Economic Influence

Buying Direct and Indirect Influence

Timeline of Instruments 



Summary

As a former member state of the Soviet Union, Ukraine has deep economic ties to Russia. These ties range from foreign direct investments (FDI) and aid money to the manipulation of energy prices and trade. The Russian state has used these instruments to influence markets and manipulate Ukrainian policy to benefit their interests.

Arguably the most significant link between Ukraine and Russia are physical remnants of the former Soviet Union’s vast infrastructure used to transmit energy between the two nations. To this day, a large portion of Ukraine’s energy is sourced from Russia, making the nation vulnerable to Russia’s manipulation of energy flows. In particular, Russia has halted the transmission of energy to Ukraine on numerous occasions to coerce the nation to pay higher prices for gas or pay back its debt (12). But sometimes, there might be additional reasons for energy cuts. In June 2014, though Russia claimed to cut all supply of natural gas to Ukraine after the nation failed to pay back $1.95 billion in debt, the shutdown occurred at a time when disputes between pro-Russian separatists and the Ukrainian military had escalated (13). Furthermore, it seems that Russia has exploited gas prices in Ukraine in a reward-punishment system. For example, in 2010, Gazprom increased the costs of its gas prices from $50 per 1000 cubic meters to $230 per 1000 cubic meters, all while decreasing gas flows by 125 million cubic meters. The changes in pricing and availability came in response to the Orange Revolution which established a pro-Western Ukrainian government. Gazprom lowered its prices after the Yanukovych administration approved the Kharkiv Pact, giving Russia the ability to rent Crimean bases until 2042 (14). Russia also made similar moves in response to the 2014 Ukrainian Revolution, ending a deal that offered Ukraine lower gas prices in return for not signing agreements with the European Union (EU). Ultimately, Ukraine’s dependence on Russian energy makes the nation susceptible to energy attacks and manipulations, such that it is difficult for Ukraine to make policies independent of Russia’s opinion. This dependence becomes particularly problematic when considering the other economic influences that Russia also has over Ukraine.

Russia is one of Ukraine’s major investors: according to the International Trade Administration, Russia accounts for about 37.8% of foreign direct investment into Ukraine (15). But perhaps the most telling sign of Russia and Ukraine’s economic relationship is that, although the Ukrainian government has decided to increase taxes on companies that operate from offshore countries, Ukraine is excluding Cyprus, a nation through which Russian corporations transfer their money to Ukraine. Moreover, Russian FDI increased prior to the Ukrainian Revolution in 2014. In particular, from 2010 to 2013, foreign direct investment increased consistently year over year, from $4332 million in 2010 to nearly $6 billion in 2013. It is clear that Russians were investing more in Ukraine directly leading up to the conflict. But in 2014, foreign direct investment plummeted by nearly $4000 million, while official development aid increased dramatically from $0.7 million in 2013 to $6.8 million in 2014, according to an OECD report (16). These numbers might appear small since a large sum of Russian aid is known to flow through Cyprus prior to reaching its final destination within Ukraine, making transfers increasingly difficult to track and allowing Russia to intervene more subtly in countries. Additionally, the plummet in FDI prior to 2014 is reflective of Russian businesses divesting from business assets in Ukraine; if this investment disappears, Ukrainian jobs might dry up, goods might not be produced, among other important factors. When considering the close relationship between the Russian government and private industry, the rapid decrease in FDI might suggest a purposeful and strategic effort by Russia to economically cripple Ukraine by hurting productivity.

Conclusions 

Solutions designed to combat Russian economic influence should consider both the immediacy of the issue, given instances as in 2014 when Russia cut off energy supplies to Ukraine, as well as the long-term structure that allowed these situations to develop in the first place. These solutions include working with allies and partners to alleviate Ukraine from immediate vulnerabilities by diversifying the nation’s energy sources and regulating channels for covert money transfers; supporting Ukraine as it addresses its own domestic issues, including corruption; pressuring Russia through the use of sanctions and diplomatic campaigns that target Russia’s standing in the international community by condemning their actions in Ukraine.  Furthermore, these solutions can be applied more broadly to other nations where Russia attempts to use economic manipulation.

More specifically, Ukraine is not the only country subject to Russian economic influence. Nations such as Serbia, Bulgaria, Latvia, Hungary and Slovakia all have economies that are largely influenced by Russia. Particularly prevalent in the oil and gas industries, Russia has maintained strong levels of control that have not only forced these nations to pay significantly more for gas and oil than their Western counterparts, but have also given Russia the ability to impact government’s decision making and market development (i.e. liberalization, company mergers, taxation). Moreover, Russia has also been able to use loopholes within economic systems to evade taxes and investigations into corporate agreements, even those driven by Russian state-sponsored corporations. Ultimately, the prevalence of Russia using similar methods to economically manipulate other countries demonstrates that this is a developed and coordinated strategy designed to enhance Russian influence and fulfill Russian interests by manipulating the economic systems of foreign nations.


Sources

  1. Andrew E Kramer, "Russia Cuts Off Gas Deliveries to Ukraine," The New York Times, January 01, 2009,  http://www.nytimes.com/2009/01/02/world/europe/02gazprom.html.
  2. Oscar Jonsson and Robert Seely, “Russian Full-Spectrum Conflict: An Appraisal After Ukraine,”                                                                                                   The Journal of Slavic Military Studies, 28 no.1 (2015): 1-22.
  3. Lukoil, Annual Report, 2013, http://www.lukoil.ru/FileSystem/PressCenter/115808.pdf.
  4. Rosneft Oil Company, Consolidated Financial Statements, December 31, 2013,  https://www.rosneft.com/Investors/Reports_and_presentations/Consolidated_financial_statements/. 
  5. Jonsson and Seely, "Russian Full-Spectrum Conflict."
  6. Ibid.
  7. Ibid.
  8. "Russia Plans To Build An Undersea Gas Pipeline To Crimea," April 01, 2014,                                                                                 http://www.businessinsider.com/r-russia-plans-to-build-undersea-gas-pipeline-to-crimea-newspaper-2014-01.
  9. Neil Macfarquhar. "Gazprom Cuts Russia's Natural Gas Supply to Ukraine," The New York Times, June 16, 2014,  https://www.nytimes.com/2014/06/17/world/europe/russia-gazprom-increases-pressure-on-ukraine-in-gas-dispute.html.
  10. Lukoil, Annual Report, 2014, http://www.lukoil.ru/FileSystem/PressCenter/115800.pdf.
  11. "Ukrainian Artillery Destroyed Lisichansk Refinery," TASS, July 18, 2014, http://tass.com/world/741311.
  12. Edward C. Chow and Sarah Ladislaw, "Crisis in Ukraine: What Role Does Energy Play?" CSIS, February 22, 2018,            https://www.csis.org/analysis/crisis-ukraine-what-role-does-energy-play.
  13. Macfarquhar, "Gazprom Cuts Russia's Natural Gas Supply to Ukraine." 
  14. Jonsson and Seely, "Russian Full-Spectrum Conflict."
  15. "Ukraine Foreign Direct Investment & Foreign Portfolio Investment Statistics," Export.gov, September 27, 2017,               https://www.export.gov/apex/article2?id=Ukraine-foreign-direct-investment-statistics.
  16. OECD (2017), Geographical Distribution of Financial Flows to Developing Countries 2017, Paris: OECD Publishing, 2017.