Letter from America
(Business New Europe – bne.eu – Tim Ash, Standard Bank – October 13, 2014) I spent the last past week in DC trying to gauge better the Western response function to the crisis in Ukraine and with Russia. Herein are a few big picture take-outs from my discussions with a range of academics, journalists and policy types.
First, the contrast with my last visit a few months back was quite stark. Back then I found a fairly split view between those who preferred to take what can only be described as a “charitable” interpretation of Russia’s actions with regards to Ukraine – trying not to believe the worst (believing the Russian script that this was a defensive action against the threat of further NATO enlargement and the disintegration of Ukraine) and really hoping for the best – and then those that were of the view that this was a new, different and much more offensive Russia under Putin, which presents a clear threat to Western values, NATO members, and hence needs to be countered. Events over the past month or so, particularly evidence of much more direct Russian military intervention in Donbas, in the run up to the ceasefire agreed on September 5, appears to have moved the consensus squarely behind the latter view, i.e. that this is a new and much more “offensive” Russia which is looking to expand beyond its current borders and into the near abroad. Some argued that Putin had always had these offensive intentions but had managed to cloak these until the recent crisis in Ukraine.
Perhaps the only debate was how far Putin is prepared to go – evidently into Ukraine, but has he really now got desires to bring ethnic Russians in the Baltic states, or even in Kazakhstan, back within the Russian “umbrella”? Therein views were mixed. Some argued that this was entirely possible as Putin perhaps now saw this as his opportunity to finally and firmly mark his place in Russia’s history by creating a Greater Russia, and while the Obama administration was largely disinterested in foreign policy and while Europe was divided. Others countered that he still would not dare to risk taking on NATO over the defence of the Baltic republics. A middle view was that while he might not have aspirations to fully take back the Baltic states, there was now an opportunity to weaken NATO by taking NATO to the edge, gradually eroding confidence in NATO’s Article V – recent actions of “arresting” an Estonian security official, and a Lithuanian fishing vessel, plus also an upsurge in probing of approaches to NATO airspace by Russian military planes were all seen as part of this process of testing/probing/undermining NATO defences and the credibility of the collective security clause. Perhaps the new found “threat” to the Baltics was seen as pushing the agenda out, to move focus away from Russia’s annexation of Crimea, and intervention in Donbas, and to try and make NATO “accepting” of these as long as Russia stops at NATO’s existing border. Perhaps Russia is just trying to generate leverage and improve its negotiating position with respect to Ukraine – i.e. we (Russia) will hold back from threatening the Baltic states but in lieu NATO has to accept that Ukraine remains in Russia’s geopolitical and strategic orbit.
Second, while there was something of a consensus in terms of the perception that the West faces a much more “offensive” Russia there was less clarity in how to deal with this, and whether the West could present a credible united approach, and especially when noting as above Europe’s divisions and the disinterest in foreign policy on the part of the Obama administration, and especially with the new focus on countering ISIS, that seems to have pushed Ukraine/Russia issues down the agenda for the Obama administration.
The Obama administration appears set against arming Ukraine, even if this were only in terms of beefing up Ukraine’s defensive capability. The line therein is that this could just provoke Russia into greater direct intervention before such defensive capability was built – the line is plied that there is no military solution and that what is the point arming the Ukrainians when they will never be able to take on or defeat the Russian military, as evidenced by the overwhelming defeat suffered at Illovaysk in early September and ultimately brought the September 5 ceasefire. Many might contest this argument – indeed, outside the administration there now seems to be strong support in the US to arm Ukraine, albeit ultimately this might need a House bill, after midterm elections, or the next presidency to come to fruition.
There did appear to be a lot of understanding and sympathy towards Ukraine’s position and predicament, and that this was a worthy cause to support and defend, and yet we sensed a degree of resignation that under the Obama administration the US was unlikely to do that much beyond extending warm words of support. When questioned as to what exactly the US had done to support Ukraine, several observers noted that “well Poroshenko was allowed to address both Houses of Congress, and that this sent a strong signal both to Russia and the domestic population of US support for Poroshenko”.
The latter point does raise clear concerns for Ukraine, that with an Obama presidency unwilling to really do much in the defence of Ukraine, and withÊEurope divided, now might be an optimal time for Russia to try and secure final delivery on its longer term strategic objectives of bringing Ukraine firmly back within its strategic orbit. And, before the election of a likely much more hawkish (on Russia issues) president to follow President Obama.
