Wednesday, 28 May 2014

Putin on the ropes, and what this means for China.

Loath as I am to agree with Tom Friedman, but I have to say that he is correct in this piece to say that it appears that in the Ukraine Putin finally appears to be backing off, and that if the Ukranian government's offensive in eastern Ukraine succeeds (and it appears to be succeeding) this will make the outcome of the Ukrainian crisis an overall setback for Putin and his political model.

Whilst there are no doubt still those deluded enough to deny that Putin was behind the take-over of Luhansk and Donetsk Oblasts by militias comprising a mix of local ethnic Russians, Russian Cossacks, and Chechens claiming to be acting on the orders of (Putin ally and ruler of the Chechen region) Ramzan Kadyrov, no-one in their right mind can really believe now that it was not Putin who was calling the shots. This was especially the case after Putin firstly admitted that Russian soldiers had been involved in his earlier invasion and annexation of the Crimea - a territory on which Russia had basing rights that obviously did not stretch to occupying all government buildings and airports, overthrowing the local government and annexing the territory - and then his spokesman claimed that he had "lost influence" over the militias, implying obviously that they had been under Russia's influence.

The link between Putin and this takeover being obvious, the defeat of the pro-Russian militias in eastern Ukraine, and Putin's apparent abandonment of his proxies there, therefore becomes a defeat for Putin. This is quite a revolution given that a couple of weeks ago many (including myself) were afraid that Putin's strategy of first infiltrating a region with "self-defence" militia, then holding a referendum of highly dubious validity, and then annexing that territory would be applied to all Russian-speaking parts of the Ukraine just as it had been applied to the Crimea.

There was, in reality, no difference at all between the situation in Crimea and that in the eastern part of the Ukraine. Putin's claim to have merely been intervening in the Crimea to defend ethnic Russians against "fascists" makes no sense  if it does not also apply to eastern Ukraine, since they were both subject to the same supposed risk. The votes "inviting" Russian troops into Luhansk and Donetsk were of the same dubious validity as that in the Crimea, the same is true of the referenda held in each territory.

Why, then, haven't Donetsk and Luhansk - industrial, resource-rich areas with a combined population of 6.5 million - been occupied and annexed? My guess is that Friedman is right when he points to the response of the markets in this crisis, and the economic sanctions imposed by the EU, the US, Canada, Australia, and other countries. The Russian economy, after a decade of relatively high growth, is predicted not to grow at all this year. For a country which, like China, is ruled by an autocratic government whose main pillar of support is the promise of delivering economic growth in exchange for curbed democratic freedoms, this is a definite cause for concern.

Observers in China may well reflect that it exactly the depth of Russia's engagement with the global economy that makes them so vulnerable to economic sanctions and a negative response from the markets. Unlike the China Yuan, the Russian Ruble is a currency traded on the world markets, an arrangement that ensured its rapid decline in value at the outbreak of Russia's involvement in the Ukrainian crisis. Russia has spent more than 40 billion USD defending the Ruble so far this year.

Similarly, Russia lacks the kind of controls on capital flow that China has. As a result of the risky atmosphere brought about both by Russia's involvement in the conflict and the risk of sanctions, it is predicted that roughly 85-90 billion USD will flow out of the Russian economy this year - the equivalent of the entire Russian defence budget.

It seems unlikely that the P.R.C government would wish to leave themselves open to such a backlash in the form of economic sanctions and market response by further opening their economy to the extent that Russia has any time This is especially so in the light of the "bad" crises that have arisen around China's regional and internal conflicts this year.

As long as the P.R.C. remains a power that wishes to keep the use of force against neighbours like Taiwan on the table,  further opening up to global markets therefore seems unlikely. Indeed, this would suit the faux-leftist ideology of some in the Chinese leadership for whom "neoliberalism" (a nebulous and vague term whose meaning rarely seems to vary from "capitalism") is considered a "threat".

[Picture: Spent shell-casings litter the road in Karlovka in eastern Ukraine after fighting between government troops and pro-Russian militia. Via Wiki]


TG said...

I've been following the developments in Ukraine closely since last year when Maidan started due to some personal connections (and I was in Kyiv just before everything begun). You're quite right, I think, because it matches my observations. The initial sanctions targeted at a few oligarchs were effective, but not right away. I remember how Kremlin was making fun of that, but I think it made a few people a little nervous. Then there was so much talk about further sanctions, it was a confusion, because nobody knew what will happen. And that affected foreign investors, who were pulling money out of Russia, I heard 60 billion left until now. 40 billion as you mentioned cost them to stabilize the ruble. Then there were threats regarding Europe buying gas elsewhere (or at least trying to). As Ian Bremmer tweeted: Russia's mega-deal of the century with China means 38 billion cubic meters/year of gas. European gas demand from Russia per year is 160 billion cubic meters. Then there is the cost of maintaining Crimea. That region can quickly turn into a bigger problem when local realize that they've been served a rotten egg. Kyiv's money flow is over, and for Russia, Crimea is so far it's only cost. Tourism will drop, new infrastructure will have to be built to connect the peninsula with the Russian mainland, and it won't be cheap (plus he also promised higher pensions to Crimeans). If you calculate all this, it just doesn't look as if Putin has any joker in his sleeve anymore.

