ASH: Ukraine, ask yourself what Putin wants

ASH: Ukraine, ask yourself what Putin wants
Analyst Timothy Ash says to understand what is going on in Ukraine you have to ask what Russian president Vladimir Putin is really after. The trouble is no one really knows the answer to that question
By Timothy Ash Senior Sovereign Strategist at BlueBay Asset Management in London April 9, 2021

I have spent the week reading various sell side bank research reports on the evolving crisis in Eastern Ukraine and feel so sold short on these that I decided to write my own analysis.  

So what’s happening in Eastern Ukraine, what has changed?

Guess let’s just look at the facts:

* There has been a really noticeable and significant upsurge in fighting since the beginning of the year and the numbers really speak for themselves - so in H220, after the ceasefire agreed by the two sides in July, I think 4 Ukrainian soldiers died, while so far this year 27 have died, including 7 in the past ten days.

* Open media sources suggest a meaningful Russian military build up in Donbas, Crimea and in the West of Russia and also Belarus, bordering Ukraine. This is unusual, of significant scale and

out of kilter with usual troop rotations and training exercises that Russia normally conducts. The Ukrainian military report an extra 28 combat battalions being placed in theatre in addition to the 20 already in place. Iskander missile units have also been placed close to the Ukrainian border. Note that is in addition to the already very substantial Russian and proxy troop presence in Donbas and Crimea.


* When we talk about Belarus I think it’s also important to look at the changing strategy there by Russia towards the Lukashenko regime evident over the past year, and it’s all about now weakening Lukashenko, undermining Belarus’ sovereignty with the ultimate aim I think of allowing Russia the ability to put more Russian troops in/thru Belarus to open a second front against Ukraine.

* Change of rhetoric in the Russian media and press back to a very belligerent tone, painting Ukraine as a fascist threat and the country as threatening offensive actions against Russian “citizens” in Eastern Ukraine - “citizens” as after Russian “intervention” Ukrainian citizens living in occupied areas of Donbas have been offered Russian passports - around 500k have taken them. But the Kremlin inspired Russian media seems to be creating the narrative or excuse for another Russian military operation in Ukraine, now in defence of Russian citizens. We have seen this movie before play out in South Ossetia.


* Russian macro policy makers seem to be building the defences, back to Fortress Russia settings. The CBR did a complete about turn last month and hiked policy rates, against expectations. They are also signalling a 150bps plus further hike in policy rates is coming. Previously the CBR had appeared relaxed about rising inflation - sending a message that they could look through this and keep policy rates on hold for an extended period of time. Something changed mid MPC meetings so much so that CBR officials appeared to brief the media prior to the last policy rate hike that things were changing. That’s quite extraordinary and not justified by any new change in the inflation data. Meanwhile, the MOF has upped OFZ auction sizes, front loading these, and state owned banks have stepped up on the bid. It feels like they want to cover the MOF’s financing needs early. What has changed? Arguably the Kremlin expects geopolitics to get trickier and a more defensive monetary and financing stance is now perhaps required.

Why all the above? Why is Putin seemingly sabre rattling?

I think there are various plausible explanations:

First, this is just what Putin does. He likes keeping everyone on their toes and dialling up and down tensions is part of his tactical toolkit. He feels this exposes weaknesses in opponents / he can watch how they react and further test weaknesses. But he gains tactical advantage from doing this all the time.  

It also perhaps keeps attention on himself - he makes people think that he is cleverer than he is, and the “go to guy” that everyone needs to speak to if they want conflict resolution. The sad fact is that many of these conflicts are of Putin’s making. As former Russian foreign policy chief Primakov quipped “Russian foreign policy is all about going around the world creating problems, and then offering to clear them up”. Putin seems to have taken this mantra to heart - Donbas, Crimea, South Ossetia, NK, Abkhazia, Trans Dniester to name but a few.

Second, and kind of related to the first point, this might just be a test of the new Biden presidency. Biden now famously called Putin a Killer, so maybe this is Putin’s payback - “you think I am a killer, well try this for size!” But maybe Putin is trying to put the Biden presidency in its place early - getting the first hit in first.  

