Ukraine: Militias, Sanctions, and Oligarchs

Published on April 23, 2014

Media coverage since last Thursday’s four way agreement in Geneva to de-escalate tensions between Ukraine, Russia, the US, and EU has been intensely focused on signs of continued unrest in the eastern regions of Ukraine and, especially in the US media, on Russia’s “demonstrated unwillingness” to abide by the new accord through its proxies in the east.

*** The biggest immediate risk to stability in Ukraine, as we have maintained, is not a unilateral sweep of the eastern regions by Moscow but the unwillingness, or worse yet inability, of both the Kiev government and the pro-Russia militants in the east to abide by the Geneva agreement. Indeed, the agreement has raised but is now at risk of dangerously dashing expectations for any resolution to the standoff before the May 25 Presidential elections (see SGH 4/16/14, “Ukraine: Talks Tomorrow to Fail, Again”). ***

*** Reports of turmoil in Ukraine up to now have been no more than multiple repeat accounts in a Twitter age of a relatively small number of localized, and limited, disturbances or deliberate provocations in the east, confirmed by on the ground reports we have read from the OSCE monitors. Or at least that has been the case until the embattled and militarily weakened central government of Kiev decided yesterday to resume its “anti-terror” campaign in the east, targeting rebels in Donetsk, Luhansk, Slovyansk, and Kramatorsk, after having halted its previous failed efforts “in the spirit of the Geneva discussions.” This may potentially unleash a new and now more serious round of destabilizing clashes. ***

*** We do not believe Moscow has a policy to pre-emptively split Ukraine. Beyond paying a steep price for such an action, when it can still push for the softer and less costly option of influence if not regional control without actual occupation, a “two Ukraines” outcome would almost all but guarantee bringing NATO further east right up the banks of the Dnieper River. And so while Moscow has refrained from actively exhorting or forcing the rebels to abandon their positions in the east, it has at the same time demonstrated a degree of restraint after Geneva, where it in fact got promises of some concessions, albeit vague, from Kiev it had been seeking. At least for now. ***

*** But recent threats by Washington of elevating sanctions to cover more Russian officials and even possibly Putin himself are being viewed in Moscow as a significant escalation of hostilities, from a struggle over Ukraine to an existential attack on the Moscow regime itself. Although such sanctions are understood to be highly unlikely to pass muster with the Europeans – Austria and Germany have already attempted to downplay those threats – the US pressure has also ominously included leaks of a unilateral and we believe unprecedented meeting of the National Security Council with major US financial investors warning of the risks of investing in Russia. If sustained, that soft boycott could in effect jeopardize Russia’s very access to foreign capital markets. ***

*** A critical, and unappreciated, strand in the current tensions is also the influence behind the scenes of Ukraine’s highly polarized and extremely powerful oligarchs from both the Western part of the country as well as the “newly converted” Eastern oligarchs. Despite efforts by some eastern regional authorities, such as the mayor and governors of Donetsk, to dampen tensions, given  the new promises from Kiev of a “constitutional dialogue,” the oligarchs’ reach is deep and not necessarily as things currently stand in the interests of stability in the country or of a rapprochement between the regional powers. This “oligarch factor” will have to be addressed before any lasting agreement for Ukraine can take hold. ***

Kiev in a Corner

While legally abhorrent, one may cynically be excused at this point for not exactly being shocked at new evidence that the militia in some of the eastern cities clamoring for a “Novorossiya” (new Russia) province in Ukraine may have direct ties to “Mother Rossiya.”

That level of Russian control was already fully implied last week in Geneva when Ukraine’s Foreign Minister Andriy Deshchytsia, against the strident resistance of his own hardliners back home and under the strong encouragement of US Secretary of State John Kerry and EU High Representative for Foreign Affairs Catherine Ashton, in effect negotiated the broad outlines of Ukrainian regional reform, language rights, and most importantly, mutual demilitarization, with his counterparty from Moscow, Sergei Lavrov.

