George Soros thinks the future of the European Union is at risk over Ukraine

Soros at Davos in 2010.
Soros at Davos in 2010.
Image: World Economic Forum Derungs
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Financier George Soros told guests at a private dinner in Davos tonight that the next few days were critical for the fate of Ukraine, and called on Europe to urgently provide more financial support for the country or risk allowing Russia to “divide and dominate.”

Soros also announced that he has “finally” retired from managing money to devote himself to political philanthropy. He didn’t comment extensively on investing conditions, but said he was less bullish than other investors because of high uncertainty and volatility.

“The current market conditions are difficult for hedge funds,” he said, voicing skepticism about the wisdom of big investors such as pension funds putting large amounts of money in hedge funds and expecting to achieve better-than-average returns. Taken together, hedge funds’ “performance tends to be equal to the market minus a 20% management fee.”

Soros praised the quantitative easing program announced earlier today by the European Central Bank. “It’s a very powerful set of measures. It exceeded the very high expectations of markets and I think it will have an effect,” he said.

Here’s a transcript of his prepared remarks provided by his staff:

I have a lot to say…

First, some personal and institutional information. I have finally retired from managing my money. I have tried many times before but this time it’s final. I am devoting all my remaining energies to what I call my political philanthropy and the two activities are not compatible.

The OSF [Open Society Foundation] spent about $850 million of my own money in 2014 and it often acted as the lead member of larger consortia.

The OSF network covers practically all parts of the world through regional and national foundations, local offices and grantees. We are involved in practically all man-made problems in the world through supported institutions such as National Resource Governance Institute, Global Witness, Drug Policy Institute, International Crisis Group, European Council of Foreign Relations, the Institute for New Economic Thinking, Human Rights Watch and a number of government monitoring and civil and human rights organizations and educational institutions. They are all independent entities with their own identity, budget and governance.

We generally don’t get involved in providing relief from natural disasters but the number and severity of man-made disasters seems to be growing exponentially.

My increased distance from financial markets and my close exposure to global problems allows me to offer an overview of the present moment in history that combines the dynamics of financial markets with the dynamics of international affairs.

I observe a general trend toward the weakening of international organizations and the rise of nationalism in various forms. The root cause can be identified either as the decline of the West or the rise of the rest. Nothing irreversible. The decline of the West was first identified by Werner Sombart in 1890. There have been several ups and downs since.

The crash of 2008 destroyed the Washington Consensus. Since then both US and EU have been preoccupied with their internal problems.

A stable international order requires a hegemonic power or powers to contain conflicts. Since the West has turned inwards, emerging regional powers have tried to fill the vacuum and conflicts festered. At first the conflicts were concentrated in the greater Middle East; recently they have spread to Europe, Africa, and the Far East.

They all seemed eminently solvable on their own but they were all interconnected and the losers in one conflict tended to become spoilers in the others; that is why they kept flaring up.

Since the Crash of 2008 the situation became even more complicated. The Washington Consensus was based on the belief that markets tend toward equilibrium but 2008 disproved that belief. Since then both financial markets and international affairs have been in what I call far-from-equilibrium conditions. With the spread of unresolved conflicts to Europe the dynamics of financial markets and international affairs have become more intimately intertwined.

This has greatly increased the level of uncertainty, volatility and unpredictability both in financial markets and international affairs because financial events are extraneous to political dynamics and international affairs are extraneous to the dynamics of financial markets. So the increased interaction between the two is experienced as external shocks by both.

For example: the financial sanctions against Russia and the collapse of oil prices. Neither of them on its own would have caused a financial crisis in Russia.

This has made the job of hedge fund managers hellishly difficult. Great opportunities mostly missed or experienced as shocks.

I will risk one observation. The heightened uncertainty and volatility makes me less bullish than the markets because they militate against risk taking and reinforce the lack of investment demand.

But my preoccupation is with international affairs. As a general observation, misconceptions and an inability to adjust to unexpected developments play an increasing role in determining the course of events.

I shall focus on three interconnected issues that together constitute my top priority today: a new, resurgent Russia; a new, democratic Ukraine; and a disintegrating, deflationary and depressed European Union. I think those three issues provide a key to many others.

For me, it is déjà vu. I am reminded of 1989. The differences are illuminating. Then the Soviet empire was disintegrating and the integration of the European Union was at its peak; now Russia is resurgent and the European Union is disintegrating. This gives the new Ukraine a pivotal role. How it stands up to Russian aggression will determine not only the fate of Ukraine but also of the European Union. That is the point that the European authorities and the general public need to understand.

The New Resurgent Russia

I used to be very involved in the disintegrating Soviet Union. I set up a foundation in 1987, after Gorbachev invited Andrei Sakharov to return to Moscow “to resume his patriotic activities” and I became engaged in the reform process which unfortunately came to a bad end. I closed my foundation in 2004 but I continue to support educational and cultural activities.
Russia has become a mafia state in which the rulers use the resources of the country to enrich themselves and to maintain themselves in power. They preserve the outward appearances of democracy such as holding elections, but there is no rule of law and no arrangements for a legitimate transfer of power. I had an insider’s view of how Putin became President and I could tell you horror stories.

Putin became popular because he established stability after a period of profound turmoil and he used a portion of the oil revenues to assure people a rising standard of living. As long as he was popular, he was reasonably tolerant of dissent as long as it remained on the margin. But after a prearranged transfer of the presidency from Medvedev to Putin in 2012 the rising middle class joined the protests and Putin became repressive at home and adventurous abroad. He started supporting President Assad of Syria with arms on a large scale. He also felt threatened by the Arab Spring and from a Western point of view became a spoiler in the Middle East.

