Sunday, May 18, 2014

Michael Hudson: The New Cold War’s Ukraine Gambit

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is “The Bubble and Beyond.” This article is from a new book, Flashpoint in Ukraine, edited by Stephen Lendman. It is currently available from Clarity Press as an e-book, and soon to be printed.

Finance in today’s world has become war by non-military means. Its object is the same as that of military conquest: appropriation of land and basic infrastructure, and the rents that can be extracted as tribute. In today’s world this is taken mainly in the form of debt service and privatization. That is how neoliberalism works, subduing economies by indebting their governments and using unpayably high debts as a lever to pry away the public domain at distress prices.

It is what today’s New Cold War is all about. Backed by the IMF and European Central Bank (ECB) as knee-breakers in what has become in effect a financial extension of NATO, the aim is for U.S. and allied investors to appropriate the plums that kleptocrats have taken from the public domain of Russia, Ukraine and other post-Soviet economies in these countries, as well as whatever assets remain.

In a recent interview in The New York Review of Books, George Soros outlines what he thinks should be done for the Ukraine. It should “encourage its companies to improve their management by finding European partners.”[2]

This means that kleptocrats should sell major ownership shares in their companies to Westerners. This would give the West a stake in protecting them, pressuring their government to tax labor rather than the wealthy, and helping them cash out and keep their takings in London and New York to finance Western economies, not that of Ukraine.

The West’s Ideological Conquest of the Post-Soviet Economies

That is not how replacing Soviet communism with a free market was supposed to work out – at least, not for the Soviet side. Mikhail Gorbachev and his supporters hoped that ending the Cold War would enable Russia to dismantle the arms race whose costly military overhead prevented the Soviet Union from devoting resources to produce consumer goods and adequate housing. In addition to the peace dividend, the aim was to establish a price feedback system that would raise industrial productivity and living standards.

The West’s ideological victory – or more to the point, the neoliberal anti-labor, anti-government and pro-Wall Street game plan – was sealed at the Houston summit in July 1990. Russian Prime Minister Gorbachev and other Soviet leaders endorsed the World Bank/USAID plan for shock therapy, privatization, deindustrialization and a wipeout of domestic personal savings (characterized as an “overhang”) to start by impoverishing the population at large and vesting an overclass with the most unequal distribution of wealth in the Northern Hemisphere.

U.S. Cold War advisors urged Russia and other post-Soviet states to give hitherto public assets and property to individuals, preferably to plant managers and political insiders. The cover story was that it did not really matter who got them, because private ownership in itself would lead the new owners to re-organize production along the most profitable lines. Pinochet’s Chile was held out as a shining success story, and a right-wing Pinochetista movement started in Russia.

The Communist Party nomenklatura, Komsomol leaders such as Mikhail Khodorkovsky and Red Directors were excited by these neoliberal promises to turn over natural resources, real estate, infrastructure and factories to themselves. The sanctimonious pretense was that property has its own logic of self-interest, which serves the social good because wealth will trickle down to uplift the population at large. In practice the neoliberal “free market” turned out to be a euphemism for looting. Subsidized by U.S. support and imposed by Yeltsin’s presidential fiat (unconstitutionally, over the objections of the Duma), ownership of hitherto public investment and natural resources were given to managers who made their fortunes by selling their takings to Western investors.

Already before 1990 billions of dollars in roubles already were being siphoned off via Latvia (Grigory Loutchansky and Nordex played a major role), while co-op leaders KGB and army leaders already were creating proto-predatory financial structures. U.S. bankers, officials and academics went to Russia and other former Soviet republics to explain that the most practical path was to create joint-stock companies and sell shares to Western buyers to bid up the price. Western banks helped kleptocrats keep the proceeds from these sales abroad so that they didn’t have to reinvest it at home (or pay taxes). The tax burden was placed on labor and consumers, not on the windfall gains and natural resource rents, land rent or monopoly rent being siphoned off.

Instead of bringing about Western European or American-style industrial capitalism with their heavily subsidized technology and protected agriculture, the effect has been to de-industrialize Russia and other post-Soviet economies, except for East Germany and Poland. In effect, the former Soviet Union was colonized in the world’s largest resource grab since Europe’s conquest of the New World five centuries ago.

As in the other former Soviet republics, Ukraine embraced the neoliberal plan to make kleptocracy the final stage of Stalinism. As Mikhail Khodorkovsky described: “Decent people get out of the system, leaving ‘idiots and lowlife’ – great material for building up the machinery of state. And yet that is indeed our state.”[3]

Along these lines one Russian journalist excoriates Ukraine’s sequence of oligarch-politicians as gangsters:

Kuchma gave orders to kill the journalist Gongadze. Yanukovich, still the country’s only legally elected president, did a couple of stretches in the clink even in Soviet times – for snatching fur-hats in public toilets.

Former Ukraine Premier Lazarenko is now doing time in the U.S.A. for money laundering, fraud, and extortion. His business colleague Yulia Timoshenko, whose complicity in those crimes was proved beyond all reasonable doubt by U.S. investigators, fearing the same fate, sought immunity by moving into politics.

