Ukraine: A Critical Inflection Point

Published on August 5, 2014

Alexander Lukashenko, the President of Belarus, one of the few countries still maintaining cordial relations with both Russia and Ukraine, organized a trilateral meeting last week of Russian, Ukrainian and European OSCE officials in his capital city of Minsk in an attempt to address the continuing crisis in eastern Ukraine.

In what may have seemed like a positive signal, Ukrainian President Petro Poroshenko chose to send former President Leonid Kuchma, a one-time friend of Moscow, as his representative to the meeting. Those trilateral discussions, however, went nowhere, and ended this week with handshakes and platitudes of improved bilateral trade ties and of a potential oil deal between Kiev and Minsk.

Far from any progress towards a truce, on the heels of US and EU sanctions, Kiev has continued the aggressive military offensive it stepped up after the MH17 crash to wrest control of eastern Ukraine from rebel forces (see SGH 7/23/14, “Russia: The Hard Press on Putin”).

*** The city of Donetsk at this point is encircled and besieged, as is Horlivka: both might fall in a matter of weeks, and sources in Ukraine think that could come as soon as next week. Importantly, from what we understand, neither city has lately been receiving any assistance from Russia. ***

*** The situation on the ground is dramatically different in the region and city of Luhansk, which is still believed to be receiving Russian support. With an approximately 100 km stretch of Ukrainian border completely controlled by rebels, Russian forces are believed to be shelling and helping these fighters counter Kiev’s offensive. Residents have been fleeing Luhansk and the larger Donetsk, and some 250,000 residents are now believed to be trapped in Luhansk, eliciting calls from Russia for an emergency meeting by the United Nations tonight to address what is, by any objective measure, a humanitarian crisis. ***

*** It is unclear whether the call by Russia for a UN meeting to address the humanitarian crisis is a precursor to a wider attempt to reach a face saving agreement with the west and diffuse the military conflict, a stepping stone to potentially justify Russian troops and intervention across the border in the name of protecting ethnic Russian populations, or a little of both. ***

*** What is clear is that since the shooting down of flight MH17 Russia and President Vladimir Putin have been pushed through a combination of biting and escalating sanctions and the stepped-up military offensive into a dangerous position. That is of either muddling through on the defensive, with retaliatory sanctions and no end in sight on its economic isolation, or of fighting back for position. We do not believe that Putin will, or can, simply come to the bargaining table under the current and humiliating conditions, and we do not take the latter possibility, of a significant retaliation, lightly (see SGH 7/25/14, “Russia: Economic, and Military, Escalation”). ***

*** Markets today collapsed on reports of a significant Russian build-up of troops within spitting distance of the Ukrainian border, and warnings by Poland’s Foreign Minister Radoslaw Sikorski that Russia may be preparing for an imminent invasion. This is not new news. Sikorski is among the most hawkish of anti-Russian EU officials, and has been at the forefront of raising the alarm on Russian aggressive intentions. Furthermore Russia had already announced that it would be conducting these war exercises in a show of force clearly directed at Kiev and the West. But the fact that Sikorski has chosen this moment to shout fire in a movie theater does not mean there is no smoke. There is a rising risk that an increasingly embattled Russia does indeed go beyond intimidation – to overt intervention in the Luhansk region. ***

Cornered, and Dangerous

For now the signals out of the Kremlin remain of a more measured retaliation. Putin has already threatened to withdraw commercial aircraft over-flight rights from EU planes and from Voronezh instructed officials to come up with a list of further retaliatory sanctions against EU and US institutions. Moscow has also just announced the conclusion of a long rumored, yet somewhat vague $20 billion long term oil deal with Iran, claiming it does not violate the sanctions regime but clearly intended to show its muscle in reorienting commercial interests away from the west, along the lines of the long term, $400bn-worth gas contract announced with China last May.

But Putin’s instructions have also come with guidance to make sure that retaliatory sanctions do not damage – or have limited impact on – domestic Russian business interests (ironically Aeroflot would nevertheless lose significant revenue from what we understand from a cancellation of over-flight fees). And that does not jibe with a leadership that is ready to cross that dangerous Rubicon into Ukrainian territory.

Perhaps not yet, but we have been and continue to be concerned that those risks of an overt military response – which were minimal in the early part of the Ukrainian crisis, including during the annexation of Crimea – are real and rising as Putin finds himself on the back foot, cornered, but still dangerous.

There is a negotiated deal that remains to be had once the various parties are ready to negotiate – Russian withdrawal from the border, assurances of some sort of regionalization and greater autonomy for Ukrainian regions short of outright federalism, a commercial deal on gas exports and transit rights, and a forswearing of Ukraine’s stated desires to seek NATO membership.

But we continue to be alarmed at the lack of dialogue on either side – especially as Kiev continues to press its military initiative – and at the cycle of pressure and escalation that is yet to be broken. At this rate the Ukrainian troops may yet meet the end of a Russian gun in Luhansk.

There has been one phone conversation between President Obama and Putin over the last few days, and importantly that was initiated by Obama, an encouraging sign. But the sides appear to have simply talked past each other, and beyond the very narrow issues surrounding the proper treatment of the Malaysian Air MH17 crash site there appears to have been no progress or even discussion of any substantive issues, or any face saving offer yet for Putin to back down.

And in fact from what we understand the pressure from the EU, especially Germany, that was exerted on Switzerland – an ostensibly neutral country since 1815 – to close its banking system to inflows from Russian individuals singled out in the EU sanctions list and follow through with political sanctions has infuriated Moscow. And furthermore even Russian individuals who are not under sanctions are now experiencing difficulty transferring money between risk-averse European banks.

The Russian media is abuzz with nationalist fervor and in laying out a case for retaliation and potential intervention in Ukraine. That includes extensive coverage of the extremely curious recent episode and follow-up interviews with the Ukrainian soldiers that entered Russia – apparently pushed over the border by encircling artillery from Russia – who chose not to return to Ukraine.

These reports in Russia are not of a Ukrainian army triumphantly beating back the Eastern rebels, but rather of a demoralized army that is refusing to fire on its own citizens, and that is at this point being manned almost entirely by mercenaries affiliated with the Right Sector organized and funded by the virulently anti-Russian Ukrainian oligarch Ihor Kolomoyskyi – with US provided intelligence and additional funding. The allegations have been that after the initial ill-fated tri-party Geneva agreement that called for the disarmament of all “non-official” forces, the Ukrainian army simply enlisted those militias into its regular standing army, and those are who are doing the bulk of the fighting on the front. 

Whatever the reality, the voices of moderation in Putin’s inner circle and in Russia at large have been silenced for now. The EU and U.S. may have Russia on the ropes – but the victory of the biting sanctions and Kiev offensive may turn into a bite that may be digging far too deeply into Moscow.

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