Article / 12 August 2014 at 9:49 GMT

Fifty days to make peace in Ukraine

Russia oil and gas expert
United Kingdom
  • Approach of winter raises stakes in Ukraine in search for peaceful outcome
  • Tough sanctions law could see disruption of gas transit to Europe from Russia
  • Ukraine could start diverting Russian gas as early as October 1

By Nadia Kazakova

Ukraine is joining another war: the war of sanctions. The country's Parliament might soon approve a tough sanctions law, which would give wide-ranging powers to the National Security Council and the President. The sanctions legislation might be more of a political statement than a practical manual. Yet, it has caused a commotion in Europe as the law allows for disruption in gas transit. 

As the winter approaches, the stakes are rising all around. A conclusive political resolution looks unlikely – the only offer on the table is Poroshenko's peace plan, which the Russian Foreign Ministry calls a tool of the Ukrainian government to mobilise Western support (ria.ru). The Ukrainian military operation has been only partially successful. The territory under separatists' command shrank dramatically, but the region's border with Russia is not under Ukrainian control and two major cities remain in separatists' hands. Any heavy-handed attempt to retake the cities would lead to civilian casualties and might provoke the Russian direct intervention.

As the winter approaches, both sides of the conflict must think about taking care of the affected population and the basic infrastructure must be restored within the next six weeks or so. For humanitarian reasons, the Ukrainian authorities might have to accept the existing status quo. The acceptance of a Russian aid convoy might be a tentative sign of such an outcome. The conflict in Donbass will then literally freeze over. 

Alternatively, there will be a humanitarian disaster, followed by the Russian military intervention and the next wave of sanctions. For Ukraine, it is not an enviable lose-lose situation. In many respects, all sanctions and counter-sanctions are only a sad sideshow to the events in Ukraine.

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The approach of winter is heightening the need for peace in Ukraine. Photo: IakovKalinin \ Thinkstock

Weapon of last resort

The Ukrainian Parliament is likely to approve a concise but powerful piece of legislation which would give Ukrainian authorities the right to use sanctions against any country, company or an individual, both foreign and Ukrainian, who is deemed to be a threat to national sovereignty and security. 

Sanctions are very widely defined. They include assets freezes, capital controls, cancellation of contracts and denunciation of inter-government agreements. The partial or complete ban on transit of energy is also mentioned. While the draft law does not mention Russia a single time, there is little doubt that the message is written very clearly for Ukraine's largest neighbour.

Most sanctions in the legislation appear to be weapons of last resort, in case of a direct Russian intervention. In the event, Ukraine is willing to throw everything at its disposal to make Russia hurt. 

It might hurt Ukraine every bit as much though through the loss of revenues, exports and jobs. 

Russian-owned banks are a major part of the Ukrainian financial system. According to forbes.ua, Russian-controlled banks account for 32% of banking equity and 18% of total assets. Moreover, they continued to inject liquidity into their Ukrainian subsidiaries to balance off withdrawal of local deposits.

Russian-owned companies are big across many industries. Around one in ten of Ukraine's largest 200 companies are Russian-controlled. They include steel producers, mobile operators, subsidiaries of Sberbank, VTB, and Gazprom among others.  

Tit-for-tat

Ukraine and Russia have traded some trading bans already. In March, Ukraine halted all exports of weaponry and military equipment to Russia. In mid-June 2014, Ukraine introduced a wider ban on all military technology cooperation with Russia. On some estimates, it cost the country around $300 million a year (18% of its $1.8 billion arm exports). 

More importantly, some parts and services that Russia imported were exclusively or mostly from Ukraine, for example 50% of components of Russia's ground-based intercontinental ballistic missile (www.carnegieendownment.com). In July, Russia banned Ukrainian milk products, including cheese, as well as pork and potatoes on sanitary grounds. In June, Gazprom switched off gas exports to Ukraine, as the countries failed to reach agreement on the price and outstanding debt.

The new Ukrainian sanctions law is unlikely to make the current situation much worse. It might legitimise embargoes already in place. It would trigger a Russian response, which would effectively do the same. 

Gas transit: October is critical

There have been no problems with gas deliveries through Ukraine so far and there is an official promise to keep the transit uninterrupted for now. There are trilateral gas talks planned for sometime in September between Gazprom, its Ukrainian counterpart Naftogaz and the European Commission. Unless there is a breakthrough, however, Ukraine might start tapping the Russian transit gas to supply its own consumers, probably as soon as October. 

If Gazprom responds by reducing transit volumes, Ukraine might evoke sanctions against the Russian gas producer and ban its transit via Ukraine. It is unlikely, as Naftogaz hopes, that Gazprom would then rush to sign new transit agreements with various European companies, who would still have access to the Ukrainian transit system. It would more likely lead to a stand-off and disruptions in gas supplies. Clearly, the gas issue would need to be a part of the political dialogue, not a casualty of the sanctions war.

-- Edited by Martin O'Rourke

Nadia Kazakova is a specialist on Russia, particularly the oil and gas sector

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