But the ink was barely dry on the agreement before it became clear that not only were the pro-Russian forces leery of prematurely ceding any ground, but the government of Prime Minister Arsenyi Yatsenyuk also had very different notions than Moscow of what mutual demilitarization actually meant.

The Geneva agreement was actually reasonable on paper – Russia got most of what it wanted, even if the agreements were somewhat vague; open discussion of a constitution that could include some degree of autonomy for the Eastern regions, protection against anti-Russian/Semitic language, and the most important point, especially for the Americans and Ukrainians, disarmament.

But the vague language of the deal immediately created controversy, as Russia maintains that the disarmament deal includes militias in Kiev and not just “rebels” in the east. On this point it is not just with the Russian-controlled forces that this is a problem, but the current government of Ukraine as well, since for now it has little power, few forces, and almost no ability or even will to implement the deal.

Ukraine’s regular army from what we have heard has been drastically reduced from its 65,000 level before the recent troubles, consisting mostly of conscripts who are badly equipped and ill-trained. Their real fighting forces now are the remnants of the so called “Alfa Units,” in fact ironically an offshoot of an old military organization of the ex-Soviet KGB that once consisted of 80,000 troops or so who were deployed over time in places as far flung as Afghanistan to Tbilisi, and Vilnius. They split after the break-up of the Soviet Union, with some going to Kazakhstan, and others to Ukraine, where they proudly kept their old name. They also are reluctant to fight against their old comrades and bear no sympathy for the right wing extremists who “won” the Maidan battle.

These units initially actually refused to back the current government in Kiev which at first threatened to dismantle them for allegedly supporting the government of former President Viktor Yanukovich before his ouster. Kiev quickly withdrew that threat.

Even if the intentions of Kiev, Russia, the EU, and the US are all in good faith, implementation is thus very, very fragile. The four Swoboda right wing ministers in the Yatsenyuk cabinet are believed to have too much power and effectively hold strategic portfolios; with an ever growing anti-Russian sentiment in the country, their popularity is rising and Prime Minister Yatsenyuk – provided he really wants to – has a hard time controlling them.

And it does not help the already frigid relations with Moscow and the pro-Moscow factions in eastern Ukraine that Kiev hired a few American ex-Blackwater operatives to help manage their own forces. Ukrainian troops of course worked very closely with Americans in Iraq.

In the meantime every EU politician – and especially Members of the European Parliament in search of re-election – has gone to Maidan Square promising Ukrainians everything from NATO membership to a sped-up Association Agreement and EU accession. The European Parliament itself, in its last plenary gathering before the elections, approved a rather hawkish non-binding resolution drafted by Dutch Liberal Van Baalen condemning Russia and completely siding with the Ukrainian government.

The EU leadership, in contrast to the parliament, does not want Ukraine to join the union, and certainly could ill afford it even if Ukraine did.

Sanctions as an Existential Threat

Beyond any alleged or perceived US involvement on the military side, for Russian President Vladimir Putin still seething from the “Maidan Square coup” of February 21, the latest accompanying threats from Washington to target the economy and individuals close to him and even his own bank accounts have personalized the conflict to a new and more threatening existential level.

The successful annexation of Crimea and deployment of what are certainly Russian-controlled forces in the east of Ukraine does not, in the Kremlin’s eyes, give any room for discussion of equivalency of actions in these latest threats of sanctions. The former is about spheres of influence in Ukraine, whereas the latter is seen by Moscow as “regime change” in effect, an effort to destabilize the Russian economy and its very leadership structure.

Whether or not that is indeed the US intent is almost beside the point, the personalized nature of the sanctions could backfire badly.

Vice President Joe Biden’s high profile visit to Ukraine on Tuesday, a mere five days after the Geneva talks, warning Russia of its actions and promising further US support for Kiev, is not surprisingly being viewed as further provocation, and directly linked by Moscow to the decision the next day by Yatsenyuk  to resume “anti-terror” efforts in the east.

