Who'll bail out Ukraine, West or Russia?

The Ukrainian crisis is quickly becoming a geostrategic conflict. The Crimean parliament's declaration of independence from Ukraine ahead of the March 16 referendum indicates Crimea may possibly join Russia. As Russian President Vladimir Putin maneuvers to restore Russia's right to behave with a superpower's impunity-particularly in its own backyard-the West pushes back.

But economic forces also have shaped this confrontation, especially Ukraine's record as the world's worst performing industrial economy over the last 20 years.

It was popular discontent with this disastrous performance that fomented the recent dissent. This, in turn, triggered a bloody response from ousted Crimean President Viktor Yanukovych. His response consolidated the opposition-and ultimately cost Yanukovych his job.

Beyond this week's political and military maneuvers, the outstanding question is: Who will bail out the Ukrainian economy? Russia, or the EU and the United States? A bailout will be the price of drawing Ukraine into one of the two trading systems on offer.

Stated simply, Ukraine is the economic equivalent of a failed state. After gaining independence in 1991, the country moved briefly to liberalize its economy along the same lines as most of Eastern and Central Europe.

However, Ukraine soon jettisoned its reforms in favor of the state-oligarch model, which was also evolving in Russia. Some 20 years later, Ukraine's GDP has shrunk 30 percent.

Even Russia's sorry economy is 20 percent larger than it was in 1991. And Poland's economy, which looked much like Ukraine's in 1991, has grown 130 percent over the same period.

Ukraine's economic performance has been so terrible and for so long that its sovereign debt issues are now considered the equivalent of junk bonds. Even before the crisis, Ukraine's credit rating was worse than Greece's. And it was no better than that of Argentina, a global financial pariah for its mismanaged debt defaults and summary expropriations of foreign-owned companies.

Ukraine's debts will soon be due, with some $15 billion in sovereign bonds maturing this year and another $15 billion in 2015. With a current account deficit equal to 8 percent of its GDP, Ukraine cannot pay off and refinance those debts without large-scale aid-$20 billion to $25 billion-and affiliating itself with a larger trading system.

An economic and trade alliance with Russia would deliver the bailout, but with little prospects of improving the underlying economy.

The European Union and the United States (through the International Monetary Fund) also are prepared to provide the bailout if the Ukrainian government accepts far-reaching economic reforms. The EU-US/IMF reforms should lead to better economic times down the road.

But they also would mean more short-term hardships for ordinary Ukrainians. That's why Yanukovych sided with Putin.

With a new, pro-Western government in charge in Kiev, Ukraine's fate may well lie in the hands of Europe and the United States. Their choice is simple to state, if difficult to execute: Do they put sufficient economic and diplomatic pressure on Putin, to convince him to pocket his own bailout-and let the West pick up the pieces?

The author, Robert J. Shapiro, is co-founder and chairman of Sonecon, LLC, a private company that advises US and foreign businesses, governments and non-profit organizations.