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Conflict Economics: Eastern Europe 2020

Updated: Nov 25, 2020

Policy pulse - George Anjaparidze - 28 January 2020

Belgrade – Pristina: cautious optimism for 2020

Economic costs continued to mount in 2019

Kosovo’s consumers continued to be harmed by the 100% tariffs imposed by Pristina on Serbian imports. The indecision of the EU on enlargement, especially with respect to North Macedonia, was perhaps the most discouraging development of 2019. By making EU enlargement in the Balkans more elusive the EU diminished prospects for normalization of relations between Pristina and Belgrade. The prospect of EU membership, in particular the eventual access to EU structural funds, is a major economic incentive for normalizing relations between Pristina and Belgrade. Access to EU structural funds would result in about a 20-fold increase in public finance flows from the EU.

There is room for cautious optimism in 2020 for restarting negotiations but economic incentives are still needed

2020 holds greater promise. At the local level, annual data will soon be available that will make it possible to assess the negative impacts of tariffs on consumers in Kosovo. Such an assessment would empower the incoming Kosovo government with evidence on the economic benefits of suspending the tariffs. Given the solid nationalist credentials of the likely incoming government, suspending the tariffs would unlikely be perceived by the public as appeasement to Belgrade.

Internationally, a greater US involvement is likely to yield results. President Trump’s appointment of US Ambassador to Germany as US special envoy for talks between Belgrade and Pristina can be a source of positive leverage. The agreement to in principle resume direct rail and air services is evidence of US effectiveness. Furthermore, the new EU Foreign Policy Chief, Josep Borrell, could play a key role by putting on the table the promise of near-term economic support for parties to resume dialogue. This could be done credibly given the on-going review of the methodology for EU enlargement. The updated methodology, in part, aims to front load the economic benefits to candidate countries from EU integration.

Ukraine – Russia: in need of a rebalance?

The situation in Ukraine continues to impose economic costs on all parties

The conflict in Ukraine imposes significantly higher costs on Ukraine (compared to Russia) in both relative and absolute terms. External estimates from academics indicate that output in the Donbass region has fallen by about 50% due to factors directly attributable to armed conflict. In comparison, like for like estimates point to a fall in economic activity of about 15% in the rest of Ukraine. There are no readily available like for like comparison for assessing the impacts on Russia. However, the range of estimates of the relative impact of Western sanctions on Russia, suggest that sanctions have lowered economic output by 0.5 - 1.5%.

The cost of waging war is also lower for Russia. For most of the conflict, Russia’s direct military resource commitment has been relatively small (estimated at one battalion plus tactical operations combined with positional warfare and indirect fire). In contrast, Ukraine has incurred major losses while having to approximately double its military expenditure. This means Russia is able to perpetuate the conflict at a fraction of the cost incurred by Ukraine. While Ukraine’s recently improved readiness has enhanced its ability to increase costs for Russia, Ukraine’s ability to deploy this capability at scale is constrained by overall Russian military superiority and the threat of a massive invasion of Ukraine.

Rebalancing the cost equation of the Ukraine conflict and introducing a “Marshall Plan for Donbass” can help normalization

Under these circumstances, the outcome of negotiations in 2020 is unlikely to be successful or at best will be extremely unbalanced (disproportionately favoring Russia). In terms of economic instruments, there are two important steps that should be considered by Ukraine’s Western partners. First, there is a need to rebalance the cost dynamic (e.g. new rounds of more intense sanctions). Second, predictable and long-lasting resources need to be provided on an unprecedented scale that will economically integrate the Donbass region into Ukraine and Europe. A “Marshall Plan for Donbass” needs to be committed to ahead of further Zelensky - Putin negotiations. This should give confidence to Ukraine that with time the region will be integrated into Ukraine, even if in the short-term Russia continues to hold sway. Crimea is a more complex issue, with conditions in 2020 unlikely to be conducive for dialogue. However, there may be attempts to bundle the Crimea issue as part of the Donbass negotiations.

Georgia – Russia: from bad to worse

Georgia – Russia relationship goes from bad to worse in 2019

2019 saw the Georgia – Russia relationship hit lows not seen since Russia’s 2008 invasion of Georgia. Georgia still does not have diplomatic relations with Russia. Nevertheless, in recent years, relations improved with resumption of direct flights and more trade. However, in June 2019 an error of protocol sparked mass protests in Georgia against continued Russian occupation of two Georgian territories. In response, President Putin issued a decree banning all direct flights between Russia and Georgia. As a result, Russian airlines and consumers have incurred the biggest absolute losses. The impacts on the Georgian tourism sector were to a large extent mitigated due to good connectivity available through regional hubs such as Minsk, Riga, Almaty and Istanbul. In a more strategic context, the flight ban is a missed opportunity for Russia to recover its soft power potential and makes it more difficult to forge closer economic and human to human ties.

Political volatility is expected in 2020 but economic initiatives can create opportunities for collaboration

2020 is an election year in Georgia, with an uncertain outcome. According to the latest polling data, no political party has more than 20% of public support. The ruling party still leads but current polls suggest it is unlikely to win an outright majority. However, there is high uncertainty in the polling data as about 1 in 3 survey participants either refused to answer or do not support any political party. During the period in the lead up to elections, Georgia is particularly vulnerable to external meddling. For example, Russia may give a platform and engage in dialogue with fringe political groups in Georgia to resolve an engineered crisis or credit them with a removal of the ban on direct flights. There is also continued concerns about how Russia might react to any developments related to Georgia’s closer integration with NATO.

On a more optimistic note, Georgia’s closer cooperation with the EU on economic issues has not been a source of confrontation with Russia. The joint statement, by foreign ministers of Georgia, Moldova and Ukraine, calling for an enhancement of integration with the EU could also create opportunities for cooperation with Russian investors and business community.

Other trending topics to watch in 2020:

  • The Moldovan presidential elections are scheduled for the Fall of 2020. It is also unclear how long the current minority government will hold, so parliamentary elections in 2020 may also be a possibility. In the lead up to elections, Russia will likely exercise more soft power in Moldova through supporting investments projects, proposing collaboration through the Eurasian Customs Union and offering other economic incentives. Russia may also use its leverage in the Transnistria region to help Moldovan authorities show results from striking a collaborative approach with Russia. Therefore, some incremental improvements in the lead up to the 2020 elections are a possibility in the Transnistria region.

  • The negotiations between Armenia and Azerbaijan have made little progress in 2019 on the normalization of the Nagorno Karabakh conflict. The latest indication is that parties may no longer be comfortable with using previously accepted principles as the basis of negotiation. Therefore, the risk of an increase in hostilities in 2020 is more likely. This could be triggered by domestic political considerations, economic crisis or an attempted to repositioning on the ground.

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