Speakers: Karen E. Donfried, President, The German Marshall Fund of the United States, Robert Kahn, Steven A. Tananbaum Senior Fellow for International Economics, Council on Foreign Relations, and Stephen Sestanovich, George F. Kennan Senior Fellow for Russian and Eurasian Studies, Council on Foreign Relations
June 9, 2014
HAASS: OK, good evening. And welcome on this summer's day to the Council on Foreign Relations. Tonight is either the fourth or fifth -- I've lost count -- of this new series we've started, which is the "What to Do About," and tonight it is Russia and Ukraine.
And the structure or approach of this series, for those of you who have not seen any of the predecessors, is to take an issue in American foreign policy where in the real world there's lots of debate about what we should do about something and to have a version of it right here.
And what we do is we take people who are scholar-practitioners and we essentially construct the equivalent of a high-level meeting in the U.S. government. No one acts in a role, so Karen is not representing the NSC or Rob is not representing Treasury and Steve for sure is not representing the State Department. And instead, they are all essentially ministers without portfolio. They are wise women and wise men offering their analysis and recommendations on issues of policy.
Tonight, as I said, is what to do about Russia and Ukraine. It is on-the-record, I believe. And what we are going to do is start with a little bit of conversation amongst ourselves, and then I will ask you to take over with questions. Just to make sure everybody knows who's up here, Karen Donfried, until recently, was the senior person in charge of all things European on the staff of the National Security Council. And now she is the new -- you're still new...
DONFRIED: I'm still new.
HAASS: ... president of the German Marshall Fund of the United States. Congratulations on your new position.
Rob Kahn is the not-so-new Steven Tannenbaum Senior Fellow here at the Council on Foreign Relations for international economics. And if you're not a regular reader of his blog, you should be. And what's the catchy title again?
KAHN: Macro and Markets.
HAASS: Macro and Markets. Rob is clearly not in charge of branding here at the Council on Foreign Relations, but we're glad to have him all the same.
(LAUGHTER)
Last but far from least, Steve Sestanovich, who has held all sorts of senior positions in the U.S. government, holds academic positions at places like Columbia University, and is also the George F. Kennan Senior Fellow here at the Council for Russia and Eurasian Studies. So that is the line-up; we are in safe hands here.
So let's start as we would at a meeting of this sort with the setting, essentially what's going on, what's the latest? This situation/crisis has now been unfolding, what, for three, four months. And we're in the near-term aftermath of an election. You were there.
SESTANOVICH: I was an observer.
HAASS: So why don't we start with you, Steve? Because you I think have been the most recent to set feet on the ground. So what is the -- let's get a sense of the landscape. We'll look at -- begin with Ukraine and then we'll work our ways out to Europe and Russia. So let's start with that.
SESTANOVICH: Well, the political landscape in Ukraine is that you now have a legitimate leadership that no one can contest. Mr. Poroshenko, the famous chocolate king, got himself 55 percent of the vote in a turnout that was strong across the country.
HAASS: Has anyone questioned in any way the legitimacy or fairness of the election?
SESTANOVICH: It was really an impressive election. You had people saying that -- local monitors saying this is the first European standards election that we've had since 1991. And I was very impressed by the group of people that I saw just in the precinct where I was observing, but I heard the same thing from people who had been all over the country and local monitors -- thousands of them -- who were deployed in all parts of the country, not in Donetsk and Luhansk. And that's the second part of the landscape.
Poroshenko was inaugurated over the weekend. He gave a speech that combined the outstretched hand and the outstretched fist. He said there's going to be no end to the counterterrorism operation -- a term really like, because that was what Putin called the offensive in Chechnya.
The -- but he said -- and he said there would be no negotiating with those people. So he's not -- in offering dialogue, he's not reaching out to them. But he is saying he wants dialogue and he's offering an agenda of conciliatory measures, Russian language, local autonomy related to budgets and taxation, and the like.
Whether he can deliver that at a time where his army is yielding border posts kind of by the day is hard to say. So he has a military question mark about his policy. He's got a strong political mandate.
HAASS: Let me just ask one more question on the security situation before I turn to Rob on the economics, which is you said his military, which has had trouble from the get-go, is yielding posts and territory in a fairly regular basis. What's our reading of the nature of those they're yielding it to now? To what extent is Ukraine, if you will, those doing the taking here, have they in a sense become Ukrainized, essentially local dynamics? Or to what extent do we think that the dynamic is coming from outside, and more particularly from Moscow? How do we read the security dynamic?
