The prospect of NATO enlargement deep into the former Soviet Union – endorsed by the alliance’s April 2008 summit – deserves the close attention of investors in the region. In the case of Georgia, there is a straightforward risk of armed conflict involving Russia in one way or another. For Ukraine, NATO accession carries both risks and opportunities. It would reinforce the EU convergence story at the heart of the long-term investment case for Ukraine; but in the shorter term it also accentuates the main country risk factor, the country's deep internal divisions.
The surest way to overcome that risk would be a prior accommodation with Russia about Ukraine’s formal entrance into the NATO accession process. Any such deal would, in turn, remove the poison that this issue injects into Russia’s already strained external relations, whose negative impact on investor sentiment and funds flows has become apparent over the past year. The obvious and workable solution would involve demilitarisation.
Foreign affairs and geopolitics typically come onto the radar screen of financial markets when there is a risk of armed conflict involving major countries, especially in an economically sensitive region – as, for example, in the chronic tension over Iran’s nuclear programme. None of that applies at first glance to the prospect of NATO enlargement into the former Soviet Union, which was discussed at the NATO summit in Bucharest on 2-3 April; the final communique affirmed that Ukraine and Georgia would eventually join the alliance, despite the postponement of a decision – probably until the alliance’s 60th anniversary summit, in April 2009 – to give those countries formal candidate status in the form of a “Membership Action Plan” (MAP). Instead, the issues at stake here appear to be more of the psychological kind – related to national identities and self-perception as well as a perceived zero-sum competition for spheres of interest – rather than anything to do with real security, let alone economic, risks.
For all that, we reckon that this latest chapter in NATO expansion does deserve the attention of investors in the three countries concerned: Georgia, Ukraine and Russia. The NATO-related investment risks are different for each. In the case of Georgia, the risks are more recognisably in the conventional security category, given the cross-border implications of the unresolved separatist conflicts in that country. As for Ukraine, NATO accession has an indirect bearing on long-term economic performance. The investment significance of this issue for Russia lies in the marginal impact on portfolio asset prices of sentiment via funds flows.
This note assesses those risks in turn, but the outcomes in the case of Ukraine and Russia turn out to be closely intertwined.
The risks of Georgia’s joining NATO are serious in principle because the country is in a state of frozen internal conflict that involves Russia in various ways. Fortunately, the prospect of Georgian NATO membership looks remote; on the other hand, Georgia’s being invited to start a MAP in the next year or two is still possible.
Georgian President Mikheil Saakashvili came to power in 2004 on a “national reunification” platform, which by its nature threatened to reignite the “frozen” conflicts in the secessionist regions of Abkhazia and South Ossetia (see the map below and, for full background information, our October 2006 report The risk of war in the Caucasus). Saakashvili’s mentors in the US have prevented him from succumbing to the temptation of going down the hopeless and dangerous path of attempted military solutions, and his desire for NATO membership adds a powerful new incentive for restraint.
The secessionist wars of the 1990s in Abkhazia and South Ossetia both dragged in fighters from the neighbouring Caucasian regions within the Russian Federation, where, as the world knows from the horrors of Chechnya and Beslan, armed separatism has also been rife. If the main threat of renewed open conflict in Georgia until now has been provocation from the Georgian side (since the de facto independent regimes in Abkhazia and South Ossetia are broadly content to sit quietly on their gains), the opposite could be true if Georgia were admitted to NATO.
In fact, any chance of Georgian accession to NATO depends on the government’s gaining proper control of its territory by reaching a settlement with its breakaway regions. Indeed, Saakashvili came out on the eve of the Bucharest summit with a new offer on Abkhazian autonomy. But at best it will take years of confidence-building measures before the Abkhaz might accept Georgian sovereignty. The implication is that NATO membership for Georgia, with the dangers that would bring (most notably, the risk of local circumstances leading to a situation whereby NATO was technically at war with Russia), is not a concern for the foreseeable future.
The most straightforward outcome for both Russia and NATO would be a delinking of the Georgian and Ukrainian MAP applications that allows NATO to freeze Georgia in the position reached at the Bucharest summit; according to that position, NATO recognizes Georgia’s “vocation” to join the alliance while continuing to shelve the MAP. On balance, we think this is the most likely outcome. NATO does not want to involve itself more deeply in the resolution of Georgia’s frozen conflicts, something that would be implicit in a MAP invitation. Saakashvili’s erratic performance before and during the Bucharest summit did nothing to advance his country’s cause, and there is always the possibility that domestic unrest in Tbilisi or incidents in either Abkhazia or South Ossetia would give NATO a convenient excuse.
