September 2014 Ukraine: Monthly Highlights in brief

September 2014 Monthly Highlights from “Digests & Analytics Ukraine” News Agency

Sanctions against Russia and cease-fire memorandums signed in Minsk haven’t de-escalated the conflict in Donbass. President Poroshenko attempts to build the «authority vertical» without having sufficient cadre resources. Early parliamentary elections are in the high gear. Ukrainian economy continues to slow down.

War in Ukraine

Cease-fire negotiations in Minsk and legalization of Donetsk and Luhans’k «People Republics» (DPR and LPR)

• Cease-fire memorandums signed in Minsk by OSCE, Russia, Ukraine and representatives of terrorists, haven’t resulted in Donbass complete conflict de-escalation even though they somewhat lowered the intensity of combat actions. Legal status of agreements, signed from Ukrainian side by ex-president Kuchma, stays unclear. DPR and LPR aren’t defined as parties of agreements and therefore don’t bear any responsibility for compliance and that have been immediately declared by self-proclaimed «leaders», who are also stressing that they are attempting to unify territories under their control with Russia. Verkovna Rada, under pressure from President Poroshenko, held a closed session and adopted legislations on special status of Donbass territories, controlled by DPR and LPR, as well as on amnesty of participants in illegal armed groups. As per experts opinion, the main Russian objective of including terrorists into the negotiation process have been reached. These legislative initiatives challenge the unitary status of the Ukrainian state, but authorities stress that those are needed for re-grouping and concentration of forces.

The conflict zone  

• Russian army and Russian-backed militants successfully advanced on Ukrainian positions in all directions and unified territories controlled by DPR and LPR. Ukrainian army have beed encircled near Ilovaysk and suffered heavy losses. Russian army seized the South of the Donetsk region and attempted to take over Mariupol, but the latter attacks have been expelled. Ukrainian army left positions in Luhansk Airport, blasting the runaway before leaving.
• Signing of truce memorandum haven’t brought the cease-fire. Militants have been continuously shelling Ukrainian army positions. Massive daily shellings and attacks on Donetsk International Airport have been ongoing. Dozens of civilians have been killed and hundreds wounded from artillery shelling of residential areas.
• President Poroshenko, after consultations with parliamentary fractions leaders, decided not to introduce martial law but have simplified the army conscription process.
• Minsk protocol cease-fire can’t last for a long time as Russia won’t be able to supply occupied Crimea after seasonal closure of the Kerch Straight ferry. The conflict could re-emerge at any moment. Thousands of pieces of heavy military equipment and tens of thousands of soldiers of the Russian army on Ukrainian borders and on administrative border with Crimea, ready to invade Ukraine, have been reported by Ukrainian intelligence service, foreign observers, USA and NATO.
• During the coming autumn-winter season, military advantage in Donbass steppe will be on the side of units located in towns. Accordingly, voluntary withdrawal of Ukrainian army from cities and towns will complicate combat operations.
• Systematic destruction of infrastructure of the territories occupied by terrorists and Russian army, while approaching the winter, allows to assume the existence of Russian plan to push civilians from Donetsk and Luhans’k regions to Russaian territory for further resettlement in Siberia, far North and far East, where Russia faces catastrophic scarcity of inhabitants.

Terrorist threat

• Security Services of Ukraine are continuously capturing subversive and intelligence groups, which are preparing terrorists attacks, both in combat area, as well as on the rest of the Ukrainian territory. Daily phone calls about mining of infrastructure installations in Kyiv have never proved substantial but they disorganize functioning of city authorities. Measures undertaken by Ukrainian authorities against persons supporting terrorists are obviously insufficient.

Russian «humanitarian convoys»

• Russia continues to infiltrate Ukrainian territory with unknown goods, part of which being ammunition and armored vehicles, under the guise of humanitarian aid, that neither have been  inspected by the International Red Cross, nor cleared by Ukrainian customs. Ukrainian authorities assume that «convoys» remove from Ukraine wounded and dead troops and mercenaries, as well as equipment of the strategic enterprises. Russia doesn’t intend to stop this practice, which is treated by the World community as invasion of Ukrainian territory.

Exchange of war prisoners

• Around one thousand of Ukrainian prisoners of war and hostages have been released in exchange for terrorists within the framework of Minsk agreements. Ukrainian military claim that they have been captured near Ilovaysk by regular Russian army units. Several hundred of Ukrainian military are still being held in captivity.

Problems of Crimean tatars  

• Occupation authorities conduct searches in buildings belonging to Crimean tatars and secretly detain them. Medzhlis leaders have been banned from entry to Crimea. These facts caused their leader Chubarov to accuse Russia in persecutions on the basis of nationality during the UN conference on indigenous people. Crimean tatars plan to hold next Medzhlis in Kyiv.

Politics

Association Agreement with the EU

• Verkhovna Rada and European Parliament simultaneously ratified the Association Agreement between Ukraine and the EU. Ukrainian society ambiguously reacted to the fact of delay of the free trade zone implementation between Ukraine and the EU until the end of 2015, under pressure from Russia. Russian Prime Minster Medvedyev signed a package of sanctions against Ukraine that will come into force as soon as the free trade zone is be activated.

