A bottomless pit: the costs of Crimea’s annexation by Russia. OSW Commentary No. 143, 29.07.2014

The annexation of Crimea has brought the Russian authorities significant dividends, in particular on the domestic stage: it has resulted in an unprecedented social and political consolidation, and strengthened Vladimir Putin’s position after several years of decline in social support for him. It has provided Russia with strategic benefits, giving it broad access to the Black Sea and the military infrastructure on the peninsula, as well as access to natural gas and crude oil reserves. Russia has also taken over numerous assets (including the tourist infrastructure) previously owned by the Ukrainian state. However, the decision itself concerning Moscow’s annexation of Crimea was taken off the cuff, with no calculation of the costs of integrating it with the Russian legal, political and socio-economic space. Russia took over a region that required subsidies from the Ukrainian budget; moreover, the annexation struck at the most important industry of the Crimean economy – tourism. Crimea’s integration with Russia will be a complex process that entails high costs, financial, organisational and social, including multi-billion dollar investments in the modernisation and development of infrastructure, covering the region’s budget deficit, and paying out social benefits. For reasons of prestige and political significance, Moscow is treating Crimea as a showcase region. Russia is determined to prove that the Crimean incorporation will be beneficial for the region’s economy and will raise people’s living standards. However, the expenses triggered by Crimea’s integration will coincide with a deteriorating economic situation in Russia, aggravated by US and EU sanctions, and this may force Russia to postpone or even give up some of its ambitious investments in the peninsula. Some of the integration costs will have to be borne by other Russian regions, even though they already face serious financial problems that have forced them to reduce their own investment programs. Another issue that has come into question is the fulfilment of the Crimean people’s’ expectations concerning the improvement of their living standards, due to the tourist sector’s problems (small-scale tourist services used to be one of the local people’s main sources of income), the rising costs of maintenance, and finally, restrictions of civil rights after the introduction of the more restrictive Russian legislation.

Azerbaijan-a growing problem for the West. OSW Commentary No. 146, 15.09.2014

Azerbaijan’s cooperation with the West, launched two decades ago, has helped it become a relatively strong and ambitious actor on the international stage. It has become a key country in the region from the Western (USA and the EU) and Turkish points of view, as well as an important partner in the energy sector. The strategic EU concept of the Southern Gas Corridor, also supported by the United States, is among the initiatives based on cooperation with Azerbaijan. Surprisingly, however, Azerbaijan’s increased ambition and importance have caused its policy to diverge ever farther from the expectations and plans formulated by the West. The changes in the balance of power in the South Caucasus, occurring in the context of the conflict in Ukraine, have forced Azerbaijan to revise its assessment of its position in the region. The main impetus for Azerbaijan’s actions is fear of Russia, as well as the weakness of the West which has become particularly apparent in the recent stages of the Ukrainian crisis. Azerbaijan’s actions so far have displayed its tendency to deepen its self-isolation in foreign affairs and consolidate its authoritarian system. This comes as a challenge to the West, whose ability to shape its relations with Azerbaijan has weakened considerably. This state of affairs poses the threat that in the current situation, the Southern Gas Corridor concept, which Azerbaijan amended in 2012 in its own favour, might become totally blocked.

