Why the Ukraine crisis is getting even more dangerous

It is safe to say that I have been an alarmist about the conflict between Russia and the West over Ukraine’s external orientation (my wife tells me I should call this the “Doom and Gloom” blog). I have been worried for years that NATO and EU expansion was going to lead eventually to a security crisis. I was worried about the consequences of Georgia and Ukraine trying to join NATO well before the Russo-Georgian War of 2008, and even more worried thereafter. And I was worried about the political fallout from the decision to offer Ukraine an EU Association Agreement in Vilnius at the end of last year and Russia’s reaction should the Yanukovich regime fall.

When Russia occupied and then annexed Crimea, I did not think the Crimean operation would solve what Moscow considers its strategic objectives in Ukraine, which meant that the crisis was likely to get worse. And I likewise think that a lawless and economically destitute “Novorossiya” on Russia’s western border does not solve Moscow’s perceived strategic problem, which again means the conflict is likely to get worse before it gets better.

I am now more worried than ever. In a nutshell, I think that the risks of a general war between Ukraine and Russia are growing, as are the risks that such a war could lead to a military clash between NATO and Russia.

In the two weeks since the Donbas separatists organized parliamentary elections in the self-declared Donetsk and Luhansk People’s Republics, there has been a major surge in military supplies, including heavy armor, sophisticated radar systems, and military-grade jamming systems coming across the border from Russia. Russia has again increased its military assets along the border, and there is convincing evidence that Russian regulars are still involved in combat operations in the conflict zone.

As I suggested in my last post, Moscow’s immediate military objectives are not clear to me, but at the least it strikes me as very unlikely that we will see a stable ceasefire take effect in the coming months. The least-worst possibility is that Russia’s latest surge is directed at keeping the separatists adequately supplied over the winter or at making the line of contact between Ukrainian and Russian/pro-Russian forces more contiguous and defensible . It is quite possible, however, that the intent is to enable the separatists, perhaps with even more open support from Russian regulars, to take significant additional territory. And it is possible that Russia may decide to engage in a full-blown “shock and awe” offensive against the Ukrainian military.

Meanwhile, Russian military brinksmanship with the West is increasing, the relationship between Putin and Western leaders reached a new low at the G-20 summit in Brisbane, Putin’s domestic approval ratings remain sky high, Moscow shows every sign of ramping up its efforts to divide and weaken Europe and the Western alliance, and there is no evident path forward for de-escalating the crisis in Russia’s deteriorating relations with the West.

Nor has the economic news been good, particularly for Ukraine. After looking somewhat less dire at the beginning of the month (see, for example, the interview with Timothy Ash of Standard Bank on The Financial Times’  “Beyond Brics” blog on November 3), Ukraine’s economic prospects have worsened.

Although GDP fell less than expected in Q3 (“only” 5.1% from Q3 2013), the hryvnia, which ended October about where it was in mid-August, began another steep decline last week, falling from 12.95 to the dollar on November 10 to 15.15 today. Borrowing costs for the government have spiked and are now some three times the average for emerging markets. The country is facing major dollar-denominated debt repayments in the summer, which it clearly will be unable to pay if it does not receive additional support from the IMF and the West.

Assuming a reasonable reformist government is formed in the coming weeks, the expectation is that the IMF will come through with the next three tranches of support under the current $17 billion standby agreement with Kyiv by the end of the year, or at least early next year, and that it will then agree to an additional $20 billion or so in stand-by loans. Nevertheless, debts markets are effectively saying that there is a better than even chance that the country will default or force a haircut on its lenders within five years. At the least, Ukraine is in for a very painful 2015.

In Russia, the latest figures have the economy still growing, albeit barely, and performance is doing a shade better than expected (around 0.7% annualized in Q3). But last week the Russian Central Bank forecast zero growth through 2015, and the results of a Bloomberg survey on October 30 of 27 experts suggested that there is a 70% chance of a recession in Russia in the coming year.

Meanwhile, the ruble continues to weaken, oil prices have fallen further since the beginning of the month, and the likelihood is that the federal budget is going to come under serious pressure at some point (for now, however, the fall of the ruble is helping alleviate that pressure because the dollar earnings from Russia’s trade and current account surpluses are worth more domestically).