SESTANOVICH: Well, I think there's -- the U.S. government -- if I can put it this way -- the U.S. government, since we're play acting here, the U.S. government has no doubt that there is a significant infusion of Russian assistance over a pretty porous -- across a pretty porous border. It's not in large numbers. It's mostly special forces advisers. But it is -- it's not an autonomous outpouring. There are -- these groups have been strengthened by getting Ukrainian arms from units that have abandoned their posts.
HAASS: Well, let me ask the question in a slightly different way, which is, do we think essentially they are now calling their own political shots and decisions? Or to the -- do we think they're listening and waiting for guidance? What's our reading of how independent they are?
SESTANOVICH: They definitely are listening to Moscow, and there have been some indications of Russians coming in and trying to displace the local hotheads so as to have a more better organized and coordinated operation, but also one that can cut a deal.
HAASS: Rob, let's talk about the economics for a second, and then I'll turn it to Karen, which is, you've had, what, probably a month or two before the election, you had the massive commitment from the E.U. and the IMF. The United States commitment was, shall we say, on a more modest scale. So what is the state of the economy? What's the stake of international support? And how did the two, if you will, interact?
KAHN: Well, it's pretty dire. Certainly this was a crisis -- an economic crisis that was many years in the making for economic policies, overvalued exchange rate, unsustainable fiscal policies, and the like. But as you said, the pretty -- a pretty sizable IMF-led rescue package was put together, with -- subject to a set of conditions, and by and large, the government's kept its word and taken the actions it needed to take to get that money going and to keep that money going.
The problem is that the economy is suffering quite dramatically, because now you've lawyered over on top of it a political crisis and an economic crisis. Growth will probably fall something on the order of 5 percent to 10 percent this year. Fiscal revenue, not just because growth is lower, but because in some parts of the country the fiscal -- the government's not really functioning -- will be a lot worse. And so I suspect that even -- that economic performance will fall significantly short of even what the IMF assumed only a few months ago.
HAASS: And remind of the numbers. There was $17 billion, $18 billion of aid that was promised?
KAHN: Of IMF money was $17 billion. The total could have been as much as $27 billion.
HAASS: And what is your sense -- I mean, if this were Silicon Valley, we'd talk about a burn rate. What is your sense of how long this is going to last, based upon what they're consuming as opposed to producing economically, and at what point we, the United States or other -- the world is going to be confronted, if you will, with the possibility of an additional tranche?
SESTANOVICH: I think pretty soon. When we talk about burn rate, we should distinguish between what you might call an external burn rate and a government burn rate, because the significant depreciation of the exchange rate -- while it's been very difficult -- helped the current trade accounts quite a bit and reserves have been stabilized.
But in terms of the fiscal burn rate, that money is not enough, and I'm expecting that probably as soon as the summer we're going to have to take a new look and rewrite that program and find some additional financing to keep this thing going.
HAASS: So, Karen, a big chunk of our policy has obviously been the political and economic bolstering and security bolstering of Ukraine and the results, I would say, seem to be slightly better on the political side than on the economic or security. And the other part of the policy was obviously -- the flipside was more to try to influence Russian behavior, largely through pressures and sanctions. And we just had the meetings in Europe, and I would simply say that there is something less than consensus between the United States and the European governments. The French government is going ahead with its arm sales. The other governments don't seem particularly inclined to make Russia pay any higher price for what it's done. It's not clear what would -- or even for what it's doing.
So what is your reading of the transatlantic, if you will, consensus or lack thereof here?
DONFRIED: Sure, and just a comment.
HAASS: Yeah, comment on anything, yeah.
DONFRIED: There's clearly a connection between the politics and the economics, because the fact that you have this unrest being fomented in the east in Donetsk and Luhansk, which are very important in terms of heavy manufacturing, so the longer that unrest continues, the more of a hit the Ukrainian economy takes, so these things are definitely connected.
In terms of the transatlantic piece, certainly it's been a priority of the Obama administration to keep unity with its allies, and that was on display last week when the president began his trip in Poland, went to Brussels for the G-7, which is the first time in almost two decades that there hasn't been a G-8 meeting with Russia being excluded, and then all of them being on the same stage in Normandy.
