Ukraine

[Crafty_Dog]

Ukjraine would not be on my radar screen but for the analyses of Stratfor in the past few years.  Beginning today Stratfor is starting an extended analysis of the situation in Ukraine, its pivotal role in US-Russia and Euro- Russian relations and so I begin this thread.

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Part 1: Instability in a Crucial Country
Stratfor Today » November 18, 2008 | 1205 GMT
Summary
Ukraine is a country at a crossroads. Not only is it among those being hit hardest by the current global financial crisis, but it is now flirting with actual dissolution. The country’s economy is fundamentally weak, and ongoing political strife has made economic reforms necessary but impossible. Furthermore, the country is the cornerstone of the geopolitical battle between the West and Russia. Its weakness makes Ukraine dependent on outside powers, but outside powers appear to be working to pull the country apart.

Analysis
Editor’s Note: This is the first part of a series on Ukraine.

Of all the countries being hit by the global financial crisis, Ukraine is one of the most profoundly affected because it is already coping with failing financial institutions, a collapsing economy and a domestic political scene too shattered to handle much of anything. On top of that, it is unfortunate enough to be the centerpiece of the geopolitical turf war between Russia and the West. In short, Ukraine is so deeply troubled that it cannot exist or remain united as a state unless an outside power enables it. And right now, outside powers are doing just the opposite.

The Current Financial Crisis
Ukraine is fundamentally unprepared to weather the global financial crisis. The country’s budget deficit is 2.8 percent of gross domestic product (GDP) and is likely to increase before it decreases, as declining industrial output triggered by the global recession will inevitably reduce expected tax receipts. Confounding the budget deficit is the parliament’s promise to increase minimum wages in 2009 — a promise that no party will want to back out of publicly when parliamentary and presidential elections could be held soon.

Related Link
Countries in Crisis
Ukrainian currency problems are also quite severe. Foreign investment has been leaving Ukraine’s equity markets (it declined almost 80 percent so far in 2008; only Iceland experienced a larger drop) and speculators have been attacking the currency, the hryvnia. The hryvnia has lost 20 percent of its value in the last month alone, and there are fears that a devaluation is on the way. As confidence inside Ukraine slides, bank runs are taking place; Ukraine’s Central Bank President Vladimir Stelmakh estimated that customers withdrew almost $3 billion — approximately 4 percent of the country’s total deposits — from accounts within a week.

As the hryvnia’s decline continues, all loans — both business and private — taken out in foreign currencies (whether Swiss franc, euro or dollar) will begin appreciating, creating a very real possibility of defaults that domestic banks will not be able to cover.

This brings up the issue of total public and private sector debt. Ukraine’s debt is not exorbitant (private sector debt is at $80 billion and public is $20 billion; combined, it is a moderately high 66 percent of GDP), but it is the speed with which it has accumulated over the past two years that is worrying. With the decline in the hryvnia and upcoming debt service payments (around $46 billion due next year for private sector and $1.6 billion for public), Ukrainian total foreign currency reserves — totaling $37 billion — could begin drying up fast, particularly if the government continues to try to use the reserves to prop up the hryvnia.

Ukraine’s public sector debt, currently only 10 percent of GDP, could also begin to rise as the domestic banks face liquidity pressures and the government is forced to intervene as well as it can, though it cannot afford bailouts like those in the United States, Europe and Russia. The country’s sixth largest bank, Prominvestbank — which holds 4 percent of the market share in Ukraine’s banking sector — was already bailed out by the government on Oct. 8 to the tune of $1 billion, and the Ukrainian economy’s overall weakness indicates that more domestic lenders could follow suit.

However, much as in Central Europe, it could be the foreign banks that create havoc for Ukraine’s economy. Foreign banks already own roughly 50 percent of the country’s banking system: Austria’s Raiffeisen owns Bank Aval, Italy’s UniCredit owns Ukrsotsbank and the French BNP Paribas owns UkrSibbank. These banks — both foreign and domestic — were particularly active in bringing about the Ukrainian explosion of mortgages and retail loans, most of which were made in foreign currencies (euro and Swiss francs) so as to take advantage of a lower interest rate.

Ukraine is right behind the troubled Hungary, Croatia and Romania in terms of the percentage of total loans made in foreign currencies (roughly 50 percent of all loans in Ukraine). As the hryvnia depreciates, consumers and businesses will be less able to service these foreign-currency-denominated loans. This will lead to a potential mountain of unserviceable debt that could collapse domestic banks and spread the contagion to the rest of emerging markets and potentially to foreign bank headquarters.

The International Monetary Fund (IMF) has offered Ukraine a $16.5 billion loan. However, Ukraine’s internal political chaos has suspended the country’s ability to meet the IMF’s conditions or even make a decision on the IMF’s terms.

Fundamentally Weak
Beyond the current financial crisis, Ukraine’s economy is volatile at best — leaving little hope for the country to pull itself out of any difficulty. One problem is that each region in Ukraine is highly dependent on a specific industry for money; so when that industry fails, the entire region tends to fail. Furthermore, most of Ukraine’s lucrative business is based in the eastern half of the country, which typically gives that half (and Russia) a bit more political and economic power. Although Ukraine mainly depends on its metallurgical industry, it also gains much revenue from grain, military exports and energy transit. However, each of these sectors is suffering from deep problems that could not be easily fixed even if the country had the proper tools.





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Metals
Ukraine is one of the world’s top 10 steel-producing and iron-ore-producing nations and is the third-largest exporter of steel. The metallurgical industry accounts for 40 percent of Ukraine’s exports, nearly 30 percent of its GDP and 12 percent of its tax revenues — and it employs more than half a million people.

However, the metallurgical industry is exceedingly inefficient and outdated. It is also highly dependent on expensive natural gas from its neighbor, Russia, making the cost of Ukrainian steel already 25 percent higher than its Russian and Chinese competitors. To make matters worse, demand and prices for many metals, especially steel, are collapsing globally. Prices for steel soared for the past year, prompting many steel-producing countries such as Brazil, India, Russia, China and Australia to overproduce, creating a global surplus. This leaves Ukraine horribly exposed since anyone who would have previously agreed to pay for the more-expensive Ukrainian steel now has several other options.

Ukraine’s Industry Ministry has officially declared the metallurgical sector to be in crisis, with 17 of the 36 steelmaking furnaces closed. Moreover, many of the metals heavyweights in Ukraine are foreign-owned — by firms such as ArcelorMittal and Rusal — and are already discussing massive layoffs. This will also greatly increase Ukraine’s account deficit. The bottom line is that Ukraine simply cannot compete on a global level in metallurgy, though much of its economy is dependent on it.

Grain
Ukraine saw an increase in revenues from an abundant grain harvest and exporting; in the third quarter of 2008, Ukraine’s exports outpaced imports. Grains account for approximately 6 percent of the country’s exports and brought in more than $2 billion the summer of 2008. The problem with grain is that the revenue it generates is cyclical, and thus Ukraine will not see any more cash from it until mid-2009. That, combined with severe credit constriction — which will stress farmers in the upcoming planting season — makes any dependency on the grain sector shaky.

