In recent months, tensions between Kiev and Moscow have taken center stage at the political, economic and diplomatic levels. In this article, other reasons beyond the purely military one are unpacked.
"In war, truth is the first victim", Epilo.
Despite the fact that, Ukraine possesses approximately 5% of the world's mineral resources. Kiev is one of the leading countries in reserves and extraction of manganese, iron and non-metallic raw materials and accounts for 1.8% of the world's uranium deposits.
Also, this state is commonly known as the breadbasket of Europe, having more than a quarter of the chernozem or "black earth" (the most fertile agricultural land in the world) on a global scale.
However, in recent months, the dispute between Ukraine and Russia has been the subject of prime-time television programs, analyses, studies and conferences not only in the print media, but also by analytical media, blogs and think tanks. At the same time, this issue is setting the diplomatic agenda of the main powers on the current geopolitical chessboard.
In this article, we will try to shed some light on this much talked and discussed topic, without clearly analyzing why the tensions now and what are the geopolitical and energetic backgrounds that explain all this tension.
The first historical Russian empire was Kievan Rus, founded by the Vikings and King Rurik. In 882, they made Kiev the capital of the first Russian state. During the following centuries, Ukraine was ruled by Lithuania, Poland, Sweden, the Mongols, the Ottoman Empire and Russia (the Soviet Union from 1917 to 1991).
During this course of various empires, there is a key date, 1774. After a war between the Ottoman and Russian Empires, by the Treaty of Kucuk Kaynarch, the Crimean Khanate became independent and would pass under Russian control. However, in 1792, by the Treaty of Las, Catherine the Great dissolved the Crimean Khanate and integrated it into Russian territory.
In the 19th century, the geopolitical chessboard in Europe would change, with the rise of France, Great Britain, Prussia and Russia, the Austro-Hungarian Empire and the Ottoman Empire. Since the 19th century, Ukraine has been known as the breadbasket of Europe, thanks to its "black lands" (chernozem) and, Ukraine would be the object of struggle between the main European powers.
Between 1853-1856, a war for the control of Crimea would begin. France, the United Kingdom, the Kingdom of Piedmont supported the Ottoman Empire, against Russia and the Kingdom of Greece. Two years later, Russia signed the Treaty of Paris. Moscow admitted defeat and would lose the capital of Crimea, Sevastopol, but Crimea remained under Russian control.
At the beginning of the 20th century, after the February Revolution of 1917, a nationalist movement for Ukrainian independence was reborn.
In February 1917, the Kiev Parliament (Central Rada) announced the foundation of a new state, the Ukrainian People's Republic, independent from Moscow. Thus began the Bolshevik-Ukrainian war (1917-1921), between Ukrainian independence fighters and Bolsheviks for control of the country (a country whose borders were not well delimited).
Between April and December 1918 this young country was renamed the Hetmanate, and was supported by the Austro-Hungarian Empire and Germany. During 1918, troops loyal to the Ukrainian People's Republic took control of large areas of the Donbas region (Donetsk and Luhansk). However, in 1919 a new conflict broke out, the Polish-Soviet war, for the control of this territory. In 1921, Poland and the Soviet Union agreed to divide Ukraine, which on the Soviet side was renamed the Ukrainian Soviet Socialist Soviet Republic (Ukrainian SSR).
Map 1: territorial changes in Ukraine during the 20th century. Source: https://vaventura.com/divulgacion/historia/historia-frontera-ucrania-rusia
From 1922 onwards, agriculture was subjected to collectivization policies, where the Soviets took control of these private lands to work them in common and all production was redistributed throughout the Soviet Union.
However, in 1932 and 1933, due to climatic conditions and Stalin's policies triggered a bloody famine, known in Ukrainian as "Holomodor". An estimated 3 to 4 million Ukrainians died as a result of the famine.
At the same time, the Ukrainian national movement was concentrated in the western regions of today's Ukraine, which would become part of Poland until 1939.
During World War II (1939-1945), Ukrainians fought against the Nazis, but military groups were also formed to fight against the USSR. In 1944, Stalin expelled and deported the Crimean Tatars for alleged collaboration with Nazi Germany and they were abolished as a nation by Stalin.