Third, this might be a response to Biden’s plan for a new alliance of Democracies - how better than for Putin to stir things up in Ukraine and expose the real differences in views between the US and Europe on Ukraine but also things like Nord Stream 2. It has been noticeable how the US and U.K. have responded to Russian escalation in Ukraine by calling the Kremlin out, while the French and Germans called for restraint from both sides.  

Fourth, this might be aimed at heading off and moderating US sanctions for US election meddling, North Stream, Solarwinds and the CBW. Putin might think that by escalating in Ukraine Biden will pull his punches on sanctions scared not to be seen to escalate things in Ukraine. Already this might have been the case with the latest set of US sanctions seeming to have been delayed again, perhaps by as much as three weeks.

Fifth, perhaps this is a response to recent changes in Ukrainian politics and Zelensky’s decision to sanction Putin’s ally Medvedchuk and to close various pro Russian TV stations. Maybe Putin thinks that this will weaken Russia’s grip on Ukraine further and must be reversed. It has been pretty noticeable that Zelensky had up until recently adopted a softer line in negotiations with Russia - eager to quickly bring peace in the East. This did bring a reduction in the death toll in the East at least up until this year. But noticeably it also brought something of a resurgence in relative support for pro Russian political factions, including the opposition block. It’s important perhaps to note that support for the opposition block did not really increase but support for pro-Western groups fractured. Zelensky’s own popularity dipped from 70% plus in his 2019 election victory to high teens in late 2020. Thus partly reflected his failure to address corruption and oligarch state capture. To rally his support he went after oligarchs such as Medvedchuk and Kolomoisky and played the nationalist card by closing pro Russian TV channels. Zelensky needed to do this to secure majority Rada backing for economic reforms including in the fight against corruption. But arguably that made maintaining peace in the East that much more difficult.

Now from Putin’s perspective maybe he had been willing to play the long political game assuming that as Zelensky’s popularity waned the natural winners would be pro Russian forces like the Opposition Block. But Zelensky’s move against these maybe has made Putin think the long political game no longer works and with more limited access to pro Russian media channels the Ukrainian population will further turn West.  

Sixth, perhaps the water situation in Crimea is so bad that Russia is looking for an opportunity to take water supplies further into Ukraine. That would imply a push around 100km into Ukraine - seems doable.

Seventh, maybe this is all a distraction for difficult domestic politics in Russia itself - it turns the page on Navalny and his protests and changes the narrative from domestic unrest and declining living standards to nationalism/jingoism in the run up to Duma elections. Maybe a quick win in Ukraine would play well domestically in Russian elections.

Eighth - what if this is the big one?  

I have long worried that the biggest risk here was of a final, defining conflict between Ukraine and Russia.

Unfortunately world history usually shows that when two military foes are rearming to the teeth it usually only ends one way - in war. And that is what we are seeing on the ground with Russia and Ukraine.

And we know what Putin wants - he wants Ukraine within Russia’s strategic orbit, back as he sees it where it belongs in the Russian cultural world - Kievan Rus as the 1000-odd year birthplace of Russian civilisation. Without a shadow of a doubt that is Putin’s Plan A, but how/whether he can deliver on that is another matter.

Maybe he thought that by playing the long political game (point 6 above) he could achieve these objectives at a lower cost than through military conquest. Maybe this calculus has changed?

Perhaps he now thinks it’s now or never in terms of the military balance of power on the ground, and while Europe and NATO is divided and unlikely and unable to respond, and while there is a new, weak and distracted (by Covid, China, Capitol riots, US economy) US President in office. Maybe he thought under Trump he could afford to wait as in a second Trump term the US would agree to Russia’s strategic hegemony over Ukraine in a great power summit, Yalta 2. Maybe he thinks that is no longer on the table with Biden.

Nine - maybe it’s a combination of 1 thru 8. Maybe he is thinking of going through the escalation gears and seeing where that gets him. His best case scenario is 8, but maybe he could try a 6 and military options might open up along the way  

Perhaps Putin sees no downside from escalation, it’s all win-win for him?

I have sent out a few polls this week and the consensus calls seem to be either Putin is bluffing or we are in for mild escalation pending new talks. That’s very much the status quo, but something just feels very different this time. In my mind we could be on the cusp of something really serious.