Ukraine is key to resolving Russia's crisis

Russia's way out of crisis
Russia's way out of crisis   

Russia's economy is in free fall due to a combination of low oil prices and economic sanctions. This is precisely the moment to resolve the Russia-Ukraine crisis and rescue both nations from economic chaos.

President Vladimir Putin of Russia and President Petro Poroshenko of Ukraine must act to restore normalcy, internally and with their neighbors. They need German Chancellor Angela Merkel's help to set a framework for negotiation. For Europe, peace at its borders hangs in the balance.

Economic sanctions have taken their toll on Russia. The oil-price collapse has further weakened the regime, which depends on oil and gas for half of its budget revenue. But this week, the situation became far more dire as the Russian ruble fell 50 percent since the start of the year. Russia's attempt to raise interest rates to 17 percent failed to get Russians to keep their currency in Russia. Russians have lost almost half their real income. With $30 billion in loans dues in December and another $150 billion next year, Russia cannot finance its debt.

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German Chancellor Angela Merkel and Russian President Vladimir Putin
Pedro Ugarte | AFP | Getty Images
German Chancellor Angela Merkel and Russian President Vladimir Putin

For the first time since Russia invaded Ukraine and annexed Crimea, pressures on the Russian economy are cracking President Putin's aura of invincibility. It is not just the elite around Putin who suffer. President Putin cannot claim to advance Russia's place in the world if sanctions and a global oil-price collapse have brought Russia to its knees.

The fall in oil prices is driven by market fundamentals. Technology and innovation will keep North American production strong even with low oil prices. Iraq, Iran, Venezuela, Algeria, Nigeria – as well as Russia – are too cash-strapped to cut output to drive up prices. Saudi Arabia is not going to sacrifice its market share in Asia to bail out these mismanaged economies. With oil demand weak in Asia and flat in OECD countries, expect oil to stay low next year.

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But Russia and Iran have a unique problem beyond mismanaging their energy resources: Sanctions have shut them off from international markets, and they cannot refinance their debt. With debt payments pending, Russian oil giant Rosneft attempted to float a domestic bond, only putting more cash into the economy and accelerating the ruble's dive. Multiply that experience by debtors still to come.

The path to normalcy in Russia is stability and security in Ukraine. That was the fundamental purpose of Western sanctions on Russia in the first place. Ukraine needs this stability to consolidate confidence in all Ukrainians that they can thrive in a Ukrainian state. But Ukraine and Russia need help to forge a pact on stability. Left to their own instincts, Russia and Ukraine will each come to the negotiating table with demands that will cause the other to walk away.

That is why Germany plays a key role in resolving the current impasse. Chancellor Merkel is unique in her relationships of trust and influence with Presidents Putin and Poroshenko. For Russians and Ukrainians, Merkel is the key to Europe. The EU and the United States need to coordinate with her team, but she must lead this process.

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The elements of a deal are well known. Russia needs to take its troops out of Ukraine, stop all support for the insurgency in Ukraine, and cease its media battle against the Ukrainian people and state. Ukraine must devolve authority to local governments and ensure that language and culture are not used as a personal referendum on who is a Ukrainian citizen. Russia must sell gas to all parties to its west on market terms. Ukraine must transit gas and pay its bills for the gas it consumes.

All parties must accept a massive presence by the Organization of Security and Cooperation in Europe to monitor the Russia-Ukraine border and developments on ground in Ukraine. The minute one observer is jailed or mistreated, the deal is off. Some will try to try to solve Crimea's future in this package. That is too complicated and must be deferred.

In exchange for its retreat from Ukraine, Russia will receive access to capital and to the technology to develop its energy resources. Ukraine must rise to implement the economic reforms that will win the confidence of international donors and investors and make its economy competitive.

Failure to grab this moment would be tragic. Russia's alternative is a deepening economic crisis that could lead to internal protest. Expect President Putin to respond with an iron hand that entrenches his authoritarian control on politics and economics. Ukraine's alternative is a continued freefall as the war in the east drains its coffers and makes economic reform seemingly insurmountable.

Sanctions are a policy tool to create opportunities for better outcomes. The collapse in international oil prices has turned that tool into an opportunity that can restore an economic livelihood to Russia and Ukraine. Skeptics will argue that Russia simply wants a Ukrainian frozen conflict, even if it abuts against Russia's own internal economic collapse. But perhaps this is the moment to test President Putin's interest in a better future for his citizens. For Russia and Ukraine, there are only upsides to try.

Commentary by Jason Bordoff and Carlos Pascual, who are, respectively, founding director and fellow at Columbia University's Center on Global Energy Policy. Ambassador Pascual established and directed the State Department's Energy Resources Bureau as Special Envoy and Coordinator for International Energy Affairs from 2011 to 2014 and has served as U.S. Ambassador to Mexico and Ukraine. Mr. Bordoff previously served as a White House energy advisor to President Obama from 2009 to 2013. Follow them on Twitter @pascualce1 and @JasonBordoff.