Ukrainian economy overshadowed by war. OSW Commentary No. 148, 08.10.2014

Ukraine’s financial results over the past few months prove that the economic crisis which has been ongoing since mid 2012 has exacerbated. According to data from the Ukrainian Ministry of Economy, Gross Domestic Product for the first six months of 2014 shrank by 3%. In the second quarter, it fell by 4.6%1 and may further be reduced by as much as 8–10% over the year as a whole. After the first six months of this year, the balance of payments deficit reached US$4.3 billion. After deflation last year, prices grew by 12%, and the hryvnia dropped to a historic low. Although a surplus was seen in Ukrainian foreign trade in goods and services, reaching over US$3 billion at the end of June, its trade volume is shrinking. The main reason behind this deteriorating situation is the actions taken by Russia. Moscow has been fomenting the conflict in Donbas since April, has consistently imposed embargoes on imports of more and more Ukrainian goods and cut gas supplies to Ukraine in June. This has forced the government to focus on the current management of state finances and to carry out budget sequestration twice this year. The government has also used this as an excuse not to implement necessary systemic reforms. The increasing share of military expenditure, the shrinking exports (-5% in the first six months), including in particular to Russia, which until recently was Ukraine’s key trade partner, and the rapid fall in industrial production and investments have all made the situation even worse. All that saves Ukraine from an economic collapse is the loan from the International Monetary Fund and higher taxes, which allows the government to maintain budget liquidity. However, if the conflict in Donbas lasts longer and if Russia continues its economic blackmail, including withholding gas supplies, the economic crisis may prove to be long-lasting.

Before the parliamentary elections in Ukraine. OSW Commentary No. 149, 15.10.2014

The parliamentary elections to be held in Ukraine on 26 October will bring about deep changes in the political composition of the Verkhovna Rada, Ukraine’s parliament. It is very probable that after the elections only one or two of the five parties which are represented in the parliament today will remain, and the leading positions will be taken by groupings who were still considered marginal a year ago. The Petro Poroshenko Bloc, a party which according to polls can count on victory, did not exist a year ago and today still remains in the construction phase. It is likely that around two-thirds of the newly elected deputies will be people with no parliamentary or even no political experience. On the one hand, this may be a strong impetus to revival; but on the other the lack of experience of most of the parliamentarians may be a problem. Another source of potential problems may be the process of consolidating the internally unstable political parties which have emerged during the electoral campaign. All of the parties which will count in the upcoming elections have a pro-European programme. It is probable that the numerous supporters of an anti-Western orientation (although not necessarily a pro-Russian orientation, as recent events have shown) will be represented by very few deputies elected in single-mandate constituencies. On the one hand, this homogeneity within the Rada will facilitate the country’s reforms, including work on the new constitution, while on the other it might be a subject of permanent criticism by Moscow and its Ukrainian representatives. The elections will take place in the conditions of a growing wave of social disappointment and ongoing military actions in the eastern part of the country. Nevertheless, it can be expected that the vote will be held without any major disturbances, and its course will be transparent and fair.

The Ukrainian Orthodox Church's stance on the revolution and war. OSW Commentary No. 151, 27.10.2014

Volodymyr (secular name Viktor Sabodan), the Metropolitan of Kyiv and All-Ukraine, the head of the Ukrainian Orthodox Church (UOC), which recognises the honorary primacy of the Moscow Patriarchate, died on 5 July 2014 at the age of 79. He was replaced by Metropolitan Onufry (secular name Orest Berezovsky), aged 70. The fact that this representative of the moderate trend, far from politics, was elected signifies that the UOC’s previous policy will be continued in the coming years: strengthening the Church’s independence without questioning its canonical bonds with Moscow. Metropolitan Onufry’s task is to wait out the hard times, rather than to embark upon an active policy. The political developments this year have significantly weakened pro-Russian views and sentiments among the Ukrainian public, including members of the UOC. On the other hand, they have also contributed to the radicalisation of views within firmly pro-Russian circles. The hierarchs of the Ukrainian Orthodox Church have distanced themselves from these developments. The reasons for this included a lack of unity among them as regards this issue, as well as the leadership crisis linked to Metropolitan Volodymyr’sillness. The main problems the Ukrainian Orthodox Church is facing today are as follows: meeting the expectations of those of its members who hold patriotic views (mainly the younger generation) without at the same time antagonising its numerous members who are pro-Russian; and also continuing to disregard the Kyiv Patriarchate and maintaining bonds with the Russian Orthodox Church. Therefore, we may expect the UOC to continue avoiding taking a clear stance on the present conflict, instead focusing on charity.