Military Exports
Ukraine also depends on military exports to bring in cash. During and after the collapse of the Soviet Union, military units (including nuclear forces) were moved from Ukraine back inside Russia proper, but Kiev retained and commanded a great deal of Soviet military hardware and production facilities. Since around the mid-1990s, Kiev has sold that used equipment to countries as diverse as China, Sierra Leone, Kenya and even the United States. Though Ukraine retains significant stocks of such equipment, those stocks continue aging and slipping further toward obsolescence, and there is a (rapidly approaching) limit to how far the Soviet military legacy can carry Ukraine. There are a few discrepancies in estimates of how much money military exports bring in for Kiev. The official estimate by the Ukrainian Defense Ministry is around $1 billion a year; however, there are many within the government who claim it generates three times that amount but some equipment is sold under the table to other parties (such as Georgia) that Kiev does not want to be formally connected with.

Energy Transit
The only other really substantial moneymaker for the country is energy transit. Eighty percent of Russia’s energy exports of oil and natural gas to Europe transit through Ukraine. Currently, Ukraine receives approximately $1.9 billion a year simply for transiting Russian and Central Asian natural gas to Europe, along with some compensation on its own domestic purchases — be that a small bartered amount in payment or discounted natural gas. Ukraine announced Nov. 5 that it is planning on raising the amount it transports in 2009 in hopes of raising its revenues. However, the energy game is tricky for Ukraine because it also has to import 90 percent of its own domestic supplies of natural gas — something that typically gets the government into a $2 billion debt to Moscow every quarter — and Russia is considering raising its prices to Ukraine in the new year.

Tell Stratfor What You Think

[Crafty_Dog]

November 19, 2008 | 1204 GMT
Summary
Within Ukraine there are several forces that, in theory, could steer the country in one direction or another. However, the political forces have been locked in a battle for control for the past four years. Meanwhile, Ukraine’s oligarchs and other forces with both economic and political clout are too distracted by the current global financial crisis to take action. Thus, Ukraine has been left with no ability to handle its own crisis or determine its own future.

Analysis
Editor’s Note: This is the second part of a series on Ukraine.

Ukraine’s government is simply far too shattered and chaotic to handle the country’s current financial and economic problems or make any of the reforms needed in its defunct financial, economic, military and energy sectors. Kiev has been a confused and chaotic mass of shifting coalitions and governments since the 2004 Orange Revolution, which was supposed to herald a new era in which Ukraine would be part of the West rather than a Russian satellite.

From the Orange Revolution through today, Ukraine’s political scene has been dominated by three main parties (though there are myriad smaller parties):

Our Ukraine: The vehemently pro-Western party under current Ukrainian President Viktor Yushchenko

Bloc Yulia Timoshenko: A coalition of parties under current Ukrainian Prime Minister Yulia Timoshenko that can flip to either the pro-Western or pro-Russian side; and

Party of Regions: The vehemently pro-Russian party led by former Ukrainian Prime Minister Viktor Yanukovich.
Our Ukraine and Timoshenko’s bloc were the parties behind the Orange Revolution, though all three major parties have flip-flopped into different coalitions half a dozen times in the past four years. Most of the breaks and alliances among the three groups have not necessarily come about because of changes in ideology; rather, they are driven by the personalities and egos of Yushchenko, Timoshenko and Yanukovich. Typically, with each turnover in the government and coalitions, the laws and reforms passed by the former ruling group are either undone or ignored. This has seriously retarded any restructuring or improvement in almost any sector or institution in the country.


Furthermore, each political group generally controls a certain region of the country, so the parties look out for those industries, oligarchs and regional economics that pertain to their regions. This means that if a political party is booted from power, any restructuring or deals in place for its favorite region, industry or business can be overturned. The result is a business environment as chaotic and confusing as the political environment.

Ukraine is still suffering from political chaos. There has been one small internal shift: So many political figures outside of the big three personalities are so worn down from the constant bickering that they have started a wave of new political parties and groups. Parliamentary elections could be held in December of January, with a presidential election in late 2009 or early 2010. And with 72 percent of Ukrainians saying they are tired of the political infighting, these new smaller parties could end up changing the political landscape and making Ukraine’s political future even more unpredictable.

The Oligarchs

As in neighboring Russia, Ukraine also has the political and economic force of the oligarchs — those who swooped in after the Soviet era to snatch up certain enterprises and businesses, making themselves incredibly wealthy and powerful very quickly. The oligarchs are very politically active. Some started out in politics and then seized wealth and position to become oligarchs; others began by securing wealth and position to use as leverage in politics. Just as in Russia, Ukraine’s oligarchs either back certain political forces — paying for campaigns and receiving kickbacks once their chosen players are in power (such as the oligarchs backing Yushchenko and Yanukovich) — or they establish their own political parties as a means to influence distribution of resources and advantageous business deals (as with Timoshenko). This has helped fuel the constant government chaos and sustained a level of distrust in Ukrainian businesses and those who run them.

But at the moment, the oligarchs are unable to shape the political or economic landscape in Ukraine because they are being crushed by the economic crisis. According to some records, Ukrainian oligarchs’ assets have lost some 90 percent of their value in the past few months. For example, Viktor Pinchuk (a Timoshenko backer), who controls Ukraine’s leading steel company Interpipe, has lost $2 billion. Sergei Taruta (a Yanukovich backer), who controls another metallurgical giant ISD, has lost $4.8 billion.

While Ukraine’s oligarchs are scrambling to keep their businesses and wealth intact, they are too preoccupied to be as politically active as usual. With two critical elections looming, there could be a shift in that the oligarchs will not be able to dole out cash as easily as in the past. For example, Timoshenko has already heard from one of her financial backers — Konstantin Zhevago, who owns Financial and Credit Group and iron producer Poltavsky — that he will not be dishing out his usual funding because he recently lost most of his wealth. The crisis among the oligarchs has led both Timoshenko and Yanukovich to try to postpone elections, knowing they do not heave enough cash to run full campaigns.

Rinat Akhmetov

The one Ukrainian oligarch who is not absent from the political scene is the wealthiest in the country — Rinat Akhmetov, who owns assets in energy, steel, coal, banking, hotels, telecommunications, media and soccer. Most Ukrainian oligarchs are worth only a fraction of what Akhmetov is worth. Much of his wealth was not in the hard-hit equity markets, and so he has only lost a reported $7 billion of his $36 billion in the economic slowdowns; thus, he still has quite a bit of influence to wield in politics and economics.

Akhmetov is looking to take advantage of others’ economic misfortune and wants to expand his reach over more assets (especially in coal and electricity) not only in Ukraine, but also in Russia, Poland, Romania and Hungary. He has long been the puppet master behind the Party of Regions and Yanukovich; Stratfor has learned from sources that he also holds a great deal of leverage over Yushchenko and Timoshenko. Long kept in the shadows, Akhmetov is considering running for the presidency, knowing he has the financial capabilities, political backing from his leash holder (Russia) and enough clout against the big three political leaders to possibly really shake things up.

