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Wednesday, 25 February 2015

Guest post: the long, hard struggle in Ukraine | beyondbrics

Guest post: the long, hard struggle in Ukraine | beyondbrics:

By Timothy Ash of Standard Bank
The crisis in Ukraine shows no sign of abating any time soon.
Minsk I and II have failed to bring a real ceasefire or to provide a basis for negotiations over a lasting settlement. Indeed, Minsk II appears likely to follow the script from Minsk I, bringing only a temporary lull in fighting, as the two sides tactically re-position on the ground and in the international diplomatic scene before recommitting to the battle to ensure delivery on their longer term strategic objectives.
For Russia, I think the strategic objectives have remained transparent for the past year or so – No Maydan, No Nato and No EU entry for Ukraine, and to bring Ukraine back under Russia’s geopolitical and strategic orbit. Moscow’s agenda in Ukraine is part of President Vladimir Putin’s longer term Russian state-building agenda (see Fiona Hill and Clifford Gaddy’s recent biography, Mr Putin: Operative in the Kremlin) of redressing the mistakes (from a Putin perspective) of the past two decades since the collapse of the USSR. This is about resurrecting Russia as a great power and ensuring respect for Moscow from the west, and for Putin personally to be taken seriously. There is an economic component therein, which was/is the creation of a Eurasian Union/CIS Customs Union, and the desire to create an economic/political block to rival the EU/China/US. Having Ukraine in such an entity is still a central tenant of that agenda.
There also appears to be a Greater Russia agenda underlying all this, but the Eurasian Union goes beyond that, with Greater Russia seen as part of a larger area where Russia has strategic/geopolitical control extending out to much of the CIS space. I still doubt that this extends to the Baltic states, which in theory “benefit” from protection under Nato’s Article V defence clause. But to ensure delivery on the Eurasian Union/Greater Russia project, Russian tactics also appear to include sabre rattling across the wider European region, including the Baltics, and acting to undermine/destabilise rival economic and security structures including Nato and the EU, but also to undermine the transatlantic relationship. Weakening and undermining one’s opponents is part of the process of strengthening oneself.
The long-term strategic objectives may have remained unchanged for the past year but Russia’s tactics to ensure delivery have changed as events have unfolded. This is a dynamic process, in which the Russian side probes and tests the opposing side before adjusting tactics again. Russia has sought to use a combination of carrots, such as cash (a $3bn Russian bail-bond extended to the former Yanukovich regime in December 2013, as part of a larger $15bn programme), and a lot of stick, for example the annexation of Crimea and more direct military intervention in Donbas through proxies, plus accentuated military activity across the region – including a huge increase in Russian military flights towards Nato-controlled airspace, plus troop build-ups and manoeuvres across Russia’s western borders – and diplomacy, eg talks under the auspices of the Contact Group, the Normandy format, and Minsk I and II, where the aim has been to head off united opposition from the west and stall any decisions to roll out further sanctions on Russia, or to arm Ukraine. Russia’s tactics have been evolving, but also rolling to keep its opponents off-balance, and thereby to ensure advantage in delivery of its objectives. Russia appears to be waging a war of sorts (how you describe this is open to question – Cold War II, Hot War, Proxy War) with the west over Ukraine and the region – be it military, economic, diplomatic, cyber.