Timoshenko is the person whom ordinary people of Ukraine have called vorovka, feminine for thief, to her face. Indeed, the source of the billions this “engineer-economist” (her position in Soviet times) amassed in the ‘90s is perfectly obvious: pocketing the money for gas that came from Russia to Ukraine and Europe. Getting payment for the gas [sold by] Timoshenko’s corporation was always a wrangle, and at times impossible. She salted away her booty in European banks, often carrying bags of cash across the border, for which she was repeatedly arrested but wriggled out of jail sentences by suborning judges and such. Again, all this is on record. [4]/a>
These leaders have left Ukraine looking like a Northern Hemisphere Nigeria. Real wages plunged by more than 75 percent from their 1991 level wages already by 1998 and have stagnated ever since.[5]

 This “cheap labor” makes Ukraine appealing to European investors, who now are making their own move to obtain what Ukraine’s oligarchs have grabitized. The West has made it clear that it will help these individuals convert their takings into cash and move it safely into Western banks, luxury properties and other nouveau riches assets.

The Coup Seeks to break up Ukraine, Libya- or Iraq-style

From a military vantage point, the New Cold War aims to prevent revenue from these privatized assets from being used to rebuild, re-industrialize, and hence potentially to re-militarize the Russian and Near Abroad economies. This is why U.S. strategists have moved to pry Ukraine out of the Russian orbit. The dream is to achieve the Cold War’s coup de grace along the lines outlined by Zbigniew Brzezinski in his 1997 Grand Chessboard: “Without Ukraine, Russia ceases to be a Eurasian empire.” The aim is to break as much of Ukraine as possible out of the Russian orbit and to draw it into the West, and into NATO itself.

This has been the plan ever since President Clinton broke the disarmament agreement made by George H.W. Bush with Gorbachev and extend NATO to the former Warsaw Pact members, starting with the Baltics. The logical extension of this tactic is to promote separatist movements in Russia itself, much as U.S. strategists are seeking to stir the pot of ethnic resentment in China, and as they have done in Libya, Iraq and Syria.

They found their most recent opening when Ukrainians mounted a mass demonstration against the rampant political and economic corruption built in from the outset of independence. The hoped-for aid from Europe turned out to be only to subsidize the kleptocracy, not to promote meaningful democracy. President Yanukovich reacted to Eurozone demands for yet more austerity by choosing Russia’s far better offer. Meanwhile, “Occupy Maidan” was filling up with middle-age demonstrators, women, students, Russian-speakers, nationalists and others whose common aim was to end the thieving. They wanted reforms, and were protesting against the oligarchs, not only Yanukovich but also Timoshenko and the others.

But the Obama Administration seems to be channeling Dick Cheney these days. Its Assistant Secretary of State for European and Eurasian Affairs was the neocon Victoria Nuland, who wanted Arseniy Yatsenyuk to be in charge, an economist willing to turn the Ukrainian economy away from the Russian orbit toward the Eurozone. To accelerate matters instead of waiting for the scheduled autumn elections, a preemptive coup. U.S.-backed separatists mounted a coup, bringing in right-wing neo-Nazi groups and foreign snipers to escalate a violent confrontation on February 20.

Public relations spinning made it difficult to understand who was behind the snipers firing on demonstrators and police. An public campaign by the coup leaders and U.S. spokesmen accused Yanukovich’s police of doing the firing. But a TV investigative team sent from Germany’s ARD confirmed what had been trickling into the news contradicting the American version of events. The April 10 report found that contrary to the claims of the coup leaders in Kiev, the demonstrators were hit from behind by snipers shooting from the roof of “their own headquarters, the Hotel Ukraina.”[6]
One doctor found that all the bullets taken from bodies he examined were identical, suggesting a single group of snipers. The German team quoted family members about how the coup’s new Attorney General, Oleg Machnitzki, has stonewalled them with regard to the details of the death or injury of their relatives. He is a member of the right-wing Swoboda party, appointed to investigate snipers who seem to have come from his own group.

The ARD program quotes a senior member of the new government’s Investigative Committee saying that “The results of my investigations which I have found, simply do not match up with what the prosecutor says” in blaming Yanukovich. The program concluded: “the fact that a representative of the nationalist Svoboda Party as Attorney General quite obviously hindered the elucidation of the Kiev massacre, creates a bad image of the new transitional government – and thus also of all those western governments that support the new rulers in Kiev.”

In a travesty of reality, White House spokesmen portrayed the U.S.-orchestrated violence as representing a spontaneous nationalistic anti-Russian spirit of the Maidan demonstrators, as if they were supporting pro-EU and hence anti-Russian passions. But what evidently happened is that the coup leaders sought to jump in front of the anti-corruption parade by creating chaos and then restore “order” by removing politicians from the Eastern Russian-speaking region.

Yanukovich reached an agreement with the protest leaders to step down and appoint an interim government, but his palatial home was sacked and he fled for safety to Russia. The coup leaders (calling themselves the “transitional government”) fanned regional tensions by banning the use of Russian on television and other public places, and even began to cut off water to Crimea, while replacing local Eastern Ukraine officials with “Right Sector” apparatchiks in an attempt to force the region’s oligarchs and factory owners to turn away from their main markets in Russia and re-orient the economy toward Europe.

Matters have not worked out as planned. The U.S.-backed destabilization moves were so blatant that they prompted former President Jimmy ‘to warn that: “The rest of the world, almost unanimously, looks at America as the No. 1 warmonger. That we revert to armed conflict almost at the drop of a hat – and quite often it’s not only desired by the leaders of our country, but it’s also supported by the people of America.”[7]

Commenting on the anarchy into which the U.S.-backed coup has plunged Ukraine, Singapore’s Prime Minister Lee Hsien Loong summed up what so often has been the result of foreign uprisings backed by U.S. promises.

