The political economy of the military conflict in Ukraine

The geopolitical situation regarding the conflict in Ukraine has escalated considerably due to the downing of a passenger jet from the Netherlands to Malaysia. Given the visceral and gruesome nature of the events now unfolding, domestic political opinion throughout the West is now a major force in this conflict. However, given the political economy in Russia and the United States in particular, the potential for de-escalation is small. The potential for the conflict to now have wide-reaching economic impacts has grown. In the analysis below I explain how the political economy in the U.S. favours President Obama taking an increasingly hawkish position and how the political economy in Russia favours President Putin also maintaining an aggressive stance regarding Ukraine. In addition, the airline massacre also means that the EU will be galvanized into supporting tougher sanctions against Russia, with the potential of a tit-for-tat response.

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The geopolitical situation regarding the conflict in Ukraine has escalated considerably due to the downing of a passenger jet from the Netherlands to Malaysia. Given the visceral and gruesome nature of the events now unfolding, domestic political opinion throughout the West is now a major force in this conflict. However, given the political economy in Russia and the United States in particular, the potential for de-escalation is small. The potential for the conflict to now have wide-reaching economic impacts has grown. In the analysis below I explain how the political economy in the U.S. favours President Obama taking an increasingly hawkish position and how the political economy in Russia favours President Putin also maintaining an aggressive stance regarding Ukraine. In addition, the airline massacre also means that the EU will be galvanized into supporting tougher sanctions against Russia, with the potential of a tit-for-tat response.

The world is now watching

While the political turmoil and subsequent military conflict in Ukraine has been front page news for months now, the shooting down of Malaysia Airlines Flight 17 has made the situation in Ukraine perhaps the most followed news story globally. Many people do not tune into international stories with abstract and remote political and military features because it has no direct effect on them. But a plane crash is a different matter altogether. Because anyone could imagine themselves on that plane, the situation in Ukraine has become much more tangible and much more relevant to a wide swathe of the global population. Moreover, the fact that MH17, a civilian aircraft, was not even going to Ukraine, but just flying across Ukrainian airspace, and shot down, has made the incident a repulsive and emotion-laden event far beyond a normal plane crash. The mishandling of passenger remains has caused shock and horror throughout the world.

As a result, the situation in Ukraine now takes on domestic political importance throughout Europe, in Australia and in the United States, where decisions about economic sanctions against Russia as well as military and economic support for Ukraine have to be made. What was once a foreign war has become a big domestic issue. And because of how events have unfolded, public opinion  in these countries is decidedly against the separatist militants in Ukraine who now enjoy little public sympathy there.

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Here’s what we know.

  • Malaysian Air MH17 was flying at an altitude of 33,000 feet over Ukrainian airspace with 283 passengers and 15 crew when flight controllers lost contact with the aircraft 50 to 60 km from the Russian border, an area controlled by separatist forces.
  • MH17 was flying an approved flight path and was told to fly at 33,000 feet instead of 35,000 feet because of other civilian aircraft also flying in the same airspace. But records over the past few weeks indicate that the MH17 route was often as much as 300 miles south of where this particular flight tracked (Telegraph). 
  • It is widely believed that the aircraft was downed by a surface-to-air missile fired by a Buk SA-11 launcher, a Russian-made system widely deployed in former Soviet states since the 1970s as tactical air defense weaponry.
  • The separatists had been successful in shooting down lower-altitude Ukrainian aircraft using MANPADs, AAA and similar surface-to-air anti aircraft systems, forcing the Ukrainians to fly at medium altitude above 15,000 feet, out of the range of these weapons. AT least 12 Ukrainian military aircraft were shot down by rebels over the past few months.
  • While the Ukrainian and Russian military have numerous Buk SA-11 launchers, reports that the separatists had recently acquired one proliferated in early July. Last Monday, Ukraine admitted that separatists had shot down an An-26 military transport plane flying at 20,000 feet, well out of the range of MANPADs and other anti-aircraft systems the separatists had possessed earlier. 
  • Additionally, multiple witness accounts in Torez near where MH17 went down have a Buk launcher in the town at the time of the shooting. A YouTube video even shows a Buk launcher travelling on the road from Torez to Snizhne. The date of the video cannot be verified. Many other photos on social media whose date cannot be verified also show Buk launchers in separatist control. 
  • Posts on social media controlled by the separatists that were deleted soon after the incident, claimed to have shot down a Ukrainian military transport aircraft at the time MH17 was shot down. No record of any other plane crash was recorded in that area at that time, suggesting that someone believed MH17 was a Ukrainian military plane. RIA-Novosti, a Russian news agency, reported that local “witnesses” said a Ukrainian An-26 had been shot down “near the Progress coal mine”
  • Ukrainian SBU, the security service of Ukraine, released a tape and transcripts immediately after the flight was downed of a conversation between an alleged separatist and an alleged Russian intelligence officer discussing the incident (my tweet on 17 Jul) in terms that suggested they were surprised the downed aircraft was a civilian plane. The Russian says “It is 100% certain that it is a civilian aircraft” (my tweet on 17 Jul) (YouTube) Another recording says, “On TV they’re saying now that it is an An-26, a Ukrainian transporter. But what’s written on it is Malaysia Airlines…There is a sea of bodies, women, children.”