What has become clearer in recent months is that while Putin is prepared intervene directly in Ukraine, this has its limits. We say this as at various times over the past year, Russia has had the opportunity to undertake a much larger scale and potentially decisive military incursion into Ukraine (eg after the annexation of Crimea and after Ukraine’s military defeats at Illovaisk and Debeltseve) – to drive his tanks to Kiev in two weeks – but instead he has opted for consolidation, perhaps awaiting a response and concessions from the other side. This perhaps reflects Putin’s own pragmatic and cautious personality, and uncertainty still as to whether the Russian military has the capability to undertake a large-scale operation in Ukraine. Ukraine is a huge country still, with a very large population (>40m) and would be very challenging for the Russian military to both take in one single operation and, importantly, then to hold. It also perhaps reflects some surprise at the level of opposition seen in Ukraine to Russian intervention – reflected in opinion polls and in the number of Ukrainians willing to fight on the front line. Indeed, the willingness of Ukrainians to fight against great odds has surprised most military observers. This suggests that Russia is reluctant to get involved in a full-scale, open conflict for fear that this would drag it into another Afghanistan-style conflict, which would be hugely damaging for Russia in human and economic terms. Interestingly, both are vulnerabilities for Moscow, given the weakness of the Russian economy and sensitivities in Russia to large human losses, as reflected in the rise of soldiers’ mother’s movements.
Russia’s strategy appears to be to incrementally up the ante in military terms, ratcheting up intervention with the aim of gradually taking more territory and imposing an ever higher military, economic, human and political cost on the government in Kiev – and assuming that the west will buckle and force Kiev to concede for fear of a wider war on the continent. This appears to have been seen already in the efforts towards Minsk II. Such an incremental military approach also gives Russia the opportunity to back out and save face should it find that its approach is failing.
As noted above, Russia’s strategy is not just a military one, but involves pressurising Ukraine across a range of fronts, including trade, energy, infrastructure and finance. The aim is to squeeze the Ukrainian economy in a vice, raising the cost to policy makers in Kiev and to the general population, to create social and political pressures for compromise and concessions to Moscow.
The aim is to send the message that Ukraine’s economy cannot function without a working relationship with Moscow, and that western-style reforms will ultimately and inevitably fail without ceding to the will of Russia. Similarly, the aim is to call the west’s bluff, to raise the costs of financially supporting Ukraine beyond that which the cash-strapped west is again able to bear. It is perhaps also about signalling both that Ukraine cannot survive without Russia, and that the west is a very poor substitute for Russia and will inevitably disappoint Ukraine and Ukrainians.
So, what compromises is Moscow willing to accept?
An interim solution for Putin would be the creation of a coalition government in Kiev representing Russian interests – a Yanukovich II – and/or a new federal structure giving the regions, in this case the Donbas, a veto on the geopolitical orientation of Ukraine. These would be temporary solutions as the longer term agenda will still be to bring Ukraine more fully back under Russia’s geopolitical orbit and indeed into an entity like the Eurasian Union. In terms of great power politics, Moscow would like some new post-Cold War settlement with the west, a Yalta II, with new treaty agreements defining clear areas of interest for Russia, which would likely extend throughout the CIS, with strong assurances set out in treaty format over no further expansion of Nato and less so the EU.
What about the west?
The crisis in Ukraine has come at a time when the west is perhaps at its weakest and most divided at any time since WWII. The US, under President Barack Obama, is significantly disengaged from Europe, with its priorities clearly lying elsewhere – at home, in the global war on terrorism, and perhaps pivoted towards China and Asia. After wasteful foreign adventures in Iraq and Afghanistan there is fatigue over the assumption that the US must default to being the global policeman, and a preference for multilateral action, or worse, “strategic patience”, which is in effect waiting to see how events pan out before committing to any particular response. There is also a sense that Ukraine is Europe’s problem, and a desire for others to move to resolve matters – perhaps a feeling that US intervention would only make matters worse, particularly in dealing with a US-phobic Russia. But the desire for Europe to respond fails adequately to take account of the fact that Europe appears unable to act given that the EU28 is racked by division and indecision, a result of the stresses and strains seen through the eurozone crisis, and of the over-deepening and over-widening of the EU itself, with centrifugal forces now prevalent and ready for an external third party such as Russia to exploit.
