Ukraine: Shifting Battle-Lines

Published on March 17, 2014

There was never much doubt to what the results would be of the contested referendum in Crimea this weekend over secession from Ukraine and union with the Russian Federation. Nor has there been a great deal of mystery over the by now well-telegraphed sanctions response by the West.

The immediate fall-out from the referendum will rather be in the (allegedly) overwhelming 96% of the Crimean population that voted for unification with Russia out of the relatively high turnout of 83% that (allegedly) went to the polls.

*** The US and EU are today holding back on some of their first stage retaliatory response to the referendum in the hope Russia may still soften its position before Friday’s scheduled vote in the Russian Duma on Crimea. The Western allies had announced the sanctions on 21 Russian and Ukrainian individuals, all government officials earlier today as expected, but the EU is not revealing names yet, and the US final list has for now excluded some names originally floated, such as Russia’s Defense Minister Sergey Shoygu, as well as major state-run business leaders. Far from applying pressure, markets are, for now at least, relieved and loving it. ***

*** But we do not believe President Vladimir Putin, with a 96% vote count in hand, will slow-walk Crimea’s accession to the Russian Federation, or leave Crimea in a “Transnistria/Moldova” type state of legal limbo as others suggest, in order to de-escalate tensions with the West. Putin is slated to speak to the Russian Duma tomorrow and has promised to respect the “will of the Crimean people,” and the Duma will vote by Friday on steps to integrate Crimea into Russia. We expect full integration to be on the cards, and another ratcheting up of sanctions at the March 20-21 EU summit. ***

*** We believe Putin is instead seeking now to re-draw the negotiating lines over the rest of Ukraine proper, demanding and wrangling further concessions and assurances on the Ukrainian domestic electoral process in order to maintain pressure on Kiev, including in the east of Ukraine, and to consolidate the victory in Crimea. Moscow floated for the first time today demands for a more federal-style Ukrainian electoral system as part of constitutional reform before the Ukraine’s parliamentary elections. These will be controversial to Kiev obviously, but will need to be addressed as part of any settlement now in order to win Russia’s long term cooperation with any new government. ***

*** Putin is in fact already braced for at least parts of the “Level 1” and “Level 2” of sanctions, and the West for its part has likewise kept the more damaging “Level 3” sanctions, to be fleshed out at the March 20-21 EU summit, in reserve if there are any further Russian “incursions” beyond Crimea and into the rest of the Ukraine.  Whatever is said publicly, the policy of Kiev and the West had already been moving towards one of “containment” of Putin rather than any realistic expectations of rolling Russia back in Crimea (see SGH 03/10/2014 Ukraine: A Post-Crimea World ). ***

To underscore the degree of Western resignation over Crimea, the interim government of Prime Minister Arseniy Yatsenyuk actually expressed relief at being given a week’s respite before having to discuss vacating Ukraine’s barracks in the Crimea. And we have even heard rumors that the “self-defense forces” now governing Crimea include in fact the Russian 349th Infantry Troop, a KGB elite Alpha unit that was apparently utilized in Kosovo as well. But the real identity of these forces is now all moot as well.

Keeping Hope Alive

Germany’s Foreign Minster Frank-Walter Steinmeier is reported to have expressed strong reticence to cancelling the EU-Russia Summit dialogue as part of the first round of sanctions. With the most to lose in commercial ties, as well as a critical Nordstream gas route from Russia through the Baltic Sea to protect, German hesitation towards escalating tensions with Moscow certainly comes as no surprise.

Indeed one of Germany’s key demands in a “post-Crimea” phase is for OSCE monitors to be in place across the Ukraine for the upcoming Presidential elections of May 25, as well as to monitor any military or potential subversive Russian activity in eastern Ukraine.

That desire for OSCE monitoring is actually apparently shared by Russia, but for the opposite reasons. Putin has agreed to such monitors in order to reportedly help protect Russian citizens from the far right nationalists, currently active especially in the western part of the Country.