What you saw at the G-7, the statements that came out, it wasn't just the U.S. that was accusing Russia of engaging in supporting the separatists in the east. It was the entire G-7. And what President Obama and Prime Minister Cameron and others said is, Putin needs to do three things. He needs to respect Poroshenko as the legitimate president of Ukraine. He needs to stop support for the separatists. And he needs to stop materiel and militias going across the border. And if not, there will be further consequences.
Now, they didn't define what the consequences were, which gets to your point...
(CROSSTALK)
HAASS: But even before we get to the consequences, do any of you see any evidence that Mr. Putin is going to embrace any or all of those three conditions, he's going to meet them?
DONFRIED: It's been fascinating to watch President Putin at work. And Steve can speak to this probably better than any of us, but clearly, on the one hand, he's very visibly suggesting that he's stepping back. And he sent his ambassador back to Kiev and intended the inauguration. Today we saw President Poroshenko begin a dialogue with that Russian ambassador.
Yet on the other hand, it defies belief to think that Putin is giving up his goal of trying to control what happens in Ukraine. So he's clearly using other means to exert influence...
(CROSSTALK)
SESTANOVICH: There's a little more to it than that, although I think that's significant. The Russians have been claiming this is a government of, you know, fascist thugs for months, and now they can't do that. So they're -- they've made their peace with Poroshenko.
They've called for mediation by the OSCE, kind of unusual in itself. The Russians despise the OSCE. On the other hand, they don't have the greatest regard for its effectiveness, either, and that can be a kind of stalling operation, too.
Nevertheless, they have said that -- the Financial Times had a nice quote from the Russian Foreign Ministry today saying that the arms flow across the border is the work of the devil, which is to say...
HAASS: The devil's been busy in that sense.
SESTANOVICH: You just don't know which -- they don't where it's coming from, but it does put a little bit of distance between themselves and separatists. And the way in which Putin has interacted with Poroshenko suggests there's a message to the separatists there, "I can do a deal with this guy."
HAASS: But all along, the phrase that's stuck to me is the Russians were essentially intervening in Ukraine without invading. And nothing you said seems inconsistent with that. They may get a little bit more clever about how they mask their intervention. They may be gaming or gauging what it is they can get away with without triggering some unclear trigger across -- with the Europeans in particular, but one gets the sense they are going to continue, if you will, to keep their hands in as much as they can without necessarily incurring more of a penalty.
SESTANOVICH: I think it's clear that they have been impressed enough by Western unity to give up on the idea of just completely breaking up Ukraine openly, having -- you know, absorbing these eastern territories the way they did Crimea. That just -- that doesn't seem to be on. In that respect, Tom Friedman is right; they've blinked at that thought.
But you're absolutely right. There isn't any indication that they intend to give up on the idea -- and to make Ukraine whole again. They're not impressed by what the West threatens that they are going to say, "You guys have got to go back and make your peace with Kiev, and, you know, we wash our hands of you."
HAASS: One or two last questions on this, and then we'll turn to some of the next part of this, which is -- and is it your sense what's influencing the Russians, is it the reality or threat of sanctions? Or is it the cost of Crimea, and that's not something they want to keep paying? It was described to me by one person as three Olympics. It's the new unit of account in Russia, is an Olympic.
(LAUGHTER)
Is it the idea that they don't want a failed Ukraine on their borders, that it's one thing to have a Russian to widely regard over Ukraine, something else to have a Ukraine that's hemorrhaging. What's our sense now of where Russia is?
DONFRIED: I think it's all of the above and more. I think it was also striking for Russia, when you had the vote in the U.N. Security Council, that China abstained. I think that Russia has found perhaps less support for its intervention in the east of Ukraine than it might have thought. I think there might have been a thought on the Russian side that when they sparked something, that this would ignite a flame and you'd see people demonstrating in the streets of eastern Ukraine in support of Russian action, and that didn't happen. And I do think it was unity in the West that perhaps we hung together more than they thought. I do think the sanctions have had some effect in terms of capital flight and those around Putin who have been targeted, not just personally, but also their businesses. So I think it's the combination of all of this.
KAHN: But there's one thing that they've gained here, which I think is undeniable, and that is a kind of recognition not just in Kiev, where it's -- that recognition has always been strong but in the West -- that they are a kind of -- they are a power broker that affects the internal course of Ukrainian politics. And they've been -- and that isn't even so much disputed now. The recognition in -- from these meetings, where, by the way, Putin was also -- he was supposed to be disinvited, and he was skulking around, just sitting to the left of the queen of Denmark.
