Ukraine and the Future of Reforms

DAVID SPEEDIE: Good evening, everyone, and welcome. Thank you for coming out in midsummer to the Carnegie Council. I'm David Speedie, director of the program on U.S. Global Engagement here at the Council. As many of you know, we have had a continuing interest and series of events on Ukraine. That will be the focus of our discussion with our guests this evening.

The topic this evening is "Ukraine and the Future of Reforms," which I suspect could probably take a good deal longer than the one hour that we have allotted. It is a very complex and fluid situation. But we have two genuine experts here to guide us through this.

Ambassador John Cloud, whom we welcome to the Council for the first time, is a specialist in both European and economic issues. He has been a diplomat in service throughout Europe—in Berlin, in Warsaw, and also at the U.S. Mission to the European Union, and in Lithuania, where he served as ambassador from 2006 to 2009.

For Nick Gvosdev this is not on his first visit here. We welcome you back, Nick. It's always a great pleasure. He is a professor—they are both, I should say, professors of national security studies at the U.S. Naval War College. Nick, as a senior editor at The National Interest, is ubiquitously published and interviewed and so on and so forth.

The context here is that Nick and John traveled to Europe in May, mid to late May, and met with former and/or current government officials and think-tank representatives in Lithuania, Poland, and Germany, as well as similar meetings with EU officials in Belgium, Brussels. What they will do is report on some very interesting impressions and discussions that they had during this time. Obviously these are three countries, and the EU itself, with a paramount interest in Ukraine.

In the beginning, I think the sequence is that Nick will give us sort of a macro overview both of the trip itself and of the situation in Ukraine, and then John, the economist, will give us a little bit more detail on the economic challenges. So, Nick, if you will lead us off.

JOHN CLOUD: I can start. First, as Naval War College employees, we have to begin by saying we are speaking in our personal capacity and not on behalf of the War College or, in my case as a retired State Department Foreign Service officer, on behalf of the State Department.

We had the opportunity to travel to these four countries because of an endowed chair at the War College. Mr. William B. Ruger, of Ruger gun fame, endowed a chair on national security economics at the War College. So we were able to use those resources. We thank the Naval War College Foundation for making that possible.

So we traveled to Lithuania, Poland, Germany, and Brussels. We spent more time in Warsaw and in Brussels—just the way you fit in a weekend and other things like that. We had an opportunity to talk to a wide-ranging number of people, some currently in the government, some think-tankers, some people previously in the government, including a couple people officially on advisory groups to the Poroshenko government in Ukraine.

I'll let Nick talk about the macro situation and then I will talk more on the micro.

NIKOLAS GVOSDEV: Thank you.

Let me just give some overall impressions. Echoing what Ambassador Cloud has said, these are my own impressions. We talked with many people. We talked on the condition of background that we weren't going to identify people that we spoke with, so that they would give us their unvarnished opinion and their assessment.

Putting this into a larger context, we traveled, in May, in the run-up to and during the Riga Summit, which was held to discuss the future of the European Neighbourhood Policy in Eastern Europe. That helps provide some context as well. There are several conclusions that I would draw, amalgamating all of the different comments and impressions that we received.

The first is that Europe and the European order is poised at a very difficult juncture. Europe has established a series of rules as to how it wanted to operate in a post-Cold War environment. It expanded the size of European institutions to bring in more members, and did so at a time when the costs of expansion were low and no one really expected that there would be problems on the horizon.

Now Europe is faced with difficulties where, on the one hand, if it enforces the rules that it has set for the way it wants Europe to operate, there are immediate costs. This was something that was really made clear to us when talking about the impact of the sanctions on Russia that Europe has imposed and then, in turn, the countersanctions that Russia has imposed, which is bringing a cost to European businesses and companies, particularly those that worry about losing contracts and market share to firms in countries, particularly in Asia, that can duplicate or offer alternatives to Russia—now, of course, certainly with the Saudis announcing this new major sovereign investment fund into Russia, again this idea that there are alternatives and Europeans could be losing some of those traditional market shares.

At the same time, not to enforce rules on territorial integrity of a country, not using force as a way to resolve disputes—that countries are free to make their own geopolitical and geoeconomic choices—not to enforce those rules also brings costs.

So Europeans are faced with a choice of enforcing rules and paying costs or not enforcing rules and paying a different set of costs down the road. What this does is, these become political questions. We saw some of this, and we have seen it since our return, in monitoring the run-up to the last meeting of the European Council, where a decision was made to extend sanctions on Russia for another six months. But we were getting the impression that this was very much a compromise decision, that the sanctions would be extended for another six months, but that at the end of the year, assuming that there had been no major violations of the Minsk accords and that there is some degree of a political process in place, there might be greater pressure on European countries to either suspend some of the sanctions—roll them back, give sanctions relief—or, if nothing is formally done, at least to allow for turning a blind eye to some of the creative ways that some European companies are now looking at how they can get around the current sanctions that have been imposed on Russia.

