Monday, 2 March 2015

One year in Ukraine: Consequences for Russia

Image source: www.kremlin.ru via Wikimedia Commons
Tumbling energy prices, a plunging currency, Western sanctions, sovereign rating downgrades, and a broader economic downturn are all problems hurting Russia, as Vladimir Putin’s tawdry war in Ukraine continues. Last year's initial victory of quickly seizing Crimea has since been offset by more negative consequences of Putin’s proxy war.

One year has now passed since Vladimir Putin ordered Russian special forces soldiers to infiltrate and occupy Crimea. Clad in plain green uniforms without Russian insignia, but carrying out their task with quiet professionalism, “little green men” quickly invaded Ukraine's sovereign territory, seizing points of strategic, governmental and military significance.

Back then, Moscow brazenly lied that its invading troops were merely local militias, spontaneously mobilised on their own initiative, while quickly consolidating the occupation with political annexation by Russia’s Duma parliament on March 21. Stealing Crimea took away one Ukraine’s few bargaining chips for its repeated energy spats with Russia: naval basing for Russia’s Black Sea Fleet, leased since the collapse of Putin’s beloved Soviet Union in 1991.

"little green men"
Dishonesty is fair game for Putin. Clever use of “Maskirovka” tactics for this stunning quick win was never going to fool opponents for long. But it was successful in the confines of the Crimean peninsula, confusing and slowing down the responses of Moscow’s opponents in Kiev and the West, muddying the waters initially, when – like any daring covert military operation – risks are highest.

Smoke and mirrors used in Crimea were quickly reflected elsewhere, into Ukraine’s eastern Donbass region in March and April. In this poor rust belt region, Russian remains the lingua franca for many, and reminiscences for a mythical Soviet golden era run strong. Like in Crimea, more “little green men” disrupted Donbass and administrative centres across much of eastern Ukraine.

Fighting in Donbass

Then began a kickback by the Kiev government – reviled as pro-West by Russia, since the deposition of preceding president and pro-Putin pawn Viktor Yanukovych. Increasingly, Putin’s agitators were not having things their own way. While Russian influence is strong in parts of the country’s east, it is still Ukrainian rather than Muscovite Russian, which is spoken by majorities in most places.

Putin persisted with excuses of (Moscow-recruited) pro-Russian separatist militias, plus increasing talk of expatriate military “volunteers”, crossing the border to do Russia’s fighting.

That was despite a mass of proof to the contrary: satellite intelligence showing Russian tanks crossing into Ukraine; Russian squaddies geo-tagging social media posts inside Ukraine; and, inevitably, mounting Russian casualties found hidden away in military hospitals far from Ukraine.

The first signs of Russian weakness had begun to show, on the battlefield and away from it. Summer 2014 saw Ukraine’s gathering counterattack push back the little green men towards Donetsk and Luhansk: the two strongest separatist enclaves, into which Russia could more easily pour more men into the fight.

Opting for a strategy of fakery, falling short of a steamroller-type invasion, such as in Georgia (2008) or Chechnya (1994), for all its benefits, had also revealed its costs: requiring a gradual build up of heavier conventional forces to support the lightly armed hard-pressed vanguard.

While Putin did send heavier hardware, Russian forces in Ukraine still lack the full weight and numbers waiting across the border. Deploying that weight would probably allow Russia to quickly bulldoze to victory in a conventional war against a weaker opponent (like in Georgia), but without this Putin’s proxy war is inevitably slow.

When heavy support weapons, such as howitzers and rockets, have been used casualties have inevitably multiplied, increasing international outcry against Russia. Fighting is thought to have killed about 5,500 people so far. Some of the biggest Ukrainian military losses came when transport planes and army helicopters were shot down.

But the high-tech weapons and Russian-trained crews needed for this soon contributed to more condemnation and sanctions. The biggest gaffe came on July 17, when Malaysian Airlines' flight MH17 was shot down by a Russian-manned Buk surface-to-air missile system near rebel-held Donetsk, killing all 298 people on board.

