A few months ago, Ukrainian President Viktor Yanukovich was expected to sign some agreements that could eventually integrate Ukraine with the European Union economically. Ultimately, Yanukovich refused to sign the agreements, a decision thousands of his countrymen immediately protested. The demonstrations later evolved, as they often do. Protesters started calling for political change, and when Yanukovich resisted their calls, they demanded new elections.
ValueWalk's Raul Panganiban interviews Kirk Du Plessis, Founder and CEO of Option Alpha, and discuss Option Alpha and his general approach to investing. Q1 2021 hedge fund letters, conferences and more The following is a computer generated transcript and may contain some errors. Interview with Option Alpha's Kirk Du Plessis
Some protesters wanted Ukraine to have a European orientation rather than a Russian one. Others felt that the government was corrupt and should thus be replaced. These kinds of demonstrations occur in many countries. Sometimes they’re successful; sometimes they’re not. In most cases, the outcome matters only to the country’s citizens or to the citizens of neighboring states. But Ukraine is exceptional because it is enormously important. Since the breakup of the Soviet Union, Ukraine has had to pursue a delicate balance between the tenuous promises of a liberal, wealthy and somewhat aloof Europe and the fact that its very existence and independence can be a source of strategic vulnerability for Russia.
Ukraine provides two things: strategic position and agricultural and mineral products. The latter are frequently important, but the former is universally important. Ukraine is central to Russia’s defensibility. The two countries share a long border, and Moscow is located only some 480 kilometers (about 300 miles) from Ukrainian territory — a stretch of land that is flat, easily traversed and thus difficult to defend. If some power were to block the Ukraine-Kazakh gap, Russia would be cut off from the Caucasus, its defensible southern border.
Moreover, Ukraine is home to two critical ports, Odessa and Sevastopol, which are even more important to Russia than the port of Novorossiysk. Losing commercial and military access to those ports would completely undermine Russia’s influence in the Black Sea and cut off its access to the Mediterranean. Russia’s only remaining ports would be blocked by the Greenland-Iceland-U.K. gap to the west, by ice to the northeast, by Denmark on the Baltic Sea, and by Japan in the east.
This explains why in 1917, when the Bolsheviks took power and sued for peace, the Germans demanded that Russia relinquish its control of most of Ukraine. The Germans wanted the food Ukraine produced and knew that if they had a presence there they could threaten Russia in perpetuity. In the end, it didn’t matter: Germany lost Word War I, and Russia reclaimed Ukraine. During World War II, the Germans seized Ukraine in the first year of their attack on the Soviet Union, exploited its agriculture and used it as the base to attack Stalingrad, trying to sever Russia from its supply lines in Baku. Between the wars, Stalin had to build up his industrial plant. He sold Ukrainian food overseas and used it to feed factory workers in Russia. The Ukrainians were left to starve, but the industry they built eventually helped the Soviets defeat Hitler. After the Soviets drove the Germans back, they seized Romania and Hungary and drove to Vienna, using Ukraine as their base.
From the perspective of Europe, and particularly from the perspectives of former Soviet satellites, a Ukraine dominated by Russia would represent a potential threat from southern Poland to Romania. These countries already depend on Russian energy, fully aware that the Russians may eventually use that dependence as a lever to gain control over them. Russia’s ability not simply to project military power but also to cause unrest along the border or use commercial initiatives to undermine autonomy is a real fear.
Thinking in military terms may seem more archaic to Westerners than it does to Russians and Central Europeans. For many Eastern Europeans, the Soviet withdrawal is a relatively recent memory, and they know that the Russians are capable of returning as suddenly as they left. For their part, the Russians know that NATO has no will to invade Russia, and war would be the last thing on the Germans’ minds even if they were capable of waging one. The Russians also remember that for all the economic and military malaise in Germany in 1932, the Germans became the dominant power in Europe by 1939. By 1941, they were driving into the Russian heartland. The farther you move away from a borderland, the more fantastic the fears appear. But inside the borderland, the fears seem far less preposterous for both sides.
From the Russian point of view, therefore, tighter Ukrainian-EU integration represented a potentially mortal threat to Russian national security. After the Orange Revolution, which brought a short-lived pro-EU administration to power in the mid-2000s, Russian President Vladimir Putin made clear that he regarded Ukraine as essential to Russian security, alleging that the nongovernmental organizations that were fomenting unrest there were fronts for the U.S. State Department, the CIA and MI6. Whether the charges were true or not, Putin believed the course in which Ukraine was headed would be disastrous for Russia, and so he used economic pressure and state intelligence services to prevent Ukraine from taking that course.
In my view, the 2008 Russo-Georgian War had as much to do with demonstrating to Kiev that Western guarantees were worthless, that the United States could not aid Georgia and that Russia had a capable military force as it did with Georgia itself. At the time, Georgia and Ukraine were seeking NATO and EU membership, and through its intervention in Georgia, Moscow succeeded in steering Ukraine away from these organizations. Today, the strategic threat to Russia is no less dire than it was 10 years ago, at least not in minds of the Russians, who would prefer a neutral Ukraine if not a pro-Russia Ukraine.
Notably, Putin’s strategy toward the Russian periphery differs from those of his Soviet and czarist predecessors, who took direct responsibility for the various territories subordinate to them. Putin considers this a flawed strategy. It drained Moscow’s resources, even as the government could not hold the territories together.