The second macro-level issue, tied very much with this first issue of enforcing rules or not enforcing rules and paying costs either way, is a sense that Europe and the Euro-Atlantic world is besieged by several simultaneous crises. The Greek crisis was definitely bubbling up while we were traveling. That was very much an issue, particularly as we moved further west in our travels. Ukraine tended to diminish and other crises, starting with the Greek crisis, became more front and center in terms of where Europe should be putting time, attention, and resources.

You have the ongoing refugee crisis across the Mediterranean. Certainly the countries of Southern Europe in particular have been overwhelmed by large numbers of migrants coming from Syria, coming from the destabilized situations in North Africa, and then, of course, the loss of Libya as a stable entity that blocked a good deal of migration from sub-Saharan Africa, or at least controlled it. That has been removed, and so now you have more migration pressures coming from the heart of Africa as well into Europe.

Therefore, as you move geographically in Europe and say, "What is the most important security issue facing Europe?" certainly in Lithuania there is concern about a resurgent Russia and the Ukraine crisis. That is not—and we got this impression very much from speaking with people at the commission and the council in Brussels—that is not, of course, a universally shared view in Europe. In Spain, Ukraine is far away, is not particularly a problem. Russia is not a threat. The real threat is migration, the collapse of the Mediterranean barrier. Those are the real issues. So somehow you have to find a way to simultaneously address these crises—the Ukraine crisis, the Greek crisis, the migrant crisis across the Mediterranean—and you have to do so in the European context of a consensus format where you need 28 countries to agree.

Also, then, the question of solidarity comes in, which is that the EU has always based itself on the idea that countries share burdens. One of the things that was a subtext to what we were hearing was the sense that some of that solidarity was beginning to fray. We have seen it with the Finns questioning why the Greeks should continue to get bail-out aid if they are not willing to make hard economic decisions. Where should migrants go? We heard very clearly, the further east, "We can't really absorb any migrants that are coming in from the South. We have to be ready for potential migration flowing out of Ukraine. There could be destabilization there. We really don't want to take people who have come into Greece or Italy and have them brought to Lithuania or Poland or elsewhere." Then that raises these questions of solidarity. Spaniards or Italians or Portuguese or Greeks may say, "Why should we be as concerned about the set of issues that you are concerned with?"

So we definitely got a sense there of some challenges to solidarity within the European Union brought about by these simultaneous crises and the need to prioritize which are the most important ones. Where do the resources go? Where does the attention go? It's not universally seen that Ukraine is the most important European crisis. Perhaps the Greek crisis will fade to some extent now, but certainly at the time of our trip there were those who were saying that Greece was more important to the future of Europe than Ukraine was and that therefore the European Union should be paying more attention to what was happening in Greece.

The third set of overarching issues in dealing with this is a sense also of reigniting the debate in Europe about "where does Europe end?" Where do the natural boundaries of the European Union exist in the East? At what point do you say that a country may be of European heritage, it may have connections to European culture, but it really is not part of the European project? Where do you start drawing those dividing lines in terms of where and when countries should be brought in?

One of the things we heard very clearly the further east we were in Europe was that Ukraine had made a civilizational choice to Europe, it had made a choice to join the West, and that choice should be respected and should be honored and should be supported by resources, not simply by declarations; there should be an all-out effort made to secure Ukraine as part of a European family of nations. Then you had, to some extent, people saying, "Well, a country can choose that it wishes to join Europe. Does that necessarily obligate Europe to have to respect that choice?" Again, where do you draw the line? Where do you say that the neighborhood comes to an end?

Some real questions about whether or not the European Neighbourhood Policy, in the end, has succeeded or failed, both with regard to the East and to the Mediterranean. When it was initially launched, this idea of a "wider Europe" was that you would have a European Union core and then there would be a belt of states around the European core that would be friendly, would be prosperous, would be contributors to European security—the whole Barcelona dialogue and the dialogue between the European Union and North Africa, and then dialogue with Russia, dialogue with some of the other states of the former Soviet Union—you would have this neighborhood. The question is, if that is no longer a viable policy, what replaces it? My impression was that it is not clear what replaces it.

There was also a sense of fatigue, that Europe cannot continuously expand, and some concerns about whether or not what you have—and this also applied to some of the newer members of the European Union as well—again, the further west you went, a sense that countries did just enough of what they needed to do to qualify either for membership or aid and then they stopped and maybe even, in some cases, began to backslide on commitments that they were making to the European Union. If you are in the position of perhaps being a donor country in Europe and you think that people essentially have the tin cups out for handouts, is that what you are seeing in how these policies are being run? A certain fatigue of always being asked to donate.

Of course—and, John, this may jump on a comment that you are going to make—one of the other things, though, that is different is that many European countries are no longer giving direct bilateral aid. They essentially say the European Union handles all of this now. But then the amount of aid that is being given is perhaps smaller than what we saw, say, 20 years ago in the first wave of expansion, when there was a concerted effort to bring Central/East Europe into the European core in terms of both per capita and overall amount.

