Ukraine – Through the Bluster, Negotiations

Published on May 12, 2014

The reporting and political rhetoric surrounding Sunday’s referenda for independence from Kiev in the eastern Ukrainian regions of Donetsk and Luhansk has been to almost universally warn of the heightened risk that will surely result from the holding of these highly provocative elections. But in fact we do not think the elections pose all that much of an immediate new or elevated risk point in the Ukraine crisis, on two counts.

*** First, Moscow’s careful distancing from these controversial, and muddled, independence votes has already neutralized their potential impact as a further “casus belli” for either side of the conflict. The election results will for now be no less and no more than a leverage point for Russia to push Kiev to “National Dialogue” negotiations over the future autonomy and constitutional devolvement of regional power in Ukraine. While the votes may not be an immediate flashpoint to escalate the crisis beyond Ukraine’s borders, they could nevertheless trigger a renewed military clampdown from Kiev on the regions if provoked, and could still prove a potentially powerful card for Moscow to play further down the road. ***

*** Second, what did not happen is equally, if not more important, than the regional votes themselves: the May 9 victory celebration over Nazi Germany came and went with restraint and no significant violence, with the only provocation limited to a highly symbolic and widely covered tweaking of the West by Russian President Vladimir Putin making his appearance at a parade in Sevastopol. Kiev also opted against a major new offensive to disrupt the referendums in Donetsk and Luhansk. And finally, the EU will announce later today a rather limited widening of the sanctions regime against Russia. ***

These responses by the main players in fact further confirm, in our view, that the major parties on both sides are seeking to de-escalate tensions where possible (see SGH 5/7/14, “Ukraine – Russia Indicating Military Option off the Table”):

Germany at the Forefront

The EU will today publish a broadened list of individuals and – for the first time – companies that will fall under its current sanctions regime, a move that had been anticipated by the agreement last week on the widening of the sanctions’ legal criteria. But the names on this list have been very carefully chosen to encompass an extremely limited universe of individuals and companies directly related to Crimea, and not targeted at Moscow directly per se, which keeps sanctions “safely” political and with a limited economic impact on both Russia and the EU.

In fact, from what we hear a document was prepared by the European Commission last week that assesses the impact of trade sanctions against Russia both on member states’ individual economies and across the European Union.

As much as a warning to Russia of things that may come, the circulation of such a document, if confirmed, also clearly reflects not surprisingly the continued sensitivity of the EU to pursuing a policy of escalating sanctions against Russia without a parallel attempt at an active dialogue in search of a diplomatic solution. Indeed, the document – albeit allegedly top secret – has been rumored to preach caution in pursuing a hard line, and to highlight the disastrous consequences of endorsing a fully-fledged trade war against EU’s third biggest trade partner (335bn Euros, of which 77bn is only with Germany).

On that front, the OSCE today announced the appointment of a German diplomat, Ambassador Wolfgang Ischinger, as chief negotiator on Ukraine. The choice of a German for this position, and the announcement on its heels of a visit by Foreign Minister Frank-Walter Steinmeier to Kiev, reflects the active and lead role Berlin has been playing since the beginning of the crisis, and more so after the “Odessa Incident,” in pushing a dialogue forward with Russia.

That back channel was initially cleared by the release of the German OSCE hostages held by the rebels in Donetsk, leading to Putin’s outreach last week in distancing from this Sunday’s independence votes, the hint of an opening on the all-important May 25 Ukrainian Presidential elections, and critical negotiations with Gazprom on the payment of outstanding bills, future pricing, and gas supplies.

Gazprom, which is in the middle of a heated confrontation with the European Commission on the South Stream pipeline, is currently looking at different ways to provide gas to Europe without counting on the Ukrainian infrastructure: this move is seen in Brussels as a way to reassure the EU that its dependency on Russian gas will not be a handicap in the future. It is of course also a direct threat to Kiev’s middleman power.

In the meantime, Russia’s negotiating position was characterized perhaps best to us by Moscow itself – as one of no war, no peace, and no money.

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