Russian Ukrainian War

The Battle for Eastern Ukraine Intensifies

A good summary from Radio Free Europe and a great analysis from Forbes about the recent takeover of administrative buildings in eastern Ukraine by Pro-Russian separatists:

From Timothy Ash Standard Bank PLC:

What is noticeable is that the demonstrations in Eastern cities are still relatively small scale – a few hundreds or a couple of thousands. However, they appear well organised, and armed, and their advantage seems to be the fact that the authorities in Kyiv are reluctant to use force against them for fear of provoking a counter reaction, even military intervention from Moscow, repeating the scenario from Crimea. They hence have one armed tied behind their back – actually both arms.

 

Putin: Building the case for an invasion into Eastern Ukraine

In a previous post I wrote that in my opinion there was a 50% chance of a Russian invasion into Eastern Ukraine and that if it were to take place, it would almost certainly happen before the Ukrainian presidential elections scheduled for May 25th.

I also indicated that at the time I did not feel that an invasion would be imminent because the news cycle was not in Putin’s favor. With the capture of administrative buildings in three Eastern Ukrainian cities (Luhansk, Donetsk and Xarkiv) by pro-Russian protesters, the news cycle is now in Putin’s favor.

Watch for the Pro-Russian separatists to try to incite violence so the “Self-Defense Forces” can move in.

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Also worth noting, from a friend:

Ukraine’s only hope is the genuine threat of obliterating Russia’s gas pipeline infrastructure.  Ukraine should start blowing up gaslines and infrastructure as soon as the invasion begins, the second a Russian soldier crosses the frontier.

The Obama Gas Gambit: Will it Backfire?

Having taken military options off of the table, Obama and the West are relying heavily on the threat of a Russian recession to counter any further movements by Putin into Ukraine.

There have been calls for Obama to deploy the strategic oil reserves as sanctions. Some commentators have even suggested that Obama discussed using this strategy during his visit to Saudi Arabia.

Indeed, this strategy on its face appears to have the potential to dissuade Putin from being rash. From Timothy Ash at Standard Bank PLC:

“What is crystal clear is that lower oil prices really hurt Russia. Indeed, oil prices are the Achilles heel for the Russian economy. Twelve years ago the Russian Federal budget balanced at USD22 per barrel for oil, now it is more like USD110. And I reckon a fall in the oil price to USD80 per barrel would already cause very significant pain to the Russian economy, balance sheet and its markets. At USD80 or lower, the Russian economy would head into deep recession, the budget and current accounts would run significant deficits, capital flight would accelerate markedly depleting FX reserves and putting hefty downside pressure on the rouble. You could indeed argue that a large part of Putin’s success over the past 13-14 years has related above all else to high oil and commodity prices – he has been fortunate in this respect. If oil and commodity prices fall Russia would be heavily exposed.”

However, it is also abundantly clear that Putin is a dynamic player and not just a static actor. Putin is looking East. As mentioned in my previous posts the reasons for this are twofold. First, Russia’s regional influence depends more and more on China’s energy strategy. Second, Putin’s narrative is that Russia is the only “Great Power” willing to stand up to American Hegemony.

Consequently, it appears that two large Petrodollar (i.e. deals denominated in oil, not USD) have been announced by Russia. First, a $20 Billion arms-for-oil deal with Iran. This substantially undermines the US’s negotiations with Iran on nuclear disarmament. As I’ve mentioned before, a consequence of Russia’s invasion of Crimea is that the post Soviet collapse world nuclear order is unraveling and paper deals no longer hold any credibility (as the collapse of the 1994 Budapest Memorandum is now the precedent). It also undermines the US’s policy with respect to Syria as Russian arms are boosting Assad’s fight against the rebels.

Second, it appears that China may be embracing Russia. A major Russia-China gas deal may be announced in May. This would offset the isolation strategy that the West is using.

In summary a new twist on the old quote: Without Ukraine Russia Is Just A Country, With Crimea and China Russia Is An Empire

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In other news Russia paid lip service to the idea of deescalation along Ukraine’s border, but it doesn’t appear that there have been any significant troop movements away from the border. As a reminder there are approximately 40,000 Russian troops stationed on the Ukrainian border (with some reports of up to 100,000). NATO also continues to build up its forces along the Eastern Borders.

Also – Ukraine has released a report detailing the the Russian FSB was involved in the February sniper attacks against civilians.

Is a Russian-Ukrainian War Imminent?

May 25th is the key date. On that date Ukraine will have its Presidential elections. If the elections are successful, the transitional government will be legitimized. It would strip Putin of a key element of his story line: that Russian-Ukrainians need to be protected because the people in power do not represent them. Consequently, legitimate elections would weaken Putin’s ability to stage an invasion into Ukraine.