The last point—and I will end here and then turn it over to John for the micro picture—is the question of the U.S. role. What should the United States be doing? Again, there has always been concern in Europe about what the pivot to Asia or the rebalance to Asia would mean. Did this mean essentially that the United States said that Europe was solved and we could leave Europe and focus on the Pacific Rim? The Ukraine crisis has brought that question to the fore. On the one hand, you have those who want the United States to be much more re-engaged, much more involved. America has been largely absent as this process has moved forward. You have others who say that Europe can handle this process on its own, but that the United States then should stand back and let Europeans handle this their way and not turn it over and say, "Well, we don't like the way Europe is doing this. We would much prefer if you would do it this way."

We also heard this, by the way, with regard to the Greek crisis. There was that sense that the United States would say, "Greece is a crisis for the European Union, but we really would like you to do it this way. You are not doing it the way we would like, so we are interjecting ourselves in. But we don't want to be involved."

There was this sense that the United States, and the administration in particular, needs to clarify what it is it is prepared to do. We were there when Secretary Kerry had made his visit to Sochi. There was a certain degree of disquiet that we were hearing, until he briefed the NATO allies in Antalya—a sense of was this a wild card, that the United States was sort of not involved and then all of a sudden the secretary of state is meeting with President Putin? The Ukrainians certainly were concerned by that as well. Was there going to be something happening behind the scenes? That raised again this question: Is the United States in or out? Clarify what your position is.

Again, that is kind of an amalgamation of two weeks of meetings and visits, my main impressions, main takeaways that I took away from them.

JOHN CLOUD: Let me start off and talk about reforms. We did not get into a lot of details on concrete reforms with the people we were talking with; a little bit more when we talked to the people who were actually spending most of their time in Kiev advising the government.

The general consensus was that the government knows what they are doing, that the reform economists in Ukraine know what they are doing. They are skilled and talented. The only question we got—and these were mainly from people who had been very involved in the Polish reform in 1980-90—was perhaps they didn't know enough how to coordinate all the reforms. This was really part of a self-criticism of the Poles saying, "We didn't know how all these things fit. We knew what we needed to do, but we didn't know what had to come first and what second and what third, or what had to be done in a package. We didn't appreciate how important that management of reform was."

But generally the statements on their knowledge of what needed to be done were very good. But, just as Nick talked about their being donor fatigue, in Ukraine there is tremendous reform fatigue. They have had reform endlessly since 1991. Most of it hasn't done much or hasn't accomplished the purposes. The energy reform, the raising of the energy prices significantly, was seen as a very positive step. I know the media has reported some less positive steps in recent weeks. But at least there is the sense that there are talented people trying to do the work.

Ukraine does have a unique situation of trying to do reform in time of conflict. It's not easy to reform an economy when you are at war. At the same time, the general consensus we heard from people is that they can't wait. They have to find a way to do both at the same time.

One of the big issues was the role of the oligarchs. We heard this repeatedly from people. Some of the interesting comments we heard we heard in Warsaw: What is Ukraine going to do with the oligarchs? The current system is one the oligarchs don't want to change. They are doing very well in the current system. One person we talked to said there are really three choices: You can find a way to deprive the oligarchs of their wealth, you can strike a deal with them, or you can begin the process of building a middle class. That last one is probably going to be a very long-term process. But what you choose amongst those things will be very crucial to what happens next.

One person we talked to said he had posed the concept to Ukrainians of a "good oligarch," someone who was not quite as rapacious as others, and they could not understand the concept. They smiled at him about the concept. That was not something they have experienced.

Nick mentioned the European Neighbourhood Policy, the Association Agreements. As he said, we were there in the run-up to Riga. In Lithuania and, to an extent, in Poland, there was a real commitment that the Ukrainians and the Georgians—I put the two countries together—had to be given a membership perspective in the EU to take the tough decisions they needed to take. Beginning with some of the other people we talked to in Poland and then moving West, that was not accepted. One person we talked to in Poland reminded us that in the very early days, in 1989-90, when Poland implemented the major reforms, they did not have a membership perspective. That didn't come until, I think, 1991, when they finally achieved the membership perspective. So why should Ukraine keep saying they have to have this? To a large extent, they have to have the political will to make these tough decisions.

When you get all the way to Brussels, it was more, why did they expect to have that? That was never in the cards for the Riga Summit. There was no consensus in the EU to expand any further. From a commission perspective, they can only do what the Member States will agree to. They feel, I think, constrained. Maybe they agree, but otherwise they feel constrained.

One interesting comment we had—and this goes to a comment Nick made about this policy—one person said the rules of the EU are the acquis communautaire: it's this whole body of law that you have to undertake when you join the EU. This person told us that the Association Agreement requires countries to adopt 70 to 80 percent of the acquis communautaire. In not getting a membership perspective, they are being forced to adopt a huge amount of European law and regulation. Is there an imbalance between the amount they have to take on and what they are getting? That was an interesting element.