The humanitarian tragedy is one of those messy errors that inevitably happen in the fog of war: the Russians undoubtedly fired the missile believing they were shooting at a Ukrainian military plane.

Two thirds of the passengers were from Nato member the Netherlands – triggering damning Western condemnations of Russia. These were backed up by intelligence clues and physical evidence within the wreckage – despite predictable attempts by Moscow to deflect blame.

Another evidence of the buildup were the Russian "aid convoys", used to smuggle arms and supplies into rebel held areas, either directly within the trucks or perhaps more subtly by distracting attention from other convoys of  arms and tanks smuggled in with less furore at other crossings. Impossible to hide however, were the tank formations moving into Ukraine on border roads, which appeared in black and white on Nato satellite imagery.

Image source: Marktaff, ZomBear
[CC BY-SA 4.0 (http://creativecommons.org/licenses/by-sa/4.0)],
via Wikimedia Commons
The Minsk Protocols

Since then there have been two cease fire agreements brokered by France and Germany: one failed quickly; the other is failing fast. Both deals were hosted by Belarus: the last dictatorship in Europe; Russia’s sympathetic "near abroad" satellite state; and a model for Russia’s ideal vision of eastern Ukraine.

The first Minsk Protocol was signed in September 2014 and almost immediately violated. It ended when regrouped separatist forces stormed Donetsk airport, killing and capturing the remaining Ukrainian defenders, who – tired and outnumbered – had defended it for months.

The second ceasefire - February’s Minsk II - was quickly violated in similar style. Again, separatist forces regrouped and took another prize objective. This time it was Debaltseve. For Ukraine, losing the crossroads town along with some troops and equipment was inevitable, although Kiev authorised no retreat until it was forced out on February 18.

The military truth was that Debaltseve had been a mini salient, hemmed in by separatists on three sides. Its fall was an adjustment, at the expense of politics, to reflect military reality. But to see Debaltseve as ironing out a crease in the line looks like naivete.

The second cease-fire and Debaltseve salient
Image source: The Washington Post
For the peacemakers, it leaves another peace deal shattered. It reveals the sham of a Franco-German conciliatory peace strategy. Both times, Moscow's separatist commanders have violated the ceasefire deals, claiming not to be bound by them.

The road from Debaltseve leads straight to the bigger town of Slovyansk, still held by Ukraine. Artillery-hit Mariupol, also still in Ukrainian hands, lies just behind the front line and stands between the separatists and a coastal corridor to Crimea.

Is Russia now playing a longer game in Ukraine? In military terms, Russia can keep trickling its massive military might into the country indefinitely. Allowing enough time and attrition at this rate, Ukraine will probably lose on the battlefield and bow to Moscow’s demands. But away from the Donbass battlefield, Vladimir Putin is also under pressure.

Russia under siege

Will the Russian bear double down and try to win on the battlefield? Putin’s pride and stubbornness may come into his persistence. A defeated Ukraine has not yet come pleading to the negotiating table.While Putin won fast in Crimea, Donbass feels like a new campaign, which he has yet to win. But if Russia looks like an eventual victor in strictly military terms, further from the Donetsk and Luhansk battlefield, Russian auguries are more negative.

Since embarking on its military aggression in Ukraine, Russia has been increasingly penalised by the West, shunned by investors and shut out from the financial system. European Union and US sanctions were applied soon after the Crimean annexation, with the screws tightened in the year since then. 

Moscow is a jolly nice place, politics aside!
Source: author's own (November 2013)
Sanctions expanded from punishing Putin’s inner circle of cronies to include a widening list of Russian state-owned entities, or those with close links to the Kremlin. Indeed, Russia's model of "state sponsored capitalism" means the government has controlling stakes, big interests and influence across the country's corporate landscape. So, in a country where, in order to prosper in business, companies need close ties to the regime, sanctions are putting them, including vital banks and energy companies, inside a tightening vice.