Leadership within the EU has been sadly lacking. Often, country agendas have differed and indeed been at direct odds with one another. Over the crisis in Ukraine, deep divisions have emerged between those more understanding of the Russian view, and reflecting historical, cultural, business and political associations with Russia – extending to countries such as Greece, the Czech Republic, Italy, Slovakia, Austria, Hungary, Spain, France, Bulgaria and the Republic of Cyprus – and those who are more in tune with Ukrainian interests and/or perhaps feel threatened by Russia due to recent historical experiences, such as Estonia, Lithuania, Latvia, Poland, the UK, and Sweden, with the rest more or less in the middle, and reflecting divided domestic opinion, or no opinion, for example as appears to be the case in Germany.
What has been particularly apparent in the western approach is a real lack of coordination between the US, the EU and indeed the IMF, with the three often pulling in different directions, for example over financing Ukraine. But this also betrays an unwillingness to carry the cost of the crisis, particularly the cost of a financial bailout for Ukraine. Passing the buck has been evident throughout and this has played back into the Russian script of revealing the weak underlying support for Ukraine in the west. The case has often been made that Russia wants Ukraine far more than does the west, and there does appear to be some truth in this.
It has also been fairly noticeable that understanding and knowledge of the issues at hand have been weak in western countries, as reflected in a recent UK House of Lords select committee report on the crisis. In this report, one message was that the Foreign and Commonwealth Office was under-resourced in terms of its coverage of FSU-related issues and had become the poor relation to counter terrorism operations, as the threat from Russia had been assumed to have expired. The peace divided had essentially already been spent. My sense is that across western institutions and think tanks there was a great degree of inertia in the view of Russia and an unwillingness to adapt to a changing situation and to the idea that the threat presented by Russia under a more ambitious and impatient Putin leadership was different from that seen over the past decade or more. Perhaps this reflected a lack of resources, or it may have reflected Russia’s success in lobbying in western capitals and instilling a much more sanguine view of Russia.
Simply put, the west, under its current leadership, appears unable to deal effectively with the challenges presented by the crisis in Ukraine, and is unlikely to provide solutions.
So Ukraine may well be on its own as it battles with Russian expansionism into the near abroad. Indeed, months of disappointment with the west’s failure to provide a deterrent to further Russian intervention is creating realism at home in Ukraine. The assumption is certainly not that the western white horse is set to appear over the horizon. But, that said, there also is not much evidence of a collapse in support for Ukrainian statehood, nor is there an increasing clamour to compromise with Russia and to concede to Russian strategic objectives. Ukrainian positions remain fairly set, that the ideals of Maydan should be defended, as should Ukraine’s position as an independent, sovereign state, alongside its territorial integrity which has now been violated by Russia in Crimea, at the very least.
The problem for the Ukrainian side is that the compromises demanded by Russia are still almost unsaleable to a population that has been fundamentally changed by this crisis, first by Russia’s annexation of Crimea, then by its intervention in Donbas. It is fair to say that while a Ukrainian nation or national identity was not particularly apparent before the crisis, it is now, and it is probably fair to say that a nation has been forged from blood, sweat and tears through this crisis. Indeed, in Kiev it is often said that while Putin may be winning battles on the ground he has lost the war in terms of hearts and minds. For many Ukrainians, Putin has crossed the Rubicon and, despite all the difficulties, resisting perceived Russian aggression and expansionism is seen as a worthwhile cause – for many, at almost any cost.
A federal constitutional structure and the formation of a coalition government in Kiev would be totally unacceptable to many Ukrainians. Federalism is seen as the Russian back-door way of stopping Ukraine’s westernising and modernising agenda, as is the formation of a coalition government. Indeed, for most Ukrainians this is not about joining western clubs such as the EU or Nato, but about changing Ukrainian governance from a Russian-style “sovereign democratic” model, dominated by a narrow political and business elite, to a western democratic model, where elites are held much more accountable, the rule of law works for all, human rights are respected and property rights defended. I still don’t sense that despite the huge sacrifices made through this conflict and the ongoing collapse of the Ukrainian economy and financial system that the population, en-masse, is ready for this. Ukraine’s political elites are also unwilling to push for such a compromise as the memories of Maydan are still very fresh in the mind – the fear of Maydan II/III are still acting to discipline politicians and policy makers.
