Samuel Charap, Senior Fellow for Russia and Eurasia, IISS
Paper delivered at the Danyliw Research Seminar on Contemporary Ukraine, Saturday 1 November 2014

Politics, principles, and conscience demand that Ukraine make no agreements with Russia. After the Kremlin’s annexation of Crimea and incitement followed by direct intervention in the east, it would be unseemly at best and treasonous at worst for Kyiv to engage in any sort of deal-making with Moscow today – or so one is sometimes told in Ukraine’s corridors of power or in Washington.

But an unsentimental assessment of the facts suggests that a political settlement between Russia and Ukraine is not only desirable but also – and perhaps more importantly – necessary for Ukraine’s continued survival. Such a settlement would be more important in the short to medium term than Western support – even support at the level described in official rhetoric, let alone the far more modest reality. And while the EU Association Agreement (AA) might be critical for the long run, the lack of a settlement with Russia could easily render it irrelevant.

That Russia’s acquiescence to – if not outright support for – the AA and Ukraine’s broader European aspirations would be necessary for their success has always been too politically uncomfortable to acknowledge. But noble intentions cannot overcome the fact that Ukraine’s economy is highly dependent on Russia in a variety of ways that the West cannot afford to undo.

This dependency is multifaceted. The most oft-discussed is, of course, gas. In 2013, Ukraine imported 27bcm of Russian gas paying approximately $11 billion for it. There is no feasible alternative to direct gas supply from Russia in the short to medium term – both for heating Ukraine through the winter, and for powering its major industrial enterprises. Even if all possible pipelines were operating at full capacity, reverse flow from Europe could provide at most 12bcm. And the gas relationship is also a key source of fiscal stability. The Ukrainian coffers received approximately $3.0-3.1 billion from Gazprom in transit fees in 2013; a critical cash injection given the ballooning budget deficit and national debt.

Ukraine’s dependency on Russia is not limited to gas imports: a third of its exports went to Russia in 2013 (about the same as to the EU). That number will certainly be lower in 2014, and the EU’s share will certainly be higher as a result of Brussels’ May 2014 decision to lower barriers to Ukrainian imports. However, the structure of Ukrainian exports to the two markets differs dramatically. Europe mostly buys metal ore, ferrous metals, grain and other agricultural goods from Ukraine. Russia, by contrast, imports machinery, transport services, and industrial products – i.e. value-added goods and services that tend to provide more and higher-paying jobs.

Further, millions of Ukrainians work in Russia and send money home to support their families. For 2013 the National Bank of Ukraine calculated remittances sent from Russia at $2.62 billion, but that number counts only formal bank transfers and money sent through international transfer services. Given the ease of crossing back and forth, presumably Ukrainians working in Russia bring home in cash or in goods at least as much if not more than what passes through the banking system.

With approximately half of the Donbas now under the control of Russia-backed insurgents, Moscow has additional leverage. The conflict in the east has led to talk in Kyiv that Ukraine should resign itself to the loss of the Donbas. One can interpret these sentiments both as a function of the polarizing impact of armed conflict and a cynical political strategy; after all, with Crimea gone and the Donbas effectively removed from the polity, the current political opposition has no electoral base. In fact, the successors to the Party of Regions would find themselves permanently marginalized, a scenario the current government would no doubt embrace. However, Ukraine without the Donbas would be in an even more unsustainable economic position than it already is today: before the conflict, the Donetsk and Luhansk regions accounted for 15% of Ukraine’s population, 16% of its GDP, 25% of its industrial output and 27% of its total exports. Losing the Donbas is not an option. Regaining full control of it will only come through an agreement with Russia.

In short, the ugly truth is that Russia, having annexed one part of Ukraine and stoked a conflict in another, can still undermine any plan for Ukraine’s future if it so chooses. Before this year, there was a case for downplaying the practical implications of this truth; we could not be sure how willing Russia would be to accept the costs that come with exercising coercive leverage to achieve its goals in Ukraine. Today, there should no longer be any doubt. Policies based on an assumption that Moscow will simply accept outcomes in Ukraine regardless of the perceived implications for its interests are doomed to fail. Moreover, such policies subject Ukrainians to known risks to their lives and livelihoods, making them akin to negligence, if not malpractice.