After Stalin's death in 1953, Nikita Khrushchev took control of the USSR. In 1954, within the 300th anniversary of Ukraine's accession to Russia, Khrushchev transferred the Crimean peninsula to the Ukrainian Soviet Socialist Republic.
On the economic level, two trends can be observed. On the one hand, in agriculture the system of collective farms was re-established and agricultural production in 1955 was lower than in 1940. It should be mentioned that, the number of collective farms in Ukraine increased from: 28 thousand in 1940 to 33 thousand in 1949; the number of state farms hardly increased, standing at 935 in 1950, with 12.1 million hectares.
On the other hand, the introduction and implementation of the Fourth Five-Year Plan in 1946, would allow to double Ukraine's industrial productivity doubled its pre-war level, for example, in 1950 gross industrial output had already exceeded 1940 levels. Although the Soviet regime continued to give priority to heavy industry over light industry, the light industry sector also grew. It should be mentioned that Kiev became Europe's largest per capita producer of pig iron and sugar, the second largest per capita producer of steel and iron ore, and the third largest per capita producer of coal in Europe.
During the period 1956-72, Ukrainian society underwent rapid urbanization and energy demand would increase considerably. As a result, the government built five dams along the Dnieper River and in the 1970s, the Soviet government devised an intensive nuclear power program.
Beginning in the 1980s, the economy would stagnate due to the planners' intense emphasis on heavy industry over consumer goods.
In conjunction with this economic stagnation, in 1977, Soviet scientists installed four RBMK nuclear reactors at the Chernobyl nuclear power plant. Chernobyl is located south of the present-day border between Ukraine and Belarus. In April 1986, the worst nuclear accident in history occurred in what is now northern Ukraine, when a reactor at a nuclear power plant in Chernobyl exploded and set the plant on fire. The incident, shrouded in secrecy, was a turning point in the Cold War and the trigger for the end of the Soviet Union.
In 1991, Ukraine gained its independence and Russian-majority Crimea became part of the new Ukrainian state. After its independence in 1991, Ukraine was one of the poorest Soviet republics, with statistics showing that the GDP per capita was only $1,307. In addition, since before independence, the split between the mostly Ukrainian-speaking west and north and the Russian-speaking east and south has affected the future of this state.
Map 2: "percentage of the population identifying Russian as their mother tongue (2001 census). Source: https://www.washingtonpost.com/news/worldviews/wp/2014/01/30/9-questions-about-ukraine-you-were-too-embarrassed-to-ask/
A year after independence, the first territorial tensions would arise. In 1992, the Ukrainian parliament (the Rada) abolished the 1992 Crimean Constitution and in 1998, this peninsula lost its autonomy and any legislation by the Crimean parliament could be vetoed by the Rada.
In addition, in 1998, Kiev and Moscow signed an agreement to lease the Sevastopol base until 2017 on mutually acceptable terms. The Soviet Black Sea Fleet was divided into two non-equal parts (80% for Russia and 20% for Ukraine) in exchange for Moscow not questioning the sovereignty of Crimea. Alongside this, in 1993, in the city of Donetsk, protests would take place due to worsening economic conditions.
Besides this economic forecast, in 1991, Kiev possessed approximately one third of the Soviet nuclear arsenal, the third largest in the world at that time. In 1994, the situation would change with the Budapest Memorandum.
In this document, the United States, Russia and Great Britain pledged to "respect the independence and sovereignty and existing borders of Ukraine" and to "refrain from the threat or use of force" against the country. To this, Kiev gave up its nuclear arsenal, consisting of some 1,900 strategic nuclear warheads.
At the same time, during a meeting in 1990, then U.S. Secretary of State James A. Baker gave former Soviet leader Mikhail Gorbachev agreed on the status of a reunified Germany and agreed that NATO would not extend beyond the territory of East Germany. In 1997, the NATO-Russia Founding Act was signed. This document is a political agreement, where NATO and Russia do not consider each other as adversaries.
