Ukraine – Background Outline, Scenarios, and Comments

By

 
Petro Poroshenko

“You don’t understand, George, that Ukraine is not even a state.”
Vladimir Putin to George W. Bush, April 2008



FACT SHEET

Size of country – largest totally in Europe (size of Texas)
            Borders seven countries (see map), mostly Russia and Belarus
            Russia or pro-Russian countries and regions (Moldova) on three sides

Ethnic -  77% Ukrainian
            17% Russian speaking (about 9-10 million people)
                        Mostly in eastern provinces, Odessa and Crimea.
            6% Other, including Crimean Tatars
                        Also religious divisions reflecting regional and political divisions.

Population – about 44-46 million. (minus 2.5 million in Crimea)
            Very low birth rate and very high death rate.
            Declining population and labor force.
                        Very low life expectancy among men.
                        Rapidly aging population.
                                    Heavy per capita alcohol consumption.
            Demographics similar to Russia and Eastern Europe countries.


HISTORY

Ukraine was the original “Russia”
            Scandinavian name meaning Red. 
Kievan “Rus” first Russian kingdom to convert to Christianity (Orthodox).

Turbulent, bloody history because of location and wide plains.  Tribes going west from Central Asia, Vikings going south to trade with Constantinople, buffer zone between Ottomans and Russians, source of slaves and mercenaries.  In modern times, often part of another country’s empire.
            Now between Russia and European Union.
            Western influences in the western half, especially among young.

Crimea annexed by Russia in 1783; most of the rest of current Ukraine conquered by Catherine the Great in 1795.
            Seized by Russia after fall of Yanukovych in Febrauary 2014.

Only second time in the area’s history that Ukraine is a separate country.


POLITICAL

Poorly governed since independence in 1991.
            Corruption, organized crime, oligarchs, lack of political reform.
                        Corrupt police and judicial system.

Orange Revolution in 2004 (non-violent), repeated in 2013-14 (violent).      
Both times, demonstrated against corruption, for closer ties with Europe.
Forced resignation of President Viktor Yanukovych, pro-Russian president.

Generational split, with older generation more inclined to be sympathetic to Russia and younger generation more pro-West.

New president Petro Poroshenko (often spelled Porochenko in Western press), signs EU associative status treaty, first move to closer ties with Europe.

Major players:          
            Viktor Yanukovych (corrupt former president, generally
pro-Russian).
            Yulia Tymoshenko (leader of Orange Revolution, generally pro-West).
            Petro Poroshenko (current president, one of eight major oligarchs).
            Vladimir Putin (ruler of Russian since 2000.  Former KGB officer).
            Oligarchs, who seem to be supporting pro-West government and
                        opposing Russian militias.


RULE BY OLIGARCHS

The new president, Petro Poroshenko, is one of the oligarchs.  He appointed three oligarchs as provincial governors.  Two refused, one accepted.  One who refused, Rinat Akhmetov, is reported to be the richest man in Ukraine, with substantial holdings in the disputed areas.  A former supporter of Yanukovych, he suggested a fourth oligarch be appointed governor of Donetsk province.  He was forced to flee by separatist gunmen.

Akhmetov controls a personal militia.  He was able to thwart pro-Russian separatists in a key city south of Donetsk province.   North of Donetsk province, a key industrial city and province is ruled by another oligarch, Ihor Kolomoisky.  He is strongly anti-Russian.  Moving quickly, he has used his personal wealth and power to equip Ukrainian military forces and fund a professionally-trained provincial militia.  Not surprising, a branch of his bank in Moscow has been seized by the Russian government.


Wall Street Journal, “Ukraine’s Secret Weapon Against Putin:  A Feisty Billionaire,” June 28-29, 2014.

 ECONOMIC
           
Economic stagnation since independence in 1991.

At official exchange rates, Ukraine economy about $150 billion/year, about 1/3 the size of the economy of New Jersey.

Economic structure a legacy of Soviet Union.
About 1/4 of total Soviet industrial production.
           
Much of industrial output still oriented towards Russia but total exports to West now greater than to Russia.

Part of industrial area in eastern Ukraine adjacent to Russia.  Coal mines, iron ore, steel mills, fabricated metal products like large diameter pipes, armaments for Russia, oil refining, chemicals.  Area of pro-Russian protests.
            Economically depressed, especially Donetsk region.
Serious pollution problems.

Most of industrial companies owned by eight oligarchs.

Breadbasket of Soviet Union.
            Provided about 1/4 of food in Soviet Union.

Dependent on Russia for about 2/3 of natural gas supplies and most of oil.
Russia’s export of gas and oil used as political weapon.  Gas supplies to Ukraine cut off three times since 2006.

2010 treaty with Russia – subsidized gas prices in exchange for extending lease for Russian fleet based in Crimea.  Treaty broken by Russia when Crimea taken over this year.  Gas prices raised to European levels.