“I think you should have thought of that before encouraging the demonstrators on the Maidan. I think some people didn’t think through all the consequences. … can you take responsibility for the consequences and when it comes to grief, will you be there? You can’t be there, you’ve got so many other interests to protect.”[8]

Having encouraged the Ukrainian coup by holding out a quixotic dream of joining the EU and even NATO, the United States really has no means to follow through. It is in many ways a reply of the Hungarian 1956 uprising and that of the Czechs in 1968.

The effect is to make the United States look like what Mao Tse Tung called it: a Paper Tiger. Having waved a big stick, the United States and its NATO satellites are now leaving Ukraine broke. The aim of prying it out of the Russian orbit has left the country heavily in debt to Russia for arrears in payments for gas (now no longer subsidized) and in danger of losing Russia as its major market for industrial exports. To cap matters, Western separatists are talking of blowing up the pipelines carrying Russian gas to Germany and other European consumers, to reduce Russia’s trade balance and thus presumably deter its ability to spend on the military.

To support President Obama’s assurances that the US-backed side was not conducting the terrorism, the U.S. news media have blacked out the German investigation and similar testimony. Obama’s claims and those of Samantha Power at the United Nations may go down in history as his analogue to George W. Bush’s fictitious “weapons of mass destruction” in Iraq.

As Warren Buffett has quipped, finance and debt pyramiding are weapons of mass destruction. They go hand in hand with mass deception. Opposition to the U.S.-backed coup and its attempt to impose Eurozone austerity on Ukraine is not necessarily pro-Russian, but simply opposed to plans to tear the country away from its major export market and fuel. Of all the post-Soviet states, Ukraine’s economy is most closely interlocked with that of Russia, even with its military production. Disrupting these linkages can only be mass unemployment and austerity. The aim of a Ukrainian anti-Russian turn thus is not to help Ukraine, but to use that unfortunate country as a pawn in the New Cold War.

America’s Ukraine Adventure as a New Cold War Gambit

Why would an American president take so great a risk with his reputation, if not to make a major geopolitical move for a showdown with Russia? The $5 billion of U.S. support (to which Victoria alluded in her notorious phone remarks explaining U.S. support for the coup) has been spent to fuel a movement dreaming of joining the EU. But the drive to turn Russia’s naval base at Sevastopol and into a NATO Black Sea port was stymied by the coup leaders’ over-reaching drive to ban the Russian language in public venues. A majority of Crimeans sought protection by being absorbed into Russia, which Putin hardly could have refused.

Failing to pry away the entire Ukraine, Plan B is to break it into parts, much as U.S. strategists are fomenting Uighur and Tibetan separatism in China. Dismemberment usually is achieved most easily in today’s world under the force majeur of IMF “stabilization” such as tore Yugoslavia apart (an early venture of Jeffrey Sachs). The aim is to break away as much of Ukraine as possible from the Russian orbit, and to do so in ways designed to hurt Russia the most. This entails refusal to pay for gas arrears, and stopping Ukrainian military exports to Russia. IMF and EU-sponsored austerity would lead to deeper dependency on Western Europe for credit that a bankrupt Ukraine, driven into even deeper unemployment, could not pay. The IMF-EU then would insist that its government must pay Western creditors by proceeds from privatization sell-offs. The problem with this is that most Ukrainian debt is owed to Russia – not only for gas but also for other Russian claims including a reimbursement of Russian prepayment for its Crimean naval base.

The Ukrainian coup also aims to impose on Russia the kind of military burden that originally led its leaders to undertake their rapprochement with the West. The idea is to drain its budget militarily by heating up the New Cold War along its borders, leaving less to invest in real economic growth. And if sabre rattling over the Ukraine can taunt Russia into over-reacting, this will revive fears of the Russian bear in the Baltics and other neighboring states, fanning their ethnic anti-Russian tensions. This will help keep their elections from being fought over neoliberal austerity and the pro-oligarchy, anti-labor tax policies put in place since 1991.

 Like most national security advisors, Brzezinski depicted Russian resistance to U.S. geopolitical strategy as a threat to re-establish the kind of powerful imperial state that has become economically impossible in today’s world, except for the United States alone. The U.S. aim is to become unilateral global military tsar (or mother-in-law, or whatever metaphor you might want to use), using the IMF, ECB and EU bureaucracy, NATO, the covert operations of America’s National Endowment for Oligarchy Democracy (NED) and Serfdom Freedom House to block foreign resistance to smash-and-grab austerity policy and privatization selloffs.

This perpetual U.S. national security nightmare suspects any industrial power of being potentially military in character. Hence, any nation with a potential to pursue an economic alternative to austerity is a potential enemy.[9]

To military game-players, China and Russia appear as the two great current and present dangers, given their industrialization, control of their own resources and most of all, financial autonomy from the dollar.

Putin made it clear that Russia would be satisfied to see Ukraine as a federalized buffer state, with regional autonomy for each of its ethnic regions. But U.S. strategists fear that this would enable the eastern region, whose export industry is tied to Russian markets, to resist the Eurozone austerity that would force Ukraine to borrow, default, and then pay back by selling off its public domain, banks, farmland, basic infrastructure and industry to Western investors.

The U.S. problem is how to convince Ukraine and other post-Soviet economies to submit to an IMF-EU financial order imposing chronic austerity. The trick is to make Russia look like the major danger, not Western financial austerity and the kleptocracy it supports. When countries waver from following this policy, the fallback game is to make them fear the alternative – a combination of Russian menace and IMF-NATO punishment for not submitting.