The composite picture here strongly suggests that MH17 was shot down by separatist forces because the separatists mistakenly believed that MH17 was a Ukrainian military plane.

The conflicting narratives surrounding Ukraine

In talking about this plane shooting, it is important to look at how diametrically opposed the narratives surrounding Ukraine have become because it means there is increasingly no middle ground that will satisfy public opinion in Ukraine, Russia, and the West.

In the U.S., the prevailing narrative is of a corrupt regime under Victor Yanukovych that was rightfully ousted followed by the election of a legitimate government, which has decided to move toward the European Union and rebuff Russia’s economic embrace despite Russian aggression and threats. In this narrative, the old Ukrainian government was corrupt and illegitimate and more pro-Russian. The new government of Petro Poroshenko is seen as legitimate and pro-Western, with national self-determination as an integral part of why the new government deserves support.

In Russia, the prevailing narrative is of EU and U.S. interference in Ukraine’s domestic politics, leading to a toppling of the democratically-elected government of Victor Yanukvych in a political coup d’etat and an installation of an illegitimate and unelected pro-Western technocratic group supported by neo-Nazi sympathizers. The U.S. and EU are therefore seen as having destabilized Ukraine politically, leading to the potential for civil war. While the vote of Poroshenko was conducted during civil war in the east, the Poroshenko government has been accepted as legitimate.

In the U.S., the vote in Crimea to become a part of Russia is seen as hasty, conducted under military threat from Russia, and thus illegitimate. Therefore, Crimea’s secession from Ukraine and annexation by Russia is considered an act of expansionist aggression by Russia that hearkens back to Nazi Germany’s Anschluss of Austria and German expansionism in the 20th century, creating fear of more uncontrolled military conflict to come. Putin is believed to be trying to re-constitute a new Soviet Union in the guise of a Eurasian Union with Russia as regional superpower across the Eurasian continent.

In Russia, the central government of Ukraine in Kiev is seen as having not just been corrupt but also discriminatory toward Russian speakers. The separatist movement that began in Crimea is seen as the natural result of Kiev’s policies. And the secession of Crimea is legitimate both in vote and substance. Moreover, because Crimea is historically connected to Russia and was only made part of Ukraine 60 years ago, the annexation by Russia is also considered legitimate.

In the U.S., the pro-Russia separatist movement in eastern Ukraine is considered something fostered by Russia that would have been snuffed out long ago if not for the operational assistance from Russia. Moreover, many in the U.S. believe that some of the fighters are actually Russian and not Ukrainian and that Russia has been supplying the separatists with armaments. The missile that took down MH17 is often said to have been supplied directly by Russia to the pro-Russian separatists. And the equipment is reputed to have been  manned by separatists trained by the Russians to use the equipment or by Russian troops themselves.

In Russia, the anti-Kiev fighters in eastern Ukraine are considered to  be in a struggle for self-determination as they try to leave the corrupt and discriminatory central government of Ukraine by force after a vote overwhelmingly in favour of seceding from Ukraine was rejected. In this narrative, whether Russia has helped in some way is insignificant given the legitimacy of the struggle.

As I hear these two narratives told, I see no common ground between them. The only way to bridge the gap between them is via a cease-fire and negotiated settlement of unpalatable concessions.

The political economy in the U.S.

Having written about these conflicting narratives surrounding the conflict in Ukraine, it is important to remember that this conflict has now become a proxy war between the U.S. and Europe on the one side and Russia on the other, with the Europeans somewhat less opposed to the Russian position than the United States. With the shooting down of the civilian aircraft, the picture has now become one of war crimes that have galvanized domestic political debate that makes the domestic political economy much more important in the U.S. and Europe.