Gas use for heating, cooking and industrial fuel heavily subsidized.
            Extremely wasteful use of fossil fuels.

Four of six oil refineries owned by Russian companies.

Ukraine has potentially large shale gas deposits.


UKRAINIAN NATURAL GAS  IMPORTS

In 2012, Ukraine consumed 53.8 billion cubic meters (bcm) of natural gas.  Domestic production was 19.7 bcm.  Total imports from Russia were 32.4 bcm, or about 63% of total usage.  For a relatively poor country, Ukraine’s gas usage is unusually high.  Total usage is three times that of Poland and larger than France.  (Source:  International Energy Agency)

Cost of imported Russian natural gas about $10 billion per year.  Ukraine having trouble paying.  Needs Western financial assistance.


In 2013, the European Union (EU) countries imported $166 billion of oil and natural gas from Russia.  The EU ran an $86 billion trade deficit with Russia.


 LARGER ISSUES

Integration of former Soviet satellite countries in central Europe into economic, military and political unions of  Western Europe.
            Best opportunity for peaceful integration in over 1,000 years.

Resurgence of Russian nationalism – sees integrating Europe as a geopolitical and military threat.
            Supported by Belarus and some factions in Ukraine.
                        Geographical buffer zone next to NATO countries.
            Lack of political and economic reforms in all three countries.
            Major campaign to modernize Russian military weapons.

Russian use of oil and natural gas as geopolitical weapons.
            May be less effective in future.
                        Large deposits of shale gas in Europe and Ukraine.
                        Alternative European import sources.

Internal threats to European section of Russia.
            Declining European population.
            Rising Muslim and Asian population in southern and eastern areas of Russia.
                        Muslims make up 10-15% of Russia’s population.

Potential threat of China to Eastern Siberia and Vladivostok (Chinese territory until 1860).

Europe moving to reduce imports of Russian natural gas.
            Opportunity for U.S. Canada and other countries to export LNG to Europe.
                        Canada building large LNG facility in eastern Canada to export
                        natural gas to Europe.
           
Russian Black Sea pipeline to bypass Ukraine on hold.


SCENARIOS

Ukrainian forces defeat pro-Russian rebels but guerrilla war continues.
            Continued centralized control.
                        President appoints provincial governors.
            Russia reduces support but continues covert operations.

            Ukraine rebuilds military forces with outside assistance.

Continued fighting leading to new constitution that gives substantially more autonomy to eastern provinces.
            Possible if Russian rebellion contained and truce holds.

Reduces highly centralized political control of country.

Continued fighting and continued Russian pressure to destabilize eastern provinces with ultimate aim of absorbing two to five provinces without invasion of Russian troops.
            Victory for Russian nationalism without economic sanctions.

Russian interference has probably strengthened desire of western 2/3 of Ukraine to move closer to EU and eventually NATO. 

Russian invasion of eastern Ukraine.
Russian annexation of two eastern provinces, adding 5-6 million people to European Russia.

Harsher economic sanctions.  Serious impact on Russian economy.

Ukraine signs economic treaty with EU and eventually becomes a member of EU.
            Receives substantial financial aid.

            Outside pressure for political reform.

Scenarios are not mutually exclusive.  Some or all may happen at different times in the future.  For example, if eastern provinces become part of Russia, the rest of Ukraine will probably ask to become a member of NATO and EU.


COMMENTS ON SCENARIOS

Ukraine's president has signed an associative member agreement with the EU, as he promised he would.  Russian nationals' rebellion in two eastern provinces and Russian threats eliminated prior policy alternative of trying to balance Ukrainian foreign and economic policies between Russia and the West.  One consequence is that Ukraine will probably now receive about $32 billion in economic aid and loans from IMF, EU and US.  IMF loans come with strings attached - Ukraine will have to reduce domestic subsidies for natural gas users and begins to reform government.  I would also guess that Ukraine will have access to Western military gear and training.  In longer run, good chance Ukraine will join EU and NATO.

I think there's a good chance that current and threatened economic sanctions will lead Russia to lessen support for pro-Russian rebels in Ukraine, especially if Donetsk falls to the Ukrainians.  Russia still controls Crimea.  There will probably be less overt but continued covert Russian support.  Putin will reduce rhetoric.  Russia may continue to threaten Ukraine with invasion.

Putin cannot appear to totally abandon the pro-Russian rebels.  His seizure of Crimea, military buildup on the border, hawkish rhetoric and military support for the Russians in eastern Ukraine increased his popularity in Russia.  He has to appear to be continuing his support for the rebels without triggering economic sanctions that will seriously damage the Russian economy. 

Russian oil output is declining.  Russian has huge shale and deepwater oil and gas deposits but needs Western technology to get at them.  This is more important to Putin's strategic objectives than supporting Ukrainian rebels.  In addition to keeping large European market, increased production opens up large new markets in Asia, especially China, which intends to triple LNG imports in the next 8-10 years.  Economic and military resurgence of Russia and Russian nationalism depends on exports of oil and gas.

