FPI Bulletin: Russian Economic Crisis Gives U.S. Leverage on Ukraine

January 28, 2016

The plunging price of oil has battered the Russian economy. The economic crisis has put intense pressure on the Kremlin’s finances, since earnings from oil and gas exports comprise half of the government’s income. As a result, the cost of Vladimir Putin’s war in Ukraine is becoming much harder to bear. Thus, the United States and its European allies may now have sufficient leverage to force a settlement that restores Ukrainian sovereignty. Regrettably, the Obama administration’s misplaced hope that Russia will help secure a negotiated peace in Syria may prevent the White House from exploiting its newfound leverage. This would be a mistake.

The Russian Economy

At his annual press conference in December, Vladimir Putin said, “The Russian economy has passed the crisis, at least the peak of the crisis.” He said that his optimism reflected a belief that oil would sell for $50 per barrel in 2016. Last week, the price of oil reached a 12-year low of just $27 per barrel, forcing the value of the ruble down to 82 per dollar, its lowest point ever. The price of the ruble tends to track the price of oil, because Russia is so dependent on its energy sector. For years, oil traded at more than $100 per barrel while the ruble hovered at about 30 to the dollar. With Iranian oil expected to arrive on the market now that sanctions are being lifted, there is little reason to expect an increase in prices.

The World Bank projected in December that Russian GDP will continue to contract in 2016, but only at annual rate of 0.7 percent, as compared to negative growth of 3.8 percent in 2015. However, this projection was based on an assumption similar to Putin’s, that oil would trade at almost $50 per barrel. Even at that level, the situation might be grim for Russian consumers. In the third quarter of 2015, household consumption fell by 9.4 percent year-on-year, an increase from the previous two quarters. In part, this was driven by the persistence of double-digit inflation, which erodes purchasing power.

One visible indicator of the economic downturn was the decision by hundreds of long-haul truckers to block a six-mile section of the Moscow beltway to protest a sharp increase in tolls for highway travel. Other large cities, including St. Petersburg, have experienced protests as well. In Moscow, the target of the protests was not Vladimir Putin, but the son of a billionaire oligarch whose firm administers the tolls and will profit from their increase. A critical question is whether such anger will remain focused on oligarchs and their offspring, or whether the next target will be the president, who has entrusted the economy to the oligarchs.

A Quieter War in Ukraine

After a surge of violence during the summer of 2015, the conflict in eastern Ukraine has become substantially less bloody. The U.N. High Commissioner for Human Rights reported only 47 civilian fatalities from mid-August through mid-November, compared to 102 in the previous three-month period. Nonetheless, fighting continues, with ceasefire violations on a daily basis. More importantly, Russia continues to maintain and strengthen its occupation force, indicating that the lull in violence is merely tactical, rather than a sign that the conflict is coming to an end.

In late October, U.S. Air Force General Philip Breedlove, the top NATO commander, told reporters, “What we have not seen is Russia removing any of its forces in Ukraine. As you have heard me report at this podium before, command and control, air defense, artillery spotting support, artillery support, personnel, supplies, all still being supplied to the Donbass by Russia.” Vice President Joseph Biden reiterated that assessment in his December 8 address to the Ukrainian parliament, or Rada. He noted that “As Russia continues to send its thugs, its troops, its mercenaries across the border, Russian tanks and missiles still fill the Donbas. Separatist forces are organized, commanded and directed by Moscow – by Moscow.” A report by U.N. High Commissioner for Human Rights documented an “inflow of ammunition, weaponry and fighters from the Russian Federation to the territories controlled by the armed groups” in the provinces of Donetsk and Luhansk. The report also described the brutal and lawless rule of Russia’s puppet governments in the occupied region, including “new allegations of killings, torture and ill-treatment, illegal detention and forced labour.”

The consolidation of the Kremlin’s position in the Donbas reinforces numerous other indications that what Putin seeks is not autonomy for eastern Ukraine, but an enduring source of leverage he can apply to prevent Ukraine from restoring its sovereignty and exercising its right to join NATO and the European Union. Moscow’s strategy of sponsoring proxy forces with a separatist agenda is one it has already applied successfully in Georgia and Moldova. The result has been a series of “frozen conflicts” that Moscow can heat up when its interests require the intimidation of weaker neighbors.