In setting the stage for this New Cold War global policy, former U.S. Ambassador to Russia Michael McFaul demonizes Putin. Until his election, “Russia was gradually joining the international order,”[10] by which McFaul means that it was on its way to becoming a U.S. economic colony, with its stock market leading global indexes and making fortunes for Wall Street investors. McFaul goes on to accuse Putin of “nationalistic resurgence,” by which he means protecting Russia against U.S. smash-and-grab attempts to gain control of its raw materials when he stopped Khodorkovsky’s sale of Yukos Oil to Exxon and its partners.

McFaul admitted in another interview: “The reset’s been over for a long time. … When President Medvedev was there, we got a lot of things done that made Americans safer and more prosperous …The American national interest, that’s what the reset was about. The reset was never about better relations with Russia. Outcomes were what mattered.”[11]

Putin was demonized once Russia stopped saying “Yes.”

McFaul must be aware of Putin’s own explanation for ending the U.S. dream: Contrary to George H.W. Bush’s assurances, President Clinton expanded NATO into the former Warsaw Pact members of the old Soviet Union. What ended the “reset” was Obama’s violation of his promise to enforce a no-fly zone in Libya, only to have NATO bomb Libya apart. As Putin explained in a speech before the Duma:

This disregard to rule of law was evident in Yugoslavia in 1999, when NATO bombed the country without a UN Security Council mandate …. There was Afghanistan, Iraq and the perversion of the UNSC resolution on Libya, when instead of imposing a no-fly zone NATO bombed the country into submission. …

“They were cheating us once more, took decisions behind our back, presented us with a fait accompli,” he said, adding that the pattern is identical to that which accompanied NATO’s expansion to the east, the deployment of an anti-ballistic missile system, visa restrictions and numerous other issues.

“They are constantly trying to corner us in retaliation for our having an independent position, for defending it, for calling things by their names and not being hypocritical,” Putin accused. “Everything has its limits, and in Ukraine our western partners crossed the red line.”[12]

Foreign Minister Lavrov explained that contrary to international law and U.S. promises,
western states, despite their repeated assurances to the contrary, have carried out successive waves of Nato enlargement, moved the alliance’s military infrastructure eastward and begun to implement antimissile defence plans. … Attempts by those who staged the secession of Kosovo from Serbia and of Mayotte from the Comoros to question the free will of Crimeans cannot be viewed as anything but a flagrant display of double standards. No less troubling is the pretense of not noticing that the main danger for the future of Ukraine is the spread of chaos by extremists and neo-Nazis.[13]
Putin pointed out that “our partners in Europe recognize the legitimacy of the current Kiev authorities, but are doing nothing in order to support Ukraine; not a single dollar, not a single euro.”[14]

It was Russia that was continuing “to give it economic support and subsidize Ukraine’s economy with hundreds of millions and billions of dollars for now. This situation, of course, can’t continue eternally.” In fact, Gazprom cancelled two major gas discounts for Ukraine, normalizing the price from $268 to $485 per thousand cubic meters starting as of April 1.

The Gas dimension and Ukraine’s Debts to Russia

The usual Western financial strategy for taking an economy’s assets is to subject it to austerity and then foreclose and privatize. The problem is that most Ukrainian debt is owed to Russia. Ukraine has not been paying for its gas this year. Prime Minister Medvedev pointed out that, as President, he “signed the Kharkov Agreement with President Yanukovych. Under the terms of this agreement, we extended our use of the naval base [in Sevastopol] for a long period – 25 years,” paying $11 billion in advance. So on balance, Ukraine owes Russia $16 billion over and above the gas debt.
There is a principle in international law, in accordance with which an agreement remains in force only so long as the circumstances that gave rise to it prevail – clausula rebus sic stantibus … I think it is perfectly fair to raise the question of having Ukraine’s budget compensate these funds. This could be done through the courts, in accordance with the revoked agreement’s terms. Of course, these are tough measures, but at the same time, the agreement no longer has effect, but the money we paid is real, and our Ukrainian partners must understand that nobody hands over money just like that, for nothing.
At the same time, I remind you that Ukraine’s debt, public and corporate, to Russia is quite large as it is. This includes the $3-billion loan that we gave them recently in accordance with our agreement to buy Eurobonds, and the nearly $2 billion that Ukraine owes in accumulated debt to Gazprom. All in all then, Ukraine’s total debt comes to a very large sum.
VLADIMIR PUTIN: 11 billion plus 5 billion?[15]
Most pressing, of course, is Ukraine’s gas bill. Without paying, it may see the gas turned off. And if Ukraine simply siphons off gas being transmitted to Europe, a gas turn-off would threaten about 15 percent of Europe’s gas supply.[16]

Yet this seems to be what US-NATO strategy is trying to bring about. If Russia stops sending gas to Europe through Ukraine and does not get paid, the ruble could weaken, spurring capital flight to the West and leaving Russia with less foreign exchange available to rebuild its industrial economy.
Interim Prime Minister Yatsenyuk claimed that the new price for gas was an act of “aggression” and refused to pay anything at all. But he saw no such aggression in the IMF’s demand to remove gas subsidies for Ukrainians. The rise in price evidently is to be blamed on Russia withdrawing its discount, not on revoking the domestic gas subsidy. The government’s insolvency likewise will be blamed on Russian demands for payment of the debts falling due. To counter this double standard of blame, President Putin pointed out that “the lowest prices were in effect at the beginning of this year and Ukrainian partners stopped paying even at those prices. … April 7 marked a yet another date for payments under the gas contract for March 2014 and they didn’t pay us a single dollar or ruble of the $540 million they were supposed to pay.”[17]

When Ukraine failed to pay the $2.2 billion payment due on April 7 for the March gas, Gazprom’s CEO Alexei Miller pointed out that under the terms of its contract this ended the special discount Ukraine had been receiving. It had been “given on the condition that Ukraine would pay all its gas debts and pay 100% for the current deliveries, and it was clearly indicated that if this did not happen, the discount would be annulled in the second quarter of 2014.”[18]

Prime Minister Medvedev reiterated that no future shipments would be made without prepayment,[19] and President Putin wrote to European leaders:

Instead of consultations, we hear appeals to lower contractual prices on Russian natural gas – prices which are allegedly of a “political” nature. One gets the impression that the European partners want to unilaterally blame Russia for the consequences of Ukraine’s economic crisis.

