Minsk-2 Preliminary Analysis

Posted on Fort Russ
2/12/2015

Minsk-2: Withdrawal of Forces and Autonomy for the Donbass.
By Russkiy Malchik

Translated from Russian by J.Hawk

Information is still scarce. We have seen the main principles which were clear. But it’s obvious that they spent 16 hours discussing not the basic principles but the details. It is the details that are the core of the peace plan.

Unfortunately neither Poroshenko nor other leaders signed the joint declaration, and the “Collection of Measures” were signed only by the members of the contact group, namely LPR/DPR, Kuchma in Kiev’s name, OSCE, and Zurabov. That list likewise contains 13 points with fairly general formulations, which will require further clarification. But there are also specifics that have been published and by which we can assess how the negotiations went and what kind of compromise was reached.

The first has to do with the withdrawal of heavy weapons under OSCE control. The conditions are rather odd: it specifies a distance of 50km (for cannon) or 140km (for rocket artillery), from the actual line of the front as of midnight, February 15, and for the militia from the September 19 line [the line of demarcation from Minsk-1].

This means that both sides should leave their positions, creating a huge belt (100-300km) without weapons, de facto up to the borders of the Donetsk and Lugansk regions. Which leads to the following question: who will control it? This is the key question. So far there are no clear answers. But considering that the issue of peacekeepers was frequently brought up, this is who they have in mind. It is not for nothing that the Donbass representatives said that they will accept only Russian and Belarusian peacekeepers. Kiev, on the other hand, does not want peacekeepers, but if it does agree it will want NATO troops. So there is a big question mark here.

The second interesting provision is this. In the paragraph 11 which concerns Ukraine’s constitutional reform, which is to be implemented by the end of 2015, there is a provision which includes the main provisions of the law on the “Special Status of Lugansk and Donetsk Region”, which read as follows:

–Immunity from punishment, prosecution, or discrimination for individuals which participated in the events that took place in various parts of the Donetsk and Lugansk regions (this amounts to legalizing all combatants).

–The right to language self-determination.

–The participation of local self-government in the nominating process for the office of prosecutor general and the courts in the regions (LPR and DPR de-facto control over the legal and law enforcement systems).

–The central government shall enter into agreements with the local self-government concerning economic, social, and cultural development of the regions (Kiev will enter into agreements with Donetsk and Lugansk concerning all crucial aspects of the joint economy).

–The government supports the socio-economic development of the separate regions (Kiev will partially finance the reconstruction of Lugansk and Donetsk, and guarantees the fulfillment of social obligations).

–The central government shall facilitate cross-border cooperation between the several districts of the Donetsk and Lugansk regions with regions of the Russian Federation (Kiev will not oppose the cooperation between Lugansk, Donetsk, and Russia).

–The establishment of people’s militia in accordance with local government decisions in order to maintain public order in the several regions (the militia becomes a law enforcement organization, all power institutions remain under the control of the current leadership).

–The authority of the local authorities and officials from special elections that were designated by the Verkhovna Rada in accordance with this law, cannot be invalidated before their terms run out (this guarantees the rights of the current DPR and LPR government until they are re-elected as part of the process of forming local self-government through new elections).

As a result, Donbass receives widespread autonomy within the framework of nominally unitary Ukraine. This is the compromise which satisfied Putin after the 16-hour Minsk marathon. Moreover, France and Germany guarantee the re-establishment of the Donbass banking system, and will reach an agreement with Russia concerning the rules concerning the free trade zone between EU, Russia, and Ukraine, while taking into consideration the special status of Donbass.

The third detail pertains to border control. Here the language is extremely clear. The border between Ukraine and Russia will be re-established only after Ukraine carries out constitutional reforms, which implies autonomy (self-government, people’s militia, cross-border cooperation with Russia). In other words, once Kiev gives Donbass control over its own territory, then the border shall be re-established…but will remain under militia control.

To sum up this quick analysis based on still-incomplete information one can say the following: in purely diplomatic sense, Russia scored a success, forcing Kiev and the West to accept a painful and temporary, but real compromise. It is based on freezing the military conflict and the autonomy of the Donbass while nominally preserving Ukraine’s borders. In practice we are talking about reformatting Ukraine from a unitary into a federal state, regardless of Poroshenko’s denials. If the Galicia banderites realize this, they’ll start screaming about “Poroshenko’s treason.”

Of course, the implementation of the agreement is another question. The fact that neither Poroshenko nor European leaders signed it does not make it easier. On the other hand, Hollande’s and Merkel’s wishes are more than real, so it will fall to them to compel Kiev to implement the “Collection of Measures.” The only other option is a complete defeat for Ukrainian forces. To which Putin merrily alluded when he mentioned Debaltsevo—either you come out with your hands up, or you’ll continue to get killed.

The Minsk peace plan from February 12 does not solve the problem (and it could not solve it), but creates the possibility to delay the war until the end of 2015. With one condition: that Kiev and Washington accept the federalization of Ukraine. If not, the war will come to Kiev.