So a lasting political settlement is clearly necessary. But what would it take to get one? In the absence of a hegemon prepared to impose a settlement, key factors needed for an agreement to end a conflicts include the following: some overlap in the parties’ positions, allowing for a potential negotiated outcome that all sides can claim as a victory; a degree of flexibility in negotiating positions; an overriding shared interest in getting a deal; and domestic support for compromise. What makes the current crisis so disturbing is that most if not all of these factors are utterly absent.

There has been a lot of speculation about Russia’s aims in Ukraine. In fact, Moscow has been quite transparent, at least since mid-March, about its objectives. On 15 March, the day before the so-called ‘referendum’ on the status of Crimea was held in that region, Russian Foreign Minister Sergei Lavrov handed US Secretary of State John Kerry a draft text of a ‘Friends of Ukraine’ international action plan. The Russian Ministry of Foreign Affairs published the proposal online two days later. The document contains five actionable points. Firstly, it calls for the fulfillment of the pledges contained in the agreement reached by the Ukrainian opposition and then-President Victor Yanukovych on 21 February to disband armed groups and de-occupy buildings in Ukraine. (That settlement, which had been brokered by Russia and the European Union, lasted mere hours before falling apart.) Secondly, it outlines a new federal constitutional order for Ukraine, providing for, inter alia, neutrality; the direct election of regional governments, which would be granted a wide range of powers currently held by Kyiv; and the elevation of Russian as an official state language along with Ukrainian. Thirdly, after this constitution is approved by popular referendum, the Russian plan proposes that new elections, at both the regional and national levels, take place. Fourthly, the document stipulates that the right to self-determination of the people of Crimea, as expressed in the 16 March ‘referendum’, should be respected. Finally, the EU, the US and Russia are called upon to serve as guarantors of the above, which will be codified in a United Nations Security Council Resolution. In addition to this document, Moscow has consistently made two additional demands: a compromise on the Deep and Comprehensive Free Trade Agreement (DCFTA), the cornerstone of the AA; and full adherence to the terms of the 2009 gas contract.

Some of these demands are clearly dated and no longer relevant; all of them could be modified through negotiation. But Moscow’s key demands are clear: neutrality; non-exclusive geoeconomic arrangements; decentralization of authority from Kyiv to the regions; and an end to subsidized gas.

What about the Ukrainian and Western goals? Nominally, the EU–US strategic goal for Ukraine, shared by the current government in Kyiv, is both straightforward and breathtakingly ambitious: to create a Western-oriented and -integrated, prosperous, territorially integral, secure and democratic Ukraine. In order to achieve this goal, the West, in addition to sanctioning Russia, has doubled down on support (political, diplomatic and financial) for the new government, and pushing structural reforms to modernise Ukraine’s perpetually underperforming, largely unreformed economy. Integration with the EU and cooperation with NATO have been accelerated. In Kyiv, many senior officials speak of pursuing NATO membership, repealing the non-bloc status that Yanukovych codified, or becoming a major non-NATO ally of the US. On gas, the EU appears to have endorsed the Ukrainian government’s goal of achieving a temporary deal, while seeking to overturn the 2009 contract through the Stockholm Arbitration commercial dispute resolution process.

On the face of it, this is a rather bleak picture: the goals of the parties to any future settlement to this crisis have only one thing in common: achieving one party’s goals necessarily entails undermining the other’s.

This fundamental incompatibility has been masked by the series of temporary deals struck in recent weeks. But rather than a substantive compromise, these agreements merely postpone final resolution – a “kicking the can down the road” move reminiscent of the politicking surrounding the US budget. As the US has discovered the hard way in recent years, political compromise does not become easier with time.

The two Minsk agreements – the September 5 memorandum and September 19 protocol – have demonstrably failed to create a stable equilibrium on the ground. While the pace of loss of life has slowed, key sections of the documents read almost as aspirations nearly two months after their signature. But even if fully implemented, the Minsk agreements were not designed to resolve the major security concerns or political disputes at the core of the conflict.

