24 August 2014

Can the EU still prevent an open war between Ukraine and Russia?

The Kyiv Post: 24. August 2014
by Luc Vancraen

A Pro-Russian rebel inspects the damage after shelling in Donetsk, eastern Ukraine, Thursday, Aug. 7, 2014

The war is escalating because the European Union has not brought a credible plan to the table that both Ukraine and Russia can trust.
The EU continues to appease the wrong player. In the current circumstances, Russian President Vladimir Putin will settle for any credible plan that allows him to keep Crimea for now.
Putin cannot afford a defeat in Donbas as he fears it will just move the war to Crimea. 

It explains why he is escalating the conflict even if it means he’ll lose the opportunity to deny involvement. His trusted advisors have consistently warned him that his reluctance to go full steam will mean they face a much stronger Ukrainian army in the fall and difficult supply lines in the winter. He is running out of battle experienced volunteers and is slowly dragged into a full scale war where he needs to use conscripted soldiers. The dreams of Novorussia are long gone and it is now a matter to salvage Crimea. 

Shelling in the center of Donetsk (Aug. 24, 2014).

For many in the current circumstances a war in Crimea might seem ridiculous now but not for president Putin as he knows that a third of the Ukrainian army was stationed in Crimea and Ukraine’s volunteer battalions can easily become rebels there. The last thing he can afford is that Crimea turns into a Chechnya where Ukraine uses Russia’s hybrid war tactics against Russia. Even limited terrorist actions in a tourist resort like Crimea will be disastrous. At least for now he keeps them busy in the Donbas region. 

With the September elections approaching Ukrainian politicians can hardly be expected to make big compromises. When the Donbas war will be over tens of thousands of soldiers will return home to find their jobs gone and no other jobs available for them. The economy has stalled as a result of years of corruption topped off with a war.  President Putin will continue to destabilize Ukraine. His speculation is that social unrest will eventually force Ukraine to restore good relations with Russia. His price is known and called Crimea and a fake democracy. Ukraine is in dire need of a generous Marshall-style EU aid program. 

A local citizen inspects the damage after shelling in Donetsk, eastern Ukraine, Sunday, Aug. 24, 2014. Ukraine has retaken control of much of its eastern ter...
A local citizen inspects the damage after shelling in Donetsk, eastern Ukraine, Sunday, Aug. 24, 2014.

If there is no Novorussia today it is because of the ferocious fighting of the Ukrainian armed forces. If the EU wants the Ukrainians to stop fighting after Donbas is liberated it will have to come up with a plan that convinces even the volunteer battalions that it is just a matter of time before Crimea returns to Ukraine. 

The only way I can see this happen is through a Crimean Occupation Tax on all energy imported from Russia into the EU and all other countries that want to participate. President Putin will not like this tax at all but strangely enough it might be enough for him to belief that this could stop the Ukrainian army. It buys him time and he can speculate on convincing the EU to drop it later through good behaviour even though this won’t be easy with a name like this. 

The tax will be paid on all Russian gas, oil and coal sold in the EU. Who pays this tax? Initially it will be EU citizens through their energy bills. This allows Putin through the Russian propaganda to trivialise these sanctions and to laugh with the stupidity of the EU that sanctions itself. But don’t underestimate the creativity of the energy companies. They will find other suppliers and this helps the EU to reduce dependency from a supplier they can no longer trust. Russia will be faced very fast with a serious dilemma. Lowering energy prices to include the tax so that it remains competitive with suppliers that don’t need to pay this or totally losing the biggest customer on earth. Simulations show that after just two years it is Russia that is paying this tax to avoid totally losing the EU as a customer. 

A recession is mostly caused by a lack of confidence which can only return if the EU citizens are convinced that the EU is fully in charge of the situation. Taking a clear position against Russia’s aggression and starting a massive energy preservation program would bring back the confidence that is now rapidly evaporating and that would be totally lost when a direct large scale Russia/Ukraine conflict erupts. 

