Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

In exchange the IMF demanded big budget cuts, a 40 percent increase in natural gas bills an...

It was anything but the pot of gold that Yanukovych had promised. There were Ukrainian oligarchs with personal fortunes larger than this. Even without considering the sanctions to be expected from Russia, to have ...

In Kiev there was outrage. “We could not contain our emotions, it was unacceptable,” Ukraine’s permanent representative for NATO told Reuters. When his country turned to Europe for help, they “spat on us. . . . [W]e are apparently not Poland, apparently we are not on a level with Poland. . . . [T]hey are not letti...

Fortunately for Kiev, or so it seemed, Moscow had an alternative plan. On November 21, 2013, Putin offered, and Yanukovych accepted, a gas contract on concessionary terms and a $15 billion loan. The condition was that Uk...

In light of subsequent events, Yanukovych’s decision would come to be seen as the Pavlovian response of a pro-Moscow stooge. It was quite possible that he was subject to Russian blackmail. But setting such rumors aside, his choice was hardly inexplicable. As Ukraine’s prime minister, Mykola Azarov, explained...

Nor was this logic hidden from the Europeans in the immediate aftermath of the debacle. On November 28, 2013, according to Der Spiegel, European Parliament president Martin Schulz admitted that EU officials made mistakes in their negotiations with Ukraine. “I think we underestimated the drama of the domestic political situation in Ukraine.”43 Ukraine, he ...

“They desperately need money and they desperately need a reliable gas supply.” Schulz said he understood why Ukraine moved toward Russia. “It is not especially popular in Europe to help states which are in a crisis . . . and if you look at Moscow’s proposals, they would offer Ukraine sho...

What no one reckoned with—not Yanukovych, the Russians or the EU—was the reaction of a vocal and bold minority...

The opinion poll evidence does not suggest that there was an overwhelming majority for a decisive shift toward the EU. According to Kiev’s International Institute of Sociology, in November 2013 only 39 percent of respondents favored association with the EU, barely 2 percent more than the 37 percent who favored a Russian-led customs union.44 And th...

But events in Ukraine in 2013 were not decided by a referendum on the basis of clearly costed alternatives. They were driven by enthusiastic, fired-up minorities inspired by hopes and fears of Russia and Western Europe and an eclectic range of p...

In November and December hundreds of thousands of people rallied to Kiev’s freezing streets to protest Yanukovych’s abrupt decision...

At this point, the involvement of the EU and the United States became overt. Quite how deeply Washington was engaged was revealed by the infamous bugged conversation between Victoria Nuland, assistant secretary of state for European and Eurasian affairs, and the US ambassador to Ukraine, which is as illuminating in its characterization of US-EU relations at this point as it was in its blunt instrumentalization of Ukraine’s politicians.

Two weeks later, a desperate last stand in the streets of Kiev brought an end to Yanukovych’s presidency.

On February 21, in talks that were brokered by the foreign ministers of Germany, France and Poland and witnessed by Putin’s representative on the spot, Yanukovych was offered the protection of his office until new presidential elections were held at the end of 2014. But as support from within his party and the security forces melted away, he thought better of taking the risk.46 He too remembered Gaddafi’s fate. Early in the morning on February 22 he fled, leaving a vacuum.

Short-circuiting constitutional procedures, a new provisional government took office pending elections scheduled for May 25. What the EU had intended as a protracted transition had become a revolutionary overthrow. And rather than waiting for the outcome of the election, the provisional government, dominated by Tymoshenko’s Fatherland Part...

It would reverse Yanukovych’s abrupt decision of November. It would draw a clean line with Russia, sign the European Association Agreement and conclude new financial agreements not wi...

How was Moscow to react? The choice at Vilnius in November 2013 had been pitched by both sides a...

Thanks to the niggardliness of the IMF-EU offer, Moscow had won a significant victory, only for that to be overturned by popular protest and regime change, which, even if it had the support of a considerable fraction of the Ukrainian peop...

For Russia to have meekly accepted this outcome would have been worse than if Yanukovych had signed the Associati...

On the night of February 22–23 the Kremlin decided to act. Taking advantage of local protests and activating plans prepared in 2008 to counter a fast-track NATO application, on February 27, 2014, Russian troops in perfunctory disguises seized control of the Crimean peninsula.47 A few days later, to further ramp up the pressure on Ki...

