Ukraine Crisis: Summary and Explanation

How Ukraine's Crisis Threatens the EU

Ukraine soldier
Oleg, one of 200 Ukrainian soldiers at the Belbek military base, kisses his girlfriend Svetlana on March 3, 2014 in Lubimovka. Russian troops ordered the Ukrainians to surrender at 4pm. The deadline passed, and locals feared a Russian attack tonight. Photo by Sean Gallup/Getty Images

On April 7, 2016, a Netherlands referendum rejected a trade deal between Ukraine and the European Union. The deal removes export tariffs and is already approved by the other EU members. The Dutch vote is not binding since the Dutch Parliament already ratified the deal. But it does signal declining confidence in the EU itself. (Source: "Netherlands Rejects EU-Ukraine Deal," BBC, April 7, 2016. "Europe Awaits Dutch Vote on Ukraine Pact," WSJ, April 5, 2016.)

On September 12, 2014, Ukraine approved the trade deal. It agreed to delay its implementation a year to avoid further Russian energy sanctions and even attacks. Ukraine President Poroshenko wanted to maintain the cease-fire. NATO has not protected Ukraine, since it is not a member. (Source: "EU Deal Triggers Backlash in Kiev," WSJ, Sept 15, 2014)

Explanation

Both sides are following President Vladimir Putin's 7-point plan, which basically gives eastern Ukrainian rebels time to regroup. It is highly unlikely that Ukraine can defeat the Russian-armed separatists. It is more likely that eastern Ukraine will move closer toward being a Moscow-controlled satellite, even though it won't secede. (Source: NYT, Putin Announces 7-Point Plan, 9/3/14)

Earlier that month, NATO revealed satellite photos showing Russia's invasion of Ukraine's eastern border. An EU emergency meeting added further sanctions on Russia's oil and banking sectors.

 It was shortly after Russia sent a convoy of trucks bearing aid to Ukraine's eastern cities, held by pro-Russian rebels. Several of those trucks entered without approval. A few days later, Ukraine reported that several military vehicles were seen near the Russian border at the port of Azov, and that Russia is attempting to create a second front for the rebels.

 

Ukraine also destroyed a convoy of military vehicles that had entered its soil, bringing arms to the rebels. This is the first time that Ukraine has attacked Russian forces directly. (Source: Washington Post, Ukraine Forces Destroy Russian Military Vehicles, August 15, 2014)

In July, Russia built up its military force on the border. There's now 19,000 to 21,000 troops, 14 advanced surface-to-air missile units, and 30 artillery batteries. This is a battle-ready force that could launch an attack into eastern Ukraine at a moment's notice.

Russia has already launched rockets across the border in support of Ukrainian rebels. If it does launch a military strike, as it did against Crimea earlier this year, expect the stock market to tumble and oil prices to spike in reaction. (Source: NYT, Build Up Makes Russia Battle Ready for Ukraine, August 5, 2014)

Putin responded to the February 23 overthrow of Viktor Yanukovych, who was an ally. The pro-West faction of Ukraine's Parliament took over the government, setting up new elections for May 25, and installed Oleksandr Turchynov as the country's temporary leader.

The crisis occurred because Yanukovych mismanaged the budget, forcing Ukraine to ask for financial help.

First, it appealed to the EU, then Russia. The political unrest occurred at this point, because those who want to be closer to the EU objected when that solution was abandoned. Russia's military strike support Yanukovych's return to Kiev and closer ties to Russia.

Sanctions Against Russia

The U.S. and the European Union extended sanctions against Russia on July 29 to convince Putin to stop supporting those in eastern Ukraine who want to break up the country. The U.S. has proof that Russia supplied separatists that shot down a Malaysia Airlines commercial jet over eastern Ukraine on July 17, killing 298 people.

The sanctions severely limit five out of the six major Russian banks' ability to obtain medium and long term financing from Europe. The U.S. has also restricted technology exports to Russia's deep-water Arctic offshore or  shale oil production. Russia has already been ousted from the Group of Eight.

As a result of U.S. sanctions, BP is worried about its profits, and Bank of America has cut its exposure to Russia by 40%.  Boeing and United Technologies started hoarding titanium since Russia's VSMPO is the world's largest producer of this rare metal. 

In response, Russia banned imports of U.S. and European foods for one year.This included $300 million of U.S. poultry products. 

So far this year, foreign direct investment in Russia has dropped by $75 billion, roughly 4% of the country's entire economic output as measured by GDP. Its stock market has plummeted 20% and its currency, the ruble, has fallen 8%.  To head off inflation, Russia's central bank raised interest rates, first to 5.5% and now to a debilitating 7.5%. (Source: The Economist, Russia's Economy, May 3, 2014)

Sanctions Caused Russia's Recession

The International Monetary Fund cut its 2014 growth forecast for Russia to 0.2%, down from its 3.8% forecast last year. If the sanctions continue, Russia could fall into recession, reduce its foreign currency reserves ,and lowering the value of its currency, sparking inflation. Even though Putin continues to be popular at home, these sanctions are hurting the country's economy. (Source: Wall Street Journal, U.S., EU Significantly Expand Sanctions, July 30, 2014)

Many small countries bordering Russia are worried that if Ukraine falls, they'll be next. The EU is unlikely to defend them, since it depends on Russia for half of its gas. Many European businesses have profitable operations in Russia. Others sympathize with Putin, who is defending Russia's borders from encroachment by NATO.

Why Is Ukraine So Important to Putin?

Putin's standoff over Ukraine has boosted his popularity rating to 80%. This support strengthened when Russia extended its grip over Ukraine in April 2014, as it supported local rebels who took over city halls and police stations throughout the east. That area is home to ethnic Russians who don't want to be part of the European Union. However, those Russians were moved there by Joseph Stalin 50 years ago to strengthen the Soviet Republic's hold on the area. (Source: BBC, Ukraine Crisis: What Is Happening Where?, April 14, 2014)

This follows Russia's annexation of the Crimean peninsula in March, which protects Russia's port access to the Black Sea. Putin estimate it will cost Russia more than $20 billion through 2020 to integrate the area. Crimea contains natural gas reserves, which Ukraine planned to develop in two years in a partnership with U.S. companies. If Ukraine did this, Russia would have lost one of its largest customers.

However, annexation worries 260,000 Muslim Tatars in Crimea, who were subjected to ethnic cleansing during the Soviets rule. They were forced to move to Central Asia, where half of them died. Crimean Tatars peacefully supported Ukraine's Orange Revolution. (Source: WSJ, Crimea's Tatars Try to Keep Their Resistance Peaceful, March 11, 2013; Fox Business News, Interview with former Georgia President Saakashvili, March 4, 2014)

Russia is one of the emerging markets that suffered a currency meltdown earlier this year. Forex traders abandoned these markets when the Federal Reserve began tapering its Quantitative Easing program, reducing credit around the world.

Russia waged wars in the past in Chechnya in the early 2000s. Putin annexed Ossetia in Georgia in 2008, and the Western world didn't really intervene. He also successfully launched a cyber-attack on Estonia. However, Ukraine is larger and borders the EU directly. (CNN, Interview with Chairman of House Intelligence Committee Mike Rogers (R-Mich.)