Other Forces

The only other forces in Ukraine that can affect the political or economic landscapes are the military, intelligence services and organized crime. As stated earlier, Ukraine’s military — much like its stockpile of Soviet weaponry — is seriously deteriorating without the political or economic backing needed to push for and coordinate modernization and reforms.

Ukraine’s intelligence and security apparatus — mainly the Security Service of Ukraine — is currently tangled in an identity crisis stemming from its break with its former master, the Soviet KGB, and the constant restructuring and leadership changes. Ukraine’s intelligence and security services consist of seven agencies and institutes that are responsible for identifying threats to Ukraine both at home and abroad, collecting intelligence and analyzing data. All agency heads are appointed by and report to the president, but the parliament must approve the appointments — which means the intelligence and security services are another casualty of the political chaos as the president and prime minister fight for control.

Organized crime is another major political and economic force in Ukraine, having proliferated since the country gained independence from the Soviet Union in 1991. Ukrainian organized crime started off as a function of physical security for the oligarchs who controlled Ukraine’s resources and backed favored politicians, but expanded because the country’s weak central government was unable to effectively police criminals. Organized crime became a pillar of the state through the political-criminal nexus in which politicians, businessmen and criminals provided each other with services and favors. It has branched out considerably, with Ukrainian organized crime groups forming partnerships or acting alone in countries throughout Eastern and Central Europe — and because Ukraine remains essentially a weak state dependent on outside patronage, foreign organized criminal elements have found a market there for illicit goods and human trafficking. But organized crime, just like other businesses, is suffering during the economic and financial crisis as criminal groups lose funds in foreign banks and customers have less cash to spend on services and goods.

[Crafty_Dog]

Part 3: Outside Intervention
Stratfor Today » November 20, 2008 | 1201 GMT
Summary
Because Ukraine is vital to Russia’s defense and survival as any kind of world power, it has become the cornerstone of the geopolitical battle between Russia and the West. Russia has many levers it could use to influence the course of Ukraine’s future, though the West is not without its tools. The eventual outcome of the battle for Ukraine is uncertain.

Analysis
Editor’s Note: This is the third part of a series on Ukraine.

Since Ukraine is essentially too internally shattered to make sweeping changes or reforms, its future is at the whim of foreign powers. Because of this — and because of Ukraine’s geographic location — the country is now the chief arena for the struggle between Russia and the West.

Related Links
Countries in Crisis
Part 1: Instability in a Crucial Country
Part 2: Domestic Forces and Capabilities
The Cornerstone
Following the collapse of the Soviet Union, the West (particularly under the guises of the European Union and NATO) has pushed eastward, making its way toward Russia’s doorstep. As the West tries to continue its advance and as Russia tries to stave it off, Ukraine has become paramount to both sides — not just as a potentially lucrative territory, but because Ukraine is the key to Russia’s defense and survival as any sort of power.





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Although Ukraine hosts the largest Russian community in the world outside of Russia, the battle for Ukraine is about far more than ethnic kin. Even before the Soviet era, Ukraine was integrated into Russia’s industrial and agricultural heartland, and eastern Ukraine remains integral to the Russian heartland to this day. Furthermore, Ukraine is the transit point for Russian natural gas to Europe and a connecting point for nearly all meaningful infrastructures running between Russia and the West — whether pipeline, road, power or rail.

Without Ukraine, Russia could not project political or military power into the Northern Caucasus, the Black Sea or Eastern Europe, and Russia would be nearly entirely cut off from the rest of Europe. Ukraine also goes deep into former Soviet territory, with borders a mere 300 miles from either Volgograd or Moscow, and the Ukrainian port of Sevastopol on the Black Sea has long been the Russian military’s only deep, warm-water port.

To put it simply, as long as Ukraine is in its orbit, Russia can maintain strategic coherence and continue on its path of resurging in an attempt to resume its superpower status. Without Ukraine, Russia would face a much smaller set of possibilities.

This is why the 2004 Orange Revolution that brought in Ukraine’s first pro-Western government was Russia’s deepest nightmare. Russia knows that the Orange Revolution was a U.S.-backed project, supported by U.S. allies such as Poland. Since that color revolution, Moscow has been content with simply destabilizing Ukraine in order to ensure it does not fully fall into the West’s sphere.

Russia’s Levers
Russia has a slew of levers inside Ukraine to keep the country unstable. It also has quite a few tools it could use to either pull the country back into Moscow’s fold or break the country apart.

Politics: Russia is the very public sponsor of Viktor Yanukovich and his Party of Regions; though in the past three months, Moscow has also started granting its favor to Yulia Timoshenko — breaking the Orange Coalition and isolating President Viktor Yushchenko and his party. The topic of how to respond to a strengthening Russia has been a constant point of contention in Ukraine’s different coalitions and governments.

Energy: Since Russia supplies 80 percent of Ukraine’s natural gas, energy is one of Moscow’s favorite levers to use against Kiev. Moscow has proven in the past that it is not afraid of turning off the heat at the height of winter in Ukraine to not only hurt the country but also to push Kiev into the heart of a firestorm as European countries’ supplies get cut off when Russia cuts supplies to Ukraine. The price Russia charges Ukraine for natural gas is also constantly being renegotiated, with Kiev racking up billions of dollars in debt to Moscow every few months.

Economics: Russia controls a large portion of Ukraine’s metals industry, owning factories across the eastern part of the country, where most of Ukraine’s wealth is held. Russia also controls much of Ukraine’s ports in the south.

Oligarchs: Quite a few of Ukraine’s oligarchs pledge allegiance to Russia because of relationships from the Soviet era, because of assets held in Russia or because Moscow bought or supported certain oligarchs during their rise. Rinat Akhmetov is the most notable pro-Russian oligarch; not only does he do the Kremlin’s bidding inside Ukraine, but he is also rumored to have recently helped the Kremlin during Russia’s financial crisis. Moscow controls many other notable Ukrainian oligarchs, such as Viktor Pinchuk, Igor Kolomoisky, Sergei Taruta and Dmitri Firtash. This has allowed the Kremlin to shape much in these oligarchs’ business ventures and have a say in how these oligarchs support certain politicians.

Ships from Russia’s Black Sea Fleet during the celebration of the fleet’s 225th anniversaryMilitary: Russia’s Black Sea Fleet is headquartered and based in Ukraine’s Crimea region, in Sevastopol. Compared to Kiev’s small fleet, Russian naval power in the Black Sea is overwhelming. Russia’s Black Sea Fleet also contributes to the majority of the Crimea region’s economy. Though imposing a military reality on Ukraine would be another thing entirely from imposing a military reality on South Ossetia and Georgia, there is little doubt that Russia — and the ethnic Russian majority in the Crimea — is committed to retaining the decisive hand in the fate of the Crimea, even if the Russian Fleet withdraws in 2017, when its lease expires.

