Wake Up, Europe: George Soros on the Ukraine crisis and Russia

  • 2014-10-23
  • By George Soros

George Soros (photo: Flickr)

European leaders are failing to show adequate financial and military support for Ukraine, according to financier and philanthropist George Soros.

In an essay published in the New York Review of Books entitled Wake-Up Europe, he argues that Europe faces an existential threat from Russia and that “neither the European leaders nor their citizens are fully aware of this challenge or know how best to deal with it.” EU member states need to “wake up and behave as countries indirectly at war,” he says.

Mr. Soros, who has long been engaged in Ukraine since establishing a foundation there in 1990, argues that the EU has failed to recognize that the Russian attack on Ukraine is indirectly an attack on the European Union and its principles of governance. “Not only the survival of the new Ukraine, but the future of NATO and the European Union itself is at risk,” he says.

Mr. Soros argues that Putin’s Russia has outwitted the European Union. He argues that in the absence of unified resistance it is unrealistic to expect that Putin will stop pushing beyond Ukraine when greater influence over Europe by Russia is in sight. Europe and the United States are determined to avoid any direct military confrontation with Russia. Russia is taking advantage of their reluctance.

The danger for Europe is not only of a more powerful Russia, he says. It is Russia as a new model for a post-democratic society that is a fundamental challenge to the values of the European Union: Nationalistic values against freedom and international commitments, a strong autocratic leader against the insecurities of globalization and digitization, czarism against democracy. The danger is that Russia becomes an alternative model as it was during the decades of communism.

Mr. Soros argues that the EU has lost its way since the financial crisis of 2008. Instead of pursuing fiscal austerity, they should be investing in the war effort, even if that involves running up budget deficits. He points out that German Chancellor Merkel may be a staunch advocate of sanctions against Russia, but also supports the austerity policies that are weakening and dividing Europe, limiting its willingness to offer assistance to Ukraine.

He particularly criticizes the withholding of new financial commitments to Ukraine until after the October 26 election. This, he argues, has led to avoidable pressure on the Ukrainian currency reserves and raised the spectre of a full-blown financial crisis in the country.

Mr. Soros predicts that after the elections of October 26, Putin may offer President Poroshenko gas and other benefits on the condition that he appoints a prime minister acceptable to the Russian president. If this is rejected, Putin may attempt a smaller victory by opening by force a land route from Russia to Crimea and Transnistria before winter.

He argues that if this occurs, Russia will pose a threat to the Baltic States with their large ethnic Russian populations. Instead of supporting Ukraine, NATO would then have to defend itself on its own soil. This would expose both the EU and the U.S. to the very danger they have sought to avoid: direct military confrontation with Russia.

Mr. Soros proposes the following measures to assist Ukraine:

After the Ukrainian elections the IMF should provide immediate cash injection of at least $20 billion, with a promise of more when needed.


Bondholders should not take losses on their investments as a pre-condition for further official assistance to Ukraine. Such a move would save very little money and put Ukraine into technical default, which would make it practically impossible for the private sector to refinance its debt. Ukraine would then be entirely dependent on official donors.

Ukraine’s $18 billion of hard currency eurobond debt should be converted into long-term, less risky bonds. This would lighten Ukraine’s debt burden, enabling the government to use less of its scarce hard currency reserves to pay off bondholders and use the money for more urgent needs.

By participating in the exchange, bondholders would agree to accept a lower interest rate and wait longer to get their money back. The exchange would be voluntary and market-based so that it could not be mischaracterized as a default. Bondholders would participate willingly because the new long-term bonds would be guaranteed – but only partially – by the U.S. or Europe, much as the U.S. helped Latin America emerge from its debt crisis in the 1980s with so-called ‘Brady bonds.’

Under the current fiscal rules it would be more practical and cost-efficient to use the European Bank for Reconstruction and Development or the World Bank and its subsidiaries as intermediaries.

By trimming Ukraine debt payments, the exchange would reduce the chance of a sovereign default, discouraging capital flight and arresting an incipient run on the banks. This would make it easier to persuade the owners of Ukraine’s banks to inject urgently needed capital into them.


If it were restructured, the Ukrainian state-owned energy company Naftogaz could reduce household gas consumption by half, totally eliminating Ukraine’s dependence on Russia for gas. At present people cannot control the temperature in their apartments. Households should be charged the market price for gas, meters installed in apartments, and cash subsidies distributed to needy households. Though there is a will to reform from the incoming government, the expertise to do so is inadequate.

