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Vladimir Putin the Economist: Some Facts and Folly on Ukraine

Russian President Vladimir Putin speaks at a signing ceremony of bills making Crimea part of Russia in the Kremlin in Moscow, Friday, March 21, 2014. President Vladimir Putin completed the annexation of Crimea on Friday, signing the peninsula into Russia at nearly the same time his Ukrainian counterpart sealed a deal pulling his country closer into Europe's orbit. (AP Photo/Sergei Chirikov, Pool)

Russian President Vladimir Putin speaks at a signing ceremony of bills making Crimea part of Russia in the Kremlin in Moscow, Friday, March 21, 2014. President Vladimir Putin completed the annexation of Crimea on Friday, signing the peninsula into Russia at nearly the same time his Ukrainian counterpart sealed a deal pulling his country closer into Europe's orbit. (AP Photo/Sergei Chirikov, Pool)

Russian President Vladimir Putin has been called many things, but he’s rarely been called an economist.

Yet in recent news conferences and briefings, Putin has displayed a grasp of details he said show Ukraine’s underlying economic weakness and the peril for Ukraine of turning to the West. And he said Ukraine depends on Russia not only as a source of natural gas but also as a market for its manufactured goods.

Putin has argued that no Western deal for Ukraine can measure up to Russia’s multifaceted trade relationship and no-strings-attached $15 billion loan package.

Here are some of Putin’s points — and responses from U.S.-based experts on Russia and Ukraine, who don’t dispute many of his facts but who do disagree with his conclusions.

1. Putin contends that a Ukrainian deal with the West would leave the country “an agricultural appendage” to the European Union, exporting wheat and other crops. He said Ukrainian industry needs Russia: “Ukraine sells a roughly equal amount of goods to Russia and the European Union countries, for a value of around $17 billion in each case if I recall correctly. But the types and amounts of particular goods sold on each market are different. Of the $17 billion worth of Ukrainian goods exported to the Russian market, machinery and equipment account for $7 billion or more, but these particular goods account for only around $2 billion of Ukrainian exports to the E.U., while agricultural goods and produce account for more than $5 billion.”

In a December session with the media at a trade conference in Moscow, Putin gave the example of Ukrainian-made helicopters: “We bought almost 100 percent of helicopter engines for our armed forces from Ukraine until now. Almost 100 percent.”

Putin said Russia pressed Ukraine for joint manufacturing, but couldn’t reach agreement.

“What is the result? We have started to build the second plant for the production of aircraft engines near St. Petersburg. The first one has already started production; it is manufacturing the engines. Where will the Ukrainian manufacturers turn to with what they produce at home? Are they going to export to Europe? I very much doubt it.”

Anders Aslund, a senior fellow at the Peterson Institute for International Economics who was an economic adviser to the governments of Russia and Ukraine during the 1990s, said that Ukraine does indeed export more manufactured goods to Russia. Ukrainian machinery makes up 40 percent of the country’s exports to Russia and only 10 percent of its exports to the European Union. Steel, he said, makes up another 20 percent of Ukraine’s exports to Russia.

But Aslund takes issue with Putin’s argument that Russia’s purchase of such goods is a sort of political favor, a function of what Putin in December called “our special relationship” with Ukraine.

Aslund said the manufactured goods that Ukraine sells to Russia include helicopters, aircraft engines and railway cars. The engines and other parts are largely made by Motor Sich, which signed a five-year deal to sell $1.2 billion worth of engines for Russian helicopters. Aslund said Russia could easily find other sources of railway cars but could not produce Antonov military transport planes or helicopters without Ukraine’s equipment.

“It’s true,” he said, that Ukraine would not find any other customers for its military aircraft exports. “But,” he added, “it is more important for Russia to buy them than for it is for Ukraine to sell them.” He said: “These are good helicopters and losing them would be a big blow to the Russian military-industrial complex.”

2. Putin has also said the conditions and economic reforms attached to the approximately $15 billion International Monetary Fund program under negotiation are too onerous. He said they would force many Ukrainian businesses to shut down without providing enough capital for a complete overhaul. Putin: “It is easy to say, yes, let’s shut down a plant for a while, that’s OK, then we’ll have everything like they do in Europe. But you need to survive until then. And many businesses will close down forever; they won’t survive. That’s the point.