Russia will continue to attempt to destabilize and subvert Ukrainian government but won't invade, despite huge military advantage.  Combination of economic sanctions (including access to Western technology needed to develop huge untapped oil and gas fields), fall in foreign investment and tourism, and increased capital flight would seriously hurt Russian economy.  Exports, mostly oil and gas, are about 1/4 of Russian economy and pay for military modernization among other Putin objectives.  Europe will accelerate trend to using less Russian natural gas and oil, but will remain a major market for Russia.  

Huge potential increase in global supply because of new technology to get at shale natural gas (and oil) will make up for potential loss of Russian natural gas to Europe.  Eventually.   Other countries must make massive investment in drilling, pipelines, LNG plans and LNG tankers.  Needed new LNG ships will cost about $50 billion (New York Times, August 5).  Total elimination may take five to seven years but alternative sources of supply already available.  

Europe and Ukraine have their own potentially huge deposits.  Political opposition to fracking will slow up development in France and Germany but probably not in Poland, Romania and Ukraine, the countries with the largest potential deposits.  Ukraine will invite in Western oil countries to help develop natural gas reserves and modernize economy.  Hopefully, EU ties and foreign investments will lead to economic growth.

 If U.S. built a pipeline network from North Dakota and Canadian shale natural gas fields to Texas and/or east coast, and the U.S. government licenses liquified natural gas (LNG) plants, the U.S. could export very large amounts of natural gas to Europe at a lower price than Russia is currently charging.  One new U.S. LNG plant has been approved and seven more are pending.  Canada has already started design work on an LNG plant in eastern Canada.  This could eliminate future Russian threat of shutoff and strengthen ties of European economy to U.S. and Canada.  Major geopolitical change. 

 Speculative, more unlikely scenarios.  1) Ukraine voluntarily lets go of two eastern provinces.  Gets rid of most of remaining Russian population and economic ties to Russia.  Russian population in Ukraine less than 10%.  Future firmly with West. 2) Government and judicial system becomes less corrupt and fights organized crime.

For an earlier discussion after Russia seized the Crimea, see The Crimea, Russian and U.S. Options.


ADDITIONAL INFORMATION

 For a quick look at the huge disparity of the Russian and Ukrainian military forces, see

http://www.bbc.com/news/world-europe-26437359

 Not in the video --  Ukraine's main battle tank, the Russian T-64, has been taken out of service in Russia because it is obsolete.  Russia's tank force includes about 550 T-90s that are comparable to the West's best tanks.  Next year, Russia says they are starting production on the T-95 which, on paper, may become the best tank in the world.  It is also a step towards a fully robotic tank, which makes sense in a country with declining population.  Russia's military superiority may be irrelevant if Russia believes stronger economic sanctions will be imposed if they invade Ukraine.

 By the way, U.S. design and production to replace the Abrams tank has been slowed by budget cuts and sequesters.  The conservative Republicans are a danger to the national security of the country.

 I would emphasize that many of the top leaders in the Ukrainian military, SBU and police started their careers, and were trained, by the Soviet Union.  Also, since about 17-20% of Ukraine's population is Russian, I would assume that a lot of police and military are unreliable.  It is probably one reason some Ukrainian police and military units surrendered to Russian militia without a fight and gave the militias equipment.  Poroshenko is replacing top military leaders.  Then there is corruption.

 Economic comparisons are harder because much of both economies are underground.  Probably higher in Ukraine - one estimate by two Ukrainian economists in 2012 is that 44% of the economy is underground.  Even adjusting for that, the Russian economy is about 10 times larger than Ukraine's.  Roughly, $200 billion vs. $2 trillion.

 One of the problems is that modernizing the Ukrainian economy does not necessarily mean increasing employment.  The world's largest steel company took over Ukraine's largest steel complex.  It spent billions modernizing the plants and increasing capacity but reduced employment from 57,000 to 33,000.  One of the oligarch just built a fully automated steel pipe plant that created few new jobs.


But Russia is vulnerable to economic sanctions and, in the near future, possibly declining exports of oil and natural gas.  The two are related; economic sanctions would deny Russia the Western technology they need to get at huge untapped oil and natural gas deposits.

INFORMATION SOURCES

BBC News, “Ukraine Crisis Timeline”
http://www.bbc.com/news/world-middle-east-26248275

New York Times, “Ukraine Crisis in Maps”
http://www.nytimes.com/interactive/2014/02/27/world/europe/ukraine-divisions-crimea.html?_r=0

CIA World Factbook

Financial Times

Novenite (From Bulgaria, in English)

VICE – Russian Roulette (on YouTube)

            Video interviews in areas controlled by pro-Russian militias.

kvivpost.com (from Ukraine, in English)

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