Shutting down links to international finance raises the prospect of increasing reliance on government support or subsidies for struggling Russian banks and energy institutions, putting pressure on Russian state coffers. This is hurting more than might have been expected, because of the sanctions’ timing, just when Russian energy revenues were drying up.

The collapse in US dollar-traded oil prices has hit energy exporting economies hardest. Russian gas exports have been a corollary to friction with Ukraine, with Moscow repeatedly using energy supplies as a weapon, at times threatening to turn the taps off. But what was once a weapon for Putin’s is now a weakness since energy prices began to fall. 

Russia’s energy-driven economy needs oil to trade at least $100 per barrel for the resultant revenues generated to balance its books. In June 2014, Brent Crude (a benchmark energy price) traded at a healthy $110 per barrel; by January 2015 it had fallen to $45 a barrel; since then it has risen slightly, but it is still trading at about $61 per barrel, which is grossly inadequate for Russia’s economy.

The energy price slump, combined with an exodus of international capital from Russia, have hit its currency, the ruble. The ruble has lost half its value in the past year. It hit a record low of 70 rubles to one US dollar in mid-December.

In just 2 weeks in December, Russia spent $26bn of its roughly $338bn in central bank reserves trying to halt the currency’s decline. At the start of 2014 reserves stood at $511bn, leading to some talk of potential for sovereign default.

Russia’s sovereign credit rating was indeed reduced to junk in January by Standard & Poor’s. The rating agency downgraded Russia from BBB- to BB. Losing investment grade status only adds to government borrowing costs. In January, Fitch Ratings also cut Russia’s credit rating, to BBB- (the lowest rating still considered investment grade). The ratings firm said it expects Russia’s economy to languish until 2017.

In November, the Russian Central Bank announced it would limit the reserves it is willing to spend to inflate the ruble to a maximum of $350m per day. The central bank also said in November that it was moving the ruble off its joint peg to the euro and the US dollar. Then there was its interest rate cut in January, opting to help beleaguered Russian banks and businesses.

All three of those decisions fuelled further slumps for the ruble. The recent central bank policy of allowing a weak currency, hoping to stave off other economic woes, looks like a very delicate balance, with big risks should the Russian currency keep falling and fall too far. As of March 1 it had recovered slightly to trade at about 57 rubles to the dollar.

Putin’s war chest

The six years between Russia’s invasion of Georgia to its Crimea’s annexation were years of fat for Russia’s energy-dominated economy. That was in the days when energy revenues were very high. They are they not high now, with dire consequences for Russian coffers.

Wars are expensive. The decline in Russian energy revenues puts its spending under pressure. We do not know the sum set aside as an operational war chest for Putin’s war in Ukraine, but it is not bottomless.

For Russia watchers back in 2009-2011, the period following Russia’s invasion of Georgia, there was a stream of announcements of big ticket Russian defence procurements – myriad new planes, missiles, tanks, technology and ships – as Moscow flexed its economic muscle. The French deal to sell Mistral class helicopter carriers to Russia are just the best-known example.

While some weapons are being used in Ukraine, many are still being developed. We can expect no big public announcements admitting that Russia will cut its many ongoing defence projects, but now that Moscow’s purse strings have tightened, some projects might be quietly cancelled, postponed or scaled down.

Putin saw weakness in the West once the 2008 financial crisis had morphed into a sovereign crisis by 2010, leading to the US and EU countries cutting defence and other spending. Now it is Putin who must penny pinch with austerity. 

Putin’s military is supposed to underpin Russian power, whether for bullying energy-reliant neighbours or dominating the exploitation of Arctic oil. The decline in energy revenues undermines the finances for Russian militarism as well as eroding the rationale for maintaining high defence spending as a guarantor for Russian use of energy as a weapon of Realpolitik.

Backing Ukraine

With French and German hopes of a peace deal shaky at best and arguably delusional when viewed against events in the Donbass, the West’s strategy is increasingly hinging on strengthening its eastern flank against Russia. This looks like bolstering Nato's eastern members, continued aid to Ukraine, and possibly arming that country to support its struggle against Russia.