Putin’s strategy toward Ukraine, and indeed most of the former Soviet Union, entails less direct influence. He is not interested in governing Ukraine. He is not even all that interested in its foreign relationships. His goal is to have negative control, to prevent Ukraine from doing the things Russia doesn’t want it to do. Ukraine can be sovereign except in matters of fundamental importance to Russia. As far as Russia was concerned, the Ukrainian regime is free to be as liberal and democratic as it wants to be. But even the idea of further EU integration was a clear provocation. It was the actions of the European Union and the Germans — supporting opponents of Yanukovich openly, apart from interfering in the internal affairs of another country — that were detrimental to Russian national interests.
Ukraine is not quite as strategically significant to Europe as it is to Russia. Europe never wanted to add Ukraine to its ranks; it merely wanted to open the door to the possibility. The European Union is in shambles. Given the horrific economic problems of Southern Europe, the idea of adding a country as weak and disorganized as Ukraine to the bloc is preposterous. The European Union has a cultural imperative among its elite toward expansion, an imperative that led them to include countries such as Cyprus. Cultural imperatives are hard to change, and so an invitation went out with no serious intentions behind it.
For the Europeans, what the invitation really meant was that Ukraine could become European. It could have the constitutional democracy, liberalism and prosperity that every EU state is supposed to have. This is what appealed to most of the early demonstrators. However improbable full membership might be, the idea of becoming a modern European society is overwhelmingly appealing. Yanukovich’s rejection made some protesters feel that their great opportunity had slipped away — hence the initial demonstrations.
The Germans are playing a complex game. They understood that Ukrainian membership in the European Union was unlikely to happen anytime soon. They also had important dealings with Russia, with which they had mutual energy and investment interests. It was odd that Berlin would support the demonstrators so publicly. However, the Germans were also managing coalitions within the European Union. The Baltic states and Poland were eager to see Ukraine drawn out of the Russian camp, since that would provide a needed, if incomplete, buffer between them and Russia (Belarus is still inside Russia’s sphere of influence). Therefore, the Germans had to choose between European partners, who cared about Ukraine, and Russia.
The Russians have remained relatively calm — and quiet — throughout Ukraine’s protests. They understood that their power in Ukraine rested on more than simply one man or his party, so they allowed the crisis to stew. Given Russia’s current strategy in Ukraine, the Russians didn’t need to act, at least not publicly. Any government in Ukraine would face the same constraints as Yanukovich: little real hope of EU inclusion, a dependence on Moscow for energy and an integrated economy with Russia. Certainly, the Russians didn’t want a confrontation just before Sochi.
The Russians also knew that the more tightly pro-Western forces controlled Kiev, the more fractious Ukraine could become. In general, eastern Ukraine is more oriented toward Russia: Its residents speak Russian, are Russian Orthodox and are loyal to the Moscow Patriarchy. Western Ukraine is oriented more toward Europe; its residents are Catholic or are loyal to the Kiev Patriarchy. These generalities belie a much more complex situation, of course. There are Moscow Orthodox members and Russian speakers in the west and Catholics and Kiev Orthodox in the east. Nevertheless, the tension between the regions is real, and heavy pro-EU pressure could split the country. If that were to happen, the bloc would find itself operating in chaos, but then the European Union did not have the wherewithal to operate meaningfully in Ukraine in the first place. The pro-EU government would encounter conflict and paralysis. For the time being that would suit the Russians, as unlikely as such a scenario might be.
As in most matters, it is important to understand where the United States fits in, if at all. Washington strongly supported the Orange Revolution, creating a major rift with Russia. The current policy of avoiding unnecessary involvement in Eurasian conflicts would suggest that the United States would stay out of Ukraine. But Russian behavior in the Snowden affair has angered Washington and opened the possibility that the United States might be happy to create some problems for Moscow ahead of the Sochi Olympics. The U.S. government may not be supporting nongovernmental organizations as much as its counterparts in Europe are, but it is still involved somewhat. In fact, Washington may even have enjoyed putting Russia on the defensive after having been put on the defensive by Russia in recent months.
In any case, the stakes are high in Ukraine. The Russians are involved in a game they cannot afford to lose. There are several ways for them to win it. They only need to make the EU opening untenable for the Ukrainians, something Ukraine’s economic and social conditions facilitate. The Europeans are not going to be surging into Ukraine anytime soon, and while Poland would prefer that Ukraine remain neutral, Warsaw does not necessarily need a pro-Western Ukraine. The United States is interested in Ukraine as an irritant to Russia but is unwilling to take serious risks.
A lot of countries have an interest in Ukraine, none more so than Russia. But for all the noise in Kiev and other cities, the outcome is unlikely to generate a definitive geopolitical shift in Ukraine. It does, however, provide an excellent example of how political unrest in a strategically critical country can affect the international system as a whole.
In most countries, the events in Kiev would not have generated global interest. When you are a country like Ukraine, even nominal instability generates not only interest but also pressure and even intervention from all directions. This has been the historical problem of Ukraine. It is a country in an important location, and the pressures on it tend to magnify any internal conflicts until they destabilize the country in excess of the significance of the internal issues. Germany and the United States may continue to pursue goals that will further irritate Russia, but as Stratfor indicated in our 2014 annual forecast, they will avoid actions that would risk harming Moscow’s ties with Washington and Berlin. Russian influence in Ukraine is currently being limited by the proximity of the Olympics and the escalation in protests on the ground, but the fundamental geopolitical reality is that no country has a higher stake in Ukraine than Russia, nor a better ability to shape its fate.