Prior to the 2000s, political instability led to an annual contraction of the Ukrainian economy, ranging from 9.7% to 22.7% in 1991-1996. Bartering and the use of surrogate and foreign currencies prevailed. Ukraine introduced a sovereign currency, the hryvnia, but it was little used, causing the shadow economy to grow.
In these years, the economic structures inherited from the USSR, embodied mostly in the form of oligarchs. The oligarchs are former industrial managers of the Soviet era who made their fortune after the privatization of industries in Ukraine. Their wealth was based on a traditional and simple formula: converting cheap energy and raw materials into metals and manufactured products. As a result, there were no large institutional investors or a broad base of small investors outside the oligarchs in Ukraine.
Ukraine has been a transit country par excellence thanks to its Black Sea ports, its east-west roads and railroads, and its oil and gas pipelines. Transit channels are necessary for Russia to trade internationally, and Ukraine is on many of them.
The macroeconomic situation would change after 2000. Between 2000 and 2007, Ukraine saw an average growth of 7.4%. This phenomenon is due to an increase in the price of metals and chemicals, and a low price of gas imported from Russia, along with domestic demand: consumer orientation, other structural changes and financial development.
Alongside this, in 2000, the European Union was already the most important trading partner for Ukraine and, in 2009, the fast-growing Asian economies overtook the EU, being the basic consumers of Ukrainian metallurgical products.
However, starting in 2004 with the Orange Revolution, it would mark the beginning of the current tensions. The Orange Revolution was a popular revolt, after an election in which Viktor Yanukovich was the winner against Viktor Yuschenko. The elections were repeated and Viktor Yuschenko won, with a narrow margin, showing the division between the West (more in favor of the West) and the East (in favor of Russia).
Image 1: Protests during the Orange Revolution in Kiev. Source: https://www.flickr.com/photos/neiljs/3459097678/in/photolist-6gEMe9-247pX8Z-2m75fcG-d917-5zZGtB-zHATx-2jo5JQJ-2kVTj5Z-2kwK7jC-2hNJZXT-9gMiLh-2gJyV4C-2hNGpqH-6oKjty-6gEMeb-2mLnkXU-ZHS3ju-2mvWz2h-2hE73KR-2ixMxnB-2mQ97oR-2mMjn47-2mucUjd-2mruq8u-2mm6EnW-2jFkZCd-2kBTy86-77Mtxo-2jYXCEF-2jRyLGf-xSRoT-9jJB8h-gnA7R-W3x5hM-7FrFBu-e6ocG-e4C9QM-Dmn6Ne-RvfZzc-2mn3dxa-2mP3ENs-2kZJsyZ-pBjWrB-5eT9sS-2mnR7sz-2jRzMqU-2fx52Wg-2mhtmKx-2mcYwAG-2kCKAVz
Immediately, the first tensions with Russia arose over gas. Before 2004, Kiev paid $50 per 1,000 cubic meters, Gazprom wanted to charge $230. In January 2006, Gazprom cut off the supply, but resumed it a day later. This led Ukraine to accept a price of $95 per cgt and the introduction of the intermediary RosUkrEnergo, which soon became a source of conflict over future gas deals.
In 2009, Gazprom cut off all supplies for Ukraine's use as a pressure measure to increase the price of gas. However, Moscow and Kiev guaranteed the transit of Russian gas to Europe, after the cut-off affected 18 countries in Europe. This triggered the search for alternatives for gas transit to Europe.
It is worth mentioning that the Nord Stream gas pipeline was built in 2010 and inaugurated in 2011 by the former German Chancellor, Angela Merkel and the former Russian President, Dimitri Medvev.
A year later, in 2010, Yanukovych regained power and tried to maintain a certain balance, but moved closer to Russia. However, tensions would flare up again in 2013. Following pressure from Russia, a decree of the Ukrainian Parliament suspended the signing of the political and trade association agreement between the EU and Ukraine.
This distancing from Brussels led to a series of protests in 2013, known as the "Euromaidan" (revolution of dignity). Initially, the first demonstrators were student groups, associations of all political ideologies and Ukrainian nationalist groups of the extreme right. Of the latter, their armed wing would end up fighting in the Donbas region.