And while the announcement of a decision to post a limited but symbolic number of US troops in Poland – with the enthusiastic support of the most vocal European critics of Putin, Prime Minister Donald Tusk and Foreign Secretary Radoslaw Sikorsky – and in the Baltic States, has been largely expected, (see again SGH 4/6/14), it has also nevertheless elicited a parallel limited military exercise in response by the Russian Navy in the Caspian Sea.

Should Ukraine descend into chaos, Russia is prepared to intervene with troops – we believe that is as good as given. The forces Russia has amassed on Ukraine’s borders, however, lack the heavy logistical support for an outright occupation and are instead geared towards a rapid deployment and policing role.

But we still do not believe Moscow has a policy to pre-emptively split Ukraine. Beyond paying a steep price for such an action, when it can still push for the softer and less costly option of influence if not regional control without actual occupation, two Ukraines would guarantee to put NATO squarely at the banks of the Dnieper River.

As to Moscow’s response to the latest round of sanctions threats, there is scant evidence from what we are told of anything near the media’s often repeated assertion of $40 billion Putin has allegedly stashed away in Swiss bank accounts. Perhaps even more to the point, the vast wealth Putin does undoubtedly possess means far less to this 21st century Russian Tsar than the source of that wealth, his absolute power.

The threats now to that power on the other hand are being seen as an existential attack on the stability of his regime that go far beyond the battle over Ukraine.

Russian officials so far have been quick to dismiss and even scoff at threats of personal sanctions and travel bans, suspecting perhaps in some instances that even if Washington were to want to cast the net much wider it would be met with stiff resistance from a divided EU.

Even the individual names floated in Washington for sanctions and travel bans appear to have raised some eyebrows in Moscow for either demonstrating a strangely arbitrary policy of picking token, politically high-profile targets, or even worse, a lack of understanding of how Russia really functions.

On that list, Arkady Rotenberg, for example, is indeed a close friend of Putin, but targeting him is seen as somewhat absurd in relation to Ukraine, over which he has zero influence or power. Vladimir Yakunin is widely known to have had a long involvement with the KGB, but he is currently the head of railways, of all things, and not even considered one of Russia’s “real” billionaires. An avowed religious man, Yakunin runs a think tank called “Dialogue of Civilizations” focused on protecting “the spiritual and cultural values of humankind and to create a space for constructive dialogue among the major civilizations of the modern world.”

Banking and energy sector heads are, of course, in an entirely different league.

Rosneft is now one of the biggest oil companies in the world, with major joint ventures with Exxon (just reaffirmed), and with BP as its major shareholder. Sanctions on its Chairman Igor Sechin would certainly hit home, albeit it would not spell the end of the world for the company – Sechin is more a Moscow power player than an international traveler. Regardless, he has friends not just in London, but in other places from what we understand that could help in heading off EU support for sanctions, such as in Italy.

And even if the US were to actually feel the need at some point to widen the net from the individual to the far more damaging institutional level, the EU will clearly have an enormously high hurdle to climb before taking that step, and that includes in some of the major countries.

It has not gone unnoticed, for example, that the UK just lost a case in court for sanctioning Iran’s Bank Sepah, under pressure from the US, for allegedly financing nuclear program related activities, and is now facing billions of dollars in counterclaims.

What’s more, what has raised major alarm bells in Moscow is the deliberate leak of what we believe to be an unprecedented meeting by the National Security Council with major US investors warning them of the risks of investing in Russia in the current climate.

Shutting off international financing is no small thing for Russia, and the NSC calling in investors and telling them not to invest in Russia is far from a normal or measured approach – it is the beginning of the declaration of an “economic Cold War” in Moscow’s eyes, forcibly pulling America’s own captured private sector in with it. And it certainly rings Putin’s alarm bells over just what the ultimate objective is of American policy towards Moscow.