One thing I touched upon because I was involved in our assistance to Poland in 1989-90 and 1991, when the Wall came down. I see some significant comparisons between Ukraine and Poland. I would ask people about these. Both had huge debts, were in economic freefall. People don't remember now how bad the Polish economy was at that point. I was the U.S. debt collector, essentially, from 1985 to 1988, when I worked in the embassy in Warsaw, and I had to go in and pound on the finance minister's desk and say, "Please pay. You just had a debt rescheduling agreement. You agreed to make these payments. Why aren't you paying?" I was moderately successful, nothing more than that. It had nothing to do with me. It had to do with their deciding they were going to do that.

But the reality is there are many more differences. The economic situation may have a comparison, but something that came back repeatedly was this issue: Is Ukraine in year one or two or is Ukraine in year 24? For many of the reform elements, Ukraine is not a destitute communist system the way Poland was in 1989. It's something different. I'm not sure I can describe what it is, but it's something different. Particularly to the European Commission, I asked some of the people, what year is Ukraine in? They said clearly 24. They have been doing this for 24 years. They have seen the positive glow that we have again now, that we had at the time of the Orange Revolution. Too often they have seen that positive glow disappear.

Nick mentioned the fact that the Member States—I was told that only three Member States are running their own assistance programs in Ukraine. I have not checked that data point, so I can't confirm it. The commission, in its own part—some of the biggest programs they have ever run they are running in Ukraine. They have a program where they are giving macrofinancial assistance—the latest agreement was for €1.8 billion. Now, when you think about the money Ukraine needs, this is not a lot of money. This is the largest macrofinancial program the EU has had. They are doing things of an unprecedented nature, but it's not the types of numbers that Ukraine would hope they would be talking about.

Having worked on U.S. assistance, I looked a little bit at this. I wrote an article in early June in The National Interest on it. What is fascinating to me is that we are doing a whole panoply of assistance, different things, providing advisors to ministers—things that we did in other Central and Eastern European countries previously—but on the big picture of helping them meet their financing needs, we are doing credit guarantees. What is fascinating is that in the 1989-90-91 period, we would not do credit guarantees. We used grant money, foreign assistance funds. We purposely used those because it would not put an additional burden on Poland. In this case we are doing the opposite.

If you read the first President Bush's book that he wrote with Brent Scowcroft, he talks about all the budget problems we had in those times. This was before the Andrews Air Force Base budget agreement. We know we have budget problems again now. It plays both ways.

A couple of comments I will make on Russia and then I will stop.

The EU is doing something very interesting with Russia. They are doing it with Ukraine's full cooperation and approval. They went through a whole series of meetings, three-sided meetings with the EU, Ukraine, and Russia, to talk about the Association Agreement and this deep and comprehensive free trade agreement that the EU has negotiated with Ukraine, which now will come into effect on January 1.

I used to deal with U.S. trade negotiations. I expressed great curiosity, because the EU would never bring the United States to the table when they were negotiating with another partner. It's rather unheard-of to have trade negotiations—they can be multilateral when all are joining, like the Trans-Pacific Partnership talks now, but if you are doing a bilateral trade agreement, you usually don't allow a third party at the table. Well, the EU and Ukraine have both agreed to have Russia at the table because they want to ameliorate the concerns that Russia has expressed.

When we left in mid-May, the feeling was that a deep and comprehensive free trade agreement would go into effect on January 1. The EU had made that decision, Ukraine was on board with that, and the Russians did not seem to be objecting.

That will have an interesting reality for Ukraine, because the access to the European market contained in that Ukraine has already been given. So all that they are going to get, they have. That will give Europeans access to the Ukrainian market.

With that, let me stop. I know we are both prepared to take your questions.

DAVID SPEEDIE: First of all, Nick, you mentioned that one sort of sentiment in Europe is that Ukraine having decided to join Europe, that ought to be honored. I think it's almost inescapable to say that not all of Ukraine has chosen to join Europe. If there isn't a civil war at this point simmering, at least there is a contest that plays out along what some have called whether Ukraine will be a monocultural or a bicultural country. Is this something that Europe is aware of and takes into account, the East-West divide and how that plays into the future of Ukraine in or out of Europe?

Related to that, the question of the Minsk accords. Clearly there has been some backsliding on the Minsk accords—the commitment to negotiate directly with the rebel provinces in the East, some degree of, if not federalism, at least confederalism, and so on and so forth. France and Germany, along with Russia and Ukraine, are part of the so-called Normandy group, and some have said the United States should join that group. What is the sense in Europe? What is the awareness of the Minsk accords and how they are being followed, not followed, and so on and so forth?

In other words, it seems to me these are two important questions for the future of Ukraine, in or out of Europe.

NIKOLAS GVOSDEV: My impression, based on some things that people said and then just following it through, is that particularly in Germany, as well as in France, as well as in some of the other countries, there is a need to keep Minsk alive. They know that Minsk is failing, that there have been these violations of the ceasefire, that the Russians haven't done things, that the Ukrainians haven't done things, but that there is no alternative. If you don't have Minsk II, what is there? Minsk III, Minsk IV. But there is no alternative to that process. So there is almost a willingness to let a lot of things get swept somewhat under the rug if it keeps the process alive.