Intelligence: Ukraine’s intelligence services were essentially born from Russia’s heavy KGB presence in the country before the collapse of the Soviet Union. The Security Service of Ukraine originated in Moscow’s KGB presence in Ukraine, and the Foreign Intelligence Service of Ukraine sprung forth from Russia’s SVR foreign intelligence agency. Many of the senior officials in both agencies were actually KGB trained and worked for them during the early days of their careers. Russia’s current spy agency, the Federal Security Service (a descendant of the KGB), has a heavy presence within Ukraine’s intelligence agencies. This gives the Russians a big opening they can use to serve their own interests in Ukraine.

Organized crime: Russian organized crime is the parent of Ukrainian organized crime and is still deeply entrenched in the current system (even among the oligarchs). Russia has been especially successful in setting up shop in the Ukraine involving shady natural gas deals, the arms trade, the drug trade and other illicit business arrangements. Population: Ukraine is dramatically split between a population that identifies with Russia and a population that identifies with the West. It has a complex and multifaceted demography: A large Russian minority comprises 17.3 percent of the total population, more than 30 percent of all Ukrainians speak Russian as their native language and more than half of the country belongs to the Ukrainian Orthodox Church under the Moscow Patriarch. Geographically speaking, Ukrainians living east of the Dnieper River tend to identify more with Russia than with the West, and those in Crimea consider themselves much more Russian than Ukrainian. This divide is something Russia can use not only to keep the country in chaos, but to split the country in half should the need arise.

The West’s Levers and Concerns

The West, on the other hand, is split over what exactly to do with Ukraine. In 2004, during the Orange Revolution, it was the United States’ time to push up against Russia; but other Western heavyweights such as Germany have never really liked or trusted any government in Kiev. Berlin would love to see a pro-Western government in Kiev to work with, but the Germans know that meddling in Ukraine costs them something, unlike the Americans. This was seen in 2006, when Russia cut off natural gas supplies to Ukraine, which led to the lights going out in quite a few European countries as well. So the Europeans see the upheaval of Ukraine as yet another mess the Americans have gotten them into.

Since the Orange Revolution, the West has used two main levers — cash and protection — to try to keep Kiev on a pro-Western path. It has thrown cash at Ukraine, but there are two problems with this move. First, whoever has been in charge in Kiev has squandered and mismanaged any cash given to Ukraine rather than working to alleviate the economic, financial, institutional and systematic problems the country is facing. For example, the West is offering Ukraine an International Monetary Fund (IMF) loan of $16.5 billion with only a few strings — banking reform and an end to government squabbling — attached, but Kiev cannot manage these changes, and now the IMF is considering withdrawing its offer. Second, as the West faces its own financial crisis, it is not in any position currently to offer Kiev any more help.

The West’s other move — again championed by Washington — is to pull Ukraine into NATO. Ukraine is ill-qualified as a potential member of the Atlantic alliance, but the move would permanently break Russia’s hold over Ukraine.

Years of concerted, focused and well-funded military reform could move Kiev meaningfully toward eligibility, but there appears to be no firm consensus — especially with Germany and France against it — on pushing for Ukrainian admittance into the membership action plan. Also, NATO’s members have neither troops available to be stationed in the country nor the defense dollars to support such an expensive modernization and reform program.

The battle for the soul of Ukraine is on. The country is shattered internally in nearly every possible way: politically, financially, institutionally, economically, militarily and socially. The global financial crisis is simply showing the problems that have long existed in the country. In the near future, there is no conceivable or apparent way for any force within the country to stabilize it and begin the reforms needed. It will take an outside power to step in — which leads to the larger tussle between the West and Russia over control of one of the most geopolitically critical regions between the two. Russia has far more tools to use to keep Ukraine under its control, but the West has laid a lot of groundwork in order to undermine Moscow, leaving the future of Ukraine completely uncertain.

[Crafty_Dog]

PS:  Russian President Dmitri Medvedev told energy company Gazprom to collect Ukraine’s $2.4 billion natural gas debt “either voluntarily or compulsory in line with current laws and within the framework of bilateral relations,” Interfax reported Nov. 20.

[Crafty_Dog]

By Peter Zeihan

At the time of this writing, the natural gas crisis in Europe is entering its 13th day.

While the topic has only penetrated the Western mind as an issue in recent years, Russia and Ukraine have been spatting about the details of natural gas deliveries, volumes, prices and transit terms since the Soviet breakup in 1992. In the end, a deal is always struck, because Russia needs the hard currency that exports to Europe (via Ukraine) bring, and Ukraine needs natural gas to fuel its economy. But in recent years, two things have changed.

First, Ukraine’s Orange Revolution of 2004 brought to power a government hostile to Russian goals. Ukrainian President Viktor Yushchenko would like to see his country integrated into the European Union and NATO; for Russia, such an evolution would be the kiss of death.

Ukraine is home to most of the infrastructure that links Russia to Europe, including everything from pipelines to roads and railways to power lines. The Ukrainian and Russian heartlands are deeply intertwined; the two states’ industrial and agricultural belts fold into each other almost seamlessly. Eastern Ukraine is home to the largest concentration of ethnic Russians and Russian speakers anywhere in the world outside Russia. The home port of Russia’s Black Sea Fleet is at Sevastopol on Ukraine’s Crimean Peninsula, a reminder that the Soviet Union’s port options were awful — and that Russia’s remaining port options are even more so.

Ukraine hems in the south of European Russia so thoroughly that any hostile power controlling Kiev could easily threaten a variety of core Russian interests, including Moscow itself. Ukraine also pushes far enough east that a hostile Kiev would sever most existing infrastructure connections to the Caucasus. Simply put, a Ukraine outside the Russian sphere of influence transforms Russia into a purely defensive power, one with little hope of resisting pressure from anywhere. But a Russified Ukraine makes it possible for Russia to project power outward, and to become a major regional — and potentially global — player.

Related Links
Part 1: Instability in a Crucial Country
Part 2: Domestic Forces and Capabilities
Part 3: Outside Intervention
The Russo-Georgian War and the Balance of Power
Russia and Rotating the U.S. Focus
Europe: Feeling the Cold Blast of Another Russo-Ukrainian Dispute
Global Market Brief: Europe’s Long-Term Energy Proposal
Related Special Topic Page
Russian Energy and Foreign Policy
The second change in recent years is that Russia now has an economic buffer, meaning it can tolerate a temporary loss in natural gas income. Since Vladimir Putin first came to power as prime minister in 1999, every government under his command has run a hefty surplus. By mid-2008, Russian officials were regularly boasting of their $750 billion in excess funds, and of how Moscow inevitably would soon become a global financial hub. Not surprisingly, the 2008-2009 recession has deflated this optimism to some extent. The contents of Moscow’s piggy bank already have dropped by approximately $200 billion. Efforts to insulate Russian firms and protect the ruble have taken their financial toll, Russia’s 2009 budget is firmly in deficit, and all talk of a Russian New York is on ice.