J.Hawk’s Comment:  The biggest factor here is whether the Ukrainian military is up to the task of continuing the fighting. If it is, if Poroshenko believes its forces have been sufficiently restored, the fighting will resume. However, the Ukrainian military took a heavy beating in the last months’ fighting and it will find it difficult to replace the lost equipment. Mobilization is unpopular, and there is little chance that NATO will rearm Ukraine. Last but not least, there is also the IMF and its stringent conditions on government spending that come as part of its bailout packages. Yaresko had already announced that Ukraine’s budget will have to undergo significant changes in order to accommodate the IMF. It’s difficult to see what else in that budget could be cut aside from the defense spending. Hollande and Merkel are not stupid, they’ve seen enough of Poroshenko to know what he is capable of, so therefore they will most likely act through the IMF to reduce Ukraine’s ability to wage war.

So overall this is a better agreement than Minsk-1, though not as good one as might have been reached should the Ukrainian military first suffered a catastrophic defeat. The fact that Novorossia will continue to enjoy unimpeded contact with the Russian Federation is also a major plus–Minsk-1 agreement called for the border control to be returned to Ukraine. 

But in the meantime Novorossia continues to exist and to enjoy a high degree of autonomy, though it is not likely that its authority will spread all the way to the borders of the Lugansk and Donetsk regions, even though Minsk-2 does not appear to contain any language concerning demarcation lines.   The above, of course, assumes that there will be a ceasefire at midnight of February 15, and there might not be one. Minsk-2 says nothing about Debaltsevo, which means the Ukrainian side will continue its attempts to break into or out of the encirclement. If the ceasefire goes into effect as of the 15th with the Ukrainian forces still trapped in Debaltsevo, they will have no choice but to surrender their weapons and depart. Poroshenko cannot allow that to happen, so the fighting could well continue. One can always perpetrate a “false flag” attack or two as an excuse for breaking the ceasefire…

 

http://fortruss.blogspot.com/2015/02/minsk-2-preliminary-analysis.html

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Oleg Tsarev: Five conclusions on Ukraine as the plunder continues

End of the life cycle of the project “Ukraine is not Russia”
Конец жизненного цикла проекта «Украина не Россия»

by Oleg Tsarev, Chairman of Novorossiya Parliament, for vz.ru
December 19, 2014

——————————————————————————

It has been a year since many Ukrainians came out on the Maidan, wishing to “improve life” in their own understanding, namely by integrating Ukraine into Europe. One can already make an assessment of the consequences but, to put it mildly, they are not encouraging.

First Conclusion: Maidan was very well prepared

The preparations did not begin with Victoria Nuland’s cookies but much earlier, with Kravchuk and Kuchma who generously handed out national properties to “their own people”, with Yushchenko who delivered the coup de grace both to the economy and the military, and with Yanukovych, who placed his “overseers” in all regions of the country.

Only in the last 15 years infrastructure wear and tear increased from 40% to over 80%. As a result by early 2014 Ukraine reached a pre-default stage. Gold and hard currency reserves shrank to 15 billion dollars, the country’s inability to fulfill its financial obligations increased to 65%, reaching an almost absolute record.

By comparison, the media is reporting that Russia is considered to be at 17% risk of default. Yet Ukraine’s total debt to all creditors is, by Ukrainian standards, astronomically high at $65 billion.

What did Ukrainians receive in return? The budget started delaying even the most important payments to the regions and to the population, the hryvnia already lost almost half of its value against the dollar and 42% against the euro.

The fall of Ukrainian currency is accompanied by growth of retail prices. Inflation already reached 20%.

Second Conclusion: Ukraine was subsidized by Russia during its entire independence period

This took mainly the form of lowering the price of energy.

The total level of subsidies exceeded $100 billion, and when Tymoshenko signed her “prison contract” forcing Ukraine to genuinely pay for gas, Ukraine’s budget instantly developed a “black hole” under the name of “Naftogaz” which amounts to 4-5% of the country’s GDP.

Of course, the national treasury did not empty itself out overnight, Yanukovych also made a contribution to that. However, right now the treasury is being filled by a massive currency emission by the National Bank of Ukraine which, according to Tymoshenko itself, is nearly equivalent to the entire national budget, exceeding $300 billion. Which spells a financial doom for the country.

Third Conclusion: The Plunder Continues

And it is continued by the followers of the kolomoyskiys, the poroshenkos, the yatsenyuks who came to power in the aftermath of the Maidan.

It all began with the transferring out of the country of Ukrainian gold reserves, and is continuing through profiteering on supplies to the combat zone, pumping out of petroleum needed to maintain the “Ukrnafta” oil pumping machinery, and by theft of 5 billion cubic meters of natural gas belonging to Firtash (originally purchased by a $1.4 billion credit from Gazprombank in order to preserve Ukraine’s chemical industry).

They do not shy away from direct seizure of factories belonging to their competitors. The most recent major seizure took place in Odessa, at an oil refinery.

Fourth Conclusion: “Western partners” are strenuously pretending that everything is all right

Unlimited currency emission and the de-facto freeze of hard currency markets, the banks’ inability to return deposits, the inability to fulfill budget obligations, all of that is being ignored. The International Monetary Fund does not even have, by its own mandate, the right to give money to a country in the middle of a war.