The Kremlin Pivots to Syria

“Miraculously, Russian-backed violence in eastern Ukraine died down at the very same time that the Russian military began expanding its presence in Syria,” writes Hannah Thoburn of the Hudson Institute with more than a hint of sarcasm. The pivot to Syria has a twofold purpose with regard to the Russian position in Ukraine. First, by distracting the U.S. and its European allies, the pivot decreases foreign pressure to withdraw from Ukraine. Second, the shift from offensive operations to defensive consolidation reduces the cost of the war at a time when the Kremlin is short on cash.

Of equal importance, the pivot reduces the risk of a backlash against Putin within Russia. With its tight control of the media, the Kremlin has been able to persuade the Russian people that there is no Russian war in Ukraine, only a struggle by local separatists to protect their freedom. Yet polling shows that the Russian public would strongly oppose such a war. If it were to learn that Putin had been waging such a war without its knowledge, the response might be explosive.

It is reasonable to infer that as the death toll rose in Ukraine, it was becoming harder and harder for the Kremlin to hide the truth. The pro-democracy group Open Russia has assembled the names of more than 276 troops killed while fighting in Ukraine, along with other biographical data. In February 2015, assassins murdered opposition leader Boris Nemtsov in broad daylight, just steps from the Kremlin. Nemtsov died two days before a planned march against the war in Ukraine. At the time, Open Russia was preparing to release a major report by Nemtsov on Russian casualties in Ukraine. International monitors have reported that “a vehicle marked ‘Cargo 200’ – Russia’s military code for soldiers killed in action – crossed from Russia into Ukraine on Tuesday and later returned.” In addition, Western journalists have sought to expose the secret cemeteries in which the war dead are buried.

By ratcheting down the level of conflict in eastern Ukraine, Putin has diminished the risk of his fraud being exposed while preserving most of his gains.

A Bifurcated U.S. Policy

There are two faces of American policy toward Russia. In his address to the Ukrainian Rada, Vice President Biden repeatedly denounced the Kremlin’s aggression and pledged, “The United States and Europe will maintain pressure until Moscow fulfills its commitments under the Minsk Agreement,” the ceasefire negotiated in February of last year. Visiting Moscow just a week later, Secretary of State John Kerry spoke graciously of the potential for U.S.-Russia cooperation to benefit the global community. When a journalist asked Kerry to explain his presence in Moscow in light of President Obama’s claim that Russia was isolated, Kerry said, “we don’t seek to isolate Russia as a matter of policy.” He also dismissed the President’s comment as the product of specific circumstances, rather than a statement of principle.

Despite the sharp differences in their respective demeanors, Biden and Kerry did not contradict each other on the specifics of U.S. policy. Biden asserted, “We’ve made it clear to Russia and the world that continued delay and foot-dragging is unacceptable.” In contrast, Kerry expressed his hope that Russia would cooperate with the implementation of the Minsk Agreement, even claiming that “President Putin has agreed on steps that need to be taken.” Behind closed doors, Putin may have agreed to such steps in the abstract. Yet Russia has flagrantly violated the agreement from the moment it was signed, by maintaining an occupation force in eastern Ukraine.

What Kerry’s soft words may suggest is that the administration is willing to lower the bar for what it considers to be compliance with the Minsk accord, in the hope that doing so will facilitate progress on other fronts, especially Russian support for negotiations in Syria. This would be both deeply unprincipled as well as a major strategic error. Russia is only growing weaker because of its economic turmoil. It faces far more pressure to make concessions than the U.S. and its allies. Exploiting this leverage holds out the best prospect of restraining Russia’s violent and destabilizing behavior in both Eastern Europe and the Middle East.

The U.S. should also employ its leverage to press for the return of Crimea, which Russia invaded and illegally annexed. Vice President Biden told the Rada, “Let me be crystal clear: The United States does not, will not, never will recognize Russia’s attempt to annex the Crimea.” What Biden carefully avoided saying was that the U.S. would maintain sanctions on Russia until it returned the Crimea. Likewise, Kerry suggested that sanctions would be lifted if Russia complied with the Minsk Agreement, which requires no concessions on Crimea. If the White House comes to understand that the American negotiating position has improved considerably, it perhaps would recognize that it now has an opportunity to do both what is right and what is prudent.

Mission Statement

The Foreign Policy Initiative seeks to promote an active U.S. foreign policy committed to robust support for democratic allies, human rights, a strong American military equipped to meet the challenges of the 21st century, and strengthening America’s global economic competitiveness.
Read More