So I think there is that sense. Some of it is based on the hope that eventually you are going to have a diplomatic solution, that some of the pieces of that diplomatic solution may be there. But it also rests on this question, too. At least my impressions—not that people were saying this outright—impressions that I was picking up and I have seen in some of the writings are that you are also seeing a shift in terms of a narrative. The narrative on Ukraine generally up to this point has been largely that it is Russian aggression. Russia could have negotiated out some of these things. It chose not to. Russia is at fault. But you are starting to see—and some of it is linked to, perhaps, unwillingness in the reforms, perhaps not implementation—the groundwork being laid well, but the Ukrainians didn't do things that they should have done, and now it is really a pox on all the houses.

It is not particularly strong yet, but I can see the outlines of that, where you could see over the next number of months where people start to shift and say, "This is no longer about Russia. It's about two countries, neither of which is willing to carry out its commitments to each other and to this process. So maybe we shouldn't take sides or we shouldn't be as involved"—again, very much, I would say, bubbling in a few spots. Whether that becomes dominant or not depends. When we were there, there was concern about, was there going to be another complete breakdown of the ceasefire and you would have this all-out military offensive?

That didn't come to fruition—and again, this sense that if sanctions are going to be revisited come December, when the European Commission needs to meet and discuss whether they are going to let the sanctions be renewed after January, is it that Russia needs to have completely complied with Minsk or it needs to comply enough to say that there is a process in place. You did have some references to "well, look at what happened in 2008 with Georgia." The ceasefire was never implemented, all of the provisions, but it was enough so that everyone could move on. I think what happens over the next number of months may be critical there.

In terms of the cultural choice, you do see this—some of the people that we met with gave us articles or gave us things. There were some people who were raising questions about, is there a true European orientation or is this just a tactic that governments use to try to get money and resources? How much does it penetrate down into the society and the like? A minority view certainly, but some views there.

Then also this question: What does it mean to be European and part of the European Union? Again, frankly, the further west we went, it wasn't just simply about the Ukrainians. We would hear complaints that Moldova is not doing what it should and, as I said also, about new members. If the European Union could begin to shed some Member States, certainly I think you would find in some parts of the EU that there would be a nice list of countries they would like to see perhaps removed from the European Union.

Again, these are debates that I think have been simmering for years in Europe. They were papered over as long as the economies were doing well. Expansion was sort of sold to people and sold to publics as relatively cost-free. Now that there are costs, you are starting to see that. You are seeing political rhetoric in countries about Britain being a good choice, whether Britain will even stay in the European Union. Two years ago, that was a fanciful fringe idea, the idea that Britain would leave the European Union. Now "Brexit" is something that people have to look at.

So I think there are a lot of things that are bubbling underneath the surface that the war has brought to the surface, the economic crisis has brought to the surface, and it will be worked out, I think, over the next weeks, months, and perhaps even years.

DAVID SPEEDIE: And one for John, then we will get to the floor.

John, first on oligarchs. One of the more, on the surface of it, bizarre developments in recent times has been the appointment of Mr. Saakashvili as governor of Odessa. There is a myriad of possibilities as to why this happened. One that I have heard is that Mr. Poroshenko wanted his own guy there to neutralize the oligarchs in Odessa, who, I guess, were particularly troublesome. Of course, Saakashvili has come in with a bit of slash-and-burn, I gather, firing people and so on. The question then is, who takes their place? So that is one question. I am really interested in your thoughts on Mr. Saakashvili.

The second thing is just the basic economics of this, the €1.8 billion you mentioned. That is a drop in the bucket. I have heard estimates of €60 billion required, €70 billion, whatever. I don't know. But this seems to be pretty ominous. Eighteen months after Maidan, that this is, from the Ukrainian point of view, the best that Europe can do seems to be a pretty bleak status quo.

JOHN CLOUD: On Mr. Saakashvili, he was just named while we were there. I have heard some of the same stories about reducing staff. In many countries, reductions of staffs are a positive thing, particularly if you liberate people to go off and be entrepreneurial, if the economic situation allows that. I am not sure the Ukrainian one does.

Clearly, he has named a very controversial person there. He must have known he would be poking a finger at his neighbors, and not gaining any ground on the other side, particularly with the bigger countries of Europe. It's going to be interesting to see what else Saakashvili does. Can he get things in Odessa moving in a positive way?

In any country, when you have political figures who are not nationals come in—we were talking earlier with some of the guests about Americans of Eastern European origin who went back to Eastern Europe and the difficulties they had gaining credibility in those countries, which is where they were from. They were born there, but they had lived most of their lives in the United States. For Mr. Saakashvili, he doesn't even have that connection. Whether or not he can connect is going to be a very interesting reality that they are going to deal with.