But Russia’s financial troubles pale in comparison to its neighbors’ problems — not in severity, but in impact. Russia is not a developed country, or even one that, like the states of Central Europe, is seriously trying to develop. A capital shortage simply does not damage Russia as it does, say, Slovakia. And while Russia has not yet returned to central planning, rising government control over all sources of capital means the Russia of today has far more in common economically with the Soviet Union than with even the Russia of the 1990s, much less the free-market West. In relative terms, the recession actually has increased relative Russian economic power — and that says nothing about other tools of Russian power. Moscow’s energy, political and military levers are as powerful now as they were during the August 2008 war with Georgia.

This is a very long-winded way of saying that before 2004, the Russian-Ukrainian natural gas spat was simply part of business as usual. But now, Russia feels that its life is on the line, and that it has the financial room to maneuver to push hard — and so, the annual ritual of natural gas renegotiations has become a key Russian tool in bringing Kiev to heel.

And a powerful tool it is. Fully two-thirds of Ukraine’s natural gas demand is sourced from Russia, and the income from Russian natural gas transiting to Europe forms the backbone of the Ukrainian budget. Ukraine is a bit of an economic basket case in the best of times, but the global recession has essentially shut down the country’s steel industry, Ukraine’s largest sector. Russian allies in Ukraine, which for the time being include Yushchenko’s one-time Orange ally Yulia Timoshenko, have done a thorough job of ensuring that the blame for the mass power cuts falls to Yushchenko. Facing enervated income, an economy in the doldrums and a hostile Russia, along with all blame being directed at him, Yushchenko’s days appear to be numbered. The most recent poll taken to gauge public sentiment ahead of presidential elections, which are anticipated later this year, put Yushchenko’s support level below the survey’s margin of error.

Even if Yushchenko’s future were bright, Russia has no problem maintaining or even upping the pressure. The Kremlin would much rather see Ukraine destroyed than see it as a member of the Western clubs, and Moscow is willing to inflict a great deal of collateral damage on a variety of players to preserve what it sees as an interest central to Russian survival.

Europe has been prominent among these casualties. As a whole, Europe imports one-quarter of the natural gas it uses from Russia, and approximately 80 percent of that transits Ukraine. All of those deliveries now have been suspended, resulting in cutoffs of various degrees to France, Turkey, Poland, Germany, Italy, Hungary, Romania, Austria, the Czech Republic, Greece, Croatia, Macedonia, Bosnia, Serbia and Bulgaria — in rough order of increasing severity. Reports of both mass power outages and mass heating failures have been noted in the countries at the bottom half of this list.

A variety of diversification programs have put Europe well on its way to removing its need for Russian natural gas entirely, but these programs are still years from completion. Until then, not much can be done for states that use natural gas for a substantial portion of their energy needs.

Unlike coal, nuclear energy or oil, natural gas can be easily shipped only via pipeline to previously designated points of use. This means the decision to link to a supplier lasts for decades and is not easily adjusted should something go wrong. Importing natural gas in liquid form requires significant skill in cryogenics as well as specialized facilities that take a couple of years to build (not to mention a solid port). Alternate pipe supply networks, much less power facilities that use different fuels, are still more expensive and require even more time. All European countries can do in the immediate term is literally rely upon the kindness of strangers until the imbroglio is past or a particularly creative solution comes to mind. (Poland has offered several states some of its share of Russian natural gas that comes to it via a Belarusian line.) Some Central European states are taking the unorthodox step of recommissioning mothballed nuclear power plants.

Because Russia’s goal in all this is to crack Kiev, there is not much any European country can do. But one nation, Germany, is certainly trying. Of the major European states, Germany is the most dependent upon Russian resources in general, and energy in particular.

German Chancellor Angela Merkel and Putin spent three nights this past week on the phone with each other discussing the topic, and the pair has a two-day summit set for later this week. The Germans have three primary reasons for cozying up to the Russians at a time when it seems they should be as angry as anyone else in Europe.

First, because most of the natural gas Germany gets from Russia passes not through Ukraine, but through Belarus — and because the Russians have not interrupted these secondary flows — the Germans desperately want to avoid rocking the boat and politicizing the dispute any more than necessary. The Germans need to engage the Russians in discussion, but unlike most other players, they can afford not to be accusatory, because they have not been too deeply affected so far. (Like all the other Europeans, the Germans are working feverishly to diversify their energy supplies away from Russia, but while Berlin can keep the lights on, it doesn’t want to ruffle any more feathers than it needs to.)

Second, as any leader of Germany would, Merkel recognizes that if current Russian-Western tensions devolve into a more direct confrontation, the struggle would be fought disproportionately with German resources — and perhaps even on German soil. Germany is the closest major power to Russia and would therefore be the focus of any major action, Russian or Western, offensive or defensive. France, the United Kingdom and the United States enjoy the buffer of distance — and in the case of the last two, a water buffer to boot.

German national interest, therefore, is not to find a way to fight the Russians, but to find a way to live with them. Germany traditionally has been Russia’s largest trading partner. Every time the two have clashed, it has been ugly, to say the least. In the German mind, if Ukraine (or perhaps even adjusting the attitude of Poland) is what is necessary to make the Russians feel secure, so be it.

Third, Germany has a European angle to think about. To put it bluntly, Merkel is always on the lookout for any means of easing Germany back into the international community with a foreign policy somewhat more sophisticated than the “I’m sorry” that has reigned since the end of World War II. After the war, France successfully hijacked German submission and used German economic strength to achieve French political desires. Since the Cold War’s end, Germany has slowly wormed its way out of that policy straitjacket, and the natural gas crisis raises an interesting possibility. If Merkel’s discussions with Putin result in restored natural gas flows, then not only will Russia see Germany as a partner, but Germany might win goodwill from European states that no longer have to endure a winter without heat.

Still, it will be a tough sell: the European states between Germany and Russia have always lived in dread that one power or the other — or, God forbid, both — will take them over. But Germany is clearly at the center of Europe, and all of the states affected by the natural gas crisis count Germany as their largest trading partner. If Merkel can muster sufficient political muscle to complement Germany’s economic muscle, the resulting image of strength and capability would go a long way toward cementing Berlin’s re-emergence.

[Crafty_Dog]

Summary
The Russian Finance Ministry announced Feb. 9 that its Ukrainian counterpart requested a $5 billion loan from Moscow to cover Kiev’s budget deficit. Coupled with the International Monetary Fund’s wariness of disbursing a second tranche ($1.9 billion) of a $16.5 billion loan agreed upon in November 2008, this move indicates the seriousness of Ukraine’s financial state. It also highlights Ukraine’s more fundamental economic problems, showing that Kiev ultimately will fall into the orbit of whichever country can come to its aid financially.

Analysis
Ukraine made an official request to Russia on Feb. 9 for a $5 billion loan to make up for a decrease in budget revenues, the Russian Finance Ministry announced. Ukrainian Prime Minister Yulia Timoshenko has also asked the leaders of the world’s richest countries for emergency loans, citing the difficulties her country faces as a result of the global financial crisis.

