The blockade (by Ukrainian citizens of trade between Ukraine and Russian-controlled areas of the eastern Donbas) is still proving challenging for the President Petro Porosohenko/Prime Minister Volodymyr Groysman administration to handle. On the one part they desperately want to lift it as: a) It is proving damaging to the economy and the nascent economic recovery – which I guess Poroshenko sees as important for boosting his chances of re-election; b) It leaves Ukraine exposed to accusations from Western allies of breaking the terms of the Minsk II process, which includes commitments to work for the re-integration of (Kremlin-controlled separatist areas) into Ukraine proper.
On the other, they recognize difficult politics around this, as the nationalists and others backing the blockade have hit a popular chord with the population who question why Ukrainian entities are still trading with (Kremlin-backed separatists) which are still continuing the conflict in the east.
The message is that Ukraine should move away with trading with (separatists) and to fully put the cost of sustaining these regimes on Moscow’s lap. Moscow has kind of stirred the pot by announcing that Russia will accept (separatist issued) identifications and also making the ruble the sole legal tender in (separatist areas). There has also been talk of (separatists) nationalizing assets on their territory, but still technically in the ownership of Ukrainian entities. Not sure that Moscow actually wants to add the cost of maintaining (separatist areas of the Donbas), alongside the now long list of annexed and disputed territories including Crimea, South Ossetia, Abkhazia, and Transnistria. Formal annexation of (the Donbas) would also further diminish Russian leverage in the rest of Ukraine, which I tend to think was the primary reason for Russian intervention in the first place.
The Ukrainian government has hence tried to manage the blockade with care – nervous about using heavy-handed tactics for fear that these will get out of hand, provoking a larger popular backlash. But this week we have seen a varied strategy applied:
First, we have seen police, Security Service of Ukraine (SBU) forces move in to remove one of the blockade sites – arresting a couple of score of demonstrators. This proved relatively successful – while there were counter-demonstrations across Ukraine, and in Kyiv, these have proven relatively muted, attended only by a few hundred demonstrators. Assuming no larger opposition, I think we could see police/SBU operatives move to try and break the rest of the blockades.
Second, the prosecutor general, Yuriy Lutsenko, announced legal action against Lviv Mayor Andriy Sadovy over alleged malpractice around the management of refuge dumps in Lviv – a fire recently saw a number of people killed, and the allegations are of some kind of liability by Sadovy. Sadovy is seen as a contender for the presidency in the 2019 elections, and his Samopomich Party has been big backers of the blockade. Cynics might argue that the two events are linked – and all this is a warning to Sadovy to back off over the blockade.
Third, the government is promising a better regulation/restriction of trade with (Kremlin-controlled areas of the Donbas). The assumption is that this still allows strategic supplies of coal/raw materials across to industrial facilities in the rest of Ukraine, but presumably some strategy to ween Ukraine away from the continued reliance, for example on anthracite coal from (separatist areas). Critics would argue that this is just pandering to oligarchic interests in Ukraine.
Fourth, perhaps a sop to nationalists with questions being raised over the future of Russian bank operations in Ukraine. Nationalists have in recent days targeted Russian bank branches – even bricking up the entrances to a number of these. The NBU has threatened to sanction Russian banks for transacting with (separatist) entities and the National Bank of Ukraine and the SBU are slated to have a discussion over the longer term future of Russian banks in Ukraine.
On the issue of Russian banks, the NBU has thus far been sanguine, even supportive of their continued operation/presence in Ukraine. Partially this reflected the prior weakness/vulnerability of the Ukrainian banking sector – there was nervousness about Russian banks’ early withdrawal ($20 billion in assets at one point) and how destabilising this could have been for the wider sector, and also the potential cost to the sovereign balance sheet through likely needed action to take over these banks. Russian banks have actually behaved impeccably, cooperating with the NBU, recapitalizing as required.
I think partially this is in recognition that by handing back the keys they would automatically suffer a full loss on their assets, plus also they would be unlikely ever to be given banking licenses in Ukraine. And retaining even now skeleton operations in Ukraine gives Moscow some leverage, albeit declining. It now seems likely, given the political setting in Ukraine, that these entities will be sanctioned by the Ukrainian government for alleged transactions with (separatists) and this could see their eventual nationalization by the Ukrainian state. Russian banks have significantly wound down their operations in Ukraine. With the broader Ukrainian banking sector appearing in a healthier state and with public finances also in better order, I don’t think this process will have much of a systemic impact on the Ukrainian banking sector or economy. But it seems likely that such action will be challenged by Russian entities in the courts – adding yet another lawsuit to the now many between Russia and Ukraine.
One big takeout is the more nationalist mood/agenda in Ukraine, and I think this could also play out more broadly in Ukrainian politics – this could impact on the Groysman administration which is likely to suffer a no-confidence motion in April/May, and even in a best case is likely to be significantly reshuffled. This process could be disruptive and the danger as I see it is that we see a much more Ukrainian-first agenda rolled out, which might be less International Monetary Fund-friendly – so less willingness to do some of the IMF-related reforms, including land reform, pension reform and furthering the anti-corruption agenda. Some might argue that any government reshuffle/change in Ukraine will ultimately be focused at stalling that anti-corruption agenda which has now reached a critical point but is now so important to Ukraine longer term growth and development.