The comprehensive economic, political and diplomatic clash between the West and Russia that had been foreshadowed in the proxy war in Georgia in 2008 was now unleashed on an altogether more significant stage. With Ukraine’s territorial integrity at stake, on April 13, 2014, the provisional government in Kiev launched an “antiterrorist” operation to take back control of the Donbass. In Washington and at NATO headquarters there were those calling for immediate military aid for Kiev and a full-throated return to the cold war.

McCain and other Republican hawks would have loved to have rallied a war party. Doing so perhaps might have contributed to restoring coherence to their troubled party. But as he had done in Syria in 2013, Obama refused the call to escalate.48 In Europe there was no support for military action. It was not that Ukraine would be denied weapons. But, as in Syria, the arms would be supplied through covert channels. The public front of the West’s reaction was economic sanctions.

Putin’s line had always been that geoeconomics were geopolitics. In Ukraine, struggles over trade negotiations and customs treaties had escalated into an undeclared war. Now the economy itself would be weaponized. Or would it? To pressurize Iran, the Unite...

Russia as a globally integrated economy was far more vulnerable. Not only did Russian businesses need to export but they had supped deepl...

By early 2014 they owed $728 billion.49 But by the same token, large vested interests in the West were at stake. Apart from anything else, Russia was the number two supplier of oil and gas exports to world markets. At a time of extreme fragility in the emerging market economies, the Uni...

The crucial question was whether Europe would throw its weight behind America’s sanctions. Russia-EU trade was ten times larger than Russia-US trade. The EU received 41 percent of all Russia’s exports.

This gave the EU considerable leverage, but also meant it had more to lose. German corporate leaders and senior politicians, such as ex-chancellor Gerhard Schröder, continued to cultivate friendly relations with Putin even as Russia’s troops made incursions into Ukraine. France had two mistral class amphibious assault ships on order from Russia. Italy’s energy corporations were deeply entangled in Black Sea projects. London, the playground of the oligarchs, was the place to make sanctions tell. The Cameron government talked a good game, but was less quick to act.

Nor was it merely economic interests that were at stake. In Germany there was deep skepticism about any overhasty alignment with the United States.52 Since the summer of 2013 the NSA spying scandal had cast a deep shadow over German-US relations. A year later, the percentage of Germans who saw the United States as...

Whereas 68 percent of Americans favored extending NATO to Ukraine, 67 percent of Germans were against it. Likewise, 63 percent of Germa...

To the indignation of right-wingers in Congress, all that the EU could agree to were individualized sanctions against eighteen leading Russian figures. Senator John McCain was moved to declare, “If the Europeans decide that the economic considerations are too important to impose severe sanc...

Appeasement had failed against Hitler in 1938. It would fail against Mr. Putin. In May transatlantic tensions were mounting to such a pitch that Merkel and Obam...

Merkel had no doubt about the need for action, but she could not ignore European public opinion, and McCain’s outbursts were not helpful. The two agreed that Obama would restrain the American hawks while Merkel mov...

In the meantime, if no military aid was forthcoming and only minimal sanctions were applied to Russia, would the West at least provide generous financial support to Ukraine? Just to meet its outstanding obligations, the new governmen...

Lagarde and the IMF soldiered on without America’s full backing.57 For a well-run country, at peace and with the institutions to make the most of its ample endowments, Ukraine’s debt burden would have been far from excessive. But Ukraine was none of those things. Given the huge political uncertainty, the insecurity produced by Russian intervention and its weak institutions, there was, in fact, a strong case to be made that Ukraine’s debts were insupportable. Ukraine was insolvent and its debt should be written down. That would have been IMF protocol.

Out of enthusiastic talk of reform and overoptimistic assumptions about economic recovery, the IMF concocted a scenario that allowed it to lend Ukraine $17 billion over two years. A further 11 billion euros would come from the EU and $1 billion in loan guarantees from the United States. Japan chipped in too. In addition, the EU agreed to take 98 percent of Ukraine’s exports tariff free. Visa-free travel was envisioned for 2015. For the winter, the EU promised to backstop Ukraine’s energy supplies by providing a flow of gas through Slovakia, Poland and Hungary.