DAVID SPEEDIE: I should have said, and I'm sure everyone knows, that Mr. Saakashvili was the former president of Georgia—as John says, with no umbilical ties to Ukraine.

JOHN CLOUD: The whole question of the oligarchs is a fascinating one. When you look at the Polish experience, it is something the Poles didn't have to deal with. The quick reform right after communism meant there were—yes, there were business interests, but they were not the oligarchs, the way they are now. Mr. Poroshenko being an oligarch, but being a different type of oligarch—so many of the oligarchs have depended on the oil price and being able to resell oil and natural gas. Poroshenko was not in that business. As they raise the price on energy and they take away that price difference that people could make a profit on, it will be interesting to see how the oligarchs develop and what they do to maintain the standard of living that they have become accustomed to.

DAVID SPEEDIE: And the question of Ukraine's needs—

JOHN CLOUD: The one thing Ukraine has had this year that Greece seems to be having a problem with at the moment is an IMF [International Monetary Fund] agreement. They had that from the beginning of the year. They signed a new agreement with the IMF. That has at least provided a framework for them to deal with their financing gap. They are in the process now of negotiating with their commercial creditors to see if they can get some debt relief. That is very much up in the air at the moment. But we won't know what their ultimate financing gap is until they deal with that.

I would put this €1.8 billion in a different category from the financing gap. This is money designed for energy efficiency, different things like that. It's more the type of thing that USAID [United States Agency for International Development] does on behalf of the United States.

DAVID SPEEDIE: It's targeted.

JOHN CLOUD: It's targeted. But if there is determined to be a financing gap—and a lot of this speculation is, what will be the financing gap once they finish their negotiations with the private sector—then it's an open question of how that is going to be filled. As I said, the United States has, up until now, used credit guarantees to fill it. But we'll see what happens then.

QUESTION: David Musher.

I have two disparate questions. One has to do with the Russian boycott. There certainly are pros and cons for the EU and Russia. What are the metrics that are used to determine whether the boycott is efficacious or not?

The second question has to do with—I understand that the average pension in the Ukraine used to be $150 a month and is now $50 a month, because there has been a two-thirds devaluation or inflation. I don't know which way it is. How much more can the Ukrainians take of devaluation vis-à-vis reforms?

JOHN CLOUD: To go to your second question first, keep in mind that, yes, the Ukrainian currency has devalued significantly against the dollar this year, and against the euro, but to a large extent, the Ukrainians are buying things in that currency. They are not buying items imported from the United States or from Europe that would be seeing that huge price change. At the same time, there is significant inflation in Ukraine. So they are seeing it devalue that way as well. It's a serious question. In Poland you had hyperinflation in 1989 and the inflation came under control in 1990 after measures were taken, significant economic reform was taken.

The dilemma usually is that if you don't take the significant economic reforms, the inflation worsens; it doesn't get better. That depreciation of the value of the pensions just continues. It is hard to identify a point at which it can no longer be done.

On your first question, I'm not sure what metrics they are using. We had only a few comments—the countries we visited largely turned away from dependence on the Russian market in the late 1990s when Russia had its financial problems. So while there still will be companies in, for example, Lithuania that export mainly to Russia, they are few and far between.

We did not get a lot of comments in Lithuania or Poland that their companies were being that hard hit by the Russian boycott, the counter-Russian sanctions. There was a sense—because, remember, most of the sanctions that the EU and the United States have imposed are not trade sanctions. They are visa sanctions. They are on financial assets, freezing assets, and the like. You have an apples-and-oranges situation on how it is being applied. Definitely there was some effect being felt, but it was not highlighted in our discussions.

NIKOLAS GVOSDEV: In some cases, again, people were creative in ways around the sanctions. One of the interesting byproducts of the Russian decision to go ahead with the creation of the Eurasian Economic Union is that, as we heard, some Lithuanian businessmen who were dealing with Russia that found boycotts were just simply exporting to Belarus and a Belarus firm was re-exporting to Russia. As people have talked about, there has apparently been a massive rise in seafood exports from Belarus—Belarus with no coasts—

DAVID SPEEDIE: With its ample coastline.

NIKOLAS GVOSDEV: With its ample coastline. So you definitely have some of that.

It has definitely been in other parts of Europe that we didn't visit. Obviously, the Greeks and Spain were hit hard by some of the countersanctions because of agricultural products. But the Russians have not been able to completely source from—last year there was talk—when President Kirchner in Argentina was saying, "Well, we can fill the gap. There are Argentine products that we can send to Russia," that hasn't played out. When you look at some of the economic numbers from Russia itself, it's also clear—certainly Deputy Prime Minister Rogozin and some of the others were hoping that this would be a boon for internal Russian development.

As John pointed out, it's the financing which is the critical thing. It's not that Europeans won't sell to Russia; it's that they are no longer able to finance the long-term purchases—the idea that you can have anything more than a 90-day revolving credit to be able to buy things. Then some of these technology exports that are now frozen, particularly in oil and gas.