Kiev began its frantic search for loans from “powerful and financially stable countries” after a visit by an International Monetary Fund (IMF) delegation the week of Feb. 1 that did not go well at all. The IMF typically works by doling out loans to troubled countries in tranches, usually attached with strict conditions designed for macroeconomic stabilization. Ukraine received its first such tranche of $4.5 billion (out of a total loan of $16.5 billion) in November. But Kiev has failed to live up to the loan’s requirements, which include a deficit-free budget for 2009 — the budget has a 3 percent deficit — and a curtailing of social spending. The latter is an especially dangerous task politically, with Ukrainian unemployment figures soaring above the 1 million mark (out of a population of 46 million) and presidential elections slated for early 2010. Because of Ukraine’s shortcomings, the IMF delegation made no promises that a second tranche would be coming in the near future.

But Ukraine as a country is fundamentally broken, and its economy — which was far from stable even before the global economic crisis — will not be fixed easily with loans from the IMF, Russia or the West. The Ukrainian government is essentially at odds with itself, split between the pro-Russian and pro-Western movements. The country’s political and economic institutions need more than small tweaks, and until they are radically reformed — which would be tremendously difficult to pull off socially — Kiev cannot do without outside assistance. And whoever provides this assistance will hold the most influence over Ukraine.

This reality is only intensified by the financial crisis. Kiev depends heavily on manufacturing and industry for its government revenues, and as of December 2008, industrial production had dropped more than 26 percent year on year. Ukraine’s currency has fallen dramatically since last summer, losing nearly a third of its value, and the country’s gross domestic product for 2009 is expected to contract 5 percent.

Financial assistance does not necessarily need to come from the Russians; Kiev simply needs to find whoever will help its economy survive. Previously, Russia’s influence in Ukraine was underwritten by natural gas prices that were well below what the Europeans were charged. However, Russia raised those prices significantly, causing a monthlong standoff that affected much of Europe and created more economic problems for Kiev. Though Kiev paid its natural gas bill for January, a representative of Ukrainian energy giant Naftogaz said the renegotiated prices will cause Ukraine to go bankrupt. Currently, the Europeans are in no financial position to bail out Ukraine, so Kiev is calling on Moscow to alleviate Ukraine’s financial pains.

To be able to proceed, with the IMF’s assistance, in trying to tackle its myriad economic problems, Ukraine must first take care of its budget deficit — hence the request to Russia for a $5 billion loan, which would roughly cover the deficit. Any Russian assistance, however, will come with strings attached. While the natural gas situation remains shaky and tense, a $5 billion loan would effectively draw Kiev further into Russia’s orbit. And with political infighting and instability the norm in Ukraine, Russia will be sure to take advantage of Kiev’s financial weaknesses in any way that it can. This essentially means that Ukraine will be divorced from its Western leanings and will move firmly into Russia’s sphere of influence, both economically and politically.

[Crafty_Dog]

Summary
Ukraine’s next presidential election is scheduled for Jan. 17. All of the leading candidates are pro-Russian. This means that the last vestiges of pro-Western government brought on by the 2004 Orange Revolution will be swept away and Russia’s ongoing consolidation of power will become evident in Kiev.

Editor’s Note: This is the first part of a three-part series on Ukraine’s upcoming presidential election.

Analysis
Related Link
Ukraine: More than a Religious Schism
STRATFOR’s 2010 Annual Forecast said, “For Russia, 2010 will be a year of consolidation — the culmination of years of careful efforts.” Moscow will purge Western influence from several countries in its near abroad while laying the foundation of a political union enveloping most of the former Soviet Union. Although that union will not be completed in 2010, according to our forecast, “by year’s end it will be obvious that the former Soviet Union is Russia’s sphere of influence and that any effort to change that must be monumental if it is to succeed.”

Ukraine is one country where Russia’s consolidation will be obvious, mainly because the most important part of reversing the 2004 pro-Western Orange Revolution will occur: the return of a pro-Russian president in Kiev. Ukraine’s presidential election is slated for Jan. 17, and all the top candidates in the race are pro-Russian in some way.

Russia considers Ukraine to be vital to its national interests; indeed, of all the countries where Moscow intends to tighten its grip in 2010, Ukraine is the most important. Because of its value to Moscow, Ukraine has been caught for years in a tug-of-war between Russia and the West. Since the Orange Revolution, Russia has used social, media, energy, economic and military levers — not to mention Federal Security Service assets — to break the Orange Coalition’s hold on Ukraine and the coherence of the coalition itself. Russia even managed to get a pro-Russian prime minister placed in Kiev for more than a year. However, the presidency remained in the hands of pro-Western Viktor Yushchenko. And in Ukraine, it is the president who controls the military (including the military-industrial sector and its exports), the secret services (which, while littered with Russian influence, are still controlled by a pro-Western leader) and Ukraine’s foreign policy.

Typically, STRATFOR does not focus on personalities because long-term trends in geopolitics act as constraints on human agency, limiting the value of individual-level analysis in forecasting. However, the Ukrainian election is a critical part of Russia’s resurgence, and STRATFOR will shed light on the colorful and complicated world of Ukrainian politics and offer clarity on the personalities that will lead Ukraine back into the Russian fold — and explain how Moscow has ensured their loyalty.

The candidates STRATFOR will examine are not all front-runners, necessarily, but they are the most important candidates in the race. Yushchenko is running for re-election but, according to polls from the past year, has support from only 3.8 percent of Ukrainian voters, which is little more than the margin of error. Former Ukrainian Prime Minister Viktor Yanukovich — who won Ukraine’s initial 2004 presidential election but was swept from power in the re-vote sparked by the Orange Revolution — has always been staunchly pro-Russian and stands a good chance of victory on Jan. 17. Current Ukrainian Prime Minister Yulia Timoshenko is also in the running. She was Yushchenko’s partner in the Orange Revolution, but Russia’s growing influence in Ukraine persuaded her to make a deal with Moscow, and she is now running on a relatively pro-Russian platform. The last candidate we will examine is Arseny Yatsenyuk, a young politician once thought to be free of both pro-Western and pro-Russian ties. However, STRATFOR sources have said that Yatsenyuk is not exactly what he seems, and that much more powerful forces — with Russian ties — are behind this Ukrainian wild card.

[Crafty_Dog]

Summary
On Jan. 17, Ukraine is scheduled to hold a presidential election that will sweep the last remnant of the pro-Western Orange Revolution — Ukrainian President Viktor Yushchenko — from power in Kiev. Yushchenko’s presidency has been marked by pro-Western moves on many levels, including attempts to join the European Union and NATO. However, the next government in Kiev — pro-Russian though it may be — could still have a place for Yushchenko.

Editor’s Note: This is the second part of a three-part series on Ukraine’s upcoming presidential election.