However, this outcome is not guaranteed. Particularly if John McCain becomes the next US president, Georgia may continue to be kept in lockstep with Ukraine and invited to start a MAP in the next year or two. This would undoubtedly lead to “anti-NATO” reactions by both unrecognised states, which could reignite the Caucasian tinderbox and bring significant risk. But one should not overestimate the potential for independent action in Abkhazia and South Ossetia, neither of whose leaderships would be likely to take provocative actions without a go-ahead from the Kremlin. Ultimately, the Georgian question would be lumped together with the issue of a Ukrainian MAP and subject to intensive NATO-Russian diplomacy – with the potential for win-win solutions, as outlined below.
The significance of a MAP and eventual full NATO membership for Ukraine lies in its organic link with the EU convergence story, which is of overarching importance for long-term investment sentiment towards Ukraine. Even if NATO is at its core a military alliance, it is also a political and bureaucratic organisation that is headquartered in Brussels and explicitly applies broad political tests of democracy and the rule of law (well beyond civilian control of the military) to applicant countries. Meeting the institutional requirements of NATO will therefore be a signal of Ukraine’s fitness for eventual EU membership.
The battle for Ukrainian public opinion …
The most immediate obstacle on Ukraine’s path to a MAP is that a majority of the Ukrainian public – as shown by all opinion polls – dislikes the idea of the country’s joining NATO. Much will hinge, therefore, on NATO’s assessment of whether the Ukrainian leadership has started in earnest to try to convince the Ukrainian public of the benefits of beginning the NATO membership process. Another important factor will be whether this information campaign is having some tangible impact.
The first of these problems is already being resolved in the wake of US President George Bush’s visit on 1 April and the high profile of the Bucharest summit. Ukraine’s two leading pro-NATO politicians, President Viktor Yushchenko and Prime Minister Yulia Tymoshenko, had until recently been relatively quiet on the subject. As bitter rivals who are expected to compete for the presidency in January 2010, both have been trying to increase their appeal in eastern Ukraine, where NATO is deeply unpopular. This has meant soft-pedalling their support for beginning MAP.
But in the wake of Bucharest, this is no longer possible, and both Yushchenko and Tymoshenko are now being forced to address the issue more directly and try to change public opinion. This means, in essence, characterising NATO as a stepping stone to joining “the West” and the EU, while downplaying the fact that it is a military alliance. It also means explaining the difference between MAP and actually joining NATO and emphasizing the commitment both politicians have made to hold a referendum before membership in the alliance would be considered.
As with many issues in Ukrainian politics, the NATO debate can be best understood in the context of Ukraine’s regional/cultural division into three parts: Europe-facing western Ukraine, Russia-facing eastern and southern Ukraine and the ultimately decisive central part of the country, which includes Kiev. It seems to us likely that in the months ahead, Yushchenko and Tymoshenko will be able to begin shifting Central Ukrainians from their current stance – either opposed to MAP or undecided – to a still mixed but more positive view, which would be enough to meet NATO’s desire to see progress in this area.
A wild card that would complicate and delay Ukraine’s path to joining MAP in April 2009 would be domestic political instability driven by the Yushchenko/Tymoshenko rivalry in the context of Ukraine’s parliamentary system. The incumbent Tymoshenko government was confirmed by a parliamentary majority of one and depends on the support of pro-Yushchenko deputies, an uncomfortable situation given the rivalry between the two leaders.
We will make a more detailed assessment of Ukrainian politics at a later time; for now we offer our summary view, which is that the current coalition keeping Tymoshenko in office will survive for the time being simply because Yushchenko does not want to risk new elections at this time. However, the collapse of the government, perhaps followed by Ukraine’s third parliamentary elections within three years, cannot be ruled out, although constitutional rules prevent the president from dissolving the parliament during the first year after it was elected – that is, until October 2008.
… now joined by Russia
A more fundamental issue is the grounds for shifting Ukrainian public opinion. As mentioned above, this will require downplaying the military aspect of NATO. At present, there is a disconnect between the attitude towards NATO of the mainstream Ukrainian elite and that of the public. For the elite, as Yushchenko himself put it on 7 April, NATO membership is not only essential for but also “synonymous” with the country’s sovereignty. But except in the country’s western regions, which, annexed by Stalin from Poland, have a distinct political culture, the Ukrainian public fears escalating military tension with Russia – a country viewed not merely as a neighbour but in terms of kinship.
The present Ukrainian leadership’s problem with domestic public opinion could be solved by emotional sabre-rattling on the Russian side. But while there are no shortage of Russian politicians and members of the Russian security establishment who can be relied upon to pour out aggressive rhetoric against Ukraine, the Putin-Medvedev administration will do no such thing. Instead, the Russian leadership has joined the competition for Ukrainian public opinion precisely by playing on the military angle. Putin has made flesh-creeping references – “more in sorrow than in anger” – to the possibility of targeting missiles on NATO military assets located in Ukraine.
It follows that Ukraine’s progress towards a MAP would be greatly facilitated by a prior accommodation between NATO and Russia about Ukraine. This would also be very positive for Russia, to which we now turn.
