No endgame for Ukraine

Many of us are anxiously anticipating what the endgame will look like in the stand-off between Russia and Ukraine. Invasion or incursion, sanctions or retreat, or will diplomacy manage to find a face-saving solution?

This may well be the wrong perspective. Instead of finding an endpoint, we may have to get used to the idea of a “frozen” conflict — a drawn-out, slow-burning and continuous source of irritation.  

Russian President Vladimir Putin’s attempts to put back together what remains of earlier Russian empires is not driven by fear of an imminent attack: it is designed to deny its citizens alternative visions of life in a post-Soviet society.

This is the first item we need to understand. Russia does not want a prosperous and thriving Ukrainian democracy at its border. It wants a subservient or a failing state. There is no room for win-win thinking in this approach.

Second, the Western alliance, in particular energy-dependent Europe, is unable to stop the unfolding of a more persistent military threat.

The U.S. has pledged unprecedented sanctions in response to any transgression on Ukraine’s borders. Everyone knows what this means: a two-pronged pincer movement to isolate Russia from the international payment system and from access to capital (along the way denying its elites financial shelter abroad), and to block energy and commodity exports. The target is the balance of payment surplus which has enabled Russia to weather so many storms.

Russia’s economy has been well fortified against the threat of long and deep sanctions. Gold and currency reserves are up, U.S. dollar transactions and foreign financing needs are down. Foodstuffs and other imports have been substituted for with relative ease. The economy is geared to function at oil prices in the low $40s (or to stomach an equivalent drop in export volumes).

The solid macroeconomic framework, however, guards a country with low, and uneven, income and wealth.

Dealing with current sanctions and fortifying the Russian economy against future ones has contributed to a stark deterioration of income growth since the occupation of Crimea. (High military expenditures do not help: As a share of GDP, Russia’s military budget is one of the world’s largest, ahead of the U.S. or China.) Russia’s annual economic growth rate has averaged 5 percent between 2000 and 2014, when oil prices fell and sanctions went up. It has since deteriorated to 0.9 percent. Meanwhile, the world as a whole grew by 3.4 percent every year during this period, and advanced economies by 2.1 percent: Instead of catching up with the richer part of this world, Russia’s citizens have fallen further and further behind.

Tough sanctions may have more impact. However, the numbers indicate that Russia has shouldered much of the potential cost for creating the crisis upfront; while the West has barely begun to look at its cost of sanctions.

The truth is that additional sanctions with an impact will quickly become prohibitively expensive for the sanctioning countries, too. Only the U.S., a net energy exporter and capital importer with large and reasonably independent energy and financial sectors, appears in a position to carry that burden. But Europe is unlikely to follow.

Europe already faces a crisis with high coal and gas prices. The EU does not have a unified — let alone a principled — foreign policy. Its energy policy was largely climate, not energy security, focused. Historic, commercial and political relationships vis-à-vis Russia continue to differ substantially across its members.

In the short term, there is no easy substitute for Russian gas and coal deliveries in the midst of winter. Sanctioning Russia’s energy exports today is a little like using one’s nose to hit another person’s fist. In the long term, where curtailing export technology would make sense, Germany is unlikely to forgo the option of additional supplies signified by the Nord Stream 2 pipeline.

The predictable outcome is a lack of cohesion and political will on part of the European Union to follow through with “maximum” sanctions, should Russia’s intervention fall short of a full scale, “maximum” invasion.

Russia seeks to inflict damage on the idea of a prosperous and free Ukraine to prevent a beacon of hope from rising on its borders. It would shine a powerful light, for reasons articulated by Putin himself: a prosperous Ukraine would have risen from the ashes of centuries of shared history; and would demonstrate what is possible in the post-Soviet space much more convincingly than dreams manufactured far away.

Unfortunately, and a third point to keep in mind, is this idyllic prospect is not only under attack from the outside. It is being hollowed out from within as well: After so many decades under a common blanket of Soviet rule, parts of Ukraine’s society suffer from the same structural damage Russia displays. Its economy and body politics are blighted by corruption, haunted by inefficiency and continue to reproduce a quagmire of unfairness rather than equal access to opportunity for its citizens.

To those with bad intentions, this leaves the gateway toward obstructing the new state-wide open.

Most expect Russia to take what it can get, after rationally calculating the cost of sanctions. But searching for a well-defined endpoint may be looking the wrong way. Eyeing a target and realizing the defense is broken and the target weak, the wolf will not stop circling. A long-drawn-out, “frozen” conflict is the most plausible perspective.

Christof Rühl is a senior research scholar at the Center on Global Energy Policy at Columbia University SIPA, where he leads research focused on oil and gas and the energy transition. Rühl is an economist, specializing in macroeconomics and energy economics. He most recently served as global head of research at the Abu Dhabi Investment Authority (ADIA), where he created and managed ADIA’s first global research team to provide economic, energy and geopolitical analysis to the fund. Previously, he was group chief economist and vice president of BP for nine years.

This piece has been updated.