But the Russian ability to kind of use that to jumpstart the Russian agricultural sector and some of the other Russian sectors of the economy has been mixed so far. It hasn't been as successful. What you have seen from some of the Russians is, "Well, let's just wait to see if these sanctions will die by the end of the year before we make any hasty decisions about changing suppliers."

DAVID SPEEDIE: I look forward to some Belarusian lobsters.

QUESTION: I'm Tyler Beebe. I too have two disparate questions.

The first is, two or three weeks ago, we read where the Russians and the Ukrainians were not able to come to a pricing deal on natural gas supplies. Could you update us on what that situation is? Is there any remaining threat that we will see a repeat of what happened three or four years ago when there was a severe cut in natural gas supplies right in the winter, causing all kinds of perturbations?

The second question is, you were in Lithuania. We all know that there are sizable Russian-speaking contingents in all the Baltic countries. To what extent did you sense that Putin and Russia are fomenting dissatisfaction and unhappiness in all three countries, but particularly in Lithuania, amongst the Russian-speaking populations?

NIKOLAS GVOSDEV: On the gas, it's summer. Part of it is that right now the pressure for getting a gas deal is lessened because you don't have as much demand over the summer, and so it strings out to the fall.

There are also some other things that are in play. One is that the Russians initially announced that they wanted to end all gas transit to Ukraine by 2019, to Europe. A lot depends on whether or not this second Nord Stream line gets built that directly connects Russia to Germany. The other thing is that the Turkish project is up in the air. The Russian Gazprom canceled the deal with Saipem, the Italian engineering firm that was supposed to start building the pipeline, and says that they are going to send that back out to tender.

I think some of this is just the usual dance between Moscow and Kiev—"Okay, we're going to cancel. We can't agree on a price"—and then they will go work it through. The Ukrainians will discover what they can get or can't get in terms of sourcing gas from other sources. The Russians will make their decision about how much gas they plan to send to Europe and what the Ukrainian role will be. I'm pretty sure that throughout the rest of the summer and early fall, we will have this back-and-forth, and then suddenly in November there will be a deal on a gas price and crisis averted again for another year, with all of the disruption that that creates.

The longer-term issue with this, though—one of the questions—and this goes to the reform question, the question of environment—is that Prime Minister Yatsenyuk very early on was looking for very detailed Western investment in the Ukrainian energy sector. That hasn't occurred, for several reasons.

One is—this is the question, as Ambassador Cloud pointed out—yes, you may be at war and conflict, but there are things you have to do now. There are just certain reforms of the Ukrainian energy sector that, until those happen, you are not going to get Western investment. No Western investor is going to put money into a system where you are going to have two tiers of pricing or where you have to sell at a domestic price that is low and you don't get to sell at the world price because that is what has fueled so much of the corruption in Ukraine for the last 20 years: I buy at a domestic low price, I don't use it and I resell at the world price, and I get to pocket the difference.

The war has meant that all of the energy projects in eastern Ukraine are off the radar now because no Western company is going to invest money in Donbass as long as you have separatists and war. But even in Western Ukraine, these promising projects where people were holding out because of the collapsing world energy prices—shale just isn't a good investment anymore with oil prices the way they are now. So those projects around Lviv and elsewhere that people were saying—Ukrainians, I think, are coming back to a sense where they were hoping that there would be this great Western investment in their energy sector that hasn't materialized. That will be a factor.

Then the Russians are going to have to look at things like, "How are we going to get energy to market?" If the Russians still don't have the final price for some of the gas exports to China—and so some of that gas that the Russians a year ago were saying, "Well, the Europeans—we'll send it to China." If you don't have a price with China, that gas needs to go back to the West.

So I think you will see the two sides—they will keep moving closer and closer and then suddenly will find a compromise price that everyone reluctantly accepts, and the crisis will be averted for another year.

JOHN CLOUD: An interesting thing you have seen is that in this down season Ukraine has been getting about two-thirds of its gas from the West. You have at least two EU members that can ship-reverse on the pipelines. They are only getting about a third of the gas right now from Gazprom. I believe I read that in the media, so it's available out there.

On Lithuania, Lithuania has a much more comfortable position than Latvia or Estonia. The Russian minority is not the second-largest group in Lithuania. The Polish minority actually is. The Polish minority is a little bit over 5 percent. I think the Russian minority is a little bit under 5 percent. The Russian minority since 1991 has not been in any way—they don't have a different citizenship situation. If they declare themselves—and I don't remember the exact rules, but they were favorable to people becoming Lithuanian if that's what they wanted to do, even if they had a Russian ethnic background. So it is not as easy to make the case that the Russian minority is disadvantaged in Lithuania.

QUESTIONER: It's Estonia where the major problem is. About 30 percent of the people are Russian-speaking, I think.

JOHN CLOUD: Somewhere around that. I don't remember the exact number.

The one thing I would hear from Russians when I was there was that they just couldn't understand why the Lithuanians wanted to be independent—"why would you want to leave us" type of thing. But the Lithuanians had no problem answering that question.

