First, we had the appointment of Boris Gryzlov, a real Kremlin heavyweight as Moscow’s representative to peace talks. One read is that the appointment of a serious Kremlin insider to such a role suggests that Russian President Vladimir Putin is now willing to seriously negotiate towards some kind of settlement, which might just be acceptable to Kyiv – rather than the previous policy which seemed to be to demand concessions which were never really deliverable in Kyiv, and which were just meant to destabilize domestic politics in Ukraine, or to undermine the security situation and macro stability and financing with it.
Second, President Petro Poroshenko last week spoke about securing control over Ukraine’s borders again this year – with some suggesting that he would not have made this claim unless he thought there was a reasonable chance of delivering on it.
Third, the U.S. assistant secretary of state, Victory Nuland, had a meeting late last week in the Russian enclave of Kaliningrad, with Vladislav Surkov, another close adviser to Putin. The session was described as a “brainstorming” session over possible resolutions over the crisis in Ukraine, and generally feedback from both sides was that the discussions were “constructive.” U.S. officials also spoke about the prospect of sanctions on Ukraine over Donbas being relieved if they see Minsk implementation – albeit retaining those over Crimea.
Fourth, French and German envoys to the Ukrainian “Normandy” peace process are due in Kyiv this week for high-level discussions.
Fifth, Russia seems to be holding back from pursuing the nuclear, legal, card over the $3 billion in monies lent to the former Yanukovych regime, due in December, but now in effect in default.
Now both sides still seem to be maneuvering for position – e.g. with Russia’s imposition of a transit ban on Ukrainian exports to Kazakhstan, and Ukraine’s decision to hike gas transit fees on Russian gas transit to Europe – the latter bringing a tripling of the tariff, and hitting Russian when it is already smarting over the drop in oil prices. But we have consistently seen some escalation by the sides in the run up to key negotiations, and it might be the same this time around.
So why the sudden move on the part of Moscow to deal?
First, I think what is clear is that Russia is now facing a much more difficult economic outlook than even a few months ago. The drop in oil prices over the past month, amid the Saudi-Iran schism, seems to have been the game-changer for Moscow – and survival of the regime seems to now be the name of the game (or at least there is serious concern how long Russia’s balance sheet can hold up to ensure social stability).
Remember, only a month ago the budget was being based on the assumption of $50 a barrel average oil prices, a flat real gross domestic product growth performance, even growth, and the ruble holding at around 63 to to the dollar.
Now with oil sub-$30 a barrel, perhaps going lower, but now more likely to stay here or go lower, the Kremlin seems to have gone into “regime survival” mode.
Imagine, oil at or below the $30 a barrel level likely means a deepening or extension of the recession (minus 2-3 percent real GDP growth downturn, after 3.5-4 percent loss in 2015), a budget deficit of 5-6 percent of GDP, the depletion of the Ministry of Finance’s’s various reserve funds, and a drop in the ruble to beyond ruble 80 to the dollar, with unpredictable consequences for consumer and business confidence, capital flight, inflation and the durability of the banking sector.
GDP has dropped from over $2.1 trillion in 2013 when the crisis over Ukraine started to likely less than $1 trillion this year. This means that per capita GDP has dropped from over $15,000 to just over $7,000. And while opinion polls still suggest strong popular support for the Putin regime, experience suggests that they do not take this for granted, and rather are very sensitive to the potential for social and political unrest – and colored revolutions.
Recent bans on Russian tourist visits to Turkey and Egypt will at least limit the potential for Russia’s middle and skilled working classes to realise just how far their foreign spending power has been crushed. But eventually Russians will realise that they are in fact a lot poorer, and the Putin Potemkim village was not built on very much.
