World

Crimea and Punishment – is Putin betting a bad hand?

By J Brooks Spector 4 March 2014

As Russia tightens its grip on the Crimean Peninsula, western nations continue to puzzle out how best to respond to this, the most difficult crisis to erupt in the post-Cold War era in Europe. Fears are growing that there is no easy endgame, and there are important economic aspects that must be examined more closely as well. However, it is just possible that in his desire to consolidate Russia’s new influence on Ukraine, Russian President Vladimir Putin may be overreaching. J. BROOKS SPECTOR takes a closer look.

US Secretary of State John Kerry is now due to touch down in Kyiv today. Meanwhile, there have been further Russian military moves in the Crimea. As a result, the Ukrainian-Crimea crisis appears to have moved into a sharply more dangerous phase, with analysts now starting to call it – potentially, at least – the most explosive security crisis in Europe since the Berlin crisis of 1961, right in the middle of the Cold War.

Media reports on Monday evening said Russia had now demanded that several vessels of the Ukrainian navy, berthed at Sevastopol (which is also the home port of the Russian navy), be turned over to Russian forces. According to the AP, “Four Russian navy ships in Sevastopol’s harbor were blocking Ukraine’s corvette Ternopil and the command ship Slavutych, Ukrainian authorities said. Acting [Ukrainian] president Oleksandri Turchynov said commanders and crew were ‘ready to defend their ships…. They are defending Ukraine.’

Vladimir Anikin, a Russian defense ministry spokesman in Moscow, dismissed the report of a Russian ultimatum as nonsense but refused to elaborate.”

Nevertheless, by Monday evening it seemed increasingly clear that the Russians had effectively turned the Crimean Peninsula into a protectorate, as their troops now “controlled all Ukrainian border posts Monday, as well as all military facilities. Troops also controlled a ferry terminal in the Ukrainian city of Kerch, just 20 kilometres (12 miles) across the water from Russia. That intensified fears in Kiev that Moscow will send even more troops into the peninsula via that route.”

Along the way, the new Ukrainian Prime Minister, Arseniy Yatsenyuk, had told reporters “Any attempt of Russia to grab Crimea will have no success at all. Give us some time,” but he added that at present there were “no military options on the table” for Ukraine.  A deeper fear in Ukraine – and beyond – would be that the Russians might elect to expand their zone of control, undertaking additional military action, this time in the pro-Russian, ethnically Russian, eastern part of the country, a region that is Ukraine’s industrial heartland and agricultural centre.

Meantime, Russian Foreign Minister Sergey Lavrov, in Geneva for a UN Human Rights Council meeting, insisted Ukraine should return to the 21 February agreement that had been signed by pro-Russian, then-President Viktor Yanukovych (although not by Moscow) and that had initially been designed to draw the Ukrainian crisis to an end – before Yanukovych secretly left the country.

Lavrov told media, “Instead of a promised national unity government, a ‘government of the victors’ has been created.” This kind of statement could easily be read as the basis for Russian moves that have come since Yanukovych fled.

There are worries now that the Russians are gearing up to carry through with a combination of tightening diplomatic and economic pressures on Ukraine as well as their boots-on-the-ground activities so as to create a new reality that would allow them to lever Crimea and the eastern portion of the country into a still more autonomous relationship with Kyiv – or even more.

In the face of these moves, it is still not particularly clear what the US and the EU nations can do immediately that would make the Russians return to the status quo ante, that is, the situation prior to their military moves into Crimea. So far at least, besides a largely symbolic decision to decline to attend the scheduled G-8 meeting in Sochi in June, the easiest levers for the Western nations would be economic sanctions that would freeze Russian assets held abroad, and/or put a wide range of multi-billion dollar deals with Russia on hold or even cancel them outright.

By Monday evening, the EU had threatened to freeze a visa liberalisation regime, as well as future economic cooperation talks – and to boycott the G8 summit in Russia if Moscow does not start to back down from its actions in the Crimean peninsula by the time the EU holds an emergency summit on Thursday.

However, as its military position in Crimea has taken hold, Russia was beginning to take some economic heat from the markets over its actions – presumably something the Russian government had not particularly expected, or, perhaps, had simply assumed would just be the temporary economic cost of carrying out its strategic actions. This may have been something of a miscalculation. On Monday, Russia’s currency reached its lowest-ever level against America’s currency – at 27 roubles to the dollar. The electronic herd seems to have been thoroughly startled and begun to move its money elsewhere – and there is nothing in sight that would change such movements. In broader European trading, the effects were starting to be felt as well. Gold and oil prices rose, while the euro and the levels on European bourses fell.

