The relationship between Russia, Ukraine, and the European Union will determine the political fate of Europe’s East for at least a generation to come.

At the moment, thanks to Russia’s aggressive forays into Ukrainian territory and internal affairs, the logic of war, deterrence, and spheres of influence prevails in the region. Yet one key aspect of the strategic situation must not be forgotten: whatever kind of order emerges from this fateful geopolitical threesome will rest not only on military balances, annexations, and America’s background role as a military superpower. The new postconflict order will also rest on a joint understanding of the economic relationship between Brussels, Moscow, and Kiev.

Let’s not forget that the trigger for the current crisis (though not its deeper geopolitical root cause) was an agreement focusing largely on economics: a deal to create a Deep and Comprehensive Free Trade Area (DCFTA) between the EU and Ukraine.

Long dismissed by Russia as a side issue that warranted no special attention, the Kremlin became increasingly nervous about this accord before the EU’s Eastern Partnership summit in Vilnius in November 2013, when Kiev was expected to sign a political and economic Association Agreement that would pave the way for the DCFTA.

Moscow finally understood the ramifications of what Kiev and Brussels had been negotiating for several years: that Ukraine, which Russia perceived as a core building block of its envisioned Eurasian Economic Union, was seriously considering siding with the EU instead.

Despite the EU’s weakness in classic geopolitical terms, Russia took the DCFTA and the Association Agreement seriously enough to block Kiev’s signing of the deal in November 2013. That triggered the Euromaidan revolution and the chain of events that led to Russia’s March 2014 annexation of Crimea and the ongoing standoff in eastern Ukraine.

Today, the logic of military confrontation prevails. But it is clear that the EU, Ukraine, and Russia must also strike an economic deal if ever they are to create stability between them that is more than skin-deep.

The overlap of interests among the trio is considerable. All three have an acute interest in an economically viable, less poor Ukraine. And yet, all three are also in a bind.

The EU, Ukraine, and Russia must strike an economic deal to create real stability.
 
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Russia wants neither a failed state on its border nor an impoverished Ukrainian population prone to unrest and uprisings. Moscow can’t prop up Ukraine’s ruined economy on its own. So the West is needed to help create the kind of stability Russia wants in its periphery.

At the same time, Russia does not want Ukraine to become too firmly integrated into the Western world. Nor it does want increased economic well-being in Ukraine to lead to political liberalization that could end up giving Russian citizens the wrong ideas.

So Russia needs to retain some control over political developments in Ukraine. But when Moscow interferes too bluntly, as it has in Ukraine’s eastern regions of Donetsk and Luhansk, it isolates itself internationally and brings about Western sanctions that endanger its own prosperity.

Kiev also faces many dilemmas. Ukraine’s economy is not viable without access to the Russian markets to which its big manufacturers and agricultural businesses are deeply tied. And Ukrainian heavy industries and households alike depend on Russian energy continuing to flow at affordable prices.

The paradox is that Ukraine can only achieve resilience as a country by interacting economically with the very country it wants to be resilient against. At the same time, real modernization can only happen with close ties to the West and to Western innovative creativity, technological know-how, and mature markets.

Ukrainian President Petro Poroshenko and his team urgently need economic development to improve the plight of their people and to retain their legitimate hold on power. Furthermore, playing it both ways, with Russia and the West, is the only way in which Ukraine can stay together as one, with both the pro-Western and the pro-Russian camps getting enough of the pie to stay committed to the shaky national common cause.

The EU wants to consolidate the Ukrainian economy, but it can’t turn a blind eye to the political side of the story. The EU must insist on democratic political reform, the fight against corruption, the protection of human rights, and the strengthening of the rule of law.

As it can’t force these measures onto Ukraine, the union relies on the less-than-clean local elites to implement the needed reforms. But for the ruling oligarchs in Ukraine, these issues are a nuisance at best and a threat to their power at worst. The oligarchs naturally have little inclination to reform themselves out of business.

The EU has a number of set goals that are not easy to reconcile. It needs Russia as a reliable energy supplier, but it can’t accept Russia’s landgrab in Ukraine and its establishment of a frozen conflict on another sovereign nation’s territory. The EU wants to prop up Ukraine, and it needs Russia’s help for that—but at the same time, the union is trying to strengthen Ukraine’s democratic credentials and sovereignty against Russia’s will.

The key for an economic deal among the EU, Ukraine, and Russia seems to lie in two areas. The first is the field of oil and gas, where mutual dependence is high and pragmatism should prevail. It is surprising that Russia has not yet used its energy weapon in any really painful way in this confrontation. That seems to indicate that Moscow’s dependence on EU and Ukrainian demand is just as significant as the EU’s and Ukraine’s dependence on Russian supplies.

The second issue is some sort of compatibility between the EU’s DCFTA and the Russian-led Eurasian Economic Union. An agreement on the former was finally signed in June 2014, although implementation has been postponed until January 2016 . The latter concoction is not taken very seriously in the West. And yet it seems inevitable that some sort of compromise between the two must be found so that Ukraine, a country that needs ties to both East and West, is not forced into a binary either-or choice.

In the economic field, the ball is primarily in #Russia's court.
 
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In the economic field, as in the larger geopolitical context, the ball is primarily in Russia’s court. Much will depend on whether, on issues that have been jingoistically hypercharged over the past year in Russia, the Kremlin finds enough pragmatism to protect its own economic interests.

The only hope is that the team in the Kremlin realizes that to achieve its ultimate goal—staying in power—it will need to make economic and political compromises. The coming months will show whether Russian President Vladimir Putin is strong enough to take that route, or whether he has been weakened by his own policies to the extent that he can no longer break out of his self-imposed straitjacket.