Ukraine: At the Edge of a Flash Point

Published on April 25, 2014

US President Barack Obama and his G7 partners are expected next week to discuss the crisis in Ukraine and the possibility of a further coordination in the sanctions imposed on Russia, if they are deemed to be necessary.

Parallel track efforts still continue to find a peaceful and stable resolution to the crisis in Ukraine, but in the wake of the failed Geneva agreement and subsequent military actions, we hear little about any prospect for a near term de-escalation in tensions (see SGH 04/16/2014, “Ukraine: Talks Tomorrow to Fail, Again”).

*** We understand the odds are rising for a potential “surgical” intervention by Russian elite forces with the stated or implied purpose of “restoring order” in areas heavily populated with Russian speaking or Russian-ethnic Ukrainians. While falling short of an actual crossing of the international border with troops, an “invasion” is almost certainly how it would be interpreted in Kiev and the West, pushing current tensions to a significantly higher level of crisis. ***

*** Furthermore, we have heard suggestions that in parallel if hostilities continue to boil over within Ukraine between east and west, the very legitimacy of the May 25 Presidential election may come under threat. There are already grumblings in the east about the lack of representation among candidates, as well as talk of a significant boycott of the election. That would effectively cast a large shadow on the results, a longer term risk to stability that may quickly come into play. ***

Rising Hostility, with One Last Shot

There still is “one last shot” for a negotiated solution, but from the Russian side there is little assurance that they can rely on the current government of Kiev for any promises for greater regional representation to the extent they seek, or any will to implement the mutual demilitarization that they have talked about. Right-wing militias, for instance, rather than being disbanded, are being incorporated into the “official” state security forces.

In fact, on top of the already very dangerous escalation of military tensions on the ground in Ukraine over the past 48 hours, our understanding is that the stepped up warnings and threats to Russia of further consequences and sanctions is bringing the crisis close to a potential new flash point with Moscow (see SGH Report 04/23/2014, “Ukraine: Militias, Sanctions and Oligarchs”).

From Moscow’s perspective, those actions are occurring without what is perceived to be any effort to rein in Kiev’s attacks on pro-Russian forces, and if anything a nod to not just official army but also dangerous militia activity.

Short of outright occupation, which is not in the cards, the exact extent and definition of the regional power issue is the ultimate internal structural and strategic question for Russia and the West when it comes to future influence in Ukraine. A track for discussions here with Petro Poroschenko, the Presidential candidate who looks likely to beat Yulia Tymoschenko in the elections, if they are held, is a necessary but hardly sufficient first step for this to succeed.

In the meantime however there have been numerous press reports of clashes between Kiev’s forces and pro-Russian forces, but one of the actions largely unreported in the Western media deepening the suspicions and lack of trust in Moscow, we are told, is the movement of Dmytro Yarosh’s far-right wing militia’s operational headquarters from Kiev to the town of Dnepropetrovsk, which is located on the “border” between western and eastern Ukraine – and whose governor is the Kiev appointed, rabidly anti-Russian, oligarch Ihor Kolomoyskyi (see SGH Report 04/23/2014, “Ukraine: Militias, Sanctions and Oligarchs”).

This is being cited in Moscow as an example of either the complicity or lack of control by Kiev over its militia units, with suspicions the Ukrainian army is so weak and depleted that it needs to rely increasingly on the hard to control militias.

There is increasing concern in Kiev as well, from what we understand, over the unwillingness of a significant portion of the Alfa troop units also referenced in our earlier report to fight for Kiev as well as the haplessness of the latest attacks by government forces in the east, which has also been leading to a greater reliance on the more motivated but right wing militia forces.

There is also a questioning in both Moscow and Kiev of the role Rinat Akhmetov has been playing in Donetsk, or more specifically, of what appears to be his tacit approval of some of the more thug-like behavior of local rebels. Akhmetov is believed to be holding out for either some semblance of autonomy from Kiev to protect his regional industrial empire or seeking assurances from any future government of protection against confiscation and lawsuits (for what that may be worth).

It is not, as is pointed out to us, in Moscow’s interests to be implicated with the brutal and primitive murder of a local politician by slashing his gut, tying him to a sandbag, and tossing him into a river – one may recall the extreme discipline of the mysterious forces that were occupying Crimea.

Our understanding in fact is that the reporter carrying a US passport who was released yesterday was only released by local authorities through an intervention by Moscow and the threat of Russian elite forces.

Odessa and Financial Flashpoints

The spread of violence from the east to Odessa is also an extremely sensitive flashpoint for Moscow.

Odessa, the historic port and resort in southwestern Ukraine, is Ukraine’s major outlet to the Black Sea, especially now with the loss of the ports in Crimea. At the same time it is also home to a relatively sizable Russian-speaking minority (and once home to a sizable Jewish population).

Right wing militia groups have been sent to Odessa – or just “appeared” of their own accord — to protect this strategic city. It was one such group that had set up a checkpoint that was attacked today by a local, ostensibly pro-Russian, passer-by with a grenade. This is a worrisome geographic spreading of tensions.

As to sanctions and economic pressure, Moscow continues, as we wrote, to consider the recent threats from the US to be an escalation of tensions from a fight over Ukraine to a fundamental attack on its country, system, and the very Putin regime itself.

It is clear, of course, that many of the threats of widening the sanctions net to individuals and institutions will face again no small amount of resistance from the US’s European allies, both due to intense lobbying by European business with extensive investments and markets in Russia, and even on the legal front.

But in the wake of the recent National Security Council meeting with US investors that had riled Moscow, US-based rating agencies have followed through with credit risk downgrades. That, in turn, has led to an emergency rate hike from the Central Bank of Russia and heightened the sense of an “economic war” already being directed by Washington.

And so while some of the harder sanctions may not pass, the soft sanctions are indeed already creating a great deal of instability in Russian markets, not least of which, we are told, is the threat or concerns that VISA stop transacting in Russia. This concern is not just over credit cards, but in fact mainly over automated bank cash disposal machines, which in Russia are deeply integrated with the VISA system.

(Note – Correction. In our last report we incorrectly referenced a successful challenge of sanctions on an Iranian bank in UK courts as referring to Bank Sepah, when in fact the case was regarding Bank Mellat).

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