As for Europe, the countries in the Eurozone, after emerging from a two-year recession in 2013, managed to avoid falling back into negative territory in Q3 of this year, but only barely, growing at 0.2% from the previous quarter. Nevertheless, there is still a considerable risk of recession and deflation in 2015, and there is very little likelihood that we will see the kind of growth that would significantly reduce unemployment and relieve political pressure for at least several years.

Perhaps most alarming for Europe (and indeed for the West) has been the economic news coming out of Japan, where the economy shrank a surprising 1.6% after falling by 7.3% in Q2 and where Abenomics is in big trouble. Like Japan, Europe faces low and declining birthrates, an aging population, and supply side obstacles to growth. Unlike Japan, however, it is not a unified state or a single nation, it has a very high level of unemployment, and it suffers from serious “internal contradictions”, to use Marxist language, relating to the institutional design of the Euro. As a result, the economic, and particularly the political, effects of a deflationary trap could be even worse for Europe than they have been for Japan.

These developments would be worrisome enough, but what makes the Ukraine crisis all the more alarming is the growing risk of open war between Moscow and Kyiv. As I argued in my previous post, I do not see any clear path towards de-escalation. Moreover, recent developments suggest that escalation is considerably more likely than de-escalation.

On Wednesday, Moscow reiterated its long-standing red-line regarding NATO accession, with Putin’s spokesperson, Dmitry Peskov, stating that Russia wants “a 100 percent guarantee that no one would think about Ukraine joining NATO.” That, however, is not something that Kyiv is willing to offer Moscow at this point.  Nor is it something that I believe most Western leaders can offer – it might have been possible before Crimea, but not since. That is particularly true for the Obama Administration now that the Senate is controlled by Republicans.

Moreover, Moscow yesterday signaled – lest anyone needed a signal – that it has another red-line – the provisions of lethal weapons to Kyiv from the U.S. or its NATO allies. Obama’s Deputy National Security Advisor, Tony Blinken, stated during his Senate confirmation hearings on Wednesday (Obama has nominated him to be Deputy Secretary of State) “that one thing that could hopefully get them [the Russians] to think twice and deter them from further action is strengthening the capacity of the Ukrainian forces, including with defensive lethal equipment.” Today, a spokesperson for Russia’s Foreign Ministry responded that a decision to supply lethal weapons to Ukraine would be a “very serious signal” and a “direct violation of agreements” that the United States was a party to.

This comes as Vice President Biden is scheduled to arrive today for an official visit to Kyiv. Exactly what he will tell President Poroshenko or Prime Minister Yatsenyuk is not clear, but he is likely to offer increased U.S. military support for Ukraine. It is possible that that support will include the provision of “lethal defensive weapons” (for example, anti-tank and anti-aircraft weapons), if not now then perhaps next year or if and when a stable ceasefire is in place.

If so, Moscow will certainly learn of those commitments, which is exactly the kind of information that could lead the Kremlin to launch a general assault on Ukrainian military assets. At the least, the Kremlin is signaling to the White House that it will step up military operations if Washington commits to giving Kyiv lethal weapons, while the White House is signaling to the Kremlin that a major separatist offensive or even more open Russian military involvement would mean a major increase in U.S. military support for Kyiv, including the provision of lethal weapons.

Finally, Moscow has made clear in the past two weeks that it realizes the bind it is in with respect to the Donbas. Ukraine’s decision to stop paying government salaries and pensions or providing financial assistance to the areas controlled by the separatists is going to saddle Moscow with the costs of caring for the very vulnerable civilian population in the region over the coming winter. (I have been working on a blog post on “the coming winter war” but have yet to complete it.)

I try to avoid hyperbole, but I will indulge myself. My sense is that pressures resulting from the irresistible force of Western expansion meeting the immovable object of Russian resistance are mounting. I fear that if Moscow concludes that the United States is planning to provide Kyiv with lethal weapons, we will see a big surge of violence in eastern Ukraine, increased military brinksmanship by Moscow with NATO, increased Russian military pressure on Georgia and the Baltics, and quite possibly a general war between Ukraine and Russia.