May 15, 2014

SHARE |

TSG IntelBrief: Dealing with a Fractured Ukraine

.

There has been extensive analysis about Russian President Putin’s intentions as they relate to Ukraine, and how far he would push to reclaim what he views as Russia’s historic influence in the country. Far less attention has been given to the intentions of Kiev and Western governments as they relate to the reality that Russia is not giving back Crimea, and that at least several important eastern provinces of Ukraine will align themselves with Moscow—either outright or via de facto annexation through federalism and autonomy. Despite the international concern over what is called an “unacceptable situation,” the geopolitical and military realities suggest the West and Kiev will in fact have to accept the situation on some levels.

.

Now What for Kiev?

Some of the answer depends on how many regions or oblasts vote to secede from Ukraine, as Luhansk and Donetsk did this week. Neighboring regions such as Kharkiv or Dnipropetrovsk could also break away. Even Odessa in the south-central part of the country has experienced severe unrest, though not as sustained as in the eastern regions. Unfortunately for Kiev, these breakaway regions are vital to Ukraine’s industrial and agricultural (corn and wheat) output. Russia is dependent on military equipment manufactured in eastern Ukraine, but that dependency also applies to Ukraine’s fiscal health. If the seven regions currently at highest risk of seceding actually leave the country (including Odessa), Ukraine’s gross domestic product would drop 50%. Clearly, Kiev would be unable to manage such a situation without dramatic and sustained Western aid.

Even if Luhansk and Donetsk don’t ask for Russian annexation, they will orbit Moscow through some loose federation of sorts that will likely unfold over the summer. Kiev must plan for this eventuality, however unacceptable. Budgets and other planning will have to incorporate this reality, with the best outcome based on a mutually beneficial relationship of shared economic interests. Kiev will need to prepare for the possibility of outright annexation, and though it would greatly complicate the situation, there would be little it could do unilaterally to reverse it. Regardless, Ukraine will likely be a bipolar state, with half of the country looking west and half looking east.

.

Now What for the West?

Much of what Kiev can do depends on how much the West is willing to do. The facts on the ground are such that it is highly unlikely Ukraine will return to its early 2014 state. Despite the unacceptable nature of the Crimean annexation and the ongoing secessionist movements in the eastern Ukraine, the West will have to accept the situation at some level in order to stabilize Kiev and deescalate tensions in the region.

In a bitter irony, the West will end up providing enormous financial assistance to Ukraine, some of which will enrich Russia’s coffers, if Kiev is to have a legitimate chance at stability. Indeed, by voiding existing energy contracts, Russia is intent on making sure the West pays an increasing financial price by helping Kiev. Russia knows the West will assist with much of the claimed debt since Kiev has no ability to do so.

In addition to paying down some of Ukraine’s debt, the West will have to decide on how extensive a role it will play in Ukraine’s domestic and foreign affairs. NATO membership is not currently an option, given Russia’s adamant opposition and the lack of benefit to the organization with Ukraine’s inclusion, but military assistance will have to increase substantially. Ukraine’s armed forces, as witnessed in their inability to quell the Russian-guided unrest in the east, are not a credible deterrent for further incursion and will need extensive reform and restructuring. Economically, the West will have to provide sustained assistance and push reforms that cut down on rampant corruption and inequality.

Even more complicated are the next steps for the West’s relations with Russia, and how far the somewhat divided West will go in addressing Russia’s “unacceptable” behavior—especially since the facts on the ground will not likely be reversed.

Energy dependency, significant economic ties, and uncertainty as to their results have made countries such as Germany hesitant to impose broad sanctions against Moscow. For the West, there are a number of immediate and complex issues: How long will the limited sanctions currently in place last? What additional measures should be taken if there are more annexations? How much should the West encourage Kiev to orbit Western influences in the face of Russian fears of encirclement?

Relations between Russia and the West won’t be severed regardless of rhetoric, so the question of how to manage both the short and long-term impact of what is happening in Ukraine is vital for future stability.

.

.

For tailored research and analysis, please contact: info@soufangroup.com