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The future for the Ukraine?

No one knows how this will work out.  The sanctions are hurting Russia but Putin won't back down easily, as it would be a serious loss of face.

In recent talks with Angela Merkel, it is clear that he will not back down in fact.  Meanwhile, the Americans are conflicted about the Ukraine and pretty much want to stay out of it.  Sanctions are ok, but military action?  Forget it.

So what is next?  I don't know but I did find three articles discussing the future that are worth reading.  The first is about Europe's position, the second America's and the third Russia's.

First, the European future for Ukraine-Russia relations from The Financial Times:

Angela Merkel’s sanctions balancing act outwits Putin, for now by Stefan Wagstyl 

German chancellor has hard task to maintain hard-won consensus

It was hard enough for German chancellor Angela Merkel to secure support for economic sanctions against Russia over the Ukraine crisis in the face of protests at home and abroad.  It could be even more difficult to keep that hard-won consensus from breaking apart.  In Berlin’s view, the EU needs a full debate before the end of the year, with all options on the table, from the suspension of existing measures to the imposition of new ones.

Time is tight because the sanctions imposed this year expire after 12 months. The first round – asset freezes and travel bans imposed on individuals involved in the Crimea annexation – run out in March 2015. The much wider economic sanctions imposed during the summer fighting in eastern Ukraine expire in July.

“Keeping sanctions in place is a challenge for German policy,” says Gernot Erler, Social Democrat MP and Russia expert who is the government’s special representative for eastern Europe.

If Russian President Vladimir Putin launches new military action, beyond the territory held by pro-Russia separatists, the EU will be forced to contemplate more sanctions.

Conversely, if Mr Putin unexpectedly signals that he wants a negotiated settlement, the EU will come under pressure to relax sanctions, notably from dovish member states including Italy.

The difficult ground lies in the middle: what to do if the crisis continues at the current level, with violence interrupting the ceasefire agreed by Russia and Ukraine in early September and Moscow keeping the west guessing about its next moves?

For Ms Merkel, four points matter: de-escalate in Ukraine; keep the Kremlin out of other countries; hold together the EU; and maintain domestic support.

Her biggest asset is her record. Moscow did not expect Germans to close ranks behind sanctions – let alone the fractious EU. Ms Merkel made both happen, helped by Mr Putin’s mishandling of the Malaysia Airlines disaster.

German public backing for sanctions remains strong. A poll last week by Forschungsgruppe Wahlen, a research body, showed support at 58 per cent – up from 52 per cent a month earlier. But German officials fear support may fade, particularly if people start feeling the effects on their own pockets. While Russia accounts for only 4 per cent of German exports, businesses engaged in eastern Europe are feeling the pinch with a 20 per cent plunge in exports to Russia.

The BDI, the German industry association, is sticking to a promise to back government policy. But the Eastern Committee, the country’s industry lobby group for eastern Europe, is increasingly calling for an end to sanctions. Rather than challenge Ms Merkel directly on the rights and wrongs, the committee is questioning whether sanctions are effective.

The Kremlin is increasing its propaganda in Germany, with Russia Today, the state-run broadcaster, launching a German-language website next year, while Russian business people quietly lobby their German counterparts.

One former German diplomat argues that public opinion could shift if the crisis gets no worse. He says that at the margins Germans are already “asking why the [traditional] detente with Russia should be put at risk. They say, ‘For God’s sake let’s forget about Crimea.’ ” It will be “increasingly difficult domestically speaking for Angela Merkel.”

And if it gets harder at home, it will be harder abroad. While the US is expected to continue backing a tough line, the EU could grow softer. With the eurozone economy depressed, crisis-hit states far from Russia, such as Italy, will increase pressure on Berlin to split from hawks such as Poland and adopt a conciliatory approach.

For now, Ms Merkel’s conservative-Social Democrat coalition holds firm. Officials insist that there is no difference between Ms Merkel and Frank-Walter Steinmeier, the SPD foreign minister. But some politicians point to a distinction in tone, with Mr Steinmeier playing good cop to Ms Merkel’s bad.