Early parliamentary elections

• Central Elections Committee have registered 5,000 candidates for the early elections. 29 party lists contains numerous individuals involved in corruption and connected with Yanukovych clan. Most parties have put battle commanders on their lists. Poroshenko’s attempt to create a joint election candidate list with the party of parliament speaker and prime minister have failed. However the parties declared they will form a joint majority in the new parliament.
• Ukrainian voters are disappointed by the massive television and outdoor advertising campaign by political parties and candidates and suggest this money to be used to support Ukrainian army.
• Methods of coercing public opinion with reports by various sociology companies during the elections campaign are used both by presidential, as well as by little known political parties.

Presidential «power vertical»

• 100 days of Poroshenko presidency went unnoticed in Ukrainian media as none of the presidential election-time promises have been fulfilled. Experts assess the first press conference of President Poroshenko as an attempt at parliamentary elections PR, seeing numerous diluted and abstract priorities in the «Strategy 2020» reform program.
• President is appointing his former colleagues to all key positions. Trading of seats and positions within authorities as well as return of corrupted individuals to key positions have been evidenced.
• Prosecutor General Yarema have tried to justify facts of nepotism and corruption among his subordinates as well as absence of results in investigations of activities of former president Yanukovych and his surrounding.
• The New York Times analysts assess events in Ukraine as capitulation to Russia and believe total corruption within the highest ranks of authorities is the key reason for Ukrainian army defeat and absence of reforms.

Lustration

• Authorities’ reluctance to implement lustration could lead to transformation of civilian activism into lynching of corrupt politicians. The law on “cleansing of authorities” should launch reforms of state governance, but elected MPs, linked to repressions against Maidaners and with support of separatists and terrorists, have been excluded from the scope of the legislation. The mechanism of the law implementation haven’t been defined and after 400 amendments made by the deputies, it became a useless declaration of intentions. President Poroshenko haven’t signed the law and sent it for an expertise to the Venetian Commission. Prosecutor General Yarema claimed the law is anti-constitutional.

Economics

Administrative measures of the National Bank of Ukraine on exchange rate and regulation of the banking sector

• Decisive measures by the NBU, supported by the President and Prime Minister, as well as warnings to banks about revocation of licenses, allowed to prevent catastrophic devaluation of local currency on the interbank foreign exchange market, but this led to daily foreign currency interventions. The selling rate of 12.95 UAH/USD have been agreed during meeting of President, Prime Minister and Head of the NBU with management of TOP 50 banks. Established by the NBU limit of foreign currency sales of 3,000 UAH per day, combined with strict regulation of the exchange rate within the banking system, is pushing forex market into shadows. The real selling price of 1 USD on black market have already reached 15 UAH.

Situation in the energy sector and the «Third Gas War»

• During negotiations in Berlin between the EU, Russia and Ukraine, Ukrainian side hasn’t accepted conditions of gas supply renewal, which were previously agreed without the country representation by Euro Commissioner Ettinger and Russian Energy Minister Novak. Prime Minister Yatsenyuk stressed that Ukraine will not withdraw its legal action submitted to the Stockholm Arbitrage. Russia is trying to influence European politics via reductions of natural gas supplies, effectively blocking the reverse supplies to Ukraine. An alternative for Europe could be supplies of liquified natural gas from the US, previously approved by the Congress. Norwegian Energy Minister promised that the EU could count on increase of supplies from Norway in case of disruptions from the Gazprom side. As per experts opinion, Russia will not suspend gas supplies to Europe, as re-orientation of gas and oil sales to other markets is quite complicated. Outstanding debt of commercial enterprises to Naftogas reached 40 bln. UAH. Deficit of natural gas reserves could lead to disruption of residential buildings heating during the autumn-winter season. Accordingly, the Government is trying to push major natural gas consumers to switch to economy mode and allow them to conclude separate contracts for natural gas supply, despite resistance of the Ukrainian natural gas lobby.
• Loss of the coal mining enterprises in the east of Ukraine sharply worsened the energy balance of the country and resulted in partial emergency blackouts for certain consumers.

Absence of economic reforms, inflation, decline of industrial outputs

• Inflation grew up in August by 0.8% per month and by 12.9% as of YTD. IMF forecasts that extra 19 bln. USD of financing will be required if conflict in Ukraine escalates further. EBRD worsened the forecast for Ukrainian economy development, increasing projected decline to 9% instead of previous 7%. State Statistics Agency reported that monthly industrial output declined by more than 20% in August vs. a year ago, and by 13% since July of this year. Ukrainians withdrew around 100 bln. UAH from Ukrainian banks since the beginning of the year. As of August, steel production dropped by one third in comparison with a year ago. Ukraine dropped out of the list of top 10 steel producers in the world.
• As per experts opinion, the government doesn't execute any required economic reforms and suggested legislative initiatives are of cosmetic nature and are incapable of changing the situation.
• The government plans to increase transportation and utilities fees just after the parliamentary elections.
• Request by oligarch Kolomoysky to decentralize financial flows within the country during a de-facto war (without effective mechanisms of control over spending of budget resources) could lead to loss of state governance control.

The World reaction to aggression and sanctions against Russia

• The West concluded that Ukraine doesn’t have any chance in a war with Russia without military aid, but is not willing to participate in the conflict, assuming that at this stage the aggression could be stopped via negotiations. President Poroshenko have been promised military aid during his official visit to US and Canada, but nature and volume of such aid haven’t been discussed.
• USA, Canada, EU, Norway, Switzerland and Japan introduced additional sanctions against Russian companies from banking and energy sectors, and against individuals in Russian power structures (including Putin’s closest circle), Crimea, LPR and DPR. These sactions led to devaluation of ruble and sharp slowdown of Russian economy.