Triangular Geopolitics in Europe’s Eastern Neighbourhood. CEPS Commentary, 2 December 2014

Over the last few months, Russia has employed a number of economic and security measures to derail the Deep and Comprehensive Free Trade Agreement (DCFTA) between the EU and Ukraine. Russia’s opposition to the Agreement was based on the argument that it would damage its economy and weaken its trade ties with Ukraine. Russia’s actions ultimately led to war in Ukraine, but did not succeed in reversing Ukraine’s EU integration policies; instead there are now trilateral negotiations between the EU, Ukraine and Russia on mere technical trade aspects of the DCFTA. The Kremlin is using similar rhetoric and, to some extent, similar coercive measures against the DCFTAs with Moldova and Georgia. But the small scale of Moldovan and Georgian trade with Russia is not a legitimate reason for the EU to replicate the Ukraine ‘trialogue’ on the DCFTAs in these countries. Instead, Moldova’s heavy dependence on Russia’s energy and the former’s transit role for the EU offers a greater possibility to set up trilateral negotiations, similar to the recently finalised gas trialogue between the EU, Ukraine and Russia.

The declared end of South Stream and why nobody seems to care. CEPS Commentary, 5 December 2014

More than seven years after the South Stream pipeline project was first announced in June 2007, it finally seems to have been dropped by Russia’s President Vladimir Putin on his visit to Turkey this week. This CEPS Commentary looks at the ostensible reasons for President Putin’s decision as well as on what’s potentially behind them. It concludes that the EU may actually benefit from this decision in being able to secure more gas with less political interference from Russia.

Russia in Serbia – soft power and hard interests. OSW COMMENTARY No. 150, 2014-10-29

Russian President Vladimir Putin’s visit to Serbia on 16 October has demonstrated Moscow’s willingness to secure its interests in the Balkans and use Belgrade in its confrontation with the West. It seems, however, that Russia does not have much to offer to Serbia’s authorities, which are reluctant to make more concessions towards Russia. However, Moscow has already gained a strong position in Serbia, which is due to the country’s dependence on Russian natural resources and, in particular, strong support for Russian policy on the part of Serbian elites and society. The traditional pro-Russian attitudes have been strengthened as a result of a series of Russia-inspired, wide-ranging soft power initiatives which have proved so successful that a large part of society has begun to believe that Russia’s interests are consistent with Serbia’s. Russia’s increasingly active policy towards Serbia and the Serbian minorities in the neighbouring countries – Bosnia and Herzegovina, Montenegro and Kosovo – has been part of a larger plan aimed at hampering the integration of the Balkan states with the Euro-Atlantic structures and maintaining an area of instability and frozen conflicts in the EU’s near neighbourhood. Russia’s policy is also becoming increasingly effective due to the EU states’ diminishing support for Balkan countries’ European integration.

Russian sanctions against Moldova. Minor effects, major potential. OSW COMMENTARY No. 152, 2014-11-06

Russia has been Moldova’s main trade partner and Russian capital has accounted for a large part of its foreign investments, dominating in the energy and the banking sectors. Moreover, Russia has been a key job market for Moldovan expatriate workers. In the economic sphere, this is making Moldova unilaterally dependent on Russia. Moscow has been attempting to exploit this situation to put pressure on the authorities in Chișinău for quite some time. In recent months Russia has increasingly used instruments for exerting economic pressure on Moldova, as a means of responding to the current authorities’ pro-Western policy. A key element of this policy was Moldova’s signing on 27 June 2014 of the Association Agreement with the EU (which came into force on 1 September 2014). Over the last year, Russia has implemented a number of import restrictions on Moldovan goods. The aim of the Russian actions is to fuel social disappointment, and ultimately – to prevent the pro-European coalition currently in power from winning the parliamentary elections scheduled for 30 November 2014. Another aim might be to convince the Moldovan authorities to suspend the implementation of the Association Agreement – a plan openly put forward by Vladimir Putin during the CIS summit in Minsk on 10 October 2014. So far, however, the Russian economic sanctions have failed to produce the expected results. Support for the pro-European parties has been high, and there is little chance that the pro-Russian groups might achieve a parliamentary majority. It is not inconceivable, then, that in the upcoming months Moscow might decide to resort to other, more potent instruments of economic pressure such as speculation on the financial market, carried out as part of its de facto control over the banking sector. Another possibility is further tightening of trade restrictions, issuing expatriate workers from Russia or using Moldova’s dependence on Russian energy.