In the U.S., Democrats are normally pigeon-holed as weak on defense. The Republican party has been battering President Obama on this score in numerous cases over the years including the pullout out of Iraq and Afghanistan, the confrontation with Iran, the Veterans Affairs scandal, and the incident in Benghazi that took the lives of Americans at the diplomatic mission there. Obama’s stance on Ukraine is only one of many areas where Republicans are trying to paint him as soft on military issues. The fact that ethnic tensions in Iraq have flared up has made the ‘weak on defense’ argument more potent with the Republican base.

At the same time, Obama’s poll numbers have been slipping across the board, on defense, foreign policy, the economy, immigration, you name it – multiple issues (see Time and Gallup). Hillary Clinton, who is generally considered more hawkish than Obama, is considering whether to run for President again in 2016. She has begun to make rhetorical space between herself and Obama in order to not be associated with the President too closely despite having been in his administration (see WSJ). Tthe prospect of her running with a more hawkish message on defense issues helps to back Obama into a corner where he has to take a stronger stance against Russia on Ukraine.

John McCain, Obama’s Republican 2008 challenger, is talking about supplying Ukraine with weapons in order to defeat the separatists. Obama will have to do something given this pressure.

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These are the considerations which led to stiffening sanctions on 17 July and that will lead to even more aggressive sanctions due to the MH17 disaster. 

The political economy in Russia

In Russia, Vladimir Putin has successfully pivoted to a more populist image that is not dependent on the Urban elite but more on pro-Russian patriotism by the masses outside of Moscow or St. Petersburg. Despite the decline in the economy, Putin’s stances on Ukraine have garnered him record support while the E.U. and the U.S. have slipped in stature in the eyes of the Russian people. In a poll taken from April to June, Gallup shows Putin with 83% favourability numbers, well up from his declining 54% in 2013.

Putin approval

By contrast, ratings of U.S. and European Union leadership have sunk to record lows in the single digits.

US and EU approval in Russia

Moreover, President Putin’s stance on MH!7, that it is Ukraine’s fault for fighting this war in the east has widespread support. Russian television and Russian news is reported to be rife with narratives completely at odds with the facts I laid out at the top of this post. For example, even RT has run an outlandish English-language article that claims the Ukrainians might have been trying to assassinate President Putin on his way back from Brazil and struck the Malaysian plane by accident. Ria-Novosti’s German service ran an article stating that the Ukrainian army had 27 Buk anti-aircraft transporters in the area where MH17 went down, suggesting it could have been the Ukrainian military that downed the plane instead of the separatists. This is pure propaganda and can only serve to entrench a narrative in Russia that is completely at odds with the facts on the ground. And given the stridently anti-Russian  Western narrative, also supported by less obvious and considerably more believable slants, we have yet again another area of no overlap.

This means that to the Russian population, an aggressive and defiant response from Vladimir Putin is not only acceptable but almost necessary to defend Russian honour against perceived smears by Western powers looking to destabilize Ukraine and surround Russia with enemy nations and heavy armaments. There is no chance of de-escalation from Putin’s side in my view.

The political economy in Europe

The picture in Europe is more nuanced. In Germany, where the last Chancellor Gerhard Schroeder is on the board of Gazprom and was seen partying with Vladimir Putin on his birthday in April, business and trade linkages to Russia are much deeper than they are in the US. Italy also has deep ties to Russia. And so there has been reluctance to impose harsh sanctions on Russia over the Ukraine crisis in the absence of compelling evidence that Russia has been directly involved in military conflict.

But the Malaysian Airlines Flight 17 disaster has changed this entirely. Support for the Netherlands, who lost about 2/3 of the lives in the crash needs to be tangible given the horror scenes coming out of Donetsk, the separatist controlled city where the remains of passengers have been shipped. The media is rife with tales of the unbelievable stench of death as passengers remains are treated like cattle and possessions go missing due to theft.  European leaders are now threatening harsher sanctions, even in Italy and France. And while German Chancellor Angela Merkel said on Friday it was too soon to make any decisions about imposing harsher sanctions against Russia, it is clear that she will accede to more sanctions if Russia’s stance remains defiant – as it likely will do.