Two other turning points in my opinion had an effect on Putin within Ukraine. First the decisive military operation. Started in Slavyansk, Mariupol, and Kramatorsk, where arguably there weren't any victories for the Ukrainian army in the beginning, but as weeks passed they advanced more and more, and now after they reclaimed the Donetsk Airport, it seems they have a momentum to recapture Donetsk and Luhansk, but I'm afraid it will be very bloody. Another turning point was when Akhmetov finally called for "resistance against separatists, who are going to destroy the economy of Donbass". My Ukrainian friends say his awakening came too late, but the voice of those who oppose the separatists/terrorists became stronger. This video went viral, and resonated with many in the region who are tired of the standoff.

I do however ask myself whether Putin actually didn't plan to annex Donbass, but merely tried to destabilize it in order to push for an autonomy for the region, or did he really mean to annex it, and realized that the cost is too high, but now kind of lost control, because the separatists just don't want to give up? There is evidence that Russia is still sending militias into Donbass, they seem to be well supplied, it's hard to imagine that Putin doesn't have control over that.. It's not impossible, but for me very hard to imagine. What do you think?

Lacompacida Nuronia said...

I expect PRC learnt from this event that having an openly traded currency is bad, and open economy worse, and the only trump card PRC can have is a strong military.

Gilman Grundy said...

I've been following the Crimea story for a while now, though the 2010 election came as a unpleasant surprise. I was never one of the boosters for Putin, though I think there has not been enough acknowledgement that he is doing things that Yeltsin himself did with the support of Europe and the US.

Of course living "next door" to it all has heightened the importance of it all for me - my fiancee's colleagues looked after Maidan supporters who were taken to hospitals in Wroclaw for treatment for gunshot wounds, and friends are in local support groups for the Ukraine. People here remember the martial law period here in Poland and have little time for Russian revanchism, and reaching further back in time most people in Wroclaw were forcibly resettled from Lviv by the USSR after WW2.

Ukraine was seen as a very normal country two years ago. Poland shared the 2012 European Cup with the Ukraine and the subject of ethnic tensions simply didn't arise. We were even thinking about having our honeymoon in Crimea before this crisis brewed up.

I don't know if Putin planned from the start of the crisis to annex the Donbass, but the timeline certainly suggests that he was willing to try it after successfully annexing Crimea. I felt that he had been emboldened by the lack of any real response at that point.

My impression is that at this point Putin is willing to let the militias try to take control of the area but is not going to spend too much political capital in doing so. He's not going to commit Russia to a full-scale war, which at this point is what it would take to annex the territory. Once committed he can't fully back down though, and likely doesn't want to anyway.

The situation in South Ossetia went on for more than a decade before Putin seized on Georgian actions to allow the ethnic-cleansing of South Ossetia by various militias and its de facto permanent separation from Georgia. It's likely that Putin would like to leave open a window to do the same to the Donbass at a later date - Poroshenko should not, cannot allow this though.

The outcome may well be a smashing of the Russian puppet-states in eastern Ukraine similar to what the Croats did to the Serbian splinter-state established in Krajina during Operation Storm after Milosevic effectively abandoned Serbian Krajina to its fate. I can only hope that the end result - essentially the entire population being made refugees - can be avoided. I drove through the Krajina region last year and there were still many ruined houses, and I understand that many Serbs still have not moved back.

Gilman Grundy said...

Last comment was @MKL.

@Lacompacida Nuronia - if the PRC leadership really does think that, then they will be abandoning the true strength of economic power for the temporary illusion of strength provided by military might. We all saw what happened to the USSR as a result of following the same path.

nulle said...

I find it interesting that the PRC wants the RMB/yuan to become the international currency to replace to USD. PRC also wants to take over the world, starting with the East and South China Sea.

Unfortunately, having RMB replacing the USD as a reserve currency, or even as international currency has risks similar to the Russian Ruble. Also these risks also include everything you do is under the microscope, especially trying to put an oil rig in another countries maritime borders. Everybody is watching whether China is using the "Safeguarding Manadrin Speakers in " to invade neighboring countries in Asia.