At first, Putin’s adventurous foreign policy was very successful because of the domestic preoccupation of Western powers. Remember how Putin saved President Obama from a domestic defeat by persuading Assad to surrender his chemical weapons? It was a diplomatic triumph. Then came the Association Agreement of Ukraine with the European Union in 2013. Putin had no
difficulty in outbidding the EU. The Agreement was designed for the Yanukovych regime that could not be trusted; therefore, it asked for a lot and offered little in exchange.

When Yanukovych accepted Putin’s offer all sides were surprised when the Ukrainian public rebelled. Putin insisted that the protestors on Maidan should be dispelled before Russia paid out the first $3 billion but the protestors, instead of running away, rushed to Maidan and it was Yanukovych who had to run away. Once more, on February 21, 2014 Putin ordered Yanukovych to use lethal force, but an unarmed but determined public prevailed and a new, European minded Ukraine was born.

The resistance on Maidan revealed a blind spot in Putin’s worldview. He has been so successful in manipulating the public that he simply could not believe that an unarmed public could successfully resist a fully armed police force. He had to pay a heavy price for his mistake: a previously manageable Ukraine turned resolutely anti-Russian.

But this setback merely served as an inducement for Putin to show his mettle. He replaced communism with a nationalist ideology based on ethnic grounds, social conservatism, and religious faith-the brotherhood of the Slavic race, homophobia, and holy Russia. When he annexed Crimea his popularity shot up to unprecedented levels. Now Russia has become a strategic rival of the European Union offering an alternative based on the rule of force as opposed to the rule of law.

At this point I have to introduce the weaknesses of the European Union. A repressive mafia state like Russia could not pose as a strategic rival if it were not for those weaknesses.

The euro crisis has transformed what had been a voluntary association of sovereign states who were willing to surrender a part of their sovereignty for a common cause into something radically different: a relationship between creditors and debtors in which the debtors had difficulties in meeting their obligations and the creditors imposed conditions that made it difficult for the debtors to escape from their subordinate position. That relationship was neither voluntary nor equal. The original concept of a united Europe fired the imagination of my generation. I considered the European Union the embodiment of the Open Society ideal. But for the citizens of the heavily indebted countries the EU became an external enemy that endangered their prosperity and future. The political opposition to the EU grew: it captured 30% of the seats in the European Parliament in 2014 but it had no leadership and no alternative to offer.

The European public and much of the European leadership have remained unaware of the transformation of a disintegrating Soviet Union into a resurgent Russia and the European bureaucracy operates in a bubble of its own creation. It started working on an Association Agreement with Ukraine on 2011 and in spite of repeated Russian warnings completed it in 2013. The heads of state were surprised when they were asked to sign it. In other words, the EU sleepwalked into a conflict with Russia.

No time for blow-by-blow account. Let me just tell you about the new Ukraine which is in many ways opposite of the old Ukraine.

The New Ukraine

I have been to Ukraine four times since the victory of Maidan. The new Ukraine really exists. It is a unique experiment in participatory democracy sustained by a spirit of volunteerism.

That spirit first manifested itself on Maidan and it has continued. What makes it unique is that it finds expression not only in fighting but also in constructive work. Many people in government and parliament are volunteers who have given up their well-paying jobs in order to serve their country.

Volunteers are helping the one million internally displaced people and working as advisors to ministers and local governments. I have spent most of my time with them and I am impressed by their maturity and determination.

They are up against the old Ukraine that is entrenched in the bureaucracy and the oligarchy, who are in cahoots. And of course they are up against the determinate hostility of Putin who wants to destabilize Ukraine at all costs.

The trouble is that the new Ukraine is a well-kept secret not only from Europe but also from the Ukrainian public. Radical reforms are being hatched but they haven’t yet been implemented.

It is instructive to compare Ukraine today with Georgia in 2004. Saakashvili immediately replaced the traffic police and removed the road blocks that were used to extort bribes from drivers and the public immediately recognized that the regime has changed. Ukraine has not found a similar demonstration project. The police reform in Kyiv is scheduled to start this week but people who need a driving license are still paying the same bribe as before.

The difference is that Saakashvili was a revolutionary leader with dictatorial tendencies. He stamped out corruption but eventually turned it into a state monopoly. Ukraine is a participatory democracy that does not have a single leader but checks and balances. Democracies move slower but that may turn out to be an advantage in the long run.

The big question is, will there be a long run? Ukraine is under immense military and financial pressure from Putin’s Russia right now. The Russian economy is heading for a decline under the dual burden of sanctions and lower oil prices but Putin has evidently decided that he can destroy the new Ukraine before it can establish itself and he hopes to do so while maintaining deniability. He could then turn around and become more cooperative.

Ukraine should be able to defend itself militarily as long as Putin maintains the pretense that the separatists are acting on their own but it urgently needs financial assistance. I believe Europe will respond favorably. Unfortunately democracies are slow to act and an association of democracies like the European Union is even slower. Much depends on the next few days. Not only the future of Ukraine but also the future of the European Union itself is at stake. I believe the loss of Ukraine would be an enormous loss for Europe. It would allow Russia to divide and dominate.

Conversely, if Europe closes ranks behind Ukraine, Putin would be forced to abandon his aggression. Right now, Putin can argue that all the troubles of the Russian economy are due to the hostility of the West and the Russian public finds his argument convincing. If Ukraine receives much needed financial assistance, the responsibility for Russia’s financial troubles will clearly lie with Putin and the Russian public will force him to follow the new Ukraine’s example.