Right from day one of Ukraine’s existence as an independent state, Russia has supported the stability of the Ukrainian economy by supplying it with natural gas at cut-rate prices. In January 2009, with the participation of the then-premier Yulia Tymoshenko, a purchase-and-sale contract on supplying natural gas for the period of 2009-2019 was signed. Ukraine, right up till August 2013, made regular payments for the natural gas in accordance with that formula.

However, the fact that after signing that contract, Russia granted Ukraine a whole string of unprecedented privileges and discounts on the price of natural gas, is quite another matter. This applies to the discount stemming from the 2010 Kharkiv Agreement, which was provided as advance payment for the future lease payments for the presence of the (Russian) Black Sea Fleet after 2017. This also refers to discounts on the prices for natural gas purchased by Ukraine’s chemical companies. This also concerns the discount granted in December 2013 for the duration of three months due to the critical state of Ukraine’s economy. Beginning with 2009, the total sum of these discounts stands at 17 billion US dollars. To this, we should add another 18.4 billion US dollars incurred by the Ukrainian side as a minimal take-or-pay fine. In other words, only the volume of natural gas will be delivered to Ukraine as was paid for one month in advance of delivery.
Undoubtedly, this is an extreme measure. We fully realize that this increases the risk of siphoning off natural gas passing through Ukraine’s territory and heading to European consumers.[20]

Putin might also have mentioned that when Russia lent Ukraine $3 billion in 2013 to support its currency by buying Eurobonds, it included a clause in the contract “that stipulates that the total volume of Ukrainian state-guaranteed debt cannot exceed 60% of its annual GDP. If that threshold is breached, Russia can legally demand repayments on an accelerated schedule,” forcing Ukraine to default.[21]

This prospect seems likely in view of the Maiden coup’s intention to break Ukraine away from the Russian orbit, disrupting its major export market.

Ukraine’s Fragile Economic Structure and Balance of Payments


Reflecting the geographic specialization of labor established in Soviet times, Ukraine is still a major exporter of military equipment to Russia. But Kiev’s first deputy prime minister, Vitaliy Yarema, threatened to halt all arms supplies to Russia, stating that “Manufacturing products for Russia that will later be aimed against us would be complete insanity.” One report calculates that the range of exports includes “the engines that power most Russian combat helicopters; about half of the air-to-air missiles deployed on Russian fighter planes; and a range of engines used by Russian aircraft and naval vessels. The state-owned Antonov works in Kiev makes a famous range of transport aircraft, including the modern AN-70. The Russian Air Force was to receive 60 of the sleek new short-takeoff-and-landing aircraft, which now it may have to do without.”[22]

Ukraine’s oligarchs also sell steel and other industrial products to Russia. In the US-NATO plan, these factories would be sold to European investors to produce for Western markets. But Eurozone economies are shrinking as a result of their post-2008 austerity imposed to squeeze out debt service for foreign creditors. So the anti-Russian stoppage of export sales threatens to plunge the hryvnia’s exchange rate even further than the 35% decline against the dollar in the first three months of 2014, making it already the world’s worst performing currency this year. As Mark Adomanis at Forbes summed up the economic costs of the coup’s anti-Russian stance: “Russia has always had the ability to wreck economic havoc on Ukraine, and this should have made the West a lot more cautious about the Eastern Partnership and the general effort to incorporate Ukraine into European institutions. In retrospect the entire effort to sign the association agreement appears to have been a rather reckless gamble which no one knew the stakes of.” To avoid a drastic collapse that would plunge the economy into deep depression, the West would have to provide much “more generous (and politically risky) packages of financial assistance.” Instead, all the IMF, Eurozone and United States have done is to egg Ukraine down the road toward financial catastrophe.[23]

Blaming Russia for Ukraine’s Coming Austerity and New Privatization Sell-offs

The problem confronting US-NATO strategists is how to persuade Ukrainian voters to support the neoliberal austerity model of deep unemployment that will force labor to emigrate westward in a wave of “Ukrainian plumbers.” Fanning the flames of resentment from the years of Soviet domination is a tactic that has worked well in the Baltics. Latvia has just joined the Eurozone (following Estonia’s lead) and resentment of the World War II and postwar Russian dominance is so strong that the Russian language is limited to 40% of instruction in secondary schools and effectively banned from public universities (with some small exceptions such as Russian literature).

The Maidan coup leaders are playing a similar anti-Russian card to focus the coming election on past sufferings instead of on how the coming IMF-dictated austerity will further impoverish Ukraine’s economy.