DAVID SPEEDIE: The British said that about 250 years ago.

You mentioned, Ambassador Cloud, Prime Minister Yatsenyuk. We were talking earlier, before the session started, about the decline of his party, as it were, somewhere below the 5 percent approval level. Clearly, what one might look for and hope for in Ukraine, especially if one is Ukrainian, is some degree of continuity. You mentioned also the fairly short-lived euphoria of the so-called Orange Revolution and so on. This is a country that has been through so much upheaval, turmoil. What is the political future if Yatsenyuk is indeed in precipitous decline? Is there a next generation?

The other thing is that in the last election some of the familiar names kept coming up, the people who had been around, Mrs. Tymoshenko and so on and so forth. Is there an up-and-coming cadre of new leadership?

JOHN CLOUD: It's my understanding that the Parliament had a larger group of new people than Ukraine had seen in the past. You still have a lot of the old names.

In Poland in the early years after 1989, there were changes in the prime minister and changes in the government, even in the first few years when it stayed Solidarity, but the policies stayed roughly the same. So you had continuity on policies. Even when the post-communists came into power, when Kwasniewski's party came in, the policies did not change very much. There was a consensus on what needed to be done that was broad-based.

It is not clear yet if Ukraine is developing that consensus. Again, this is something the oligarchs will fight against because that will go right at their pocketbooks.

NIKOLAS GVOSDEV: I think it's true that there are some new faces in the Rada, but you also have a lot of people who have been around. The question is, are the new people of sufficient weight to begin shifting the system or do people get captured by the old system—patronage and support. You ran as a reformer, but then you suddenly learned to love this old system as you took part in it more, as you go through. I think that is a question.

One of the things that some people did say on the trip—and we know this from the Eastern European experience, Central European experience—sometimes you have to make a choice between having a political career and pushing through reform. Yatsenyuk initially even said that when he became acting prime minister. He said, "This is a kamikaze mission, and I don't plan to survive. I'm going to have to do what needs to be done." The question is, the longer he stays there, does he start becoming comfortable with being prime minister and wanting to keep that job, and so that commitment—but you look at some of the people in Poland and elsewhere who did push through the reforms. They did so at the cost of any future political career. They either knew at the time or they have come reluctantly to accept the reality that they would not be political players. But they did the reforms because they had to be done.

One of the interesting things—not just interesting, but troubling for me looking at what is going on in Ukraine at this point—John mentioned that we have seen the Rada beginning to fiddle with reform, because as politicians look at poll numbers—all right, the energy prices are going up, but let's expand the number of people who can get subsidies. Well, we need to pay back loans, but we will let people pay back at an advantageous rate for the hryvnia to the dollar or the euro.

You don't quite see yet the culmination of a—and this is where I think the continuity question, policy continuity—policy continuity worked in Central and East Europe because people knew that there was no choice and they accepted that if they did reform, things would get bad, but they would get better, but if they didn't do reform, things would get bad. I think that the problem—and you have seen this with Tymoshenko kind of in the background, because her party proposed some of these things in the Rada, rolling back or fiddling with reform, as she waits in the wings—is to be able to say, "Look, Ukraine has to do these things, and if it doesn't do these things, it doesn't lead to an improvement."

I think that may be a different case than what you had in 2004. When the Orange Revolution faltered in 2005-2006, there were alternatives, and Ukraine kind of went to its old balance between Russia and the West and we will extract things from both sides. It is not as clear moving forward that even if Russia wants to—as the Greeks have found out as well—Russia simply doesn't have the position to give the kinds of resources.

If Ukraine doesn't do reforms on the grounds that they are too hard, that doesn't mean that conditions will get better in Ukraine. You don't quite yet see politicians who have made the case to the Ukrainian people and peoples across the cultural line, to say, "We have to do these things because the alternative to not doing them is also going to be a lot of pain and a lot of economic collapse."

This is one of the things that is troubling about what has happened in Moldova over the last—the Europeans have tracked this—which is that you have had this disillusionment with the EU in Moldova because people believe that the Eurasian Union is a viable alternative and that "well, doing the things the Europeans want is too hard, so we'll go back to Moscow and Moscow will find a way to fund it." Or maybe now people think that the Chinese somehow will do it. The Greeks also had that illusion for a few days, that China was going to come in and bail them out.

But if you don't have that sense—if you don't do these reforms, you are still going to have the pain. If you still have politicians saying, "There's a way for us to avoid the pain," then you are going to muddle through and you are not going to have that happen.

DAVID SPEEDIE: On that, we have come to the end of our fascinating hour. I said in the beginning that this would be difficult to capture in such a short period. I think you have both done a wonderful job of leading us through the situation in Ukraine, the view of Ukraine in Europe, and along the way, some very interesting insights into developments and the situation in Europe itself.

Nick, it's always a pleasure to welcome you. John, I hope we will welcome you back. But in the meantime, thank you so very much.