Dialogue with the Eurasian Union on Ukraine – an opportunity or a trap? OSW COMMENTARY No. 154, 2014-12-01

The Eurasian Union (or, to give it its full name, the Eurasian Economic Union, EEU) is Russia's flagship project, by use of which it aims to institutionally subordinate the post-Soviet states to itself using political ties and the projected common economic space. The Kremlin has so far managed to persuade Belarus and Kazakhstan, and tentatively also Armenia, to join this integration project, which on the surface looks like a multilateral initiative but in reality conceals a network of bilateral relations centred on Russia. However, in order for Russia to reconstruct its influence in its neighbourhood permanently and without change, it is of key importance that Ukraine is incorporated into the EEU. That still seemed feasible even in 2013, but the Maidan and the Russian-Ukrainian war have undone this possibility. However, they also opened up an alternative scenario for Russia, one in which the Western states recognise the Eurasian Union as a legitimate partner in discussions about a new order in Europe with a view to restoring peace in Ukraine. It is worth taking into account the strategic consequences of that scenario. We need to consider if the idea which Moscow has been lobbying for – and which has found some supporters in Brussels and Berlin – threatens to take us back to the Cold War system of geopolitical blocs and implies recognition of Russia's dominance over Ukraine and the other Eastern Partnership countries?

The eastern ‘partnership’ of gas. Gazprom and CNPC strike a deal on gas supplies to China. OSW COMMENTARY No. 139, 2014-06-16

The CEOs of Gazprom and China’s CNPC signed a contract concerning Russian gas supplies to China on 21 May 2014 in Shanghai. The contract had been under negotiation for many years and was signed in the presence of the two countries’ presidents. Under this 30-year deal, ultimately 38 billion m3 of natural gas will be exported annually from eastern Siberian fields (Chayandinskoye and Kovyktinskoye) via the Power of Siberia pipeline planned for construction in 2015–2019. The lengthy negotiation process (initial talks regarding this issue began back in the 1990s), the circumstances surrounding the signing of the contract (it was signed only on the second day of Vladimir Putin’s visit to Shanghai, and the Russian president’s personal engagement in the final phase of the talks turned out to be a key element) and information concerning the provisions of the contract (the clause determining the contract price has not been revealed) all indicate that the terms of the compromise are more favourable for China than for Russia. This contract is at present important to Russia mainly for political reasons (it will use the future diversification of gas export routes as an instrument in negotiations with the EU). However, the impact of this instrument seems to be limited since supplies cannot be redirected from Europe to Asia. It is unclear whether the contract will bring the anticipated long-term economic benefits to Gazprom. The gas price is likely to remain at a level of between US$350 and US$390 per 1000 m3. Given the high costs of gas field operation and production and transport infrastructure development, this may mean that supplies will be carried out at the margin of profitability. The Shanghai contract does not conclude the negotiation process since a legally binding agreement on gas pipeline construction has not been signed and not all of the financial aspects of the project have been agreed upon as yet (such as the issue of possible Chinese prepayments for gas supplies).