But the markets cannot be fooled. The interest rates on Ukraine’s Credit Default Swaps (CDS), Eurobond interest rates and internal currency obligations are beating all records, indicating that a default is inevitable. Business publications (The Economist, Der Welt, and others) are beginning to prepare investors for the inevitable: if Ukraine is not given, say, another 20-25 billion dollars in the nearest future (and this in addition to the IMF and EU assistance to the tune of $37 billion), Ukraine will declare bankruptcy.

The interest of a one-year Ukrainian bond increased from 10% at the beginning of 2014 to the unheard of 27% today. Analysts cannot recall another such massive jump.

The same is true for Ukraine’s default risk assessments. At the beginning it was rated at 49%, which is high enough, but during the period of greatest tensions with Russia the indicator jumped to 60%.

Fifth Conclusion: Ukraine has no money

The currency reserves of the National Bank of Ukraine are microscopic, and almost entirely consist of securities which nobody else wants (there are rumors that $6 billion of currency reserves were traded for shares in Lehman Brothers which went bankrupt in 2008), the exporters are not selling their hard currency since they themselves are struggling, and importers cannot obtain hard currency even for critical purchases.

At the same time Kolomoyskiy is supplying substandard body armor at their weight in gold and is increasing the capital of his own Privat Bank, while at the same time reducing tax obligations to the state.

Ukraine is bragging that it increased exports this year, forgetting to add that it accomplished that feat by exporting the last of its grain reserves. As to what will happen in the spring and how the people of Ukraine will be fed, it does not seem to concern the government.

No Coal for Power Plants and None in Sight

The Donbass coal cannot be purchased for ideological reasons since, according to Yatsenyuk himself, that would be “financing terrorists.” The entire energy sector of Ukraine is sustained by supplies of nuclear fuel from Russian Rosatom (which represents nearly 50% of energy production in Ukraine).

The winter is coming, yet ‘the provision of heating of the population’ (as Klitchko famously said before) is still under question.

The efforts of the new Ukrainian ruling elite include not only the attempts to hurt Russia and the owners of Ukrainian Eurobonds (half of the total of $17.5 billion is owned by the US-based Templeton Fund), but also their own citizens, otherwise the Ukrainian “bust-out” might fail.

They are even attempting to cut off the untamed Donbass from the Ukrainian financial system and close government offices and banks in the Donetsk and Lugansk Republics. That is to say, to abandon to their fate more than 4 million of our citizens by claiming that Donbass is not making budget contributions. And those are the policies which, in their view, are supposed to revive Ukraine’s economy.

Kiev is accelerating its own collapse

Donetsk alone fulfilled 89.2% of its budget contributions in 10 months. Yet now the retirees are being told that their pensions are not being paid by Kiev since June because allegedly Donbass has not been making transfers to the national budget. This despite the fact that since January Donetsk alone transferred 5.519 billion hryvnia, of which 4.746 billion went into the national pension fund.

One should also add that Donbass represents almost a third of Ukraine’s industry, nearly all of its coal, and a fourth of its exports.

Only one conclusion can be made on the basis of the above: a crisis is coming, and it will take many forms.

  1. The paralysis of the budget and the banking system. Default before individual depositors (which already took place as far as the inhabitants of Crimea and Donbass are concerned). Multi-month delays in the payment of salaries, pensions, benefits. The seizure of industries belonging to the competition (mainly Firtash, Akhmetov, the Yanukovych group). Plunder of the remnants of state property. The ultimate bankruptcy of Naftogaz.

But the key element of the process of the collapse of the economy is the default by the state before its own people, which can take place not only in the form of direct failure to fulfill social obligations but also through hyperinflation. This would represent a total war, aimed against one’s own country.

  1. Possibly (in parallel or slightly later) a chaotic external default, which may be triggered by the collapse of the IMF program (the next tranche was delayed until Kiev satisfies at least some of IMF’s conditions). Once that happens, Ukraine’s Gas Transit System will be snapped up for pennies (that system is only needed as long as an agreement with Gazprom exists), alongside other remaining “gems”.
  2. A total war against Novorossia (or Russia) is possible as a consequence, or an attempt to delay a complete economic collapse and chaos. After all, one can never blame the Maidan for anything. But will the people fall for it?

***

Right now Ukraine needs an injection of at least 100-120 billion dollars, which could prevent a sharp economic collapse. In the absence of such an injection the country’s GDP is likely to drop by 50%, implying the collapse of the country’s whole economy.

The final destination on this path is a catastrophe and complete bankruptcy, which would be an unprecedented trial not only for the people of Ukraine, but also for Russia, Europe, and the entire world. But the crisis can no longer be stopped; one could still try to switch course to a pro-Russian, Anti-Maidan one, but that is out of the question for those who have inspired the Maidan.

And therefore a collapse is not to be avoided.

 

Translated for FortRuss.blogspot.com

http://fortruss.blogspot.com/2014/12/ukraine-plunder-continues.html — translation — Ukraine: The Plunder Continues
http://www.vz.ru/opinions/2014/12/19/721135.html?google_editors_picks=true