These demonstrations overthrew the government of President Yanukovych and forced him to flee to Russia and elections were held, where Petro Poroshenko won. In the face of these revolts, the provinces of Donbas, Crimea and Sevastopol, uprisings would take place. Moscow seizes the opportunity to avoid losing its sphere of influence and sends the well-known "green men". This would trigger the annexation of Crimea and Sevastopol to Russia and the split by referendum of the autonomous republics of Donetsk and Lugansk (Donbas) from Ukraine and since 2014, a war has been waged in the Donbas region.
As a result, the United States and the European Union imposed sanctions on Russia, targeting state-owned banks, imposing an arms embargo and restricting sales of sensitive technology and the export of equipment for the country's oil industry.
Also, in response to the Russian move in Crimea, Kiev decided to cut off the water supply through the Northern Crimean Canal (NCC for short), which carries water from the Dnipro River, to Crimea. This cut-off was aggravated in 2018, when one of the largest rivers in Crimea, the Biyuk-Karasu dried up. This issue has led to intense friction between Ukraine and Russia.
Map 3: Ukraine after 2014. Source: https://www.elmundo.es/internacional/2017/07/19/596e4ec722601d8c1f8b458b.html
To settle the tensions, the Minsk Agreements (Minsk II) are signed. In these agreements there are two key aspects: a ceasefire is ordered since 2015 and the creation of a 50 km security zone and a constitutional reform in Ukraine, addressing the status of the Donetsk and Lugansk provinces. Both Russia and Ukraine would never implement this agreement.
From 2014, the situation in Ukraine would change. Successive Ukrainian governments (Poroshenko and Zelensky), would move closer towards the European Union and the U.S. To this, in March 2014, 43% of the Ukrainian population did not want to join NATO, in 7 months, the tables would turn.
The same happened with Ukraine's possible entry into a customs union with Russia, Belarus or Kazakhstan or into the European Union. After the tensions of 2014, 59% of the population would like to join the EU club.
In 2014, the EU and Ukraine held the first meeting of the association council under the new association agreement and the following year, the updated association agenda was adopted. This agenda is key to economic reform and modernization in Ukraine.
In 2017, Brussels and Kiev took another step forward. In summer 2017, the Council of the European Union adopted a decision to conclude the association agreement with Ukraine on behalf of the EU. This was the last step in the ratification process, which enabled the full implementation of the agreement as of September 1, 2017.
At the same time, in 2014 and 2015, the House of Representatives and the Senate passed a series of resolutions condemning Russia's aggression in Ukraine and expressing support for increased military aid. During the Trump administration, military assistance was increased, for example, in 2018, it sold Ukraine anti-tank missiles worth $47 million.
One of the most important steps has been with NATO. In 2019, an amendment to the Ukrainian Constitution came into force. A year later, Ukrainian President Volodymyr Zelenskyy approved the new National Security Strategy of Ukraine, a step towards the development of distinctive partnership with NATO with the goal of joining it.
However, Ukraine's economy after 2014, has not fully recovered. It should be mentioned that, according to World Bank figures, tourist arrivals to Ukraine have never recovered, reduced to double compared to what they used to be before 2014. Foreign direct investments, while performing better than tourism, have also not rejuvenated since 2014.
Figure 1: "Conflicts overshadow investment, foreign direct investment flow (USD million from 2011-2020). Source: https://www.investmentmonitor.ai/analysis/ukraine-russia-business-impact-investment
In the midst of this board and situation, a new player entered, the People's Republic of China.
Ukraine started selling corn to China in 2013 and by 2019 had become its largest supplier. In 2013, Xi Jinping, launched the Belt and Road Initiative (BRI). Immediately, Ukraine gained new importance as a transit hub and market for Chinese goods, and in 2018, Beijing opened a Silk Road trade and investment center in Kiev.
Alongside this, in 2013, China bought up to 3 million hectares of agricultural land in Ukraine, an area the size of Belgium. Two state-owned companies will take over this land in the eastern Dniepropetrovsk region to grow crops and raise pigs for domestic consumption.