Keen to intimidate Europeans out of squaring up to him over Ukraine, President Putin has been flexing military might by an increasingly confrontational stance, including intrusive activity at sea and in the air around Europe’s northern coastlines.

There are fears that Putin could attempt to foment unrest or even military intervention, as in Ukraine, under the guise of supporting Russian minorities within other eastern European countries, including Nato members such as Poland and the Baltic states of Latvia, Estonia and Lithuania.

“I do believe Mr Putin understands [Nato’s self-defence provisions], but I do not believe it will preclude Mr Putin from taking actions to reach out to Russian-speaking populations that are in our easternmost nations,” warned Nato’s supreme allied commander for Europe, USAF general Philip Breedlove, advising the US Defense Department in February.

The Nato alliance has responded to increased Russian provocations by reinforcing its fighter patrols over Poland and the Baltic countries, holding conspicuous military exercises in Poland, Ukraine itself and the Black Sea, and by creating of a new 5,000 strong “spearhead” brigade level force (led by 1,000 British troops), designed for fast deployment.

The US and other Western countries have already sent some military aid to Ukraine. However, sent via Nato this has consisted of non-lethal equipment, such as body armour, communications equipment and medical supplies.

Such aid isn’t “changing the results” on the battlefield, according to Nato’s supreme allied commander for Europe, general Breedlove, advising the Pentagon and the US Congress in February. “What is clear is it is not getting better. It is getting worse every day. We see Mr Putin is all-in, and they will proceed till their objectives are accomplished,” said Breedlove.

The US Congress has been debating a $1bn military aid package for the Ukrainian army. President Obama has said he is considering arming UkraineIn January, the Atlantic Council, an influential US think tank released its report on Ukraine, recommending sending $3bn worth of lethal and non-lethal military aid for Ukraine over three years. 

Breedlove also said he suspects that whether US aid arrives tomorrow or in months’ time, Ukraine will be unable to prevent Russian forces in Ukraine advancing. "I do not believe Ukrainian forces can stop a Russian advance in eastern Ukraine," he warned.

Furthermore, arming Ukraine would turn yet the conflict into a full-blown East-West proxy war, along the lines of other proxy Cold War conflicts in Afghanistan, the Middle East and Africa. This carries further risk of escalation, cautioned Breedlove, and "could trigger a more strident reaction from Russia".

Ukraine has already been receiving financial aid from successive IMF loan packages, designed to stave off a financial collapse, but looking increasingly desperate. The latest $17.5bn IMF Extended Fund Facility is supposed to be topped up to about $40bn, in combination with other unspecified bailout funds, such as from the EU.

If Russia is prepared to sustain a long campaign in Ukraine, including weathering the negative effects to its own economy, Putin is probably basing his strategy on Ukraine’s economy imploding before his own does, if his military efforts don't by themselves end decisively, compelling Ukraine to the negotiating table.

At its current economic trajectory, Kiev's economy will easily collapse first, and by some margin. It is increasingly depending on emergency loans and aid, a course the West has already embarked upon.

That being the case, the West needs to commit to its policy by continuing and intensifying its aid commitments to Ukraine. And possibly by arming Ukraine if necessary. France and Germany should commit to sustaining Ukraine, in addition to the UK and US.

The West should stick to that path until Putin no longer thinks he can win, or the cost of continuing so frightens him into backing down. Hurting the Russian bully will doubtless carry economic costs for Europe, but it is a contest that the West can win, but it cannot afford to lose.

Vladimir Putin cherishes memories of the Soviet Union's imagined glory days. There is some truth to it: the rump state of Russia today is an embittered, shrunken and weaker power than the mighty (but grim) USSR in its heyday. Like all bullies, Putin throws around the reduced weight of modern Russia to hide weakness.

By the consequences of his war in Ukraine, Putin might be reminded of the reasons for his beloved Soviet Union’s collapse and dissolution: brought about by a combination of unsustainable military spending, unpopular authoritarian leadership, and a failing economy that couldn't compete under pressure from the West.