The negative external perception of Russia fuelled by a series of recent disputes with the US and EU has spilled over from the media to investor sentiment. While this effect cannot, of course, be quantified, it is supported anecdotally in meeting after meeting with investors which we have taken part in ourselves or learned of from others. It follows that the best possible external contribution to the Russian investment climate would be for existing contentious issues to fall into abeyance and no new ones to arise.
Fresh international tensions and crises are always possible, if not likely. But leaving aside future imponderables and looking at existing problems, the question of Ukraine and NATO has the greatest potential to cause a major crisis with Russia. The reason for this is quite simple: the problem will not go away. Even if Ukraine’s MAP is postponed again because of further domestic political turmoil, sooner or later Ukraine will presumably have a long enough period of relative stability to qualify to join MAP.
Both Medvedev and the core European members of NATO – above all, Germany – will be eager to reach some accommodation that will change the perception of Ukrainian entrance into MAP as a zero-sum game. But this will be very difficult to achieve even with the cleverest diplomacy. And even in the unlikely event that Medvedev were to be personally convinced that acceptance of a Ukrainian MAP does not pose a threat to Russian security interests, he would never be able to make this case publicly. It is simply too far removed from the overwhelming consensus view in Russia, at both the elite and public levels.
From this perspective, it might have been better to have brought this seemingly inevitable crisis with Russia to a head in the last weeks of Putin’s presidency, leaving the way clear for Medvedev to preside over the equally inevitable thaw. The success of the Medvedev administration depends on an effective new domestic reform drive, which could be undermined by a chronic neo-Cold War standoff. So in this sense, the investment risks go beyond mere sentiment.
Russia’s ‘energy weapon’: myth becoming reality?
On balance, however, we reckon that the breathing space that the Bucharest summit has given Medvedev over Ukraine and NATO is positive. The postponement of Ukraine’s MAP to allow more time for consultation with Russia was the internal NATO consensus plan until being destabilised two weeks before the summit by President Bush’s decision to undertake a personal effort to continue pushing for a MAP offer, regardless of prior informal agreements. Although Bush’s effort came to nothing in the end, it had a number of disruptive effects. It raised the temperature of the rhetoric around the issue on all sides and, by giving the appearance of a Russian victory, triggered press commentary about a “Russian veto” being a consequence of Russia’s leverage over European – and particularly German – oil and gas supplies.
This view of Russia’s using the “energy weapon” to exert high-level political influence over the EU is a myth. The energy relationship between Russia and Europe should be more correctly understood as one of interdependence. In general, growing flows of trade and investment make both sides increasingly eager to avoid a political rupture – hence Germany’s sensible desire to consult intensively with Moscow before inviting Ukraine and Georgia into MAP. But that is quite different from saying that Germany has taken to supporting Russia’s position on NATO and other issues because it is afraid that Russia will shut off the gas.
That said, if a myth is believed by enough people, it will start to influence decisions and actions in any case. Although Russian foreign-policymakers well know that switching off the gas is not an option, delusions about the strength of Russia’s hand will increase their ingrained tendency to miss diplomatic opportunities.
How to solve the NATO-Ukraine-Russia problem
Put another way, myth-peddling may complicate still further a diplomatic challenge, which, as already noted, is tough enough as it is. Yet there is a solution that could work politically for all sides, even Russia.
The concessions that would allow Medvedev to save face include no rush from MAP to NATO membership for Ukraine, no external NATO bases or equipment in Ukraine and no membership without a referendum. These have all been canvassed in public – and particularly notable is Yushchenko’s commitment on keeping permanent NATO installations out of Ukraine. What could change things radically would be making this a treaty commitment – in other words, an international law obligation undertaken by all NATO governments.
Medvedev could never sell domestically mere spoken promises. His mentor, Vladimir Putin, likes to recount how Henry Kissinger told him that President Bush senior promised no enlargement of NATO in return for Gorbachev’s agreement to German reunification – a commitment that (to Kissinger’s stated amazement) Gorbachev never asked to be written down, let alone formalised in a treaty. In similar vein, Putin frequently reminds audiences (such as the journalists at his press conference in Bucharest after the summit) that the latest NATO expansion into the Balkans was accompanied by similar promises but a NATO base now exists in Romania.
From a Russian perspective, the picture would be transformed by a treaty commitment that – even as a NATO member – Ukraine would remain a NATO-free zone in military terms. For Medvedev, who presents himself to both domestic and foreign audiences as a “lawyer president”, this solution would not only have a natural appeal but would be one that he could defend with authority. It would imply that as far as Ukraine’s NATO membership was concerned, NATO was a purely political organisation – an evolution that Russian officials have long advocated. A treaty deal with Russia along these lines would probably do more to allay the concerns in Ukrainian public opinion about military tensions with Russia than anything that Ukrainian politicians could manage. As a result, it would smooth Ukraine’s path to NATO membership.