Analysis
Ukrainian President Viktor Yushchenko is the last remnant of the pro-Western Orange Revolution. Now that his popularity has plummeted and his coalition partner, Prime Minister Yulia Timoshenko, has turned pro-Russian, he is set to be swept aside by Ukraine’s Jan. 17 presidential election.

Yushchenko led the Orange Revolution, and his presidency kept Russia from completely enveloping Ukraine. Although the upcoming presidential election will deliver Ukraine into Russia’s hands, Yushchenko might not be ejected from Kiev altogether.

Yushchenko entered the government in 1999 when he was nominated as prime minister by then-President Leonid Kuchma after a round of infighting over the premiership. As prime minister, Yushchenko — a former central bank chief — helped Ukraine economically and helped keep relative internal stability for two years. Yet even while he served in the government, Yushchenko partnered with Timoshenko — his deputy prime minister — and started a movement against Kuchma. When a vote of no confidence ended Yushchenko’s premiership in 2001, he and his coalition partners accelerated their anti-Kuchma movement, aiming to make Yushchenko president in 2004 with Timoshenko as his prime minister. In the 2004 election, Yushchenko faced another of Kuchma’s prime ministers, Viktor Yanukovich.

Yushchenko became the West’s great hope during the 2004 presidential campaign, as he vowed to integrate Ukraine with the West and seek membership in NATO and the European Union. Although the West fully supported Yushchenko, other parties were not as thrilled with his candidacy. During the campaign, he was poisoned with dioxin, a carcinogenic substance whose outward effects include facial disfigurement. Yushchenko’s camp charged that Russian security services were behind the poisoning.





When the presidential election was held, Yanukovich was declared the winner. However, voter fraud reportedly was rampant, and mass protests erupted across the country in what would become known as the Orange Revolution. Ukraine’s top court nullified the results of the first election, and when a second election was held, Yushchenko emerged victorious.

Yushchenko has acted against Russia on many levels during his presidency — from calling the Great Famine of the 1930s an act of genocide engineered by Josef Stalin to threatening to oust the Russian navy from Crimea and even trying to break the Ukrainian Orthodox Church and Russian Orthodox Church apart. He also tried to fulfill his promises that Ukraine would join NATO and the European Union (but these ideas proved too bold for some Western states, particularly Germany, since accepting Ukraine into either organization would enrage Russia). Most importantly, Yushchenko and his Orange Revolution were able to keep Ukraine from falling completely into Russia’s hands for at least five years. Yushchenko used the president’s control over foreign policy and Ukraine’s secret service and military to stave off Russia’s attempts to assert control over the country.

But all was not well in Kiev during Yushchenko’s presidency. His coalition with Timoshenko collapsed barely nine months after Timoshenko was named prime minister. Furthermore, Yushchenko was feeling the pressure of being a pro-Western leader in a country where much of the population remained pro-Russian or at least ambivalent enough that mere promises of pro-Western reform would not sway their vote. Yushchenko tried to find a balance in his government by naming Yanukovich prime minister in 2006, but this led to a series of shifting coalitions and overall instability in Kiev. It also stripped Yushchenko of much of his credibility as a strong pro-Western leader. His popularity has been in decline ever since.

Even though his polling numbers are currently at 3.8 percent, which places him behind five other candidates at the time of this writing, Yushchenko is trying for re-election. Unless he cancels the election — which would cause a massive uprising — this is the end of his presidency and of the Orange Revolution.

However, it might not be the end of his work inside the government. STRATFOR sources in Kiev have said that Yushchenko, Yanukovich and Russian officials are in talks that could lead Yushchenko to a relatively powerless premiership in Ukraine — a move to block Timoshenko and appease the Western-leaning parts of the country. There are regions in Western Ukraine that feel no allegiance to Russia. The Orange Revolution was strongest in the area around Lviv, a part of Ukraine that feels much more oriented toward neighboring Poland and the West. This region could very well become restive with the reversal of the Orange Revolution. A pro-Russian president, therefore, might have to include Yushchenko in the government to prevent fissures within the country. Though such a decision could create the same kind of political drama Kiev has seen in the past few years, Moscow will want to ensure that if such political chaos does occur Yushchenko will know his — and Ukraine’s — place under Russia.

[Crafty_Dog]

   
Ukraine's Election and the Russian Resurgence
January 26, 2010




By Peter Zeihan

Ukrainians go to the polls Feb. 7 to choose their next president. The last time they did this, in November 2004, the result was the prolonged international incident that became known as the Orange Revolution. That event saw Ukraine cleaved off from the Russian sphere of influence, triggering a chain of events that rekindled the Russian-Western Cold War. Next week’s runoff election seals the Orange Revolution’s reversal. Russia owns the first candidate, Viktor Yanukovich, outright and has a workable agreement with the other, Yulia Timoshenko. The next few months will therefore see the de facto folding of Ukraine back into the Russian sphere of influence; discussion in Ukraine now consists of debate over the speed and depth of that reintegration.

The Centrality of Ukraine
Russia has been working to arrest its slide for several years. Next week’s election in Ukraine marks not so much the end of the post-Cold War period of Russian retreat as the beginning of a new era of Russian aggressiveness. To understand why, one must first absorb the Russian view of Ukraine.

Related Special Topic Page
The Russian Resurgence
Since the break-up of the Soviet Union, most of the former Soviet republics and satellites found themselves cast adrift, not part of the Russian orbit and not really part of any other grouping. Moscow still held links to all of them, but it exercised few of its levers of control over them during Russia’s internal meltdown during the 1990s. During that period, a number of these states — Estonia, Latvia, Lithuania, Poland, Hungary, Romania, Bulgaria and the former Czechoslovakia to be exact — managed to spin themselves out of the Russian orbit and attach themselves to the European Union and NATO. Others — Azerbaijan, Georgia, Moldova, Uzbekistan, Kyrgyzstan and Ukraine — attempted to follow the path Westward, but have not succeeded at this point. Of these six, Ukraine is by far the most critical. It is not simply the most populous of Russia’s former possessions or the birthplace of the Russian ethnicity, it is the most important province of the former Russian Empire and holds the key to the future of Eurasia.

First, the incidental reasons. Ukraine is the Russian Empire’s breadbasket. It is also the location of nearly all of Russia’s infrastructure links not only to Europe, but also to the Caucasus, making it critical for both trade and internal coherence; it is central to the existence of a state as multiethnic and chronically poor as Russia. The Ukrainian port of Sevastopol is home to Russia’s Black Sea fleet, and Ukrainian ports are the only well-developed warm-water ports Russia has ever had. Belarus’ only waterborne exports traverse the Dnieper River, which empties into the Black Sea via Ukraine. Therefore, as goes Ukraine, so goes Belarus. Not only is Ukraine home to some 15 million ethnic Russians — the largest concentration of Russians outside Russia proper — they reside in a zone geographically identical and contiguous to Russia itself. That zone is also the Ukrainian agricultural and industrial heartland, which again is integrated tightly into the Russian core.