As far as German and EU unity is concerned, Ms Merkel starts from a better position than at the outset of the crisis. But the ground is beginning to shake under her feet.

The second article is from The Huffington Post written by Nobel prizewinner Roger Myerson and John Herbst, who served as U.S. ambassador to Ukraine from 2003 to 2006.

Three Ways America Should Respond to the Ukraine Crisis 

With thousands of regular Russian troops in Ukraine and tens of thousands massed on the border, the danger of further Kremlin aggression in Ukraine is high. America must work urgently with its European allies to find a stronger and more effective response to deter this threat. Based on strategic analysis and long diplomatic experience, we offer here three basic principles that should guide America's response to this international crisis.

First, we recommend that America should meaningfully recognize its obligations to Ukraine under the 1994 Budapest Memorandum on Security Assurances.

In this agreement, Russia, the United States and the United Kingdom committed to support Ukraine's sovereignty and territorial integrity in exchange for Ukraine's relinquishment of the Soviet nuclear weapons in its territory. The cause of nuclear nonproliferation will suffer throughout the world if American security assurances, which were offered in exchange for a country giving up nuclear weapons, are subsequently found worthless when the country faces aggression. We want the world to see that Ukraine's peaceful surrender of nuclear weapons has earned it access to conventional weapons when it truly needs them to defend its borders.

America should make clear that its assistance under the Budapest Memorandum involves delivery of defensive weapons because Ukraine's borders were violated and further aggression is looming. Such assistance would be provided immediately and could include anti-armor, anti-aircraft, anti-missile and intelligence-gathering equipment. Such assistance would raise the price of a possible grab by the Kremlin or its surrogates for the port city of Mariupol or for additional territory in the Luhansk and Donetsk Oblasts. Mr. Putin is very vulnerable here. Polls by Moscow's Levada Center over the past few months show that over two-thirds of the Russian people do not want Russian soldiers fighting in Ukraine. The United States should inform Moscow that the flow of such equipment would stop once Russia fully implements its commitments under the Minsk process: withdraws Russian fighters (regular soldiers and "volunteers") and military equipment from Ukraine; and respects Kyiv's full control of the Donbass, including its side of the Russia-Ukraine border.

Second, to ensure alliance solidarity and to further encourage Mr. Putin to cease his aggression, America should make a strong conditional offer that, once the Kremlin has fully implemented its Minsk commitments and Ukraine has complete control of the Donbass, the United States would pledge not to support Ukraine's membership in NATO. This condition would require a Kremlin understanding in some form that Ukraine has the right to establish any non-military relationship with the European Union that the two sides may find acceptable, and ongoing Russian respect for Ukraine's sovereign choices and territorial integrity.

This offer would directly address Russian security concerns about NATO expansion. But by demanding Russia's basic respect for Ukraine's borders, it would enhance Ukrainian security quickly in ways that the theoretical prospect of NATO membership cannot. We can understand that Moscow would strongly object to NATO advancing on its borders, but this proposal should reassure Moscow in a way that does not guarantee Russia's security at the expense of its neighbors' insecurity.

The most important force for the defense of Ukraine is the patriotic valor of its people who have faith that they can be better served by a sovereign independent Ukraine. Political reforms that strengthen their faith can do more for the future of Ukrainian independence than military hardware.

Thus, our third recommendation is that the United States should encourage Ukraine's leaders to fully implement the reforms that they promised in their election manifestos, and give the people of Ukraine a more accountable government that will serve them better in the future.

It is disturbing that there has been so little progress toward reform, even after a commanding majority voted for fundamental reform in Ukraine's recent parliamentary elections. The United States and its European partners should remind President Poroshenko and Prime Minister Yatsenyuk that our support for Ukraine's stressed economy will be contingent on their implementing a fast and effective reform program.

The third  article is again from The Financial Times, with a guest article by Timonthy Ash who heads up emerging market strategies for Standard Bank.

