- Kremlin quietly tightening links with the breakaway territories, Bloomberg reported
- Putin's spokesman promptly called the Bloomberg story naïve and primitive
- But the story was likely meant to signal Russia's intentions and test the reaction
- Newly declared Russian policy would cement status quo in the region
- Russian move to take de-facto control follows slow demise of Minsk accord
- Latest ceasefire attempt has come to nothing
- Deterioration of the situation would only add to already mounting political risks
- New Russian policy means higher risks for markets, including risk of extra sanctions
Newly declared Russian policy would cement the status
quo in the region. Image: Shutterstock
By Nadia Kazakova
US president Donald Trump communicates with the world via Twitter. Russia's Vladimir Putin might have found a more subtle and business-friendly route. He seems to conduct his foreign policy via Bloomberg.
While Putin's administration continues to pay lip service to the Minsk accord (wider autonomy to so-called Luhansk and Donetsk people's republics within Ukraine), in reality the Kremlin wants Donbass region fully separated from Ukraine, according to Bloomberg sources. There are no plans to annex the region, though.
The Bloomberg article probably stated the obvious for those who have been following the situation in the east of Ukraine (but fewer in the financial markets pay attention). But the news story was likely meant to send a signal about Russia's intentions and to test the reaction.
The newly declared Russian policy would cement the status quo in the region. Since their emergence in April 2014, the separatist republics would not have existed without Russian support. In early 2017, Putin signed a decree officially recognising passports issued by break-away republics. It would allow over three million of their citizens, for example, to open accounts with Russian banks.
In late February 2017, the head of the Donetsk people's republic proclaimed that the contact line with the Ukrainian armed forces would become the official border with Ukraine. In March 2017, large Ukrainian companies have been confiscated by separatists' governments following an economic blockade by Ukraine.
The Russian decision to take de-facto full economic and political control over the separatist regions followed the slow and largely unnoticed demise of the Minsk accord
. The breaking point has been Russia insisting on wide autonomy for the separatist regions as a pre-condition for any further steps and a comprehensive ceasefire, while the Ukrainian government had no desire or popular mandate for such a move.
By early March this year, the Minsk accord all but disintegrated. The contact group continues to meet, but its latest attempt of a ceasefire (from April 1) has come to nothing. Over the past weekend, the Ukrainian press reported extensive gun fire along the separation line and a soldier killed on the Ukrainian side.
On April 23, an Organisation for Security and Cooperation in Europe patrol car drove into a mine in the rebel-held Luhansk region. A US citizen, one of the unarmed special observer mission, was killed, two others were injured. The incident caused a flurry of diplomatic activity, including a US State Department statement
calling for Moscow to use its influence on “Russia-led separatist forces” to implement the Minsk agreement and allow the OSCE to conduct a full investigation into the explosion.
Sealing off the Donbass region — if that is the new Russian policy — would have further consequences. For the Putin administration, it closes the door on the political settlement in the east Ukraine and, effectively, takes that issue off the geopolitical negotiating table. On the one hand, it gives Moscow more flexibility elsewhere, including in the Middle East. On the other hand, the Donbass region becomes a full financial burden and political responsibility.
Any deterioration of the situation in the region (flare-up along the border, political unrest, incidents similar to the one on April 23) would only add to the already mounting internal and external political risks for the current administration.
For the financial markets the new Russian policy would mean higher risks. Risk of extra sanctions (either on Syria or east Ukraine), risk of a higher budget deficit as subsidies and military expenses mount, risk of unknown unknowns in the tinderbox of this conflict.
Investors must keep alert and pay more attention to what is going on in Ukraine. There are plenty of downside risks which are mostly ignored by the market at the moment. And stand by for more Russian foreign-policy announcements on Bloomberg.
Tinderbox region. Image: Shutterstock
— Edited by John Acher
Nadia Kazakova is a specialist on Russia, particularly the oil and gas sector