Map 4: Beijing's purchase of agricultural land in Ukraine. Source: https://www.businessinsider.com/chinas-disputed-deal-to-farm-5-of-the-ukraine-2013-9
In 2015, an agreement was signed to build, Nord Stream 2 between Gazprom, Royal Dutch Shell, E.ON, OMV and Engie. Nord Stream 2 is a 1,200-kilometer pipeline under the Baltic Sea connecting Russia to Germany and a way to ship Russian gas without passing through Ukraine or Poland.
Add to that corruption in Ukraine. In 2019, according to Transparency International's Corruption Perceptions Index, Ukraine ranks 120th out of 182 countries, the second most corrupt state in Europe after Russia.
However, in 2019, would come to the presidency of Ukraine, Volodymyr Zelensky, where one of his goals is the fight against corruption. In 2019, Zelensky enjoyed an approval rating of 70%. However, as of February 2022, Zelensky's popularity is at an all-time low.
Ukrainian President Volodymyr Zelensky described Nord Stream 2 as "a dangerous political weapon" and Washington went so far as to impose on Russian companies related to this pipeline.
In the wake of the SARS-CoV-2 pandemic, according to the National Bank of Ukraine it was reported a decline in real GDP by 4% in 2020. To it, the capital flight in Ukraine in 2020 is put at almost $900 million, according to the data of the UNCTAD World Investment Report. It has been like this for two years already. And it is getting worse.
Alongside this phenomenon, very few foreign investors, apart from yield-seeking distressed asset bond lords, are considering Ukraine today. Meanwhile, the Ukrainian authorities continue to sabotage the work of anti-corruption agencies.
Since the end of 2021, the European continent has been experiencing an energy crisis, with Russia supplying around 41% of all gas to Europe. At the same time, Brussels is living how to cope with the Brexit and the end of the Merkel era.
In September 2021, Moscow makes an unprecedented military deployment on the border with Ukraine and the situation becomes even more tense. At the same time, Russia demands that Ukraine does not join NATO and demands the West to withdraw all troops close to Russian territory.
From January 2022, an intense round of negotiations would begin between Russia and the US and the Russia-NATO summit, where Ukraine was never present. In the midst of this tension, Russian President Vladimir Putin met with his Chinese counterpart Xi Jinping on February 4, 2022.
In a joint statement, China and Russia made clear their disagreement with NATO's actions and called on it to abandon its desires for "further expansion", in clear reference to the tension with Ukraine. At the same time, Beijing and Moscow signed a 30-year contract for the supply of gas to China through a new pipeline, making sales in euros.
At the same time, Japan, Azerbaijan and Qatar do not rule out supplying natural gas to Europe. Japan confirmed that it will divert Liquefied Natural Gas (LNG) ships to Europe. In addition, the US has asked Qatar and other major energy producers to examine whether they can supply Europe with gas in case of further tensions over Ukraine.
In the short to medium term, other players such as Australia, Algeria, Nigeria, Egypt, Iran or Israel could play a key role in supplying gas to Europe.
Throughout February 2022, states inside and outside the European Union have recommended their nationals to leave Ukraine and airlines such as KML, Lufthansa have cancelled their operations with Kiev.
However, the tension took on a new level. On February 21, 2022, Russian President Vladimir Putin announced the recognition of the independence of the self-proclaimed Donetsk People's Republic and Luhansk People's Republic in eastern Ukraine and declared the Minsk Agreements dead.
This move has already produced the first reactions. Just one day after this tacit recognition, Germany suspended the certification of the Nord Stream 2 gas pipeline. At the same time, the 27 members of the European Union unanimously agreed on a first set of sanctions against Russia for Putin's decision.
The still British Prime Minister, Boris Johnson, announced that the United Kingdom will impose sanctions on five Russian banks (Rossiya Bank, IS Bank, General Bank, Promsvyazbank and Black Sea Bank) and three wealthy individuals, as a result of the tensions in Ukraine.