A decade ago Russian President Boris Yeltsin went to Latvia and tried to divert this attitude by saying Russians themselves also were exploited by Stalinist bureaucracy. It didn’t have much effect. The trauma of Soviet domination was so strong that Russian-speakers are treated as second-class citizens (many of the older ones without even being granted citizenship). The effect in Ukraine can be imagined by thinking what would happen if Canada were to ban the use of French language in public documents, universities and the mass media. Such a move certainly would prompt Montreal and Quebec to secede. Likewise if New York banned the use of Spanish and encouraged groups expressing a desire to start killing ethnic Hispanics.

For neoliberal US-IMF-NATO strategists, the advantage of fanning ethnic rivalries is to keep focusing Baltic elections on anti-Soviet memories instead of the disaster of neoliberal austerity programs. Playing off ethnic groups against each other has helped lock the Baltics into a pro-EU, pro-austerity program. Ukraine’s coup leaders have been even harsher in closing TV stations that broadcast in Russian, arrested and beaten up leaders opposed to the Maidan coup, and deemed opposition to IMF-EU austerity criminal and “separatist.” All this has led Ukraine’s Russian-speaking eastern provinces to turn to Russia for protection. Foreign Minister Sergei Lavrov claims that the United States is accusing Russia of doing what it itself is guilty of. The Western coup leaders are responsible for breaking up the nation, not Russia. “I will leave these claims on the conscience of our American partners. One shouldn’t lay one’s own fault at somebody else’s door.”[24]
As one report has summarized the coup leaders’ behavior:

Over the last week and a half the Ukrainian government has tried to arrest every protest leader it can find and charge him with being a separatist. Conviction carries a jail sentence of 5 to 8 years.
The banks here, most notably Privat Bank which is owned by the oligarch Kolomoyskyi, are limiting and freezing the accounts of people throughout the south-east region. For the last month, persons working in the coal and manufacturing industries have been told that if they joined the protests, or even spoke about them on the job, they would be fired. And, for the last two weeks, 30% of the workers’ pay has been deducted to support the new National Guard, which is composed mostly of Pravy Sector fighters who have been threatening the population of the region.

Yulia Tymoshenko was quoted last week as saying, “It doesn’t matter who wins the presidential election, we all win. We all hate Russia!” By “Russia,” she also means the people of south-east Ukraine who won’t accept being ruled by an ultra-nationalist government.[25]

The aim seems to be to goad Russia to act intemperately and with brutality, perhaps even to make a serious military move against which NATO can deliver a devastating response from the ships it has moved into the Black Sea. A Russian incursion would support NATO’s claim that Europe needs its protection, and also help keep Ukrainian and Baltic voters more fearful of Russia than of the IMF and ECB. The irony is that NATO was supposed to protect Europe from the threat of military conflict with Russia. Its adventurism at the hands of U.S. neocons now threatens to put Europe at risk, while devastating Ukraine’s economy.

What Blocks Russia from Offering an Economic Alternative

The Eurozone is turning into an economic dead zone, but neither Russia nor major European parties are proposing to change the regressive rent-extracting tax and financial system that is imposing austerity and enables kleptocrats to bleed the post-Soviet economies, and toward which the West itself is moving.

As noted above, one problem blocking both Russian and Eurozone opponents of financial austerity from presenting such an alternative is the U.S. ethnic divide and conquer strategy of playing to distract populations from debating the real economic issues at hand. Another deterrence is the Thatcherite claim that There Is No Alternative.

Of course there is an alternative. But without going back to the events of 1991-94 and rejecting the path that Russia took under Yeltsin at the hands of the notorious Harvard Institute for International Development (HIID), the US Agency of International Development (AID) and World Bank planners, all that President Putin can do is use personal persuasion. His attempt to stop the bleeding has led the U.S. press to depict him as a tsar, not as a liberator from World Bank-Harvard neoliberalism. When he sought to rebuild Russia, he was accused of becoming an autocrat blocking “free markets,” the American euphemism for the kleptocracy that has crippled Russia’s ability to steer its development in the way that the United States and Western Europe industrial economies have done.

Given the political alliances in which Ukrainian politics are controlled by an oligarchy, what can Vladimir Putin offer the country? What is needed is a full-blown alternative to neoliberal tax and financial policy. Yanukovich rejected the IMF-EU “aid” with its destructive “conditionalities” of fiscal austerity and financial deflation, but all that Russia can offer Ukraine are subsidies for its politically gerrymandered oligarchy. In Russia, Putin used “jawboning” to urge the oligarchs and them to invest their takings at home to rebuild Russian industry. But without formulating an alternative to the financial and tax system, and indeed an alternative economic model, Russia can’t offer a better economic system to its Near Abroad.

The cure for a rent-seeking oligarchy is to tax away rent seeking and de-privatize public monopolies. What Ukraine’s kleptocrats have taken (and what foreign investors seek to extract) can be recovered by promoting classical progressive policies taxing land and natural resources, regulating monopolies and providing public infrastructure investment, including a public option for banking and other basic services. That is what drove the U.S. and Western European industrial takeoffs, after all.

It involved a long political conflict with the post-feudal landlord class and financiers, and a similar fight must be waged today. By the time World War I broke out a century ago, social democracy was winning the battle and socialism appeared on the horizon. But today that battle is not even being fought and the economic tools to guide reform – the concept of economic rent as unearned income, and the ability of central banks to create credit in the same way that commercial banks do – have all but disappeared from public discussion.

Russia shies from offering a solution along these lines, because that is labeled “socialist.” Without enacting at least the classical criteria of a free market – a land tax, a natural resource and windfall gains tax on “unexplained enrichment, it is hardly in a position to promote these policies in the Ukraine or Baltics.