Activists of Ukrainian movement "For European Future" hold EU flag with the Ukraine national emblem during their rally at Independence Square in Kiev 

The proceeds of the Crimean Occupation Tax should go to an energy preservation fund that subsidizes energy saving measures like Led lamps, isolation for roofs or walls and double glassing or more energy efficient furnaces. The cleanest energy is the energy we  don’t use. According to the EU commission we could over the next 5 years save €400 Billion in energy import purchases by investing €200 Billion in energy preservation. These energy preservation measures create a lot of jobs and would actually be the most efficient infrastructure works the EU could do to stimulate the economy. The proceeds of the tax would stay for 80% in the country where the Russian energy is consumed. Twenty percent will be spent in Ukraine as infrastructure works to stimulate the Ukrainian economy that under the Russian threats cannot get foreign investments. It would show Russia the futility of its destabilisation efforts as in this plan Ukraine would get annually €5 Billion. As it leads to reduced energy imports it helps bring the financial household of Ukraine further in order. 

Poland needs about twice as much energy as Germany to generate the same amount of heating or electricity. Ukraine is about five times less efficient with energy than Germany. The poorest EU countries should get a subsidy from richer nations that exceeds the 20 percent they transfer to Ukraine.
The EU has set five year preservation targets which it often fails to achieve. If the EU however truly commits to Ukraine and international law it can appeal to the civic organisations to help it achieve these green targets. Nobody knows better where they waste energy than the EU citizens that consume this energy. The civic organisations can mobilise the people in a way the government cannot do this. If we are all asked to do efforts to get the EU and Ukraine through the winter then we all get an opportunity to be great and in that effort we will avoid a recession. 

The highest gain in energy saving can be made in Ukraine. If Ukraine was anywhere near Germany in energy efficiency it would not need to import energy from Russia. Here again our civic organisations could help out if they were asked by the EU. Ukrainians are too poor to buy energy saving lamps but if EU citizens can buy a Led light in their supermarkets and fund a second one that civic organisations get to Ukraine to swap for an old style lamp I am convinced we can replace half a billion lamps in Ukraine in the next 6 months. In the end it boils down to every EU citizen buying a led lamp for themselves and meanwhile one for Ukraine. Leave it up to the civic society to come up with ideas, they will have many great ideas. 

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German Chancellor Angela Merkel and VPM Groysman: Germany plans to help Ukraine resolve IDPs problems, says offers 500 million euros for Donbas restoration, reaffirms Crimea must be Ukrainian

We know what sanctions work with Russia as we have in-voluntary tested them in 2009. Due to the financial crisis energy prices decreased seriously and Russia immediately went into a steep recession during which their GDP contracted by 7.9% for the whole of 2009. The Crimean Occupation Tax has the same impact as low energy prices on Russia. If the Ukrainians have to go at it alone because the EU lacks again the courage to help them they can block the gas pipeline which would effectively cut Russia’s gas export seriously and bring it into a recession. Some EU countries would be hard hit and end up in recession too. It would be wise to agree on sanctions together with Ukraine. For Ukraine to be helpful they need to serve three long term goals: structural financing, energy preservation and the peaceful return of Crimea. On none of these the Ukrainian government should compromise. 

The EU also knows that it can survive economically if Russia would commit economic suicide and cut the gas supply totally as Japan voluntarily cut all its nuclear power suddenly after Fukushima and switched to LNG gas. Switching back on Japanese nuclear power plants according to new and improved safety standards developed over the last years would drastically improve their trade balance and free a lot of LNG gas. This is a backup plan that makes Russia’s gas threats moot. 

The EU now finds itself into a position where it has to appease the Ukrainian people rather than Putin. 

Only a Crimean Occupation Tax on Russian energy imported in the EU seems to me a strong enough message to convince the Maidan civic society to ask their Ukrainian army to postpone the fight for Crimea. Strangely enough this might come as a relief for Putin as it might help him survive longer while he plunges his country further into chaos. It will also make that a return of Crimea can be sold to the Russian people by his successor. In the end the EU would use its economic strength to uphold International law and make the world a safer place. The EU would finally put actions behind the values it proclaims and avoid a bigger war.


Luc Vancraen is an entrepreneur in Kyiv and holds a master's in business administration from Boston University.

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