Undermining Ukraine, Undermined by Markets


Think Tank Review: Eastern Ukrainian separatists held early elections for their heads of State on 2 November. Though the elections went largely unrecognized by the international community, Russian officials decided to recognize the separatist elections as legitimate. Consequently, Western think tanks have refocused their attention on Ukraine and how best to deal with Russia going forward.


Last month’s roundup pointed to a possible détente between Russia and the West: agreements were penned, oil and gas deals forged, and tensions eased. The two giants seemed to have regained some footing in the form of the Minsk Protocol. However, since late October and early November, the peace agreement has been significantly undermined. Moscow’s decision to recognize the accelerated Eastern Ukrainian elections recreated a portrait of two diametrically opposed nations, jockeying for Ukraine. And as the Minsk Protocol edges toward irrelevance, Western media outlets – again – eye Ukraine with renewed vigor, debate the contested elections, and analyze Moscow’s oil future.


RE: All Eyes On Ukraine

In 2007, Russian President Putin spoke at the Munich Conference on Security Policy that stunned the West and sent shockwaves throughout the political community. Putin’s apparent distaste for the international status quo was chalked up to “Russia’s strong growth” trends.

Then, on 31 October of this year, Putin delivered what Dmitri Trenin of the Carnegie Endowment called, “Munich II.”

Trenin later fleshed out his ideas and said Putin appeared to be a wartime president, “defying the U.S.-dominated global system” and appearing “supremely self-confident.”

More recently, a litany of US State Department press releases have condemned Russia as spurning reconciliation and harming the very agreement that could successfully wage peace in Ukraine – but not for reasons directly correlating to Putin’s speech. Elections are the real reason.


Western response to elections: ‘Disenchanted, Unsympathetic, Disgruntled, and Preparing’

Penned by Russia, Ukraine, and Pro-Russian rebels on 5 Sept. (and revamped on 19 Sept.), the Minsk Agreement is a focal point of Western strategy (President Obama and the US State Department) and considered by some to be the potential end to Ukrainian turmoil.

But the separatist elections on 2 November risk the entire peace process, from the West’s perspective. Most recently, Russia’s recognition of the elections even prompted Ukrainian President Petro Poroshenko on Tuesday to threaten the separatists autonomy upheld by the Minsk Protocol. Without intervention, the future appears grim.

Twitter helped gauge US think tank’s reaction to the elections:

Current Brookings scholar and former US ambassador to Ukraine, Steven Pifer, tweeted:

The twitter of Carnegie Endowment’s Moscow Headquarters said the “[Eastern Ukrainian] rebels tried to replicate what they knew about elections—so this all looked like [elections] in the USSR.”

Without official exit polls and an independent oversight body, Brookings’ Pifer, inferred that the elections were a charade.

And Steven Sestanovich of the Council on Foreign Relations (CFR) re-tweeted an opinion that the “fake Donbass elections [were] a slap in the face of the EU.”

In sum, the initial Western reactions on social media show that think tanks are: disenchanted with Putin and his leadership, unsympathetic toward Eastern Ukraine, disgruntled about the state of the Minsk Protocol, and preparing for the worst.

But instead of simply watching Western scholars react on social media to politically-charged events, assessing oil futures provide insight into Russian strategy throughout and forecasting Russian strategy provides insight into likely developments.  it is also beneficial to watch oil futures and forecast Russian strategy in real time.

 

Russian Oil Strategy

As Russia sits on some of the world’s largest energy reserves, selling oil and gas has become a critical factor in Russian foreign policy. Gas, of course, plays an important role in Russia’s geopolitical struggle with the West over Ukraine, where Russia has recently “resumed vital supplies of gas” for the winter. And, in Asia, gas plays an important role in the future stability of the Russia-China relationship.

In general, higher energy prices make Russia more confident in its foreign policy, while lower prices require more belt-tightening and caution. To contextualize, Charles Wolf Jr. of the Rand Corporation points out that oil prices have tripled since the start of the new century, when crude was $35 per barrel. From 2011 to early 2014, prices have skyrocketed to $106 and $109 per barrel – a 300% increase from 2000 and the cause of a Russian economic windfall.

Since mid-2014, however, oil prices have steadily fallen to levels unseen for years. “With demand dropping across Europe, Japan, India, China, Brazil and much of the emerging world market,” Charles Ebinger of Brookings states, Russia must change tack.

Ebinger adds that there are short-term repercussions of falling oil prices on Russia like the inability “to fund the Assad regime” in Syria. But longer-term repercussions include a “major economic setback” for Russia. Since Russia’s 2014 budget is projected using an average price of $97 per barrel, “a price slide to $80 per barrel” or below would mean a serious economic blowback against Russian projections.

It would also mean more impetus for Russia to expedite its oil-selling strategy. The problem is, where China is apathetic to Russian advances, Ukraine is – albeit reluctantly – attentive.  

For example, although a 30 year, $400 billion gas deal was signed between Russia and China in May, Edward Chow of the Center for Strategic and International Studies (CSIS) was cited saying, “the fact that another agreement on the Russia-China gas deal had to be signed [in mid-October] suggests that not everything had been previously settled.” Chow also noted “the Chinese side has been consistently more cautious on their comments regarding Russia's eagerness to proceed.”

Moreover, all Russia’s advances toward China regarding the Altai gas pipeline have fallen short. In response to another Russian advance in mid-October, China publicly announced that “new consultations were needed to examine the project” before they could commit. “It was a polite but adamant form of rejection,” Mikhail Krutikhin of the Carnegie Endowment said.

In another example, though Russia has been in a tit-for-tat struggle with Ukraine for its breakaway Eastern regions, it has recently “resumed vital supplies of gas” to Ukraine for the winter. This political asymmetry is likely to continue should oil prices continue to decline.

 

A version of this article first appeared on Russia-Direct