A project development team could bring together international and domestic experts to convert the existing political will into bankable projects. The initial cost would exceed $10 billion but it could be financed by project bonds issued by the European Investment Bank and it would produce very high returns.

Mr. Soros, in his article, writes:

Wake up, Europe

Europe is facing a challenge from Russia to its very existence. Neither the European leaders nor their citizens are fully aware of this challenge or know how best to deal with it. I attribute this mainly to the fact that the European Union in general, and the eurozone in particular, lost their way after the financial crisis of 2008.

The fiscal rules that currently prevail in Europe have aroused a lot of popular resentment. Anti-Europe parties captured nearly 30 percent of the seats in the latest elections for the European Parliament, but they had no realistic alternative to the EU to point to until recently. Now Russia is presenting an alternative that poses a fundamental challenge to the values and principles on which the European Union was originally founded. It is based on the use of force that manifests itself in repression at home and aggression abroad, as opposed to the rule of law.

What is shocking is that Vladimir Putin’s Russia has proved to be in some ways superior to the European Union—more flexible and constantly springing surprises. That has given it a tactical advantage, at least in the near term.

Europe and the United States—each for its own reasons—are determined to avoid any direct military confrontation with Russia. Russia is taking advantage of their reluctance. Violating its treaty obligations, Russia has annexed Crimea and established separatist enclaves in eastern Ukraine. When the recently installed government in Kiev threatened to win the low level war in eastern Ukraine against separatist forces backed by Russia, President Putin invaded Ukraine with regular armed forces in violation of the Russian law that exempts conscripts from foreign service without their consent.

It is easy to foresee what lies ahead. Putin will await the results of the elections on October 26 and then offer Poroshenko the gas and other benefits he has been dangling on condition that he appoint a prime minister acceptable to Putin. That would exclude anybody associated with the victory of the forces that brought down the Viktor Yanukovych government by resisting it for months on the Maidan—Independence Square. I consider it highly unlikely that Poroshenko would accept such an offer.

Putin could simply sit back and await the economic and financial collapse of Ukraine. I suspect that he may be holding out the prospect of a grand bargain in which Russia would help the United States against ISIS—for instance by not supplying to Syria the S300 missiles it has promised, thus in effect preserving US air domination—and Russia would be allowed to have its way in the “near abroad,” as many of the nations adjoining Russia are called. What is worse, President Obama may accept such a deal.

That would be a tragic mistake, with far-reaching geopolitical consequences. Without underestimating the threat from ISIS, I would argue that preserving the independence of Ukraine should take precedence; without it, even the alliance against ISIS would fall apart. The collapse of Ukraine would be a tremendous loss for NATO, the European Union, and the United States. A victorious Russia would become much more influential within the EU and pose a potent threat to the Baltic states with their large ethnic Russian populations.

The current European attitude toward Ukraine fails to recognize that the Russian attack on Ukraine is indirectly an attack on the European Union and its principles of governance. It ought to be evident that it is inappropriate for a country, or association of countries, at war to pursue a policy of fiscal austerity as the European Union continues to do. All available resources ought to be put to work in the war effort even if that involves running up budget deficits.

It is time for the members of the European Union to wake up and behave as countries indirectly at war. They are better off helping Ukraine to defend itself than having to fight for themselves. One way or another, the internal contradiction between being at war and remaining committed to fiscal austerity has to be eliminated. Where there is a will, there is a way.

The IMF should provide an immediate cash injection of at least $20 billion, with a promise of more when needed. Four billion dollars would go to make up the shortfall in Ukrainian payments to date; $2 billion would be assigned to repairing the coal mines in eastern Ukraine that remain under the control of the central government; and $2 billion would be earmarked for the purchase of additional gas for the winter. The rest would replenish the currency reserves of the central bank.

It is also high time for the European Union to take a critical look at itself. There must be something wrong with the EU if Putin's Russia can be so successful even in the short term. The bureaucracy of the EU no longer has the monopoly of power and it has little to be proud of. It should learn to be more united, flexible and efficient. And Europeans themselves need to take a close look at the new Ukraine. That could help them recapture the original spirit that led to the creation of the European Union. The European Union would save itself by saving Ukraine.

George Soros is Chairman of Soros Fund Management and author of The Tragedy of the European Union. A longer version of this article appears in the New York Review of Books (New York Review of Books)