Second, and related therein I think there is recognition by Moscow that the period of high oil and commodity prices (2000-2013) is gone, and that the Saudi-Iran shism is likely now to usher in an extended period of low oil prices and hence a much more challenging outlook for Russia – I think only a few weeks back Russian policy makers were overly sanguine over a speedy “bounce-back” in oil prices, and perhaps were surprised by the fact that Moscow’s recent Syrian intervention failed to have much impact in terms of oil prices or leverage extracted for potential concessions over Ukraine. There is now new realism in Moscow over likely oil price trends, what this means for the Russian economy and the social and political risks now building domestically. So I think the willingness to partake in high-risk foreign adventures, such as in Ukraine, is now moderating.
Third, recognition that Western sanctions against Russia are working after all – and despite all the skepticism in the West and elsewhere that they were pointless.
True, they may not have been the main factor forcing Moscow back to the negotiating table over Ukraine (oil was), but they have made a brutally difficult economic situation for Russia – because of low oil prices – that much more painful, arguably now to breaking point. So faced by a now acutely difficult domestic economic situation, Moscow is desperate for some light relief – and does not want to be seen as still being in the sanctions bad boy corner, while Iran has been let out of detention.
Fourth, perhaps recognition that Moscow’s policy towards Ukraine has essentially failed – Putin might have secured Crimea, but at the price of the loss of the rest of Ukraine.
The military option largely failed In Donbas – as Moscow was unwilling to deploy the required massive military deployment to ensure victory and to engage in total war, while the Ukrainians proved willing to fight, and as time goes by their capability to defend Ukraine (they don’t need an offensive capability) is growing, taking the military option off the table for Moscow in effect.
Meanwhile, other efforts to extract leverage by Moscow – including the energy, debt and trade accounts are all weakening over time.
In energy Ukraine has cut imports from Russia – in gas to near zero, while low oil and energy prices reduce Russia’s leverage further.
The trade channel has similarly been cut off for Moscow, by the collapse in Russia-Ukraine trade over the past 2-3 years, and Russia’s efforts to impose a transit ban is now viewed as somewhat desperate, and trade/transit bans now threaten to hurt Russia more by threatening key supplies of military inputs.
Even the debt-default channel has been nullified by the private sector restructuring, provision of International Monetary Fund financing, leaving Moscow now with the prospect of a long-drawn out, and still possibly fruitless legal battle over the $3 billion in Eurobonds lent to the former Viktor Yanukovych regime.
The harder that Moscow now presses Ukraine in the trade, economy, debt and energy fields, the more independent of Russia Ukraine becomes, and the weaker foothold that Russia will have for the future in Ukraine. Thus having lost the battle for “heart and minds” in Ukraine after the annexation of Crimea and the military intervention in Donbas, there will be little reason for Ukrainians to economically interact with Russia – and even more to develop other economic relationships Westwards.
Fifth, there is perhaps a final hope that the best way to keep Moscow’s options open now in Ukraine is to adopt a less confrontational approach and to assume that Ukrainian politicians revert to script over the past 20 years and self-destruct under their own momentum.
Reviewing the above the question is still whether Russia’s long-term strategic objectives towards Ukraine have changed – i.e. to bring it back within its sphere of influence – but in the short term Moscow seems to be signaling a desire to compromise, and to deal.
The question then is how far it is willing to back down over issues stalling Minsk II implementation.
For the US, the key issue remains as Poroshenko says, control over its borders, which for Russia would mean cutting off military supplies/resupply to the (separatist) regimes, and the potential that these authorities could collapse when cut from support lines to Moscow.
Ideally Moscow still seems to be pushing for assurances over some form of enhanced autonomy (Kosovo-style) or a federal-style solution – which are still clearly unacceptable to Kyiv.
But importantly, Moscow seems to be willing to deal – and this was likely the topic of discussion for Nuland/Surkov, and also for Boris Gryzlov in his recent trip to Kyiv. The question will be how far Poroshenko wants to push Moscow at this stage, and will the West be cajoling him along to accept a compromise which still might be difficult for him to sell back home, and could still destabilize domestic politics in Ukraine. Many in Ukraine would be nervous over the speedy return of (Russian-controlled territories in the Donbas ) to Ukrainian control over fear that they could act either as a Trojan horse within Ukraine, and/or provide a huge drain again on an already weak state.