Moscow has in the meantime amassed 60,000 to perhaps 80,000 troops on its border with Ukraine, just in case, and the interim government of Kiev has declared the mobilization of a militia of 60,000 or so. But Kiev has made no indications it will even pretend to attempt at any suicidal push back into Crimea, and all indications are that its buildup is to defend from an incursion into east Ukraine. Its 12,000 troops in the Crimean barracks are likely to be withdrawn without a fight after next weekend (all this, despite recent aggressive statements by Svoboda leader Oleh Tyahnybok claiming that the Ukrainian army will not be leaving Crimea).

And after flatly turning down Yatsenyuk’s request for military assistance, the US has now offered to conduct military “peacekeeping” exercises with Ukraine along with a host of other NATO allies. But the Pentagon has been quick to point out that these exercises have been planned in advance (they all seem to be), will be conducted safely in the friendly far west bastion of Lviv, and even then not until July, well after the elections, in order not to unduly inflame tensions with Russia.

In the meantime the US has offered 150 airmen and 12 F-16 fighters to Poland, 6 F-15s and one KC-135 to Lithuania, and AWACS reconnaissance planes to fly over the region.

On the political front, EU officials continue to look for ways to balance Kiev’s desire for an economic shield and integration with Europe with an acknowledgment of Russia’s economic interests in Ukraine and the region.

EU officials will therefore offer to sign the political section of the EU Association Agreement and will unilaterally commit to apply the provisions of the so-called Deep and Comprehensive Free Trade Area that will result in 500 million Euros in savings on customs duties for Ukraine. However, the EU will not sign the entire agreement before the May 25 Ukrainian (and European) elections and will make the point, this time around, that an agreement with the EU need not necessarily exclude a Customs Union with Moscow. As for the hope of a future path to EU membership, Ukraine should not be holding its breath: none of the Member States even remotely wants another Romania.

Sanctions and Election Flashpoints

Moscow earlier this month gave indications that it may move off its demands for a return to the February 21 road-map signed between its foreign minister and the foreign ministers of France, Germany, Poland and then Ukrainian leader Victor Yanukovich, which scheduled elections not before December 2014. The move appears to reflect the fact also that the most important electoral date will be the one set for Parliamentary and local elections, for which the Russians instead have shown a much greater deal of interest, as opposed to the Presidential elections of May 25.

In a broad ranging interview with the press, Putin even indicated that he could be amenable to accepting the results of the May 25 elections, depending on how they were conducted (and presumably on its outcome).

It is a well known secret that between the three major pro-Western parties, Arseniy Yatsenyuk and Yuliya Tymoschenko’s Fatherland Party, Vitali Klitschko’s Punch Party, and the chocolate oligarch Petro Poroschenko, Putin is most comfortable in dealing with Tymoshenko. But even a Klitschko victory may allow for a thawing of relations with Moscow.

The biggest source of tension by far with Moscow has in fact been not with these parties, but with the outsized inclusion of the far right Svoboda Party in four cabinet positions of the current interim coalition. This has proven a source of embarrassment for the US and EU as well, and we would expect a new cabinet (some time after the May elections, but it is not compulsory as the Rada will not be renewed) to reflect a more “measured” representation of the far right.

But there is little hope for any resurrection of the former leading Party of Regions, popular in the East, but in disarray after the flight of the disgraced and now disowned Yanukovich. Russia is banking on Serhiy Tihipko, its former deputy, to carry that banner in the meantime.

The elections will nevertheless be the next flashpoint for tensions, as Russia has started to demand changes to slow down the electoral process in order to give its backers ad candidates more time to regroup and mount a come-back against the forces of the EuroMaidan in Kiev.

We do not expect Russia in the meantime to cross the border into eastern Ukraine, but do expect its troops to remain on alert and on the border in order to keep the threat of ignoring Russia’s interests as the new political system is developed in Ukraine very real, and very immediate.

The US and EU have reserved the “Level 3” of sanctions in case of just such an incursion, and those are said to include sanctions on the state owned CEOs (Gazprom, Rosneft), institutions including banks (VTB, Sberbank), and trade, which would be a very high and damaging escalation of economic tensions indeed.

But the US has a “soft” card to play before that which could also be tremendously damaging to Russian business interests, and that is the potential to enforce money laundering rules more stringently on Russian banks through the FATF (Financial Action Task Force).

That is not to say we would ever be the ones to imply that money laundering rules can be ratcheted up or down for political reasons, or that Russian banks are involved in any shady business deals. It’s just what they are saying ….

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