For his part, on the economic front, Putin has demanded payment from Ukraine for gas arrears, but has also offered to extend Ukraine’s credit for another month or so on gas purchases, allowing it to continue to pay into those mounting arrears.

That timeframe is from what we are told deliberately designed to put the gas negotiations just at or beyond the May 25 Presidential elections in Ukraine – and allow Moscow to exert maximum influence on the winner.

The Looming Oligarch Factor

In this game, some of Ukraine’s oligarchs have quietly stepped out of the way, hedging for potential various outcomes, but for most of the oligarchs, the battle lines are nevertheless stark, and the stakes also thus dangerously high and real.

For one, while the media and analysts have been focused on Russia’s involvement in eastern Ukraine, they have missed the all-important role allegedly being played behind the scenes in the extremely volatile region of Donetsk and Donbass by the wealthiest oligarch of them all, Rinat Akhmetov.

In the Donetsk region, one has to understand only that Akhmetov has more than 200.000 employees, which means he has one million people dependent on him and at his disposal. Nothing happens in the region without Akhmetov’s knowledge or approval – at least up to now. And that very likely includes some of the militia and rebel activity that so far has been ascribed solely to Russian designs.

Akhmetov was the father by and large of the Party of Regions that carried the now deposed former Ukraine President Yanukovich, a fellow childhood traveler from Donbass, into power. Yet he was also quick to read the writing on the wall and scrambled to ally himself with Yatsenyuk right before Yanukovich’s fall.

Yatsenyuk’s fellow Fatherland party member, Yulia Tymoshenko, of Orange Revolution fame, who with Petro Poroschenko is now one of the two leading candidates for President, is Akhmetov’s bitter enemy.

The bitter enmity stems from 2004 when Tymoshenko, who had ironically also at that time just replaced Yanukovich as Prime Minister after his first tenure in office, killed a sweetheart $800 million deal Akhmetov had arranged to buy Ukraine’s largest steel mill, with the blessing of Yanukovich at the time, in partnership with Viktor Pinchuk, the son in law of former President Leonid Kuchma, another in the long line of Ukrainian politicians undertaking allegedly shady dealings.

Tymoshenko proceeded to reveal the extent of their corruption by selling the company instead to India’s Lakshmi Mittal for a whopping $4.8 billion, and then went on to block another, this time energy, deal of Akhmetov’s. The story would have had a nobler ending perhaps if Tymoshenko herself were not subsequently tied in a web of corruption on a grand scale.

As Tymoshenko is known to be vindictive, Akhmetov, who now happens to control some of the most volatile separatist regions of Ukraine, wants reassurances his interests will be protected and kept intact. Akhmetov can also ill-afford a Russian occupation of his home base, which may have something to do with his willingness to work with whomever is in power in Kiev after the May 25 elections. Even Akhmetov would be no match in protecting his assets from Moscow (at least he would still have his flats in London).

But it is not just the eastern regions that have a monopoly on extremely dangerous and powerful oligarchs. Most dubious, and perhaps horrible of them all, is Ihor Kolomoisky, the owner of Privat Group, who has been given the governorship of the Dnipropetrovsk Oblast, one of the regions, by the new government of Kiev.

Kolomoisky has offered a bounty of $10,000 out of his personal fortune for any Russian captured or killed in Ukraine and has boasted that he is personally buying the oil for what is left of the Ukrainian army with his own cash. He is a brutal, polarizing figure elevated to a major position by the right wingers of Kiev. Switzerland is now even rumored to be considering charging him with crimes against humanity for putting a bounty on people’s heads.

The list goes on, but for now, confectionary magnate Petro Poroschenko, the other front runner in the race for President, appears to be one of the more reasonable and less divisive oligarchs. And on that score alone, he cannot possibly be as unfit to lead a united Ukraine as Tymoshenko, who he appears to be leading in the most recent polls by what for now is a significant margin.

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