In short, here lies the escape route from the closed box of zero-sum thinking to a win-win outcome. So where is the catch? There would, of course, be ravings from the still vigorous brigade of cold warriors to be found on all sides. The US and EU version of this would be to denounce such a deal as an appeasement of Russia by giving Ukraine second-class status within NATO. But this objection could be easily answered. If in the future NATO felt that Russia were threatening Ukraine, it could simply follow standard procedure in international law – in this case, by withdrawing from the treaty with Russia on non-deployment of forces in Ukraine.
If diplomats managed to get the parties on track towards a settlement along these lines, it would then be relatively easy to bundle into that settlement a new deal on the Treaty on Conventional Forces in Europe. This is the treaty that Russia ratified in 2001 but then suspended in 2007 on the grounds that the NATO countries had never ratified it. In one bound, the chill in Russia’s political relations with the US and Europe could be reversed.
Zero-sum thinking is entrenched in many parts of the US foreign-policy establishment, but even more deeply in Russia. So the opportunity to resolve the problem along the lines suggested here could all too easily be missed. However, there are some signs of cracks in the Moscow consensus – notably in the world of foreign-policy and security think-tanks. Above all, there is evidence from Medvedev’s own track record, including in private business, that he is open to win-win solutions.
Bucharest Summit Declaration, issued by the heads of state and government participating in the meeting of the North Atlantic Council in Bucharest on 3 April 2008
Paragraph 23 contains an endorsement of the prospective membership of Ukraine and Georgia in NATO (relevant text highlighted in bold).
NATO welcomes Ukraine’s and Georgia’s Euro Atlantic aspirations for membership in NATO. We agreed today that these countries will become members of NATO. Both nations have made valuable contributions to Alliance operations. We welcome the democratic reforms in Ukraine and Georgia and look forward to free and fair parliamentary elections in Georgia in May. MAP is the next step for Ukraine and Georgia on their direct way to membership. Today we make clear that we support these countries’ applications for MAP. Therefore we will now begin a period of intensive engagement with both at a high political level to address the questions still outstanding pertaining to their MAP applications. We have asked Foreign Ministers to make a first assessment of progress at their December 2008 meeting. Foreign Ministers have the authority to decide on the MAP applications of Ukraine and Georgia.
Extract from President Putin’s joint press conference with President Yushchenko following their talks in Moscow on 12 February 2008, in which Putin highlights the possible military consequences of the Ukrainian leadership’s enthusiasm for NATO membership.
“Anti-ballistic missile deployments in Eastern Europe are designed, as we see it, to neutralize Russia’s nuclear deterrent. It is awful to think, let alone to speak, of the possibility that such a deployment in the future in Ukraine could result in our having to target nuclear missiles on Ukraine.”
Extract from on-the-record remarks by General Yury Baluyevsky, chief of the Russian General Staff, 10 April 2008, suggesting wider consequences – for individual citizens – of tightened military security on the Russian-Ukrainian border in the event of Ukraine's joining NATO.
“Russia will take steps aimed at ensuring its interests along its borders … these will not only be military steps, but also steps of a different nature."
Remark by President Yushchenko during a television interview on 7 April 2008.
“The question of Ukraine’s NATO membership can in fact be simplified and brought down to one thing: the country’s political sovereignty and membership of NATO are synonymous.”
Extracts from remarks by experts reported by Ria-Novosti on 9 April:
Alexander Konovalov, head of the Moscow-based Institute for Strategic Assessment
“The Baltic countries have already acceded to the alliance, which means NATO is as close to Russia's borders as it could be. So what? Did the sky collapse for that? And what about Norway? A long-standing NATO member, it also borders on Russia, and no one has ever cared. Who said that NATO is growing stronger with its expansion? On the contrary, by accepting such nations as Albania and Croatia, it will render itself a more unstable and ill-assorted organization.”
Vladimir Kulagin, professor at the Moscow State Institute of International Relations
"The problem of our relations with NATO is outside the security sphere. To the Russian government, any major interstate alliance implementing a liberal project poses a threat. But, even with the obvious ideological difference, it is simply impossible to imagine a war with NATO. Russia accounts for 3 per cent of the global GDP, while NATO, cumulatively, for 50 per cent. With this distribution of forces, Russia is highly unlikely to ever attack NATO. The latter isn't planning a war with Russia, either, for political reasons. Everyone understands that, even Vladimir Putin, who is so far restraining the military lobby and keeping the country's military spending below 3 per cent. Unlike that, the spending on the Interior Ministry, the Federal Security Service and Emergencies Ministry are skyrocketing, which perfectly reflects the real situation: the key threats to Russia's security are lurking inside the country."
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