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Photo: AFP
Photo: AFP

George Soros | Europe’s Ukrainian lifeline

Just as Europe's bold experiment in international governance is faltering, Russia is emerging as a dangerous rival to the EU

Last weekend’s European Parliament election and presidential election in Ukraine produced sharply contrasting results. Europe’s voters expressed their dissatisfaction with the way that the European Union (EU) currently functions, while Ukraine’s people demonstrated their desire for association with the EU.

The EU was originally conceived to be an ever-closer association of sovereign states willing to pool a gradually increasing share of their sovereignty for the common good. It was an experiment in governance and rule of law, aimed at replacing nationalism and the use of force.

Unfortunately the euro crisis transformed the EU into something radically different: a relationship of creditors and debtors in which the creditor countries impose conditions that perpetuate their dominance. Given the low turnout for the European Parliament election, and if support for Italian Prime Minister Matteo Renzi’s were added to the anti-EU vote on the left and the right, it could be argued that the majority of citizens are opposed to current conditions.

Meanwhile, just as Europe’s bold experiment in international governance is faltering, Russia is emerging as a dangerous rival to the EU, one that has global geopolitical ambitions and is willing to use force.

Putin is exploiting an ethnic national ideology to bolster his regime. The annexation of Crimea has made him popular at home, and his effort to weaken the US’ global dominance, in part by seeking an alliance with China, has resonated favourably in the rest of the world.

But the Putin regime’s self-interest is at odds with Russia’s strategic interests; Russia will benefit more from closer cooperation with the EU and the US. And resorting to repression in Russia and Ukraine is directly counterproductive. The Russian economy is weakening, despite the high price of oil, owing to the flight of capital and talent. Using violence in Kiev’s Maidan has led to the birth of a new Ukraine that is determined not to become part of a new Russian empire.

The success of the new Ukraine will constitute an existential threat to Putin’s rule. That is why he has tried so hard to destabilize Ukraine.

Both the EU and the US are preoccupied with their internal problems and remain largely unaware of the geopolitical and ideological threat that Putin’s Russia poses. How should they respond?

The first task is to counteract Russia’s efforts to destabilize Ukraine. With the EU’s “fiscal compact" and other rules limiting the scope of government assistance, innovative thinking is needed. The single most effective measure would be to offer free political risk insurance to those who invest in or do business with Ukraine.

This would keep the economy running, despite the political turmoil, and it would signal to Ukrainians that the EU and the US are committed to them. Businesses would flock to a newly open and promising market if they were fully compensated for losses caused by political events beyond their control.

Political risk insurance may sound too complex to deploy quickly. Insurance of this type already exists. Private insurers and reinsurers such as Germany’s Euler Hermes have offered it for years. So have government institutions, such as the World Bank’s Multilateral Investment Guarantee Agency and the US’ Overseas Private Investment Corp. They must, however, charge substantial premiums to cover the cost of reinsurance.

Faced with high premiums, most businesses will simply opt to wait on the sidelines until the storm passed. That is why the governments concerned must take over the reinsurance function and use their agencies only to administer the insurance policies.

They could guarantee the losses in the same way as they underwrite the World Bank: each government would provide a modest pro-rata capital infusion and commit the rest in the form of callable capital that would be available if and when losses are actually paid out. The EU will have to modify the fiscal compact to exempt the callable capital and allow actual losses to be amortized over a number of years. Guarantees of this kind have a peculiar feature: the more convincing they are, the less likely they are to be invoked; the reinsurance is likely to turn out to be largely costless. The World Bank is a living example. ©2014/PROJECT SYNDICATE

George Soros is chairman of SorosFund Management.

Comments are welcome at otherviews@livemint.com

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