Hello 2015: having failed in Ukraine, Russia will turn inwards

This time last year I was asked to contribute an article for beyondbrics on the outlook for 2014, and I chose Ukraine (see Hello 2014: Ukraine’s crisis may run and run, December 20, 2014). That post turned out to be prescient, although even I could never have imagined the remarkable turn of events in that country this year.

For 2015 I think Ukraine will remain in the headlines, but its future is likely at least partially to be determined by events in its eastern neighbour, Russia. The new reform administration in Kiev can succeed, if Moscow gives it some breathing space and scales back its own direct intervention in Ukraine.

Vladimir Putin, Russia’s president, faces some stark choices. His policy towards Ukraine has had decidedly mixed results. He has annexed Crimea, but he already had de facto control over the peninsula, through the long-running Black Sea Fleet agreement and the stationing of tens of thousands of Russian servicemen.

Russian-backed separatists, and very likely Russian troops, have captured part of the economically important Donbas region. His assumption perhaps is that this sliver of land will both hold back the prospect of further Nato enlargement, and act as such an economic handicap to the new government in Kiev that it will be bound to fail. Few Ukrainians prior to events this year harboured any real ambitions for Nato membership, and neither did Nato have this on its list of priorities. But now, Ukrainians almost certainly do aspire to join Nato, largely as a result of the threat they now feel from Russia. Putin may have annexed Crimea, but he appears to have lost any hope now of controlling the rest of Ukraine, as his own high popularity in Russia is matched by similarly scaled negative ratings in Ukraine, where he is roundly blamed for the violence now inflicting the country. Simply put, Putin has lost the battle for hearts and minds in Ukraine – and he may go down in history as the Russian leader who won back Crimea but lost Ukraine.

At home, the price of his intervention in Ukraine has been western sanctions, which, along with the plummeting price of oil, are imparting a debilitating blow. Russia’s budget for 2015 is still based on oil prices averaging $80 per barrel for the year – something that now feels like a distant memory. The collapse of the rouble this month has put the Russian economy and financial markets on the brink of something much worse – deep recession, high inflation, systemic problems in banks and rising problems of non payment throughout the economy.

Putin still has the option of stepping back from the brink over Ukraine, actively working to encourage a ceasefire and lasting peace agreement, and working to normalise relations with the west to open the way for the lifting of sanctions. The hope would also be that he will learn from Russia’s current economic and financial malaise and embark on a far-reaching reform programme that addresses core underlying structural weaknesses, particularly the poor business environment (corruption, red tape and bureaucracy), absence of the rule of law and lack of adequate protection of property rights. A decade of high oil prices has allowed him to neglect these underlying problems – but perhaps no more. Russia can succeed under such a strategy. But for Putin this could mean the end of the power vertical/sovereign democratic model that has served him and his allies so well.

The alternative scenario – and probably the more likely – is for Russia to turn inwards to an autarchic model and focus on building up its defences against the west, looking at import substitution strategies and with little meaningful reform in the underlying system of government.

Such a strategy seems likely to fail, as Russia lacks access to domestic and external resources for investment – and capital flight is set to accelerate. Russia is likely to see more state direction, but the track record of governments picking winners in the Soviet and post-Soviet eras is not particularly encouraging. The oil sector appears to be facing decline, without significant real investment, and increased spending on the inefficient military industrial complex looks set to squeeze the services sector through higher taxes and rent-seeking. Even the agricultural sector will struggle to take advantage of the western food import ban, as the system suffers from years of underinvestment, rural-urban migration, and an archaic structure not only at the farm gate but also upstream and downstream, and a lack of a fully functioning land market.

Russia also faces dismal demographics and is likely to suffer an accelerated brain drain as a result of the fear that opportunities to leave could be narrowing along with frustration at the lack of reform at home. A more nationalist agenda is unlikely to be conducive to much inward migration of young workers from the former Soviet Union and beyond.

Putin Inc. needs a new and different model. But over his 15 years in power, the regime has appeared unwilling or unable to tolerate the kind of radical reforms now needed, because they likely challenge the very underpinnings of the regime itself.

 

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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