A strong point was made, as to what would the West do if Putin followed through on his jibe (reportedly made to EU officials), that Russian tanks could get to Kyiv in two weeks? Many still view the sanctions rolled out thus far on Russia as modest given what has actually occurred, and yet from what we have seen thus far on the sanctions front, would the West do much more if Russia further stepped significantly up its intervention in Ukraine? Cynics would say likely not, and this might ultimately suggest that Ukraine is pretty isolated against the threat of further Russian aggression. This might suggest ultimately the only real deterrent against further Russian incursions into Ukraine is the ability/willingness of its own population to defend the country, and the perception in Russia that any such military campaign would be too costly as a result – both in terms of taking and holding territory against a likely determined insurgency.
Third, and despite all the discussion above, a common theme we heard is that the West simply does not know which direction Russia will take now, and it is now too difficult to read Russia. Traditional ties into the Putin regime, levels below President Putin, which had been useful in signalling policy direction in the past are now proving ineffective in providing accurate intel into the Putin regime’s likely next steps. This is principally as President Putin is seemingly the sole decision maker now, and he appears to play his cards very close to his chest, and may only reveal his overall strategy to a very small clique – perhaps not even including foreign minister Sergey Lavrov.
Fourth, if the West is in the dark over President Putin’s strategy, then the same seems to be the case for a great weight of the Russian establishment. This has been quite evident in recent months in terms of relative indecision over a broad raft of policy, but particularly in terms of economic policy – monetary and exchange rate policy, and after recent high profile events connected with corporates governance.
Fifth, the above indecision over economic policy, seems to be signalling to US elites, that Western sanctions on Russia, however moderate, are in fact working in terms of extracting a heavy price on the Russian economy and its elites in particular. Russia has been all but cut off from long term financing, and this is making a weak economic outlook appear that much more difficult, not helped by declining oil prices but now perhaps best reflected in the sustained weakness of the rouble. The interaction that US elites have with their Russian counterparts suggests that they have been rattled and are nervous, and are opting to making sub-optimal policy choices, e.g. over imposing the food import ban which ultimately will be damaging for the Russian economy.
With sanctions seemingly working, US elites seem now to think that they have perhaps found the Putin administration’s Achilles heel, and appear in no mood to quickly roll existing sanctions back – indeed, the consensus was that sanctions will be sticky. Even with respect to EU sanctions, which require EU28 approval to keep in place after their one year anniversary, there was some confidence that if the US asked, enough favours could be called in to keep them in place.
A message was also that we should expect further tightening of the existing sanctions regime already in place, as loopholes are gradually closed, and the overall regime made much more effective.
Sixth, in terms of possible financial support available to Ukraine, it seems as though with the existing IMF programme for USD17bn we are already close to the limits as to what can be put together. Perhaps another USD5-6bn could be raised from multiple bilateral and multilateral sources, but there seems to be little scope for a major revamp of the existing programme. There also still seems to be “drag” in terms of memory of failed past IMF programmes, and a feeling that state structures, the bureaucracy and political elite in Ukraine still cannot really be trusted to deliver on IMF reforms. There did not seem to be much enthusiasm for front loading any future disbursements, but hefty conditionality would need to be attached to any future disbursements. There was certainly hope that this new administration would is finally the real thing from a reform perspective, and was committed to reform, but there is still a degree of scepticism as to whether it can deliver – seeing is believing.
There has been some talk of a new Marshall Plan for Ukraine – I.e. “Well if we are not prepared to arm the Ukrainians then we have to stump up enough cash to ensure they do not fail economically.” Frankly though there seems to be little momentum towards a Ukrainian style Marshall plan – again lots of warm words, but not much action.
Seventh, gas. A general theme was that Ukraine should probably just accept the current gas deal being brokered by the EU – the line being that the price being touted (USD385 per tcm) is not far from the EU average, and if you can get enough gas to see you through the winter and to avoid economic collapse, that is perhaps now worth taking. However, my sense still is that Ukraine is loathed to do this while the Stockholm arbitration case is on-going, and as the gas issue still ensures EU interest in the Ukraine story. If Ukraine cuts a deal now, the danger is that the EU loses interest in trying to help find a political solution in Ukraine, but rather just tries to sweep the whole issue under the carpet in the hope that it all goes away and business as usual withÊ
Russia can resume. Ukraine might also think that with 16bcm of gas in storage, 21bcm of domestic production, and active energy conservation underway, it can probably get by until February – March 2015, and by that time it may have a definitive ruling at Stockholm. Moscow May also not be in a huge hurry to cut a deal, still thinking it can pressurise Ukraine, and the EU, by using the gas card issue to ensure delivery on its own strategic objectives in Ukraine.
Eighth, PSI remained a recurring theme, but officials still indicated that there were no formal discussions underway, and debt service was not an immediate concern/issue. However, in the context of the need for a larger IMF support programme, and the relative shortage of new money from official sources, re-profiling may end up as being part of any broader new support package for Ukraine – certainly nothing could now be ruled out, and much depends on the real economic situation on the ground, and the political/security/economic situation.
[featured image is file photo]