It was a substantial commitment. But it fell well short of what Ukraine needed. The aid from Europe would be stretched over seven years. The IMF loan, as always, came with tough conditions. Gas prices were to be raised by 56 percent and the government payroll cut by 10 percent.

Ukraine. The IMF had never previously lent to a country at war. So in putting together the April 2014 package, the Fund simply ignored the evidence of the escalating conflict. As Lagarde admitted in a press statement, this put the entire program in jeopardy from the start.59 Within days of the conclusion of the financial package it became clear that Ukraine did indeed face the worst-case scenario.

Petro Poroshenko

In July a vigorous offensive by Ukraine’s forces was on the point of overwhelming the Donbass rebels. Moscow’s response was to resupply the breakaway militia with heavy weapons.

Moscow, for its part, resorted to more classic retaliation. It did not cut off gas supplies. But it issued a blanket ban against agricultural imports from Europe while increasing its military support for the Donbass rebels, who mounted a bloody counteroffensive on August 23–24.

Since the shock of 2008, Russia’s official financial position had been rebuilt. In early 2014 Moscow’s foreign currency reserves stood at $510 billion. As in 2008, it was not the state but Russia’s globalized private sector that was vulnerable.

CEO, Herman Gref,

The third round of sanctions in the wake of the downing of MH17 bit deep. At the same moment, Janet Yellen’s Fed finally ended QE3, tightening credit conditions around the world.

The combination of sanctions, Fed monetary tightening and a plunge in commodity prices was devastating. So devastating, in fact, that it has raised the question of whether this conjunction was entirely coincidental, or whether the United States and the Saudis were collaborating to launch a strike against Russia.65

Oil politics are a rich field for conspiracy theory. There certainly are back channels between Washington and Riyadh. Secretary of State Kerry was in the gulf in the fall of 2014. The Saudis had every reason to act, if not over Ukraine then over Syria.66 Along with Iran, Russia was the main backer of Assad’s die-hard regime. Saudi Arabia was its sworn enemy. There is no conclusive proof. Nor is a conspiracy necessary to explain these concurrent events. The oil market was under stress. America’s new fracking technology had opened up a new source of supply that was cheap and highly elastic. From the point of view of the Russian economy, in any case, the ultimate motivation was irrelevant. Oil prices plunged from $112 per barrel in June to around $60 per barrel by December 2014 and kept on falling. On top of sanctions and tightening credit conditions, it was a body blow.

In October the Russian central bank intervened heavily to prevent an immediate ruble collapse. But it needed to husband its reserves, and in November it exited the market. Starting at 33 to the dollar before the Ukraine crisis began, by December 1, 2014, the ruble had fallen to 49 against the dollar.

On the morning of Monday, December 15, the ruble began to plunge, ending the day down by 8 percent. That night, after a long evening of debate involving Putin himself, the central bank decided that it would hike interest rates from 6.5 percent to 17 percent. The announcement was made at one a.m. It was intended to reassure investors and punish speculators. It didn’t work. It was read not as reassurance but as a sign of panic. As markets opened on the morning of Russia’s “Black Tuesday,” December 16, the foreign exchange market went into free fall. By the end of the day the ruble had fallen to 80 against the dollar.

The oligarchs were once again exposed. Estimates vary, but the combination of the Ukraine imbroglio, the oil price shock and the December 2014 turmoil cost the twenty richest Russians between $62 billion and $73.4 billion.71 Once again Putin called in favors and demanded action. Measures were passed calling for the end to the offshore hoarding of wealth. An amnesty was offered to those who would bring their cash home.

Russia did not want to ruin its reputation in the eyes of foreign investors by resorting to capital controls. Instead, to provide the necessary foreign exchange, the central bank ran down its reserves, which dipped as low as $388.5 billion on December 26. This cushioned the collapse of the ruble, but the pressure continued.

In his first period as president, Putin’s legitimacy had been based in large part on a sustained recovery in living standards. That easy narrative was broken by the crisis of 2008. From 2014 onward economic expectations were further diminished. Over the winter of 2014–2015 GDP was falling by more than 10 percent per annum.