But Moscow took the biggest hit as its main stock index was down some 12% and Russia’s central bank was forced to raise its prime interest rate some 1.5 percentage points in an effort to stem the financial bleed. Shares of Gazprom, the giant Russian energy conglomerate, were down some 13%m as increasingly nervous investors worry about how it would sell its natural gas to Europe if hostilities keep growing – since so much of its product must flow through those pipelines that transit Ukrainian territory.  Energy products represent around three-quarters of all exports from Russia to the EU, while EU exports to Russia are much more diversified.

The economic effects will almost certainly not be limited to those that affect Russia. “The escalation of the crisis is clearly a shock to emerging market sentiment,” Michala Marcussen, global chief economist for Société Générale, noted. While economic fundamentals might be pointing to the fact that the damage presumably would be limited to Ukraine and Russia, Marcussen hedged her view, saying, “We have to be aware of market psychology.” Energy stocks holders, hold onto your hats!

The Russian and EU economies are increasingly interconnected. The EU has become thoroughly dependent on natural gas from Russia flowing through a network of pipelines from Russia to Western Europe via Ukrainian territory. On the face of it, this dependency by EU nations on Russian natural gas and several other primary commodities would seem to put the EU in an invidious situation where economic responses to political crisis would bring serious harm on their own economies.

But writing in Politico on Monday, Darren Goode and Matt Daily argue that while Russia “has long used its vast energy supplies for political leverage, but its new conflict with Ukraine could show just how much that power has waned. Twice before, Russia has shut off natural gas shipments through pipelines to Ukraine during fights over energy prices and past-due payments, but Ukraine’s crucial location between OAO Gazprom and its European customers gives it some leverage that may help prevent Moscow from leaving Ukrainians in the cold,” even though Gazprom hinted it was reconsidering its commitments to supplying gas to Ukraine.

Goode and Daily go on to note that although “Ukraine and the European countries who have long relied on Russian gas to heat their homes and fuel power plants and manufacturing sites have also grown weary of Moscow calling the shots on energy supplies, and they’ve sought to diversify their energy sources. Russia has ‘absolutely’ lost its natural gas leverage because Ukraine can produce gas domestically, said Anders Åslund, a senior fellow at the Peterson Institute for International Economics who has been an adviser to both Russia and Ukraine, adding that both Royal Dutch Shell and Chevron have signed deals to develop gas fields there, though those supplies are not yet online….”

The two analysts note further, “When it [Gazprom] last cut off Ukraine from supplies in 2009, 18 other countries further down the pipeline reported they suffered from supply disruptions as well, including Austria, Germany, Turkey, Greece and Italy…. But Europe, which relies on imports of oil and gas to supplement its own modest production, has seen the flow of liquefied natural gas, or LNG, surge in recent years from producers in Africa and the Middle East. It’s been helped in part by the shale gas bonanza in the United States, which took a major customer off the international market, leaving ample supplies for the continent….

That means European countries that once had no choice but to strike deals for gas with Gazprom now have other options. ‘So if Gazprom stops [exporting] once again, then it’s third strike out for Gazprom,’ Anders said. Europe will stop buying gas from Gazprom until the whole situation changes.’ ”

With Vladimir Putin’s ultimate strategy still surprisingly unclear, with the chances for economic damage to Russia growing, with the facts on the ground in Crimea (and Ukraine) increasingly subject to change by force, things may be spinning out of control. It is now incumbent on diplomats to rein things back in, and then sort out a way that allows Russia to have a dignified pullback from its most forward positions in Ukraine – and one that will preclude a still more general crisis between the West and Russia, let alone the chances for increased chaos in Ukraine itself. Big ask. DM

Read more:

  • Russia sets Ukraine agenda with diplomacy, threats at the AP
  • Markets Retreat as Ukraine Crisis Deepens at the New York Times
  • Russia-EU – basic statistical indicators at the EU
  • Countries and regions – Russia at the EU
  • Trade ‘suicide’: Russia prepares to tighten borders if Ukraine signs on with EU at Russia Today
  • Russian Troops Control Crimean Peninsula at Foreign Policy
  • Russian forces expand control of Crimea at the Washington Post
  • Putin’s error in Ukraine is the kind that leads to catastrophe at the Washington Post
  • For Russia, a weaker energy hand to play in Ukraine at Politico
  • Mark Halperin: Vladimir Putin ‘unstable’ at Politico

Photo: Russia’s President Vladimir Putin (front C), accompanied by Russian Defence Minister Sergei Shoigu (front L), walks to watch military exercises upon his arrival at the Kirillovsky firing ground in the Leningrad region, March 3, 2014. (REUTERS/Mikhail Klimentyev/RIA Novosti/Kremlin)

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