Strategic Assessment: Ukraine Faces New Challenges After War Shock

The following political landscape piece is a part of Eurasia Daily Monitor’s special quarterly series of strategic assessments of developments across Eurasia. These pieces examine recent important developments and trends in the region, particularly since this past summer, and anticipate where those trend lines may lead over the coming months.

The absence of progress in peace talks regarding the Donbas region and the lingering uncertainty over Russian-occupied Crimea has left Ukraine in a state of no peace and no war as 2016 comes to a close. Largely due to the standoff with Russia, Ukraine will struggle to keep warm if the coming winter is colder than usual. At the same time, Ukraine has overcome the shock of war. The economy has been on a recovery path since last spring, reforms are moving forward, and creditors have resumed lending, while the government’s recent launch of “e-declarations” may presage a decisive fight against corruption.

As expected, there was no breakthrough at a meeting in Berlin, on October 19, between Ukrainian President Petro Poroshenko, Russian President Vladimir Putin, German Chancellor Angela Merkel and French President François Hollande. The one point all the sides agreed on was the need to draw a road map, hopefully by the end of 2016, for the implementation of the 2015 Minsk peace agreements for Donbas. Putin and Poroshenko concurred on only one point, that the mission of the Organization for Security and Cooperation in Europe (OSCE) in eastern Ukraine should be expanded.

Merkel was rather skeptical about this proposal; while Poroshenko and Putin see the details of this OSCE mission’s expansion somewhat differently. Poroshenko insists that armed OSCE policemen should observe the Ukrainian-Russian border in Donbas under Russia’s control (Ukrainskaya Pravda, October 20), while Putin apparently wants the OSCE observers to essentially guard the arms Russia supplied to the militants through that border (RIA Novosti Ukraine, October 20).

Kyiv begrudgingly conceded that, in line with the Minsk agreements, local elections should come before Ukraine re-establishes control over its border, and not vice versa. However, domestic opposition to this is particularly strong. The numbers of those who believe that the agreements must be adhered to at all costs are dwindling, as the threat of a full-scale Russian invasion has subsided. Currently, it would be nearly impossible for Poroshenko to push through parliament any legislation on elections and a special status for the Moscow-backed rebel–held areas—which Russia and the German and French mediators insist upon.

Kyiv’s main argument is that security should come first, but Moscow-backed militants keep shelling Ukrainian positions near Mariupol, Donetsk and Luhansk in spite of the ceasefire. Without a real, “broadcastable” war in Ukraine, Western leaders—tired of the confrontation with Russia and with elections looming in their own countries—are reluctant to put more pressure on Moscow. As a result, Kyiv faces a stalemate in Donbas for the time being.

Legal battles have continued between Ukraine and Russia at the Stockholm arbitration court, where the first verdicts on disputes between Naftohaz Ukrainy and Gazprom are expected next year. Last summer, Naftohaz’s claims against Gazprom were estimated to total $28.3 billion, mainly related to gas prices, while Gazprom demanded $38.7 billion for Ukraine buying less gas than prescribed by their ten-year contract from 2009. In addition, last month, Naftohaz filed an arbitration case over the damages it suffered from Russia’s seizure of its assets in Crimea, including deep-water drilling rigs (Naftogaz.com, October 19). As a result of Crimea’s annexation, Ukraine also lost access to promising oil and natural gas fields in the Black Sea. However, returning Crimea is not on the agenda for the time being, given Ukraine’s weakness and the West’s reluctance to become involved.

Meanwhile, Ukraine has not been buying any more gas from Gazprom for a year now, relying on domestic production and imports from the European Union. However, Naftohaz failed to accumulate 17 billion cubic meters (bcm) of gas in its underground reservoirs in time for October—the start of the heating season—as the government planned. Citing statistics from the previous two winters, Naftohaz claims that the 14.7 bcm stored at present will suffice. However, those winters were unusually warm, and industry had cut its gas consumption due to the recession. Now, Ukraine’s industrial plants may require more gas due to the economic recovery, after a 10 percent decline in GDP last year. Moreover, possible disruptions to coal supplies from the war-torn Donbas may further increase demand for gas among utility companies. Just like last year, Ukraine will need EU mediation to resume gas purchases from Russia.

Ukraine has been making progress on many other fronts, however. The domestic political situation has stabilized, as the government crisis prompted by corruption allegations ended last spring, and the danger of early elections was avoided. Also, the government has passed a series of important reforms, such as the introduction of an electronic procurement system, the approval of judicial reforms, the establishment of new anti-corruption bodies, and the increase in utility prices to match market rates. The calmer political environment and the passage of these reforms has prompted the West to resume the disbursement of the multi-billion-dollar assistance package promised to Ukraine in the wake of the Euromaidan revolution in 2014. Kyiv received a total of $2 billion from the International Monetary Fund (IMF) and the United States this past September; more assistance is expected from the IMF and the European Union by the end of the year.

The launch, on October 30, of electronic asset declarations (“e-declarations”) for top officials and people’s deputies has been the most recent achievement. The EU welcomed this transparency initiative, which calls on top Ukrainian officials to declare their wealth online, as “a milestone” in anti-corruption reforms (UNIAN, November 1). The filed e-declarations confirmed the population’s suspicions that many officials in Europe’s statistically poorest country are fabulously rich. In the cases of Poroshenko, Prime Minister Volodymyr Hroysman and central bank head Valeria Hontareva, their vast wealth comes from their past legal business interests. But many of the luxurious mansions and millions of dollars in cash declared by other top state officials will likely keep the newly established Ukrainian anti-corruption bodies busy.

Still, Ukraine has also seen some setbacks and worrying trends in the past several months. This fall, the parliament prolonged by another year the ban on arable land privatization, which hinders investment and violates the rights of landowners. Moreover, the government promised to double the national minimum wage next year, which may strain the state budget and unleash inflation. At the same time, some of the older prosecutory bodies—in addition to certain parliamentarians worried about possible corruption charges coming their way—have been trying to limit the remit of the new anti-corruption bodies. Finally, under the pretext of fighting Russian propaganda, the government has been limiting certain media freedoms and stressing a mono-ethnic cultural narrative, all while not doing enough to halt the proliferation of new fringe radical nationalist organizations.

Ukraine stands a good chance to stop being a kleptocracy dependent on Russia and shunned by investors. But this chance may be lost if the West, distracted by its current problems and keen on avoiding a confrontation with Moscow, fails to provide Ukraine with sufficient support or does not continue to readily and constructively point out Kyiv’s missteps and deficiencies.