Neither Russia nor other post-Soviet republics in 1990 understood what finance capitalism and rent seeking are all about – except for the grabitizers advised by Western interests, of course. When it came to helping rebuild the Soviet economies after they sought Western support in integrating after 1990, the World Bank and U.S. neoliberals promoted a neofeudal political and fiscal counter-revolution against Progressive Era reforms. The Cold War thus was ended by a lethal rapprochement between Western financial interests and local political insiders and gangs.

It was the antithesis of political and economic democracy. Yet this is what still binds today’s post-Soviet oligarchy to the West, supported by Wall Street, the City of London and German business, hoping to take the privatization windfall in partnership with the kleptocrats. Since 1991 Russia has suffered an average reported $25 billion in capital flight annually, amounting to more than half a trillion dollars over the past two decades. This is revenue that might have been used to modernize its economy and raise living standards. It was deterred by the failure to recognize that the precepts of neoliberalism are the opposite of what made the United States and Western Europe prosperous industrial economies.

At the very least, Ukraine and other post-Soviet economies need modern versions of Teddy Roosevelt, FDR and preferably a Eugene Debs. Economically, they need a Thorstein Veblen, John Maynard Keynes and Hyman Minsky. Such voices existed in Russia in 1991, including Dmitri Lvov at the Russian Academy of Sciences. Many non-neoliberal foreign economists urged alternatives to the World Bank-Harvard promoters of kleptocracy. But instead of creating a system of public checks and balances, the Soviet Union refrained from taxing the economic rents it was privatizing. The result was a travesty of free markets. Instead of the ideas of Adam Smith, John Stuart Mill and other classical economists urging markets free from unearned income, economic rent and predatory pricing, the West pretended that the antidote to Soviet bureaucracy would be neo-feudal economies free for enclosures of the public domain, rent seeking and predatory pricing.

Do Russia, Ukraine and Other Post-Soviet Economies Have an Alternative to Neoliberal Austerity?

In 1991 the United States and Western Europe did the opposite of helping the Soviet Union create a mixed economy, subsidize industry with a progressive tax system and keep natural resource rent, land rent and financial gains in the public domain rather than being privatized. What the West wanted was to extract these rents for its own investors. Russia was turned into an exporter of oil and gas, metals and other raw materials, while weakening its industrial ability to withstand US-NATO military encirclement.

What is needed today to restore natural resource wealth and post-Soviet land and infrastructure from oligarchs sending their takings abroad is a tax code of land and resource rents for starters. What has been relinquished can be recovered to finance public investment to rebuild their economies. This was the essence of the successful Western model, which saw industrial capitalism evolve toward socialism. It is the antithesis of neoliberalism.

Given the hesitancy of wealthy individuals to give up what they have taken, governments probably need to leave them with the wealth they have taken abroad. But new bleeding can be stopped by a rent tax to recapture the pre-1990 economic patrimony that has been relinquished to the oligarchs and, via them, to foreign investors. The economic rent that Wall Street envisions being paid out as dividends will be taxed away, legally under international law, by a tax code distinguishing economic rent from profits on new manmade capital investment and production.

Neoliberals will denounce this policy as if it signals a return to Soviet Stalinism, as if this ever were Marxist. To neoliberals, kleptocracy and neofeudalism are simply the final stage of socialism. But their present system is more an ideological coup d’état, imposed on the former Soviet Union in a moment when disillusion with bureaucratic collectivism was at its peak.

Reading the Communist Manifesto should dispel any thought that Russians had much familiarity with Marxist economics, or for that matter with the classical political economy out of which Marxism emerged. Marx and Engels described the positive achievement of capitalism as bringing bourgeois Europe out of feudal landlordism and inherited wealth. The ghost of Marx might have spoken to Gorbachev, advising him to pave the ground for industrial capitalism by enacting at least the reforms that Europe’s 1848 Revolution advocated: taxing economic rent, followed by instituting consumer protection laws, establishing labor unions, and public banking to take the power of fiat credit creation away from foreign creditors.

The political problem for neoliberalism is how to deter voters from acting in their self-interest along these lines. In Latvia and Ireland voters have submitted to the anti-labor, anti-government policies of global finance. Neoliberals have come to see that they can win at the polls by imposing even more austerity. We are dealing with something like the Stockholm syndrome, most typically when kidnapped victims look to their kidnappers for protection. Poverty begets fear, prompting the weak to vote out of servility to the rich – or against each other in ethnic rivalries. The wider the polarization, the more the poor victims rely on their exploiters, hoping to survive by becoming abject clients in a predatory patronage system.

This means that the further economic inequality widens and the more a population is ground down into poverty and debt, the more the weak identify their interests with those of their oppressors. They believe that their best hope is that somehow the rich will reciprocate by accepting them in a patronage system. The effect is to demoralize populations and make them so fearful that they feel even more dependent on their oppressors, whom they hope will see how obediently they are behaving and will treat them better.

The past century has seen a counter-revolution against the Enlightenment, classical economics and its culmination in socialist hopes to steer industrial capitalism to evolve into democratic socialism. What is occurring today is a self-destructive financial dynamic of impoverishment, dependency and breakdown in many ways like what happened when Rome’s creditor oligarchy plunged the Empire into the Dark Age two thousand years ago. The post-feudal real estate and financial oligarchies, the landed aristocracies of Europe and the great banking families and American trust builders have made a comeback, and the New Cold War is intended to lock in their victory. Ukraine is simply the latest battlefield, and battlefields end up devastated.


