Ukraine and the Game of Thrones: Winter is Coming (Part 1: Introduction)

As the crisis in Ukraine intensified late last year, analysts pointed to an asymmetry in the struggle between Russia and the West over Ukraine’s external orientation. The Kremlin, the argument went, cares a great deal more about keeping Ukraine in its orbit than does either the European Union or the United States. That was certainly true then, and although it is rather less true now that Western governments feel fundamental principles and security are at stake, it is still mostly true.

What those commentators neglected to note, however, is another important asymmetry, which is that Ukrainians care more about Ukraine than do Russians. As a result, many Ukrainians have fought, and will fight, long and hard to defend their country. Moscow’s role in destabilizing the country, promoting rebellion in the east, and occupying and annexing Crimea has also alienated the bulk of the Ukrainian people, and it will very likely contribute to a Ukrainian national narrative about victimization at the hands of Russia, a narrative that is not likely to go away for a very long time.

That said, there are many other important asymmetries in the struggle, notably those involving economic leverage, some of which I discussed in earlier posts (see, for example, “The War of Recessions”).

What I want to focus on here, however, is how leverage in the lose-lose economic game is going to play out over the coming winter, and in particular how Ukrainian leverage over Crimea and the Donbas separatist zone counterbalances, at least to some extent, Russian leverage over a Ukrainian economy that is deteriorating rapidly.

To put the argument briefly, I believe Russia is in a position to make life extremely difficult for Ukrainians over the winter, both by ratcheting up military pressure (which is putting pressure on the hryvnia, increasing capital flight, and raising borrowing costs for Kyiv) and by modulating natural gas and coal deliveries. This is particularly the case because Kyiv will not only have to deal with ongoing military pressure and an economy in free fall, but also with at least 400,000 (the number that have registered) internally displaced persons (IDPs) – and perhaps twice that number given that many IDPs have not registered.

With respect to natural gas supplies, Ukraine and Russia have signed an agreement whereby Russia will deliver natural gas to Ukraine at reasonable prices through March 1, 2015. The agreement requires Kyiv to pay much of its debt to Russia’s Gazprom before the end of the year, and to prepay for deliveries thereafter. Understandably, authorities in Kyiv are worried that Ukraine will make the debt payments, prepay, but then not get the deliveries they’ve paid for. Paying its debt to Gazprom, and then prepaying for additional deliveries, is also depleting Kyiv’s already diminishing foreign currency reserves and increasing the risks of a financial meltdown for the country.

Yesterday, Moscow announced that it was halting coal deliveries to Ukraine. About 40% of Ukraine’s electrical production comes from coal-fired power plants, and most of the anthracite coal used to fuel those plants has come from the Donbas. The war in the east has reduced Ukrainian coal production by some 60%, and coal produced in areas controlled by the Donbas separatists is now crossing over into Russia. Normally, Ukraine imports very little coal. The dramatic decline in domestic production this year has forced its largest privately owned energy holding company, DTEK, to begin importing significant volumes of anthracite coal, most of which has come from Russia. In addition, Ukraine’s state-owned power company, Centrenergo, entered into a contract a month ago to import significant volumes of anthracite coal from Russia by the end of the year. The suspension of Russian coal exports to DTEK and Centrenergo came without warning, and Kyiv now has to deal with yet another major threat to its energy security and economy over the winter.

Russia’s leverage over Ukraine, however, is balanced to some extent by Ukraine’s leverage over Crimea and the DNR/LNR. The people of the latter are particularly vulnerable. Even with Russian humanitarian assistance, the DNR and LNR are facing a potential humanitarian crisis over the winter. Kyiv is in a position to make that crisis worse by shutting down the “border” along the line of contact, and by ending or reducing deliveries of electrical power and natural gas to the region.

Crimea, too, is going to face a hard winter. It is particularly dependent on Ukraine for water, electricity, and especially food. Again, Kyiv is in a position to make living conditions for the local population a good deal worse by closing the border, and in particular by stopping trains delivering goods and passengers not only from Ukraine proper but from Russia as well.

Ukraine’s leverage is, however, dangerous, and Kyiv is well aware it can only be exercised with care. The reason, of course, is that exploiting it may precipitate an economic or military response from Russia. Ukraine can tell Moscow, and doubtless has been doing so in its various negotiations with the Kremlin, that it will squeeze Crimea and the Donbas breakaway regions if Moscow fails to deliver on its natural gas or other commitments or presses too hard militarily. But if it misplays its hand, Moscow could be pushed past the provocation line and cease gas deliveries or launch a full-scale invasion. Kyiv is also constrained by a sense of obligation to the people of Crimea and the Donbas, people it still considers Ukrainian citizens, as well as by a desire to avoid making them even more hostile to Kyiv than many already are.

Because it is quite long, and because this is a blog and not a journal, I’ve decided to split this post into four parts, this being the introduction. Part 2 will address economic conditions in Crimea and Kyiv’s leverage over the region. Part 3 will do the same for the Donbas separatist regions. Part 4 will address Russia’s economic leverage over Kyiv over the coming winter as Ukraine’s economy continues to deteriorate.