Together with Brussels and London, US President Joe Biden unveiled a first package of sanctions against Russia. The sanctions will affect Russian banks VEB and Promsvyazbank and against Russian sovereign debt. At the same time, the measures will also target Russian "elites" and their families.
In the last hours, Australia, Canada and Japan announced sanctions against Russia. In the case of Japan, they include a ban on the issuance of Russian bonds in Japan, freezing of assets of certain Russian figures and restriction of travel to Japan. Despite the fact that in 2021, Russia supplied almost a tenth of the LNG to Japan; Kishida rules out an impact on energy supply in Japan in the short term.
Japan, Singapore and Taiwan do not rule out applying restrictive controls on Russian exports. These would affect the technology sector, as these three Asian states are major producers of semiconductors, computer chips and other high-end technology exports on which Moscow depends.
During the evening of February 22, 2022, the Russian Parliament (the Duma) approved the use of Russian military forces outside the territory of Russia. Also, the Russian Foreign Ministry announced the evacuation of its diplomatic staff from Ukraine.
China is closely following what is happening on the Russian-Ukrainian border and, above all, Washington's reaction and action in Ukraine, with a view to a future scenario for Taiwan.
However, Beijing is calibrating its rapprochement with Moscow. First of all, there is a direct rail and sea link between China and Europe, all the way to Odessa, without passing through Russian territory, is part of its overall strategy of the Belt and Road, viewed with much suspicion by Russia.
China also does not want to weaken the EU or in deepening a conflict with it over Russia, after the indefinite suspension of the Investment Agreement, signed in 2020, which Beijing is interested in recovering.
In the event of an all-out war by Russia in Ukraine, China could throw Moscow a lifeline: economic relief to alleviate the effect of U.S. sanctions. However, this would damage China's relations with Europe, provoke serious repercussions from Washington and lead to traditionally non-aligned countries, such as India; and Beijing wants to avoid damaging its relations with the West and prevent the US from gaining more allies in Southeast Asia.
To this, it should not be forgotten that, Russia and Ukraine account for 29% of world wheat exports and the main Ukrainian wheat-growing regions are also close to Russian-controlled territory. In the event of an all-out war, this could impact the North African and Middle Eastern states and other world wheat producers could gain a larger market share.
An all-out war would also affect the U.S. to a lesser extent. Despite the fact that, U.S.-Russia trade totaled just $35 billion in 2019, according to White House data; Moscow was the third-largest supplier of foreign oil to the U.S. in 2020, responsible for 7% of imported oil. Russia also exported $13 billion worth of mineral fuels to the states in the previous year, more than half of all goods shipped to the U.S.
The most affected players would be the European Union and Ukraine. First, oil is approaching $100 per barrel and the price of natural gas continues to rise. Alongside this, other commodities have also risen, such as aluminum, which is approaching a record high, and wheat, which has reached a one-month high. This could trigger inflation to rise, especially in Europe, and accelerate a possible interest rate hike by the ECB to alleviate the economic impact.
Another key aspect would be the scope of the war. Should Russia take control of the port of Odessa and the Black Sea coast, the blow to Kiev would be critical and could lead to political change in Ukraine. Also, Poland, Hungary and neighboring states are preparing in advance for a possible surge of refugees from Ukraine.
The future is uncertain, but the following days, weeks and months will be key in determining the future of Ukraine and the economic and energy impact of this crisis inside and outside Ukrainian territory. It is said that there is a curse "may you live in interesting times". We are living through this period, but only time will tell if this curse is a reality or just a phrase.
Article published on the 23rd February, 2022.
Suggested readings:
Blanchette, J. and Lin, B., 2022. China’s Ukraine Crisis. Foreign Affairs. Available at: https://www.foreignaffairs.com/articles/china/2022-02-21/chinas-ukraine-crisis
Friedman, G., 2022. Europe and the Ukraine Crisi. Carnegie Moscow Center. Available at: tps://geopoliticalfutures.com/europe-and-the-ukraine-crisis/
Stanovaya, T., 2022. How War Would Change Russia. Carnegie Moscow Center. Available at: https://carnegiemoscow.org/commentary/86356
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