[1] Michael Hudson is Distinguished Research Professor of Economics at UMKC, and former Professor of Economics and Director of Economic Research at the Latvia Graduate School of Law. His most recent articles on the post-Soviet economies are “Stockholm Syndrome in the Baltics: Latvia’s neoliberal war against labor and industry,” in Jeffrey Sommers and Charles Woolfson, eds., The Contradictions of Austerity: The Socio-Economic Costs of the Neoliberal Baltic Model (Routledge 2014), pp. 44-63, and “How Neoliberal Tax and Financial Policy Impoverishes Russia – Needlessly,” Mir Peremen (The World of Transformations), 2012 (3):49-64 (in Russian). МИР ПЕРЕМЕН 3/2012 (ISSN 2073-3038)
Неолиберальная налоговая и финансовая политика приводит к обнищанию России, 49-64.
[2] “The Future of Europe: From Iran to Ukraine: An Interview with George Soros,” The New York Review of Books, April 24, 2014, p. 69.
[3] Mikhail Khodorkovsky, My Fellow Prisoners (2014), reviewed by John Lloyd, Financial Times, April 12, 2014.
[4] Sergei Roy, “Ukraine: Triumph, Tragedy, or Farce?” Johnson’s Russia List, April 5, 2014.
[5] Manlio Dinucci, “Ukraine, IMF “Shock Treatment” and Economic Warfare,” Global Research, March 21, 2014, citing IMF statistics.
[6] “Fatal shootings in Kiev: Who is responsible for the carnage from Maidan,” ARD German television, April 10, 2014, translated on Johnson’s Russia List, April 14, 2014, #1. The German investigators confirmed from journalists with the protestors that “the hotel on the morning of February 20 was firmly in the hands of the opposition.”
[7] David Daley, “‘America as the No. 1 warmonger’: President Jimmy Carter talks to Salon about race, cable news, ‘slut-shaming’ and more,” Salon, April 10, 2014.
[8] Gideon Rachman, “Lunch with the FT: Lee Hsien Loong,” Financial Times, April 12, 2014.
[9] The classic statement is by Deputy Secretary of Defense Paul Wolfowitz: “Our first objective is to prevent the re-emergence of a new rival, either on the territory of the former Soviet Union or elsewhere, that poses a threat on the order of that posed formerly by the Soviet Union. This is a dominant consideration underlying the new regional defense strategy and requires that we endeavor to prevent any hostile power from dominating a region whose resources would, under consolidated control, be sufficient to generate global power.”, quoting from a Department of Defense planning document, “Prevent the Re-Emergence of a New Rival,” February 1992, in P. E. Taylor, “U.S. Strategy Plan Calls for Insuring No Rivals Develop. A One-Superpower World,” The New York Times, March 8, 1992.
[10] Michael A. McFaul, “Confronting Putin’s Russia,” New York Times op-ed, March 24, 2014.
[11] Patt Morrison, “Michael McFaul — an eye on Russia,” Los Angeles Times, March 26, 2014.
[12] “Putin: Crimea similar to Kosovo, West is rewriting its own rule book,”, March 18, 2014, from Johnson’s Russia List, March 18, 2014 #4. See also “Address by President of the Russian Federation,”, March 18, 2014. Complete text in Russian.
[13] Sergei Lavrov, “It’s not Russia that is destabilising Ukraine,” The Guardian (UK), April 8, 2014.
[15] “Meeting with permanent members of the Security Council,”, March 21, 2014 (from Johnson’s Russia List).
[16] Daria Marchak and Jake Rudnitsky, “Ukraine Rejects Gas Price as Putin Waits on Prepayment,” Bloomberg, April 10, 2014 (Johnson’s Russia List, April 10, 2014, #42). Putin said Europe cannot refuse the delivery of Russian gas without harming its own economic interests. “European countries take around 34%-35% of their gas balances from Russia. Can they stop purchasing Russian gas? In my view, it’s impossible,” Putin said. (“Putin’s Q&A Session 2014,” Johnson’s Russia List, April 17, 2013, #7.)
[17] “Putin says situation with Ukraine’s non-payments for gas absolutely unacceptable,” NOVO-OGAREVO, April 11. /ITAR-TASS/ (Johnson’s Russia List, April 11, 2014 #4).
[19] Jack Farchy, Roman Olearchyk and Andrew Jack, “Kiev faces Russian gas threat,” Financial Times, April 10, 2014.
[20] President Vladimir Putin’s letter to leaders of European countries. Full text, ITAR-TASS, April 10, 2014 (Johnson’s Russia List). At his April 17 annual question-and-answer session, Putin moderated his stance and “said Moscow is ready to withstand the situation on Ukraine’s payment for Russian gas for another month, but then will switch to upfront payments for gas, amid Ukraine’s inability to pay its debts. ‘We are ready to tolerate a bit more, we’ll put up with it another month. If over the next month there are no payments, then we will transfer over to the so-called prepayment plan in accordance with the contract,’ Putin said.” Johnson’s Russia List, April 17, 2013, #7: “Putin’s Q&A Session 2014: Crimea, Ukraine, Gas, Foreign Policy and Mass Surveillance.”
[21] Mark Adomanis, “Ukraine’s Economy Is Nearing Collapse,”, April 15, 2014.
[22] Fred Weir, “Can Russia’s military fly without Ukraine’s parts?” Christian Science Monitor, April 10, 2014.
[23] Adomanis, op. cit.
[24] Sergei Lavrov, “It’s not Russia that is destabilising Ukraine,” The Guardian (UK), April 8, 2014.
[25] George Eliason, “A Changing Narrative in Ukraine,”, April 9, 2014.

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