Russian President Vladimir Putin (R) arrives to attend a ceremony dedicated to the 70th anniversary of liberating the Nazi concentration camp Auschwitz at the Jewish Museum and Tolerance Center in Moscow, Russia, 27 January 2015. (EPA Photo/Sergei Ilnitsky)

Putin Goes All In as Ukraine Fights for Funding to Avert Default

BY :DARYNA KRASNOLUTSKA & STEPAN KRAVCHENKO

JANUARY 28, 2015

Vladimir Putin is playing for keeps in Ukraine and he might bankrupt the country to get what he wants.

As fighting flares anew in the 10-month-old conflict and the death toll mounts, that’s the assessment of analysts in Ukraine and New York, as well as Moscow. While Kremlin-backed rebels pressure the Ukrainian government, the U.S. and the European Union contemplate tightening economic sanctions on Russia. Putin, however, seems emboldened in his belief that this is a showdown he must not and will not lose.

“Putin realized that he will never be in the West’s good graces and this makes him act more decisively,” Igor Bunin, the director of the Center for Political Technologies in Moscow, with ties to the Kremlin, said by phone Tuesday. “He started playing all in.”

A September cease-fire between the Ukrainian government and pro-Russian separatists, which helped stem the violence, crumbled this month. The death toll surged above 5,000 as rockets hit a residential area in Mariupol and grenade fire blew out a trolleybus in Donetsk.

For Putin, maintaining Russian influence in Ukraine and preventing it from allying with his country’s Cold War-era foes in the EU and NATO is crucial and is the driving force behind his support for the rebels.

Failed talks Fighting erupted after the foreign ministers of Germany, France, Russia and Ukraine failed to make progress at a Jan. 12 meeting in Berlin and canceled plans for a leaders’ summit.  EU foreign ministers will meet Thursday to make a decision on tightening sanctions.

Joerg Forbrig, a senior program director at the German Marshall Fund in Berlin, said that since previous talk of reducing sanctions has fallen away, Putin is back on the attack and may be trying to show that sanctions are counterproductive.

Ukraine, the U.S. and its allies say Russia supports the rebels with hardware, cash and thousands of troops. The Kremlin says the government in Kiev is waging war against its own citizens, especially Russian speakers, who make up the majority of the populations of the Donetsk and Luhansk regions.

There are signs that the conflict may derail Ukraine’s push for another $15 billion in aid. The government last week requested a four-year aid package. Christine Lagarde, managing director of the International Monetary Fund, told President Petro Poroshenko that she was ready to support a pact, but said in an interview the French newspaper Le Monde published on Jan. 26 that Ukraine “must have stability at its frontiers” for any hopes of economic recovery.

‘Every time’ Such wavering is what Putin seeks, according to Alexander Valchyshen, chief economist at Investment Capital Ukraine.

“Every time Ukraine makes a step toward the West, escalation happens,” Valchyshen said by phone from Kiev on Jan. 26.

Ukraine was already struggling to make debt payments before the war. One of the turning points in the crisis was Putin’s 2013 agreement with then-President Viktor Yanukovych to lend $15 billion to the junk-rated sovereign. The deal gave fresh impetus to the opposition protests in Kiev that led to the government’s ouster two months later.

That funding was pulled after a $3 billion first installment. Russia is now considering whether to call in the debt, making the extra aid more urgent. The Ukrainian government plans to approach holders of its sovereign bonds to try to negotiate more favorable borrowing terms.

“We don’t want a Ukrainian default, worsening the plight of the Ukrainian economy,” Russian Prime Minister Dmitry Medvedev said Jan. 14. “Still, debts have to be paid, both government as well as those of companies.”

‘Unfavorable condition’ The recent rebel onslaught forced government troops to retreat, including from Donetsk airport, an epicenter of clashes.

“It’s very important for Putin to create as unfavorable a condition for Ukraine as possible,” Anatoliy Oktysiuk, a senior political analyst at International Centre for Policy

Studies in Kiev, said by phone on Jan. 26. “The war will lead to further economic deterioration, undermining the government.”

The insurgents were emboldened by their capture of the airport, which became a symbolic battleground for both sides. Mark Galeotti, a professor of global affairs at New York University, who specializes in Russian security affairs, said their surging confidence gives Putin yet another tool of leverage.

Ukraine mobilizes As the violence escalates, lawmakers in Kiev on Jan. 15 backed a partial mobilization. Russian Foreign Minister Sergei Lavrov said the next day that the move undermines peace agreements signed in September.

The insurgents are focusing on “suppressing the firing positions of the enemy,” Denis Pushilin, a rebel representative said on the self-proclaimed Donetsk People’s Republic’s website.

Their push also helps the Kremlin’s positioning before potential peace talks.

The insurgents’ ability to expand the area they control was limited after the Ukrainian government stepped up defenses, especially at strategic locations like Mariupol, according to Anton Lavrov, a Russian military analyst. In that situation, even freezing the conflict at its current state may be acceptable for Putin, if the military gainsforce the Kiev government to recognize the insurgents as viable negotiating partners, he said.

Any outcome seen by Putin as a victory would mean keeping Ukraine within the Kremlin’s sphere of influence. Galeotti said that entails devolving more power to Russia-friendly forces in the Donetsk and Lugansk regions and Ukraine formally giving up on its aspirations to join the EU and the North Atlantic Treaty Organization for now.

“Putin’s plan is to radically change the situation and to ensure the militants have full control over the Donetsk and Luhansk regions,” Oktysiuk, the Ukrainian analyst, said.

“Russia’s aim has been to control Ukraine. Now, Putin doesn’t have any other leverage but escalation.”

Bloomberg

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