Putin Options Dwindle in Ukraine as EU Takes Lead in Peace

Photographer: Alexander Nemenov/AFP via Getty Images

Russia's President Vladimir Putin, right, with Ukrainian President Viktor Yanukovych during a signing ceremony at the Kremlin in Moscow, on Dec. 17, 2013. Close

Russia's President Vladimir Putin, right, with Ukrainian President Viktor Yanukovych... Read More

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Photographer: Alexander Nemenov/AFP via Getty Images

Russia's President Vladimir Putin, right, with Ukrainian President Viktor Yanukovych during a signing ceremony at the Kremlin in Moscow, on Dec. 17, 2013.

As Europe takes the lead in trying to end the bloodshed in the Ukrainian capital, Vladimir Putin is running out of options to shape events in a country that he sees as firmly within Russia’s sphere of influence.

Putin a few weeks ago seemed to have the upper hand after offering a $15 billion lifeline and a cut-price gas deal to shore up the country’s economy. Yet his Ukrainian ally Viktor Yanukovych has become ever-more isolated as pro-European activists hold onto Kiev’s main square after deadly clashes killing dozens, disaffected regions split off, ruling-party lawmakers defect and the European Union wields the threat of sanctions.

A European-brokered plan for early elections by December -- signed today in Kiev by Yanukovych and the opposition -- is a ploy to get Ukraine to make “the EU choice,” Russian Foreign Minister Sergei Lavrov said yesterday.

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Putin, who once described the breakup of the Soviet Union as the biggest geopolitical catastrophe of the 20th century, needs to decide how far he’s prepared to go. Current and former Kremlin advisers say his choices in case Yanukovych is forced out of office range from encouraging Ukraine’s Russian-speaking regions to secede to a limited military intervention -- a strategy fraught with risks.

‘Full of Rage’

“Putin must be full of rage,” said Gleb Pavlovsky, a former Kremlin adviser who heads the Effective Policy Foundation in Moscow. “He’s urging Yanukovych to re-establish control and just doesn’t understand what is going on, why there isn’t any control.”

To date, Putin’s strategies haven’t worked. Deploying a mixture of threatened trade reprisals and financial incentives to persuade Yanukovych to pull out of a planned trade agreement with the EU in November only emboldened protesters. Thousands of activists, who want Ukraine to embrace closer ties with the EU, have stayed camped out in Kiev’s Independence Square since then.

Putin could damage Ukraine economically by withholding promised money and pushing the country closer to default. Russian Finance Minister Anton Siluanov said today in an interview in Hong Kong that his country plans to wait until the situation stabilizes before giving Ukraine additional financial aid under the $15 billion package. He said Ukraine’s central bank may be wasting international reserves defending the hryvnia.

Russia ‘Incensed’

Russia signaled its displeasure as Putin’s envoy Vladimir Lukin refused to sign the EU-brokered agreement after taking part in the Kiev negotiations, according to an interview with the RIA Novosti news service.

Russia was “incensed that the EU crafted a deal that excluded it,” Dmitri Trenin, director of the Carnegie Moscow Center, said in a conference call today.

Lavrov urged EU condemnation of Ukrainian “radicals” and “respect for Ukraine’s sovereignty and the authority of the legitimate government” in a phone conversation today with EU foreign policy chief Catherine Ashton, according to a Foreign Ministry website statement.

Russia’s efforts to persuade Yanukovych to crush the months-old protests have only further galvanized the opposition, said Joerg Forbrig, senior program officer for central and eastern Europe at the Berlin bureau of the German Marshall Fund of the U.S. “Yanukovych has lost control of the situation and the only way out is for him is to leave office,” Forbrig said by phone.

That scenario may force Putin’s hand to intervene more directly in neighboring Ukraine.

Russians Threatened

The deployment of Russian forces to eastern and southern Ukraine may be required if events unleash civil conflict that threatens the Russian-speaking population there, according to Sergei Markov, a Kremlin adviser and a vice rector of the Plekhanov Russian University of Economics in Moscow.

“The Ukrainians are a brotherly nation and Putin may come under huge public pressure and will forced to intervene,” he said by phone.

The two Slavic countries have a shared history stretching back to the Kievan Rus more than 1,100 years ago, the ancestral state of both nations.

In addition, Ukraine is a transit route for more than half of Russian state exporter OAO Gazprom (OGZD)’s European shipments of natural gas.

Military Dangers

Sending the military into Ukraine would be “extremely dangerous” for both Russia and Europe, which depends on Russian gas for a quarter of its consumption, Pavlovky said.

The risk is that Russia may be drawn into a direct military confrontation with its Cold War opponent NATO, according to Markov. North Atlantic Treaty Organization Secretary General Anders Fogh Rasmussen urged Ukraine’s military not to turn against the Ukrainian people in comments to reporters in Athens today.

Putin has already shown his willingness to send troops into neighboring countries, following in the footsteps of his Soviet predecessors. U.S.-allied Georgia fought a war with Russia in 2008 in a failed bid to bring a Russian-backed breakaway region under control.

The five-day conflict sparked the biggest tension between the West and the Kremlin since the Cold War and prompted investors to pull out at least $290 billion from Russia, according to BNP Paribas SA. (BNP)

Eastern Secession

Putin may also choose to encourage a secession of Ukraine’s east and south, said Markov.

In Crimea, part of Russia until 1954 and home to Russia’s Black Sea fleet, some organizations are urging the government in Moscow to intervene. Parts of Ukraine’s eastern industrial heartland are seeking autonomy. Aside from Kiev, the 10 regions with the highest economic output are in the east and south, while the five with the lowest are in the west, where pro-EU sentiment is highest, according to statistics office data from 2011.

The Russian leadership is likely already reaching out to governors of eastern regions such as Kharkiv, Donetsk, Luhansk, said Fyodor Lukyanov, the head of Moscow-based Council on Foreign and Defense Policy.

Yanukovych is no longer considered worth betting on, according to Lukyanov. “If he had acted decisively at the start, we wouldn’t be where we are today,” he said.

Soviet Template

Absorbing these regions, home to Ukraine’s steel mills and coal mines and the Black Sea fleet, would follow a template of the former Soviet Union under which Russia holds areas such as Moldova’s pro-Russian secessionist region Transnistria and the Georgian breakaway republics of Abkhazia and South Ossetia.

“Crimea can become another Abkhazia,” said Masha Lipman, an analyst at the Carnegie Moscow Center, by phone today. “That can be Putin’s revenge if Ukraine begins to drift away.”

Such a strategy in Ukraine is likely to fail, though, according to Lilit Gevorgyan, a senior economist at IHS Global Insight in London.

“The pro-Russian Ukrainians while preferring close links with Russia, would not consider going as far as abandoning their sovereignty,” Gevorgyan said by e-mail. “Any overt incitement of secession by Russia is likely to backfire internationally.”

To contact the reporter on this story: Henry Meyer in Moscow at hmeyer4@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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