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Article / 27 August 2014 at 7:56 GMT

Markets groan as Ukraine unable to bridge gap with Russia

Russia oil and gas expert
United Kingdom
  • Both Ukraine and Russia need a deal brokered for economic reasons
  • Russia is pushing Ukraine to recognise the separatists as a legitimate party
  • Ukraine preparing to tough it out, but faces harsh winter
By Nadia Kazakova

As expected, there was no breakthrough at the Russian-Ukrainian meeting in Minsk. Despite the nearly two-hour private talks between Russian President Vladimir Putin and his Ukrainian counterpart Petro Poroshenko, the late-night statements that followed rang hollow.

There might have been some positive developments and plans for further talks, as per official statements. Yet, there was neither a joint conference nor a sign of a ceasefire agreement. Yet, the events before, during and post the Minsk meetings, are useful in piecing together what is going on and what might happen next.

For Ukraine, the only real red line is the territorial integrity of the country. Everything else is up for discussion, in any possible format, according to the country's Foreign Minister. It seems that talks to separatists are not ruled out (providing they lay down their weapons) and there is even a half-ajar door for them to get elected in the parliament.
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Need for peace: Both countries need a deal, but Ukraine needs it more. Photo: Thinkstock

Ukraine is in a bad shape economically and is eager to compromise to reach a quick deal. The much lauded military gains might become ever harder to hold on to, as more heavy weapons flow from across the Russian border. A trump card that the country still has: if everything else fails, ask for a non-NATO ally from the US. The consolation prize is to see Russia suffer from heavier sanctions. 

For Russia, the official position seems to be the same: Ukraine should talk to separatists directly. One assumes that Russia might close its border to weapon supplies, if the dialogue is going in a satisfactory manner. Russia can afford to wait for Ukraine to come around to its position, even with the impact of the sanctions.

As the talks were taking place in Minsk, the head of the self-proclaimed Donetsk republic said that federalisation is not an option for them any more. They want to be independent from Ukraine, moreover, they do not see Ukraine as a viable country. The goal might be to continue the war of attrition in Ukraine, see it weaken and then de facto accept independent republics. 

As a bonus, Ukraine's political and economic elite might see the light, i.e. accept that it should come back into the Russian fold, especially if the US and EU get weary of an unstable and ever more needy Ukraine. 

What happens next? There might be more meetings, negotiations and talks. There could be even small progress on humanitarian matters and, hopefully, on the gas issue. However, as the Ukrainian Foreign Minister put it, any number of meetings will make little difference. It is a matter of political will to end the conflict, which is lacking at the moment. 

It could mean further sanctions if Russia is accused of sending weapons to Ukraine. It would mean more economic and political pain for Ukraine. It is bad for currencies and the economies of both countries.

Sleepless in Minsk

The much anticipated meetings in Minsk started in the late afternoon. President Putin arrived last, at around 2pm Minsk time (3pm Moscow), and made headlines by shaking hands with President Poroshenko. On the photo, the Russian President looked radiant, as if he was shaking hands with his opponent after winning a good fight. 

The Ukrainian President looked suitably sombre, as if he was shaking hands with the opponent just before a tough punch up. Maybe one of them had a better sleep the night before.

Most of the afternoon was spent around a large table with all those invited present. The speeches were repeats of proposals heard before. The Ukrainian President re-offered his peace plan, but it came with an option of a dignified exit for all those involved. The Russian President repeated his mantra that the crisis should be solved diplomatically by talking to representatives of the restive regions. In other words, Ukraine should recognise separatists as a legitimate party to the conflict and deal with them.

The media's first response was a sigh of disappointment: nothing new, no deal. 

The main suspense then shifted to whether there would be a private meeting between the Russian and Ukrainian presidents. It seemed that Poroshenko managed to corner Putin in the end, soon after a late lunch. Their meeting started at just after 9pm Minsk time (10pm Moscow) and lasted for almost two hours. After it finished, at midnight Moscow time, and with no statement, the Ukrainian President left for the Ukrainian embassy, officially for final talks with the EU representatives. 

President Putin went to have a word with the Belarusian and Kazakh Presidents. 

Eventually, some official statements were made (well after the midnight) which have only confirmed that not much real progress has been made. 

Ukraine needs peace more than Russia

The talks have clearly shown that Ukraine needs (and wants) the peace deal more than Russia. The reasons are numerous and obvious. Despite some military success, it is clear that Ukraine is unable to defeat separatists when it has little control over the border with Russia. The army is overstretched and there are vocal complaints - coming through the Ukrainian press – that pro-government militia is suffering losses due to a lack of military support from the regular army. 

There is an urgent need to get ready for winter. Some of the coal mines in the fighting zone are flooded, the coal loading facilities at railway stations are destroyed. There is not enough gas to take the country through the winter. The Ukrainian Central Bank put aside $3.1 billion to buy some 5 billion cubic meters of the Russian gas and, one assumes, repay some outstanding debt. Yet, Gazprom might be reluctant to compromise, not with the arbitration court looming.

The Ukrainian currency – hryvnia (UAH) - has been hit hard by the war and the general economic malaise. The official exchange rate hit an all-time low of 13.65 per USD on August 26. The currency has depreciated almost 20% since mid-July and over 60% from January 1, 2014. It costs Ukraine around 70 million hryvna a day (over $5 million) to fight the war. For a country with a massive current account and budget deficit (both down to the cost of imported gas), it is simply unaffordable. 

Separatists counter-attack

Moreover, the fighting in Ukraine has intensified. A separatist counter-attack forced, the Ukrainian army and militia were pushed back. Media reported that separatists retook some strategic towns and also moved to the deep south, towards Mariupol on the Azov sea, effectively stretching the front line another hundred kilometres or so. There might be reasons for the separatists' military success.

The US Defence Department went on record on August 25 to say that they have seen columns of heavy equipment flowing into Ukraine from Russia for several weeks. There are hundreds of  pieces of heavy equipment including tanks, armoured personnel carriers, rocket launchers, air defence equipment and other heavy weapons, according to the statement. At the same time, the US military believes that the equipment is operated by separatists, rather than the Russian regular army. 

The Russian media, however, might be telling a different story. There have been reports of Russian soldiers captured or killed in military operations in Ukraine. The fate of nine army recruits, who by official accounts have been killed at the firing range in the border region with Ukraine, has been investigated by the human rights committee of the Russian President. It might not change the cause of events in Ukraine, but it brings the conflict much closer to the Russian heartland.

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Russian soldiers are a common sight in annexed Crimea, but columns of heavy equipment are now flowing into eastern Ukraine, according to the US. Photo: AndreyKrav \ Thinkstock

-- Edited by Adam Courtenay

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


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