US President Barack Obama officially announced a series of targeted sanctions on Wednesday intended to put pressure on Russian companies and markets as punishment for President Vladimir Putin’s continued support of the eastern Ukrainian rebels engaged in a now four month-long war against the central authority of Kiev. European Union officials were very cautious in following the more aggressive lead of the US against Moscow, and Russian markets initially shrugged off the announcement.
But all that was thrown into question after the tragedy of the downing the very next day of Malaysia Air Flight MH17 over the skies of eastern Ukraine and the death of 298 innocent civilians.
*** Although there is speculation the EU may follow the US in broadening the sanctions regime on Russia from individuals to institutions, the EU from what we understand remains hesitant to take that leap, even if not ruling it out. EU officials have given themselves until the end of July to formally rule on the legality of such an escalation and if necessary, to follow the US lead by drawing up a list of companies that potentially could be hit with sanctions. They are pressing in the meantime for concrete steps from Russia to de-escalate tensions in the aftermath of the MH17 crisis. ***
*** In addition to calls for another cease fire, German Chancellor Angel Merkel has specifically pressed Russia to follow through on a proposal to invite border guards from the Organization for Security and Cooperation in Europe (OSCE) to patrol the boundary between eastern Ukraine and Russia to either stem the flow of arms and fighters from Russia into east Ukraine, or corroborate Russian claims that there is no such flow. An agreement on this, including even a US presence, we believe is now possible, and would be the most significant, visible near term concession from all the major powers to ratchet down tensions. ***
*** But while there is indeed the possibility that this tragedy will lead to an attempt at de-escalation by the combatants, as markets hope, the prospects on the other hand for any sustained relief for Russia or Putin are slight. The sanctions barring US institutions from funding certain Russian institutions have and will continue to put a chill on funding and capital investment into Russia, whose companies and banks have external debt estimated at $650 billion against official FX reserves of around $420 billion. And with the threat of asset freezes still hanging over Russian companies, even the status quo threatens to raise the cost in rolling over Russian corporate debt. ***
*** But perhaps most damaging, signs of weakness in Putin’s handling of the Ukrainian crisis have raised renewed alarm bells among local investors in Russia, and that has again raised concerns in Moscow over domestic capital flight. And that, in turn, could blowback in a new erosion in Putin’s domestic political standing. ***
Attempts at De-escalation
The establishment of OSCE border monitors – including even a few from the US – was in fact proposed by Moscow in an unsuccessful round of negotiations early in July, when it was rejected by Kiev and ignored by the US, and once again in mid-July. The proposal was first made in the 11th hour of negotiations after an extension of a cease-fire that Ukrainian Prime Minister Petro Poroschenko felt was being used by rebels to re-arm instead, and without the US at the table, Kiev rejected the extension proposal and decided instead to press forward with its offensive instead.
Those dynamics may now have changed.
Our understanding is that the EU is in fact already leaning heavily on Kiev and Poroschenko to impose a cease fire on the warring sides. As opposed to his predecessor, Arseniy Yatsenyuk, Poroschenko is believed to be a more serious statesman who can use the tragedy of the airline disaster to unilaterally take a first step to de-escalate, without losing face, although a cease fire is complicated by the encirclement and potential annihilation of a battalion of Ukrainian forces surrounded at Luhansk airport without a reciprocal move from the eastern rebels. There are reports in fact that an offensive is underway by the Ukrainian forces to lift the siege of its encircled troops at Luhansk airport.
The risk would be if Kiev holds out against an immediate de-escalation in the calculation that the tragedy will turn the tide of international support further towards Kiev’s side, including the threat of further escalation of sanctions from the US on Russia. But the EU will press for movement from Kiev, and we suspect that Poroschenko will be motivated and under intense pressure to look for a de-escalation settled solution.
And through the hard line talk from both sides, Western leaders – including, critically, Kiev — did indicate at one point a willingness to negotiate with civilian representatives of the eastern rebels, specifically Aleksandr Borodai, the civilian administrator of Donetsk, and Marat Bashirov, acting prime minister of Luhansk.
These, especially Bashirov, are seen as potential legitimate representatives for the east who would be wholly acceptable to Kiev and the West – Borodai, while deeply tied to Moscow, in fact ran an investment fund at one point, and Bashirov, also with deep ties to Moscow, was a Communications Manager for the Renova Group in a former life. They were the delegates slated for the ill-fated talks on that fell apart on July 5.
Moscow Scrambling to Respond
Putin meanwhile is under tremendous pressure to extricate himself from what has turned from a victory over Crimea into a long term liability in Ukraine, and even a continuation of the status quo is now designed by the US to maintain an economic noose around the neck of the Russian leadership, a “slow strangulation” of the Russian economy and markets, with broader long term implications for global markets as well.
