Shadow Government

Ukraine: Buy, Rent, or Walk Away?

For one who has long proclaimed the centrality of economics to foreign policy, the turmoil in Ukraine offers some unexpectedly strong support. A revolution was sparked by the rejection of a trade agreement, after all. Now, in the aftermath, we've moved on to the regularly scheduled balance-of-payments crisis. Yet, the problems in Ukraine actually present an extraordinarily difficult mix of economics and politics.

Acting-President Oleksandr Turchynov was reported to have warned this week that the country is close to default and "heading into the abyss" and that it needs $35 billion over the next two years. This is not purely the result of the recent turmoil, though such things do tend to be costly; Ukraine was already in need. The spark to the unrest came when ousted President Viktor Yanukovych opted for $15 billion in Russian money -- funds that would come with far fewer strings attached than those offered through a European deal.

The issue is now pressing, since Ukraine is estimated to owe $13 billion in foreign debt service this year; failure to pay would mean default. That could have nasty repercussions not just for Ukrainians but for other indebted and teetering countries. Given those concerns and the geopolitical import of recent developments in the country, why not just pass a hat and give Ukraine the money?

Reason No. 1: $35 billion is a lot of money. To put it in perspective, this is roughly the level of the entire U.S. State Department's "foreign operations" annual budget, covering the U.S. Agency for International Development, bilateral economic assistance, international security assistance, contributions to international financial institutions, and agencies such as the Peace Corps and Millennium Challenge Corporation. This is not the kind of money you find lying around in a jar.

Reason No. 2: Is this a loan or a gift? A loan would certainly be less costly and more traditional, but the distinction has everything to do with the probability of repayment. The International Monetary Fund has had trouble before with getting Ukraine to pay money back. Usually loans of this magnitude come with conditions that are meant to increase the probability of repayment. Even in normal circumstances, recipient countries can find these conditions unpopular and onerous (e.g., dramatically raising the price of gas for heating and cooking). What are the odds that the present leadership could enforce such a plan?

Reason No. 3: To whom would the money go? Ukraine's government is provisional and contested. If the money is a loan, who is signing for it? What happens if the country splits, with the Russophile part going its own way? Who would then be responsible for repayment?

Reason No. 4: What does one get for the money? Western powers might find an investment worthwhile if it bought lasting peace and stability and brought Ukraine into Europe's orbit. But what if it only rented peace and stability? If, in two years, Ukraine does not reform and finds its pockets empty again, it could be just as susceptible to Russian enticements as it was under Yanukovych.

If this all seems a bit too risky for the United States or the European Union to take on, one might think that there is always the IMF. But the IMF is only supposed to do this when it sees a good chance of repayment. It has not been completely pure in following that principle; the IMF's participation in the Greek bailout was only made possible by implausible assumptions about Greece's ability to repay. That deviation from standard practice subsequently raised concern among the IMF's membership: How is it that countries from Asia, Africa, or Latin America must go through excruciating IMF programs to receive funds, but European countries are given a pass? Repeating the same approach with Ukraine would put the IMF's managing director (Christine Lagarde, a European), in a very awkward position.

When a population on Europe's periphery has risen up and demanded closer ties and economic linkages, it seems unthinkable that the countries of the West could walk away. Engagement, though, will mean the expensive disentangling of a daunting thicket of economic and political problems. Seeing off the Yanukovych presidency was just the beginning.


Shadow Government

Hagel's Budget Headache

Secretary of Defense Chuck Hagel has tried to make the most out of a miserable budget situation, and, as fellow Shadow Government contributor Kori Schake argues, he has to some extent done so. The attitude of the White House, which seeks to avoid any sort of military engagement, except, perhaps, those that can be conducted by special operation forces, certainly did not help him. So he did what he could not only to attempt to kill a variety of programs, but also to lower the rate of growth of military pay and benefits that grew exponentially during the last decade.

Unfortunately, some of Hagel's decisions appear to be inconsistent with the strategic imperatives that he outlined, others have little chance of winning congressional approval, and still others appear to have overlooked opportunities for additional savings. Among those decisions in the first category are the cutbacks in naval forces. While it is true that each individual ship is far more capable than the ship it replaced in the fleet, it is nevertheless true that, for blue-water navies in particular, numbers do matter. If the United States is to pivot to Asia while at the same time, planning -- in Hagel's words -- to "sustain commitments to key allies and partners in the Middle East and Europe," it requires a significantly larger fleet than the current program will sustain.

The planned reduction of the U.S. naval presence in the Persian Gulf sends the wrong signal to both friends and foes. The absence of significant naval forces in the Mediterranean has created a vacuum that the Russians have filled; for the first time in decades, Russian ships outnumber those of the United States in that sea. And the Navy would be hard-pressed to cope with any threats to NATO allies in the Baltic, if its presence remained imperative in the Pacific Ocean and the Arabian Sea.

This is not to assert that Hagel was wrong in capping production of the littoral combat ship (LCS), for example. The program had more than doubled in cost since its inception in the early 2000s. Many analysts argued that the ship's capability simply did not justify its cost; nor, it was asserted, was the LCS capable of operating in the highest threat environments. But the secretary gave no indication as to when the class of frigates that would replace the LCS would actually enter the fleet, or how much each ship might cost, or where the money would come from.

Just as there are too few ships to implement the administration's nominal national security strategy, so are the land forces in the current plan inadequate for the missions they might be asked to carry out. While Hagel linked the cuts in land forces to the administration's decision not to size the force for "long and large stability operations," he did not address the possibility that there are other types of combat operations apart from "stability ops." By not limiting himself to reducing the size of the Army, but also reducing the levels of the Reserves, National Guard, and Marine Corps, Hagel effectively ruled out the possibility that the United States could pursue two major contingencies simultaneously. With Korea an ongoing candidate for one of those contingencies, it appears there is little room for that unforeseen contingency that America seems to fight every few years.

Hagel's efficiency reductions all make good sense, at least to many defense analysts. But Congress -- as opposed to congressional staff -- is a political body, not an analytical one. And the politics that have made it impossible to plan for a new round of base closures, much less implement one, are unlikely to change in an election year.

Similarly, while many of Hagel's proposals to limit military benefits have some merit, he may discover that Congress may find it convenient to argue that it need not take any action until after the Military Compensation and Retirement Modernization Commission reports a year from now (full disclosure -- I serve on the commission). That fact that Hagel seems to have overlooked the fact that the commission is meant to deal with the gamut of compensation issues, as well as retirement issues, will provide even more of an excuse for those who would rather not take any action that affects the troops, especially as so many are still fighting, and dying, in Afghanistan.

Finally, it is somewhat surprising that the secretary did not say anything about additional reductions in the civilian workforce beyond the "targeted reductions" that he had previously announced. That force has grown so sharply in the past decade that one wonders why thousands more civilians are not being encouraged (or asked) to leave or retire, as is the case with their land-force counterparts. After all, civilians do not actually fight the nation's wars; they support those who do.

Hagel correctly pointed out that this is a budget-driven defense program. And he rightly outlined the risks that this program will magnify. It is not clear whether the White House shares these concerns with the Pentagon, however. And therein lies the rub. For should deterrence fail, the cost in American human and material resources could dwarf the savings realized by the current reductions in defense programs. For whatever its attitude to spending dollars for defense -- and it has been lukewarm at best -- this politically hypersensitive administration should realize that, as Bob Gates has put it so bluntly, the enemy gets to vote.

Photo: SAUL LOEB/AFP/Getty Images