Here are the probabilities I’ve assigned to the outcomes of this crisis (an explanation follows):

  • Imminent invasion of Ukraine by Russia (within a week): 20%
  • Invasion of Ukraine prior to presidential elections (May 25th): 25%
  • Invasion of Ukraine after presidential elections: 5%
  • Deescalation: 50%

There are a number of key factors as to why I think a Russo-Ukrainian war is likely:

  1. There have been reports of substantial Russian military buildups. Some reports suggest up to 100,000 troops have been stationed along Russia’s borders with Ukraine.                                                                           March 29th Russian Army Movements
  2. Crimea’s infrastructure  is heavily dependent on Southern and Eastern Ukraine.
  3. Southern and Eastern Ukraine also have a high proportion of Russian Speakers (between 20-60%; although the percentage of ethnic Russians is lower). Southern and Eastern Ukraine also supported the deposed administration. Ukraine Presidential Election Results 2010
  4. South Western Ukraine borders Transnistria, a breakaway state from Moldova that supports unity with Russia. There are reports of up to 7,500 Russian military personnel already conducting war games there. Putin’s current narrative supports an invasion into Southern and Eastern Ukraine to build a land bridge to Crimea and this breakaway state.transnistria and other disputed areas in Eastern Europe and Central Asia
  5. By invading Southern and Eastern Ukraine, Putin would be able to completely land lock Ukraine allowing him to wield significant influence over the Ukrainian government.
  6. Putin is afraid of the democratic protests that occurred as a result of the Maidan Revolution. He needs a swift defeat in order to communicate to his opposition in Russia that similar protests in Russia would not work.
  7. Russian external communications have also been very bizarre recently. For example, Putin called Obama just yesterday to “Draw attention to Ukraine’s extremists” (note: they exist, but they’re not significantly influential). A few days prior a member of the Russian government sent a letter to Poland suggesting that Poland and Russia should split Ukraine into two – very strange and evident of the delusional thinking in Putin’s inner circles (tying into the broader theme of Eurasianism: http://www.truth-out.org/opinion/item/22760-brown-is-the-new-black ).
  8. Finally Putin’s speech on the Crimean annexation alluded to larger plans (http://www.bbc.com/news/world-europe-26652058).

The list of reasons why I think Putin will not invade Ukraine is shorter but no less convincing:

  • I have no doubt that Putin would already have invaded Southern and Eastern Ukraine had it not been for Chinese ambivalence on the matter. As The Economist recently pointed out “The precedent of secession is anathema, because of Tibet; the principle of unification is sacrosanct, because of Taiwan.” Russia has been unable to rely on China as an ally as it did during the Syrian crisis. This is fairly substantial since China is breaking Russia’s control over the gas basins of Central Asia systematically and ruthlessly and this may accelerate as a result of the Crimean crisis. Turkmenistan’s gas used to flow North, hostage to prices set by Gazprom. It now flows East. The politics are poignantly exposed in Wikileaks cables from Central Asia. A British diplomat is cited in a 2010 dispatch describing the “Chinese commercial colonization” of the region, saying Russia was “painfully” watching its energy domination in Central Asia slip away.
  • To a lesser extent, US, EU and other sanctions are having effects. The US and EU have imposed targeted sanctions on Putin’s inner circle of advisers and some key banks. Frankly the level of sanction is significantly below what is necessary to deter Putin. There have been some targeted sanctions against Putin’s inner circle and key banks that house funds for very high net worth individuals and politicos. Russia has also been expelled from the G7 (formerly the G8). The West has been lucky that Russia’s economy has been struggling recently. This has multiplied the effect of the sanctions. The World Bank is currently predicting Russia’s economy to grow only 1.1% in 2014, down from 2.2% as previously predicted. If the situation intensifies Russia’s economy could shrink by 1.8% (http://uk.reuters.com/article/2014/03/26/uk-russia-economy-worldbank-idUKBREA2P0X420140326).
  • Kerry (American Secretary of State) and Lazarov (Russian Foreign Minister) are scheduled to meet tomorrow. I suspect that Lazarov will try to hype Putin’s case and Kerry will rebuke him. Unlikely that an invasion would happen with such a high level meeting planned unless some sort of external event gave Putin the opportunity.

Note that I’ve also provided a lower probability for an imminent invasion, compared to a general invasion before May 25th. This is because it seems that Russian propaganda machine has made a few blunders lately. The plan to divide Ukraine with Poland, which I mentioned above, did not play out so well. The UN’s General Assembly also recently overwhelmingly passed a vote in support of Ukraine’s territorial integrity. The news cycle is not currently in Putin’s favor. If he is as savvy of a strategist as I think he is, and if he is going to invade Ukraine as I think he might, he will wait until the current events turn in his favor. UN Resolution Ukraine 3-28-14

 

I would advise you to take my forecasts with a grain of salt. I’m only an independent observer. But I will leave you with this passage from an email that a friend who is in Ukraine sent me today:

“Despite constant news reports that a 100,000 Russian soldiers have amassed on Ukraine’s borders I’m still sitting here in Kyiv secure in my downtown bubble of serenity and denial. I look around and I’m amazed at the outward sense of calm in the local population. The lack of Ukraine’s experience with recent danger of this magnitude may be understandable but to an outsider with prior war experience, the lack of personal precaution by the local population must look staggering and unreal. I can’t imagine a Bosnian sticking around his home town today if he suddenly had a military force of Serbs that big on his borders. That’s the level of denial in this country. But weren’t the cafes of Warsaw full the night before the Germans invaded on September 1, 1939, or Lviv two weeks later when the Soviets invaded Western Ukraine?  I suspect they were, even though there was ample objective evidence at the time that an invasion could happen at any moment, – and it did. I feel like I’m in that same moment of history.”