post-Soviet Ukraine’s earlier abrogation of its large atomic warheads arsenal and currently accelerating European integration. Sustained Western help to Kyiv and deterrence of Russian subversive acts in rump-Ukraine would conform to the spirit of the 1968 Treaty on Non-Proliferation of Nuclear Weapons, 1994 Budapest Memorandum on Security Assurances (protecting Ukraine’s territorial integrity) and 2014 Association Agreement between the EU and its member states on the one hand and Ukraine on the other hand. Visible Western assistance to Kyiv would thereby strengthen the global WMD control regime and improve the Brussels’ Neighborhood Policy’s reputation. Last but not least, easing this over-demanding challenge for the Ukrainian state would put the ball back in Kyiv’s court concerning the country’s self-proclaimed Europeanisation. Ukraine’s government would then be responsible for creating all the remaining conditions necessary for attracting foreign investors to the country.

 

Translated from German by Andrew Kinder. An abridged version of this text was earlier printed in volume 27 of the Harvard International Review (2015).

 

Andreas Umland, PhD, is Senior Research Fellow at the Institute for Euro-Atlantic Cooperation in Kyiv, and General Editor of the book series “Soviet and Post-Soviet Politics and Society” published by ibidem Press, Stuttgart and Hannover.

 

REFERENCES:

 

Anna Chebotariova, “‘Voices of Resistance and Hope:’ On the Motivations and Expectations of Euromaidaners,” in: David R. Marples, Frederick V. Mills (eds), Ukraine’s Euromaidan: Analyses of a Civil Revolution (Soviet and Post-Soviet Politics and Society 134). Stuttgart: ibidem-Verlag, 2015.

 

Maksymilian Czuperski, John Herbst, Eliot Higgins, Alina Polyakova, Damon Wilson, Hiding in Plain Sight: Putin's War in Ukraine and Boris Nemtsov's “Putin. War.” Washington, DC: Atlantic Council, 2015.

 

Julie Fedor (ed.), Russian Mass Media and the War in Ukraine (Journal of Soviet and Post-Soviet Politics and Society 1:1). Stuttgart: ibidem-Verlag, 2015.

 

Kostyantyn Fedorenko & Andreas Umland, “Ten (Un)Easy Steps to Save Ukraine: Towards a Paradigm Shift in Western Approaches to Kyiv’s Europeanization Efforts,” Harvard International Review, 31 August 2014, http://hir.harvard.edu/archives/7026.

 

Rory Finnin, “Ukrainian Studies in Europe: New Possibilities,” Journal of Ukrainian Politics and Society 1:1 (2015), pp. 18-23.

 

Nikolay Mitrokhin, “Infiltration, Instruction, Invasion: Russia’s War in the Donbass,” in: Julie Fedor (ed.), Russian Mass Media and the War in Ukraine (=Journal of Soviet and Post-Soviet Politics and Society 1:1). Stuttgart: ibidem-Verlag, 2015.

 

Natalia Otrishchenko, “Beyond the Square: The Real and Symbolic Landscape of the Euromaidan,” in: David R. Marples, Frederick V. Mills (eds), Ukraine’s Euromaidan: Analyses of a Civil Revolution (=Soviet and Post-Soviet Politics and Society 134). Stuttgart: ibidem-Verlag, 2015.

 

George Soros, “How the EU can save Ukraine,” The Guardian, 29 May 2014.

 

Andreas Umland, “Weißer Fleck: Die Ukraine in der deutschen Öffentlichkeit,” Osteuropa 62:9 (2012), pp. 127-133.

 

FURTHER READING: So far, most of the relevant multi-author essay collections on Euromaidan and subsequent times have been published in Germany. The most important, in chronological order, are: Claudia Dathe, Andreas Rosteck (eds), Majdan! Ukraine, Europa. Berlin: Tapeta, 2014; Simon Geissbühler (ed.), Kiew – Revolution 3.0: Der Euromaidan 2013/14 und die Zukunftsperspektiven der Ukraine (Soviet and Post-Soviet Politics and Society 126). Stuttgart: ibidem-Verlag, 2014; Juri Andruchowytsch (ed.), Euromaidan: Was in der Ukraine auf dem Spiel steht. Berlin: Suhrkamp, 2014; Manfred Sapper, Volker Weichsel (eds), Zerreißprobe Ukraine: Konflikt, Krise, Krieg (Osteuropa 64:5-6). Berlin: BWV, 2014; idem (eds), Gefährliche Unschärfe: Russland, die Ukraine und der Krieg im Donbass (Osteuropa 64:9-10). Berlin: BWV, 2014; idem (eds), Zerrissen: Russland, Ukraine, Donbass (Osteuropa 65:1-2). Berlin: BWV, 2015; Manfred Sapper, Katharina Raabe (eds), Testfall Ukraine: Europa und seine Werte. Berlin: Suhrkamp, 2015; David R. Marples, Frederick V. Mills (eds), Ukraine’s Euromaidan: Analyses of a Civil Revolution (Soviet and Post-Soviet Politics and Society 134). Stuttgart: ibidem-Verlag, 2015.

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