There are still differences, however. The FT reports:

Some differences have narrowed and pro-sanctions leaders such as British premier David Cameron see resistance from Paris and Berlin fading. But Europe remains far from united on whether to target Mr Putin’s inner circle, ensnare Russian energy groups, and move to some form of arms embargo.

These differences will probably come to the fore on Tuesday, when EU foreign ministers meet for the first time since the crash, armed with a recently enhanced legal mandate that allows them to target a broader range of individuals and companies. There are no preparatory meetings planned on Monday, giving the gathering an unpredictable edge.

Tougher sanctions are coming

In my view, there is zero chance we will not see tougher sanctions here. Putin has no reason to back down or de-escalate. And his rhetoric says just the opposite, with him blaming Ukraine for the MH17 tragedy. At the same time, in the US, tougher sanctions were already being imposed when this incident occurred because of the political pressure to do something. President Obama has already said there is no military solution here. And as a result, he must turn to financial warfare in order to create a response that is sufficiently aggressive to satisfy the American electorate, which is decidedly against Russia on this issue and emotionally invested now. In Europe, the emotional investment is large, particularly because of the Dutch connection. Where it was possible to sit on the fence before, EU leaders cannot do so now if Putin does not change his stance. I believe that, as unpredictable as the EU foreign ministers’ meeting on Tuesday will be, the pressure to react and not seem ineffectual will mean additional sanctions.

Now, the sanctions to date have not been that meaningful economically. We had had visa bans and asset freezes for individuals and some minor insignificant companies because of Kremlin connections. But even the current sanctions will not freeze assets or prohibit transactions with the sanctioned companies. Instead,  the sanctions will prevent the Russian companies from tapping U.S. equity and debt markets for financing with a maturity over 90 days.

But the Russian economy is rolling over nonetheless. And recession looms already. In Ukraine, PM Yatsenyuk is saying that the loss of Russian trade is going to take an additional 2% off GDP.

Russia may respond aggressively then. With nothing to lose, there is the potential for tit-for-tat sanctions or the use of natural gas as an economic weapon. I think there is even an outside chance of invasion. As I wrote in March when comparing the Crimean annexation to the Annexation of Texas by the US, “if Putin cannot get the unit he wants through diplomacy, could he get it by force – i.e. annexation? Perhaps in part. We do know that with the Texas annexation, war began the year after. And when the Americans defeated the Mexicans, there was the possibility of the US swallowing Mexico whole. Instead, the US worked out a deal that hived off the northern part of Mexico. An analogous outcome would be war between Russia and Ukraine with Russia taking most of eastern Ukraine that was never a part of pre-1939 Poland. The western region captured in 1939 via the Molotov-Ribbentrop Pact would remain a rump state of Ukraine including Kiev.

“…My view is that Ukraine’s reaction to the annexation of Crimea is more important than what the EU and US do. It’s Ukraine as Mexico that is going to matter, more than the US and 1845’s Great Britain.”

I said in a second March post when grokking upside scenarios in Crimea that “if Ukraine peacefully accepts the loss of Crimea and Russia regains unhindered access to Crimea, the land around its warm water port at Sevastopol, without the potential of it falling into NATO hands, this could be over. Eventually the sanctions would end.” But what we have seen so far is Ukraine’s electing a pro-Western government, turning toward EU association, and fighting a fierce, disavowing any more separatist movement and fighting an unrelenting battle against the separatists that can be considered a civil war. So Ukraine has not budged one inch on any issue here. What’s more, Ukraine could escalate rather than cease-fire. There are murmurings of Ukraine starting an offensive against the separatists even while the West is calling for a cease-fire and for access to the crash site unhindered by military conflict. This speaks to how aggressively Ukraine is going after its goals.

As a result, the global economic and financial impact is unpredictable. Timothy Ash, head of emerging market research at Standard Bank sees a selloff in Russian assets at a minimum. CNBC quotes him saying “Prudence might suggest that foreign investors in Russia and in Russian assets look to reduce exposure—if subsequently you get hit by further sanctions then your loss/stupidity, and try explaining that to end-investors.” And from a real-economy perspective both Ukraine and Russia are in a recession. When sanctions spread, it could tip the European periphery back into recession and cause a reassessment of risk assets globally.

It is still early days here but the situation is extremely volatile. Anything could happen politically and militarily. And therefore the economic and financial consequences are unknowable. Nevertheless, there will be pain. Depending on how aggressive the actors are, the pain could be widespread and cause another crisis.

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