So what is the most likely outcome?
My sense is that this crisis is set to run still further. There will be periods of relative calm, as outside agents try to negotiate ceasefires, as with Minsk I and Minsk II, followed by periods of increased pressure from Russia as it tries to force the government in Kiev to deliver on Putin’s agenda, and to create social, economic and political pressure.
I don’t think that Putin himself will or can compromise at this point for various reasons.
First, arguably, this is his opportunity to make his mark on Russian history and secure the return of Ukraine to the Russian fold, while the west and Ukraine are both weak, and while the Russian nation is largely united behind him. Waiting would risk the return to office in the US of a much stronger and interventionist US president and a much more effective counter to his long term strategy.
Second, pre-Maydan Ukraine was not a threat to Russia. It had no Nato ambitions, non-aligned status, a military doctrine that was not set against Russia, a weak economy and a population that generally was still positively inclined towards Russia, Russians and even Putin. Now all these factors have reversed, and if a pro-western administration succeeded in Ukraine, it would present a rival to Putin’s sovereign democratic model. Viewed through pragmatic Russian eyes, Ukraine was not a real threat to Russia back in late 2013. But it now presents a real and present danger to Russia, and to Putin’s agenda of rebuilding a Greater Russia.
Third, Putin has gone this far and backing down now would be a personal humiliation, especially when so much effort has been extended on the Ukrainian project. And backing down is not really in the Putin psyche – see again the Hill/Gaddy biography for evidence of this.
The above suggests continued pressure on the Ukrainian economy – deeper recession, a weaker currency, higher inflation and an even lower ability to cover debt liabilities falling due. Doing the maths, based on an exchange rate of 30 hryvnias to 1 US dollar, a 5.5 per cent real GDP contraction (perhaps optimistic) and inflation of around 30 per cent, would suggest dollar GDP dropping to just $65-70bn this year from $120-125bn in 2014, and $178bn in 2013. This suggests public sector debt/GDP rising from 40 per cent in 2013, likely 60-65 per cent in 2014 to perhaps 100 per cent or thereabouts in 2015. This is unsustainable for a country like Ukraine, especially given the historical context and the likely outlook in terms of politics and security. With ratios like these, re-profiling would be a stop gap to likely eventual restructuring with a hair-cut – so the question is whether the authorities want to get a restructuring out of the way sooner rather than later. I think it would be wrong to suppose that re-profiling would see Ukraine’s speedy re-entry onto international capital markets – that seems like a pipe dream given the security setting. There is also the question, given the likely need to move to a state of emergency and a war economy, whether all resources will have to be prioritised for the war effort, including debt service.
What could change?
First, I guess there could be a more decisive Russian military incursion, especially if I am wrong about the support in Ukraine for statehood.
Second, if the government in Kiev tries to compromise, this could easily see a Maydan II or III scenario, with the associated risks of coup and counter coup and then likely an opportunist and more extensive Russian intervention in eastern Ukraine and perhaps further, to slice and divide the country.
Third, greater western efforts to ramp up the costs to Russia of its intervention in Ukraine, either through more sanctions or by arming Ukrainians to defend the country. The latter could increase the military costs of further graduated military intervention from Russia, and force a rethink and perhaps a resort to non-military routes.
All told, the above suggests a fairly grim outlook for Ukraine, but also for Russia. This is emerging as a lose-lose situation. Russia will likely be dragged into an extended conflict that will impose ever greater military and economic costs, and further extension of western sanctions. Faced by this, the Putin administration is likely to become ever more insular and less reform minded.
Timothy Ash is head of EM strategy, ex Africa, at Standard Bank. A version of this note was sent to his clients on Tuesday.
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