HAASS: We had two dinners one night.
DONFRIED: He did.
HAASS: He had a dinner...
DONFRIED: With -- Hollande, who had two dinners...
HAASS: Oh, that's right.
DONFRIED: ... one with Obama and one with Putin. He had supper with Putin.
HAASS: I apologize. I apologize.
KAHN: The -- you know, the West is now kind of imploring Putin to use his influence to calm things down in the east.
HAASS: Well, let's pick up on that, which -- OK, so we've kind of sketched out the lay of the land. What at this point are our interests? And it seems to me it ranges everything from going back to a status quo ante, where Russia -- the Russian-Ukraine connection is broken, in particular the Russian Crimea hold, to where we simply say, look, we don't like the status quo, we want it to keep it from getting worse, and there's lots of things in between.
So at this point, what -- what is realistically -- what do we -- what will define as a success? What do we define as acceptable? What is it we're committed to avoiding over, say, the rest of this year? We've got roughly halfway through the year. What is it we're -- what is it we're trying to do? What is it we're trying to avoid at this point?
DONFRIED: I see Russia's illegal annexation of Crimea and the unrest they're trying to spark in the east of Ukraine as a fundamental challenge to our post-Cold War policy in Europe, and by our I don't just mean the U.S. It was a shared policy with our European allies, and that was to try to expand that part of Europe. I mean, the U.S. term was whole, free and at peace. And that was shared by successive U.S. administrations.
That policy met with a great deal of success, if you think about NATO enlargement and E.U. enlargement. And it was premised on a belief that Russia had made a decision that cooperating with us was more in its interests than engaging in open conflict. And maybe that was already being tested in Transnistria and in Georgia, but, boy, in the case of Ukraine, there's no doubt about it. There was no precipitating factor for Russia to take over.
HAASS: But given that, what is it now moving forward? So if that was our premise, we are where we are, where in six months do we either want to be or where in six months do we want to make sure we're not? How do -- I mean, do you define success as getting Crimea back? Do you find success as not having any more Crimeas, keeping Russian involvement below a certain level, either through discouraging them or buttressing Ukraine? Is it something else?
I'm just curious, which is given where we are now, what's our compass? I mean, I know we don't necessarily like where we are, but I can imagine things that are worse as well as better.
KAHN: Well, on the Ukraine piece of it, I think stabilizing Ukrainian economy is both an objective and a tool, in the sense that presumably we want to signal that their survival as a state, viable state, is critically important, that -- and that we support it and that participation in the Western economy has a long -- the best long-term future for them, but also simply buying time is important in saying that we can withstand this type of destabilization of the sanctions, which do tend to accumulate their effects over time.
We -- we'll work because we can withstand time or we can -- we can wait it out and because the Ukrainians themselves can wait it out, as well. So I think that idea of showing that there is an economic future for Ukraine is critically important here.
HAASS: So that -- but just to translate into a clear U.S. objective, one way to say that the U.S. objective might be in the long run, however you define that, is to make Ukraine whole again, to bring Crimea back, but for the foreseeable future, the goal is to not lose any more of Ukraine. And that to me would be one definition.
And by the -- and as an aside, not to see any more Ukraines out there, to basically not see what was done there replicate in any other country in Russia's near abroad.
SESTANOVICH: Richard, I think we've probably already succeeded in not having Ukraine break up, in the sense that Crimea was annexed by Russia. But we are probably still at risk of having something like the Georgian situation be recreated, in which parts of Ukraine -- and these are really significant parts of Ukraine -- are sort of no-go territory for the central government. They exist politically and economically within the Russian orbit and with the much greater likelihood that Ukraine is a kind of -- just kind of failed state.
I think we have -- that's, I would say, the most plausible bad outcome over the next 6 to 12 months, but I think there's a plausible good outcome, since you ask about a range of possibilities, and that is to have something like a reintegration of those territories into Ukrainian state on terms that have some -- that reflect the desires of -- that have been expressed over time by the eastern provinces for more autonomy, that involve a continuing good relationship between Russia and Ukraine, and -- but that is -- that does not involve a kind of de facto partition.
Husain Haqqani | June 12, 2014 1