The Russian media and blogosphere have reported alternative theories on who shot MH17 that range from the extremely implausible (the Ukrainians shot down the plane in an attempt to hit Putin returning home from Brazil), to the outright despicable (the passengers were all dead already before the plane was hit). But the Kremlin itself has refrained from endorsing any specific view of the shooting, and has turned instead to managing the fallout of the tragedy.
And for all the wild theories, the real – and most damaging – question quietly being raised in circles close to the Russian leadership is why it took a full 24 hours for the Kremlin to deny that the missile that brought down the Malaysian Air flight was fired by Russians?
That delay is being seen not as a sign of culpability, but rather of, perhaps even worse, yet another sign of growing ineptitude and incompetence in handling a Ukraine situation that is turning into a more protracted liability than ever imagined in the heady days of the Crimean takeover celebrations.
All decisions are increasingly singularly controlled and channeled through Putin himself, and with the exception of Foreign Minister Sergei Lavrov, other senior officials including Prime Minister Dmitry Medvedev have been – tellingly and conveniently – absent from the public eye for weeks. This is a crisis now fully owned by Putin.
While maintaining the squeeze on the Russian economy, the Obama Administration has taken pains not to hurt US and to a lesser extent European business interests by very visibly avoiding sanctions on gas producer Gazprom or its CEO, Alexei Miller, and Wall Street has noticed.
This latest step-up in sanctions has, however, raised the specter of a deliberate response from Russian institutions, a warning that if there is a threat to their funding there will also be a threat to payments of debt to Western creditors. It is also likely to trigger a prudential response from Western regulatory institutions to require financial institutions to take greater reserves on their Russian exposures.
So Who Shot Who, and How?
In the meantime the debate, accusations, and countercharges over who exactly pulled the trigger on the fatal flight MH17 and why, will continue.
Of course the details to some extent are now moot, as the US position has been made clear that regardless of who exactly pulled the trigger on the missile that brought down MH17, the West are holding Russia responsible for supporting the rebels and continuing violence in eastern Ukraine.
For what it is worth, the most credible reported evidence we have gathered appears to point very strongly to the following:
The plane was downed by either a SA-11 Gadfly or SA-17 Buk missile, launched from Chernukhino, near Snezhnoye, in rebel controlled territory about 80 kilometers from Donetsk. It has been widely reported in the press that the Buk has a range of 49,000 feet and MH17 was flying at an altitude of 33,000 feet. According to Jane’s Defense Weekly, the ranges are much higher than that, and, perhaps most critically, an inexperienced user may have problems properly using its IFF (Identification Friend or Foe) system.
Who exactly shot the plane down (and why) is less easy to determine – and may remain a mystery forever- but it appears likely from what we have gathered that it was an accidental hit by rebel forces attempting to block what was assumed to be an airlift of supplies to the Ukrainian battalion that has been encircled and cut off by rebel forces in Luhansk airport. The Antonov-26 Ukrainian transport plane that was shot down by rebels on July 14 at the altitude of 21,000 feet was on its way to re-supply the troops at Luhansk airport.
As to the question of Russian involvement, it does not appear that this particular missile was part of the cache of arms that the West has repeatedly accused Moscow of directly supplying or allowing to be brought across the border into eastern Ukraine. Our understanding is that it is close to impossible for systems of this size to be transported across a border that is so heavily under satellite surveillance without being detected, and the overwhelming likelihood we believe appears to be that it was, in fact, captured from the Ukrainian A-1402 anti-aircraft missile base near Donetsk on June 29 and paraded on the internet.
Kiev has posted the translation of an intercept of a conversation allegedly from rebel leaders to Russian officers celebrating the shooting down of a plane, only to then discover that it was a civilian craft. We have not heard the transmission in its original language but non-official Russian sources, not surprisingly, dispute its veracity or the accuracy of the transmission.
The direct or indirect involvement of Russian advisors in this particular incident is more difficult to determine, but President Barack Obama and US UN Secretary Samantha Power have gone out of the way to make the broader case that in the big picture the question is not about who directly pulled the trigger, but Russia’s enabling of the rebel forces through supplies and training.
We would note, however, that sources close to Moscow’s thinking have been quick to point out that President Obama may have been better served on two counts by not asserting the firing of the missile that downed MH17 would have required Russian technical training; first, a very large portion of the eastern rebels, some estimates are of as many as two-thirds of the fighters, are former Ukrainian army soldiers who live in the east and defected to join the rebel forces, and who have been trained exactly on these weapons, and; second, with no small irony, if they had any decent Russian training, they would not have been so stupid as to mistake a commercial airliner for a much lower flying transport plane.