These are all important factors for Moscow, but ultimately they pale before the only rationale that really matters: Ukraine is the only former Russian imperial territory that is both useful and has a natural barrier protecting it. Belarus is on the Northern European Plain, aka the invasion highway of Europe. The Baltics are all easily accessible by sea. The Caucasian states of Armenia, Azerbaijan and Georgia are on the wrong side of the Caucasus Mountains (and Russia’s northern Caucasus republics — remember Chechnya? — aren’t exactly the cream of the crop of Russian possessions). It is true that Central Asia is anchored in mountains to the south, but the region is so large and boasts so few Slavs that it cannot be controlled reliably or cheaply. And Siberia is too huge to be useful.

Without Ukraine, Russia is a desperately defensive power, lacking any natural defenses aside from sheer distance. Moscow and Volgograd, two of Russia’s critically strategic cities, are within 300 miles of Ukraine’s eastern border. Russia lacks any natural internal transport options — its rivers neither interconnect nor flow anywhere useful, and are frozen much of the year — so it must preposition defensive forces everywhere, a burden that has been beyond Russia’s capacity to sustain even in the best of times. The (quite realistic) Russian fear is that without Ukraine, the Europeans will pressure Russia along its entire western periphery, the Islamic world will pressure Russia along its entire southern periphery, the Chinese will pressure Russia along its southeastern periphery, and the Americans will pressure Russia wherever opportunity presents itself.

Ukraine by contrast has the Carpathians to its west, a handy little barrier that has deflected invaders of all stripes for millennia. These mountains defend Ukraine against tanks coming from the west as effectively as they protected the Balkans against Mongols attacking from the east. Having the Carpathians as a western border reduces Russia’s massive defensive burden. Most important, if Russia can redirect the resources it would have used for defensive purposes on the Ukrainian frontier — whether those resources be economic, intelligence, industrial, diplomatic or military — then Russia retains at least a modicum of offensive capability. And that modicum of offensive ability is more than enough to overmatch any of Russia’s neighbors (with the exception of China).

When Retreat Ends, the Neighbors Get Nervous
This view of Ukraine is not alien to countries in Russia’s neighborhood. They fully understand the difference between a Russia with Ukraine and a Russia without Ukraine, and understand that so long as Ukraine remains independent they have a great deal of maneuvering room. Now that all that remains is the result of an election with no strategic choice at stake, the former Soviet states and satellites realize that their world has just changed.

Georgia traditionally has been the most resistant to Russian influence regardless of its leadership, so defiant that Moscow felt it necessary to trounce Georgia in a brief war in August 2008. Georgia’s poor strategic position is nothing new, but a Russia that can redirect efforts from Ukraine is one that can crush Georgia as an afterthought. That is turning the normally rambunctious Georgians pensive, and nudging them toward pragmatism. An opposition group, the Conservative Party, is launching a movement to moderate policy toward Russia, which among other things would mean abandoning Georgia’s bid for NATO membership and re-establishing formal political ties with Moscow.

A recent Lithuanian power struggle has resulted in the forced resignation of Foreign Minister Minister Vygaudas. The main public point of contention was the foreign minister’s previous participation in facilitating U.S. renditions. Vygaudas, like most in the Lithuanian leadership, saw such participation as critical to maintaining the tiny country’s alliance with the United States. President Dalia Grybauskaite, however, saw the writing on the wall in Ukraine, and feels the need to foster a more conciliatory view of Russia. Part of that meant offering up a sacrificial lamb in the form of the foreign minister.

Poland is in a unique position. It knows that should the Russians turn seriously aggressive, its position on the Northern European Plain makes it the focal point of Russian attention. Its location and vulnerability makes Warsaw very sensitive to Russian moves, so it has been watching Ukraine with alarm for several months.

As a result, the Poles have come up with some (admittedly small) olive branches, including an offer for Putin to visit Gdansk last September in an attempt to foster warmer (read: slightly less overtly hostile) relations. Putin not only seized upon the offer, but issued a public letter denouncing the World War II-era Molotov-Ribbentrop Treaty, long considered by Poles as the most outrageous Russian offense to Poland. Warsaw has since replied with invitations for future visits. As with Georgia, Poland will never be pro-Russian — Poland is not only a NATO member but also hopes to host an American Patriot battery and participate in Washington’s developing ballistic missile defense program. But if Warsaw cannot hold Washington’s attention — and it has pulled out all the stops in trying to — it fears the writing might already be on the wall, and it must plan accordingly.

Azerbaijan has always attempted to walk a fine line between Russia and the West, knowing that any serious bid for membership in something like the European Union or NATO was contingent upon Georgia’s first succeeding in joining up. Baku would prefer a more independent arrangement, but it knows that it is too far from Russia’s western frontier to achieve such unless the stars are somewhat aligned. As Georgia’s plans have met with what can best be described as abject failure, and with Ukraine now appearing headed toward Russian suzerainty, Azerbaijan has in essence resigned itself to the inevitable. Baku is well into negotiations that would redirect much of its natural gas output north to Russia rather than west to Turkey and Europe. And Azerbaijan simply has little else to bargain with.

Other states that have long been closer to Russia, but have attempted to balance Russia against other powers in hopes of preserving some measure of sovereignty, are giving up. Of the remaining former Soviet republics Belarus has the most educated workforce and even a functioning information technology industry, while Kazakhstan has a booming energy industry; both are reasonable candidates for integration into Western systems. But both have this month agreed instead to throw their lots in with Russia. The specific method is an economic agreement that is more akin to shackles than a customs union. The deal effectively will gut both countries’ industries in favor of Russian producers. Moscow hopes the union in time will form the foundation of a true successor to the Soviet Union.

Other places continue to show resistance. The new Moldovan prime minister, Vlad Filat, is speaking with the Americans about energy security and is even flirting with the Romanians about reunification. The Latvians are as defiant as ever. The Estonians, too, are holding fast, although they are quietly polling regional powers to at least assess where the next Russian hammer might fall. But for every state that decides it had best accede to Russia’s wishes, Russia has that much more bandwidth to dedicate to the poorly positioned holdouts.

Russia also has the opportunity. The United States is bogged down in its economic and health care debates, two wars and the Iran question — all of which mean Washington’s attention is occupied well away from the former Soviet sphere. With the United States distracted, Russia has a freer hand in re-establishing control over states that would like to be under the American security umbrella.

There is one final factor that is pushing Russia to resurge: It feels the pressure of time. The post-Cold War collapse may well have mortally wounded the Russian nation. The collapse in Russian births has halved the size of the 0-20 age group in comparison to their predecessors born in the 1970s and 1980s. Consequently, Russian demographics are among the worst in the world.

Even if Russia manages an economic renaissance, in a decade its population will have aged and shrunk to the point that the Russians will find holding together Russia proper a huge challenge. Moscow’s plan, therefore, is simple: entrench its influence while it is in a position of relative strength in preparation for when it must trade that influence for additional time. Ultimately, Russia is indeed going into that good night. But not gently. And not today.