Ukraine: A Post-Crimea World

Published on March 10, 2014

In conversations with US President Barack Obama and German Chancellor Angela Merkel, Russian President Vladimir Putin has shown no signs of backing off of Moscow’s support for a referendum on the future status of Crimea within the Ukraine that is slated for March 16, six days from now.

For their part, the US, EU, and the interim pro-western Ukrainian government in Kiev have stated in no uncertain terms that they will deem these elections illegal and unconstitutional and will not accept their results, setting the two sides on an imminent collision course.

*** But with momentum and facts on the ground in Crimea by now solidly on Russia’s side, despite continued denials of any control by Moscow over the paramilitary “self-defense” forces that have effectively taken the peninsula over, there appears to be no attempt anymore, even in Kiev, to block the referendum. The focus has rather turned to crafting the appropriate post-referendum response, with the objective now realistically one of containment, rather than any actual expectations for a reversal of Russia’s advances in the Crimea. ***

*** As an immediate legal response, to challenge the legitimacy of the referendum, the interim government of President Arseniy P. Yatsenyuk as we understand may invoke Article 73 of the Constitution and put the Crimean secession vote to the entire country, where it would clearly fail. But beyond that stamp of illegitimacy, the sense of resignation and helplessness in reversing the results of the referendum without help from the West is palpable, and even Kiev’s military threats are being carefully calibrated and crafted in terms of a response to further violence, and not to the referendum per se. This is fostering a period of high tension and potential accidents in the run up to the referendum as Russian backed forces consolidate their ground against the helpless Ukrainian forces left in Crimea.  It may also lead to an escalation of military manoeuvers as a show of force beyond the already announced over-flight of NATO F-15s in Estonia and “pre-scheduled” fleet movement into the Black Sea, but we expect Crimea to be quickly surrendered de facto in the end. ***

The referendum will give a choice of full union with the Russian Federation or a continued Federal Crimea under Kiev, along the lines of a 1992 agreement (the extension and nature of the region’s autonomy would then have to be re-negotiated with Kiev), but in any case ostensibly more autonomous than even before and under the heavy influence of Russia.

A surprise vote for the latter, more modest course, would clearly avoid the worst collision course between Moscow and the West, but even a vote for full secession at this point may only lead to a measured step up in sanctions, which would continue to hurt Russian interests, but to little escalation beyond that from either Kiev or outside parties.

The Battle over the Big Ukraine

In moving so quickly against not just the Crimean Peninsula but also in support of Russian interest groups in the eastern part of Ukraine, including taking over and draping the parliament of the Kharkiv region with a Russian flag, President Vladimir Putin has managed to keep both Kiev and her western allies solidly on the defensive back foot.

Yatsenyuk is scheduled to meet with President Barack Obama tomorrow, where he will be lauded, in one of the sad and pathetic ironies of history, for Kiev’s show of restraint in not “provoking” Moscow even further. Reality can sometimes really suck.

The US and EU have rushed to promise much needed financial assistance to Ukraine, including a $1 billion line from Washington and 11 billion Euros of aid from the EU. Until there is follow through on IMF and direct multilateral loans, the bulk of the EU money unfortunately is however in EIB and EBRD longer term project loans and not quickly available to Kiev.

It is possible but clearly problematic for the IMF and EU to lend to an interim government in that it cannot really commit to longer term reforms, and the full extent of Ukraine’s budgetary needs – a moving target – will not be clear until at least after the May 25 elections.

But our understanding is that Kiev will be pressing for immediate disbursement of even small amounts of aid – there is a number floating, 600 million Euros, part of the EU “macro-financial assistance” – in the interim as a token gesture, if anything, of support for the three pro-western parties before the elections. The EU has indicated it will move “in a matter of weeks,” and we suspect some smaller aid will be forth coming before the 25th from the US as well.

The EU and US have in the meantime threatened Moscow with an escalation of sanctions and continued international isolation, but have as of yet limited all measures to Ukrainian individuals and institutions responsible for the violence in Ukraine, and potentially boycotting the upcoming G8 meeting in Sochi.

The next step of escalation is threatened to include visa bans and asset freezes of targeted individuals and institutions, and Moscow has threatened to retaliate by suspending START treaty inspections of its military facilities.

We believe the rubber for Russian markets will hit the road if and when the US pushes through measures against Russian banks (the EU will for obvious reasons not take the lead on this).

Sanctions on Russian banks were already discussed last week – for example the EBRD will not only be lending to Ukraine but has a robust program with Russian banks that came under scrutiny as well – but were shelved for now. We are told, however, that the EBRD programs tend to steer clear of the larger, state-controlled Russian banks, and so those may at some point fall back into a sanctions net.

If the crisis is contained to Crimea, we believe Putin will be assured that there will be no talk in Kiev of membership in NATO anymore, nor is there much enthusiasm anymore from the west for expanding those boundaries into Ukraine. NATO membership also seems not to be a priority for the exhausted and impoverished Ukrainian population – especially after having for years been made wary of NATO by Russian propaganda – which is instead much more focused on improving living conditions internally.

It is, however, an issue in the medium term, as the “new” Ukraine will have to make strategic choices on how to ensure the defense of its territorial integrity, something that, we have seen, cannot be fully guaranteed by the Ukrainian army.

And the bitter silver lining for the Maidan Square activists and new government of Kiev is that the escape and cowardly nature of the fall of former Prime Minister Viktor Yanukovich and subsequent aggressive actions by Moscow have crushed the Party of Regions, Yanukovich’ s former party, despite its attempts to distance itself from the disgraced leader, and strengthened the pro-western forces in the polls running up to the Presidential elections on May 25.

Under the 2004 Constitution, which has been revived after Yanukovich’ s departure, the President has limited power in appointing the government. So while the May 25 elections could well give an idea of who the most popular politician in Ukraine is, further Parliamentary elections will have to be scheduled soon to renew a chamber that does not reflect anymore the balance of power in the country. A date has not been established for parliamentary elections yet – the February 21 agreement scheduled them for December, but that is of course all in the past.

The Presidential elections are, as things stand, essentially a toss-up between Yatsenyuk and Tymoshenko’s Fatherland Party, the boxer Vitaly Klitschko’s UDAR party, and chocolate factory magnate Petro Poroshenko. All three have been campaigning not just in Ukraine, but openly negotiating with Brussels and Washington as well, realizing their ultimate fate is deeply intertwined with the degree – and most importantly the speed – of support they can bring in from abroad.

While immediate aid is of the essence, a final agreement with the EU over the Association Agreement may be left until after the elections. And that may suit the EU, cautious about provoking Russia or bearing responsibility for further deterioration of tensions in the Ukraine, just fine. By that point, Crimea for all practical purposes may be lost anyway.

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