“At the same time, is it possible to adopt these standards and trade rules? Yes, it is possible and it is necessary; they are good rules. But it takes time and investment. You need money, and not just 15 billion. You need hundreds of billions to modernize industrial enterprises.”

In a March 4 news conference, Putin added that signing a deal with the E.U. and adopting “European technical standards” would rupture Ukraine’s ties with Russia: “Enterprises will come to a standstill and unemployment will increase.”

Angela Stent, a professor at Georgetown University, former national intelligence officer for Russia and Eurasia, and author of a new book on U.S.-Russia relations titled The Limits of Partnership, said that Putin is posing a “false kind of choice.”

She said Ukraine could reach an economic reform and association agreement with the IMF and E.U. without halting exports to Russia. She said Ukraine would remain dependent on Russia “unless Ukraine does what the E.U. wants them to do, which actually takes a long time, and modernize their economy and start producing some goods that someone wants to have.”

Moreover, negotiations over the West’s loan package have been toughest when it comes to IMF demands that Ukraine end or scale back costly energy subsidies, especially those on natural gas. Extremely low rates for households — and extensive arrears among domestic Ukrainian consumers — are the main reasons Ukraine’s national gas company, Naftogaz, has been unable to keep up with its payments to Russia’s gas monopoly, Gazprom.

The IMF itself has said that the system of subsidies is unsustainable. In its report on Ukraine in December, the IMF said: “Large pension and wage increases, generous energy subsidies, and soccer cup spending led to a widening of the combined deficit of the general government and the state-owned company Naftogaz to 5 percent of GDP in 2012. In 2013, the combined government-Naftogaz deficit is projected to expand to 7 percent of GDP.”

The Russian president said in December that Moscow was not opposed to reforms in Ukraine, but they weren’t a condition of the $15 billion loan package Moscow approved shortly before Ukraine’s ousted president Viktor Yanukovych fled.

Stent said that Russia’s aid package does come with strings, just ones that aren’t written down. “The implicit string is, ‘you’re never going to join the E.U. and will join (the Eurasian economic) union,’ ” she said. “Putin isn’t in the business of giving charity.”

3. A back door? Putin also argued at a Jan. 28 news conference that if Ukraine signed accords giving it associate status in the E.U., it would become a “back door” for European companies seeking tariff-free access to the Russian market.

Russia has a free-trade agreement with Ukraine, but when it joined the World Trade Organization it was still able to maintain modest tariffs on imports of European goods. Putin said: “The question concerning Ukraine signing an agreement with E.U. nations is not about Ukraine’s sovereign choice but about the consequences it will have on the Russian economy if it is signed. When Russia acceded to the WTO, we had a long debate with our European colleagues on how to develop our automotive industry and the level of localization that must be achieved in the Russian market. If this is a kind of a back door into our market, then naturally, we need to understand it. This is not political maneuvering; this is about pragmatic interests.”

Aslund said, however, that European companies would have to set up shop in Ukraine and that 30 percent of any good would have to be made in Ukraine to qualify as a product of that country.

Anders said Russia was allowed to maintain certain tariffs averaging 10 percent after it joined the WTO. “If goods come from the E.U., it doesn’t matter if they go through Ukraine. It’s not a credible argument,” he said.

4. Putin said inequality is one reason Ukraine is in crisis.

In his March 4 news conference, he said: “The real problem is that none of the previous Ukrainian governments gave proper attention to people’s needs. Average per-capita (monthly) income in Russia, for example, is 29,700 rubles, but in Ukraine, if we convert it into rubles, it is 11,900 rubles, I think. The average pension in Russia is 10,700 rubles, but in Ukraine it is 5,500 rubles. In other words, there is a substantial difference in living standards. This was what the various governments should have been focusing on right from the start.”

Putin also pointed at inequality: “Accumulation of wealth and social stratification — problems that are also acute in this country — are much worse in Ukraine, radically worse.”

But what is Putin’s prescription? The IMF has insisted that the government of Ukraine cut ties and special natural gas pricing deals with oligarchs whose wealth contributes to inequality.

The fund also issued a report last week saying that worldwide inequality was correlated with slow growth. It recommended that countries use tax policy and spending policies to reduce disparities. Yet both Russia and Ukraine have flat tax rates, not the progressive structure in most countries that impose higher rates on the wealthy.

At one point, Putin summed up the situation. He said that political deadlock was hurting the well-being of ordinary people. He said: “You know, we have an expression: When the nobles fight, the servants suffer.”