On September 12, the EU agreed to postpone implementation of the DCFTA until January 1, 2016 due to a Russian threat to implement retaliatory trade measures against Ukraine if its concerns about the agreement were not addressed. However, the AA has now been ratified by the European Parliament, the Ukrainian Parliament, and several national parliaments in EU member states. In other words, compromise on the substance of the document is arguably now even more remote a possibility. And as the dueling open letters between Russian President Vladimir Putin and European Commission chief Jose Manuel Baroso demonstrate, the parties are still worlds apart on that substance. The gas deal, if it does finally materialize, is only intended to allow Ukraine to survive until the Stockholm arbitration panel delivers its verdict. The law on special status of local self-government for the Donbas, which both the rebels and the government seem to be ignoring, is valid only for three years, with no clarity on what comes next.

Meanwhile, Russian and Ukrainian leaders are preparing their publics for confrontation, not compromise. Moreover, in Ukraine, compromise with Russia is nearly akin to treason. In the weeks and months leading up to the October parliamentary elections, President Poroshenko and senior officials from his administration apparently have been in regular direct contact with their Russian counterparts about the ceasefire, the gas deal, and other matters. But only the Russian side speaks openly about this communication.

While talking to Kyiv is not taboo in Moscow, it would be politically impossible for any Russian government, and particularly Putin’s government, to be seen to have “lost” in what is portrayed there as a battle for Ukraine. The crisis, along with the relentless barrage of agit-prop on state TV, has mobilized much of the Russian population in recent months. But while that mobilization has bolstered popular support for Putin, it also constrains his freedom of maneuver in negotiations. Any agreement will need to be sold as a victory for Putin.

If we imagine a negotiation between Putin and Poroshenko conducted in a political vacuum, without the path dependency of the AA process, the war, the Crimea annexation, etc., it is not inconceivable that they could reach a deal. The contours of the compromise would likely include: reaffirmation of the reality of Ukraine’s non-alignment; mutually satisfactory trade arrangements among Russia, Ukraine and the EU; implementation of decentralization plan somewhat more ambitious than Poroshenko’s June proposals, but significantly less far-reaching than Russia’s March proposals; a return of full Ukrainian control over its border with Russia, perhaps with an international peacekeeping force on the ground in the Donbas; and so on.

The events of the past year, and particularly Russia’s brazen actions in Ukraine, make this scenario seem more like a fairy tale than a historical counterfactual. The problem for Ukraine and its Western partners is that the Kremlin does not need a deal to achieve its baseline objectives in this conflict. It could do so by bringing Ukraine to its knees economically or by continuing to sow instability in the east of the country, which effectively makes it impossible for the government in Kyiv to pursue Putin’s nightmare of a Ukraine in NATO and the EU. Moscow would prefer a negotiated settlement over these scenarios, if only because it would be far less costly. But it does not need one. The same cannot be said for Ukraine. Notwithstanding Kyiv’s sometimes triumphalist rhetoric, Ukraine clearly needs a deal.

For Western policymakers, it is this factor – Russia’s strong bargaining position, relative both to Ukraine and the West – that ultimately makes this crisis so different from others in the post-Cold War period. Never before have they faced a major nuclear power as an adversary in a regional dispute occurring in that power’s backyard. In Kosovo, Russia was an opponent, but Kosovo barely registered in the hierarchy of Russian national-security imperatives. Ukraine, by contrast, ranks just short of national survival. And eastern Ukraine is one of a few places beyond Russia’s borders in which Moscow can deliver the assets required to sustain an insurgency. Even if it were to receive the much-ballyhooed lethal military assistance from the West (and that does not seem likely), Ukraine cannot defeat such an insurgency if Russia remains determined to prevent it from doing so.

Talking to Moscow is a policy of necessity; it is not one that any Ukrainian or Western leader would want to embrace publicly. For Ukraine to survive this crisis, however, they might not have a choice.

This Paper was originally posted at the Danyliw Seminar Website

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