Big business in Belarus - its genesis, conditions and prospects. OSW Commentary No. 113, 2013-09-09

Over the past ten to twenty years, Belarus has seen a steep rise in the number of local dollar millionaires. This has somewhat undermined the myth of an egalitarian model of society promoted through the Belarusian state propaganda. There is a small group of businessmen among the top earners who, in exchange for their political loyalty and their consent to share profits with those in power, have enjoyed a number of privileges that allow them to safely conduct business in an environment typically hostile to private enterprise. The favourable conditions under which they are operating have enabled them not only to accumulate substantial capital, but also to invest it abroad. However, since such businesses are seen as providing a financial safety net for the regime, in 2011 and 2012 some of their directors received an EU travel ban, while their companies were subjected to economic sanctions by Brussels. At the same time, fearing that Belarus’s big business could become powerful enough to influence the country’s political scene (as has been the case in Russia and Ukraine), Alexander Lukashenka has actively prevented such players from becoming too independent. Consequently, Belarus has so far not developed its own elite class of oligarchs who would be able to actively influence government policy. The current informal agreement between the government in Minsk and big business has proved stable and is unlikely to change in the near future. Nonetheless, a reordering of state power giving Belarus’s big business significant political influence would be possible should Mr Lukashenka lose power in the next presidential election.

Kyiv's gas strategy: closer cooperation with Gazprom or a genuine diversification. OSW Commentary No. 110, 2013-07-16

In recent months Kyiv has been intensifying its efforts to diversify Ukraine’s gas supply routes with a view to reducing the country’s dependence on imports from Russia. One of the steps which Kyiv has taken has been to make the unprecedented decision to start importing gas from its Western neighbours. In November 2012, Ukraine’s state-owned Naftogaz began importing gas through Poland under a two-month contract with RWE (the imports continued into 2013 under a separate deal), while in the spring of 2013 Ukraine started importing gas from Hungary. Kyiv is also currently looking into the possibility of purchasing gas from Slovakia. Furthermore, since 2010 the Ukrainian government has been working on the construction of an LNG terminal near Odesa. The authorities have declared that this will allow Ukraine to import up to 5 billion m3 of LNG a year by 2015. The government has also taken measures to increase domestic production, including from non-traditional sources, and it plans to replace gas-based with coal-based technologies in local power stations. Finally, in January 2013, the government signed a 50-year production sharing agreement with Shell. This paves the way for the development of Ukraine’s shale gas deposits.

Russian army justifies its reforms. OSW Commentary No. 109, 2013-06-25

The Armed Forces of the Russian Federation have been more active than usual since mid- -February this year, holding a number of previously unannounced military exercises aimed at testing combat readiness. They have also maintained, for many months, a Russian warship task force in the Mediterranean in connection with the civil war in Syria. Those activities stand out of the usual training routine of the Russian army. They have no precedent in Russia’s recent history in terms of the size of the forces involved, the measures employed, the territorial span, the number of exercises, or the scheduling and mode of carrying out the drills. The last combat-readiness tests on this scale were carried out by the Soviet army in the 1980s. The intensity of the Russian Navy’s activities in the Mediterranean and the military means engaged are comparable, in due proportion, with the activities of the Soviet fleet during the Vietnam war. The Russian leadership, including president Vladimir Putin, has been directly following the recent activities of the Russian Armed Forces and their evolution.

An aided economy: the characteristics of the Transnistrian economic model. OSW Commentary No. 108, 2013-05-14

The economy of breakaway Transnistria is a peculiar combination of the command-and-distribution model inherited from the USSR with elements of a free-market economy which is heavily dependent on Russian energy and financial subsidies. The main pillars of the region’s economy are several large industrial plants, built in the Soviet era, which generate more than half of its GDP (in 2012, Transnistria’s GDP reached around US$1 billion). As a consequence, the condition of each of these companies, whose production is almost exclusively export- -oriented, has a huge impact on the economic situation in Transnistria. This makes the region extremely sensitive to any changes in the economic situation of its key trade partners. This problem is additionally aggravated by the extremely low diversification of Transnistrian exports. The only major economic entity in Transnistria which regularly yields profits and is not so heavily dependent on the external situation is Sheriff. This corporation controls the greater part of the local wholesale and retail trade, as well as a major part of the services sector on the domestic market.