Emerging Market Strategist with Raiffeisen Research and LSE Alum, Sebastian Petric, looks at Ukraine’s unique political relationship with Russia and it’s important geographical location in linking the West to the East. 

The conflicts in Crimea and Eastern Ukraine as of 2014 has had significant effects on Ukraine, her economy and the local exchange rate. In this report, I argue that Russia was able to exploit weak governance structures and corruption in Ukraine to further her own interests via a form of statecraft. I first provide for the background to the events and subsequently, I highlight options for Ukraine and give recommendations for building Ukraine for the future. With respect to the latter, strengthening governance capabilities of the Ukrainian state, as well as addressing corruption undermining the legitimacy of Ukrainian authorities are key. More inclusive institutions profiting a large part of the population should reduce future risks to the country’s sovereignty and hence, reduce the risk for shocks to the economy and the local exchange rate.

At the time of the disintegration of the Soviet Union, the overwhelming majority of the local population – about 90% – voted for Ukraine to be an independent state and no longer one of the republics of the Union with Kremlin elites dominating decision-making. From the point of view of Russia, the disintegration itself is contested and hence, Russian elites still strive for regaining Russia’s original sphere of influence. The methods used in this respect are highly questionable. The term “near abroad” was established as a result of the Kremlin not being able to accept the loss of influence the 1990s encompassed. Russia’s strategic interests should be still the key priority for neighbouring countries and any diversion from this is disincentivised.

The poor state Ukraine found herself in in the early 2010s provided opportunity for Russia to undermine the state after the ousting of President Yanukovych, which was perceived as coup d’état by Russian elites. Strategically, Ukraine was the far most important neighbour for Russia after the disintegration of the Soviet Union. The internal conflicts, which drove Ukraine’s dysfunctionality in the early 2010s, led to widespread corruption and weak governance. This is generally regarded as an internal war, which significantly facilitated the external intervention from Russia.

Strengthening Ukrainian institutions is key in this respect. Weak governance is often cited as the root cause for conflict and functioning institutions are the key to a flourishing state according to Ghani and Lockhart (2009). This would provide hurdles for Russia to further undermine the Ukrainian state from within. Also, misdeeds from local authorities could be prevented with an increased level of governance. Financial support and external training is needed to build up institutions. In this respect, the European Union has to play a vital role. A financially stable Ukraine is the basis for a prosperous future.

That being said, the Ukrainian authorities have to have a more inclusive approach with respect to the Russian speaking minority. Indeed, the vote for independence in the early 1990s also showed that the wish for independence from Russia extends to the Russian minority living in Ukraine. Hence, financial support should be tied to equal opportunities for all Ukrainian citizens. National unity would be fostered by a great level of equality among the different groups living in Ukraine and indeed, locals might again believe in a shared future. Overcoming the fragmented identities is key for building Ukraine for the future.

However, it cannot be ignored that Russia’s approach towards her near abroad resulted in significant bloodshed, as well as economic distortions ending in a default and sharp currency devaluation. What can be done to prevent this from happening again? As touched upon above, weak governance and corruption have to be addressed via the build-up of functioning institutions. This would significantly benefit the prospects of Ukraine and its citizens.

Functioning institutions in Ukraine could lead to the country becoming a bridge between West and East. Ukraine has significant dependencies on both the European Union and Russia due to various imports and exports and hence, the country will not become clearly a member of one or the other. Being a trader in the middle can be a solution for Ukraine going forward, but to make this work functioning institutions are a prerequisite. You cannot make deals happen when at home the country is riddled by weak governance and corruption, which in the past allowed Russia to undermine the legitimacy of the Ukrainian state.

Hence, to unlock the country’s potential, Ukraine has to have close ties with her Western and Eastern neighbours. Being a bridge between the European Union and Russia would offer the country a prosperous future. This requires Ukraine to strengthen her governance and address the issue of corruption so that institutions cannot be further undermined by powerful stakeholders. Ukraine has to become a legitimate counterpart for all parties involved. “Transparency, accountability, and public voice are […] not just technical domains but also expressions of public desire…” (Ghani and Lockhart 2009: x).

Sebastian Petric is an Emerging Market Strategist with Raiffeisen Research. He was educated at the London School of Economics and Political Science, University of Oxford and the Vienna University of Economics and Business. Sebastian recently published a book on fundamental, policy-induced and institutional vulnerabilities of emerging markets.

The views expressed in this post are those of the author and in no way reflect those of the International Development LSE blog or the London School of Economics and Political Science.