Behind Ukraine-Russia naval tensions, a more brutal economic war

Russia's conflict with Ukraine is back in the headlines after Russia seized three Ukrainian military vessels and their crews near Crimea, triggering a declaration of martial law in Ukraine and a fresh escalation of tensions between the two formerly friendly neighbors.

But very little attention has been paid to the economic slugfest between the two, which has caused far more destruction than Russia's sanctions war with the West over the past five years, and will leave lasting consequences even if they manage to resolve the present, seemingly intractable, political conflict.

Russia and Ukraine were joined at the hip as part of a single state for more than three centuries. Both countries were hard hit by the rupture of traditional ties when the Soviet Union collapsed almost three decades ago, but that greatly intensified after a pro-Western government came to power in Kiev in early 2014, and Russia responded by annexing Crimea and promoting a separatist war in eastern Ukraine. The fallout from all that, plus repeated waves of bitter mutual sanctions, has caused Russian-Ukrainian trade to collapse by two-thirds in the past five years. Fresh sanctions levied this month by Moscow against leading Ukrainian politicians and companies suggest the rift may be solidifying into permanence.

But it is a remarkable fact that Russia remains Ukraine’s biggest single trading partner by a wide margin, while most individual countries of the European Union – the community aspired to by Ukraine’s Maidan Revolution – remain far down the list. The stubborn persistence of age-old economic ties in the face of harsh new political animosities is a reality that frustrates hardliners in both countries. But those ties also contain shreds of fading hope, amid the mutual acrimony, that differences might be peacefully bridged one day.

Pressure, and wait for change

The latest barrage of Russian sanctions, targeting 322 Ukrainian individuals and 68 companies, appears to be aimed at inducing a pro-Russia outcome in the upcoming Ukrainian parliamentary and presidential elections. Several leading Ukrainian politicians – including outspokenly anti-Russia presidential contender Yulia Tymoshenko and former prime minister Arseniy Yatsenyuk – are on the list, as are many top Ukrainian businesspeople. Curiously, some powerful eastern Ukrainian oligarchs such as Rinat Akhmetov and Ihor Kolomoisky are not, nor is Ukrainian President Petro Poroshenko, who owns a chocolate factory in the Russian city of Lipetsk. That selectivity is clearly deliberate.

“The Russian strategy is to wait until something changes in Ukraine,” says Sergei Markov, a former Kremlin adviser. “We know that some Ukrainian politicians would like to make a peace deal with Russia, but they are not able to in the present environment. We regard the present Ukrainian government as being under the control of Washington, and it is not able to make a free choice. When American influence fades in Ukraine – and it will – we believe our relations with the friendly Ukrainian people can be restored.”

Russian President Vladimir Putin has claimed repeatedly that Mr. Poroshenko’s government is the key obstacle to implementing the European-backed Minsk accords, which would mandate political decentralization in exchange for re-integrating eastern Ukraine’s separatist statelets into the country. Poroshenko’s exclusion from the current sanctions list – although his son is on it – is a signal to the Ukrainian president that Moscow expects him “not to push past any of our red lines,” says Mr. Markov. 

For its part Ukraine has sanctioned almost 2,000 Russian individuals and more than 700 companies since 2014, dealing a crippling blow to the operation of Russian banks in Ukraine. Commercial flights between Ukraine and Russia have been banned. Although it is still possible to travel between the two countries by train, the operation of state-owned Russian Railways has been prohibited on Ukrainian territory. The once-extensive cooperation between former-Soviet military industries was stopped in 2014. Ukraine has also moved to curb the penetration of Russian media in the largely Russian-speaking country, blaming it for spreading disinformation about the ongoing conflict.

“If not for the fact that Russia seized Crimea, things might be very different between our countries,” says Alexander Okhrimenko, president of the independent Ukrainian Analytical Center in Kiev. “Maybe we will get over it in several decades, but right now Ukrainians perceive Russia as a hostile state and any Ukrainian politician, like it or not, has to take an anti-Russian stand.”

Friendly views of people, more or less 

Mr. Okhrimenko is describing political realities. But one of the many counterintuitive peculiarities of the Ukraine-Russia conflict, which politicians in Kiev describe as a war of national defense against Russian aggression, is that substantial numbers of people in both countries continue to hold friendly views of the other. A joint survey conducted in September by Russia’s only independent pollster, the Levada Center, and the Kiev International Institute of Sociology (KIIS), found that Ukrainian views of Russia have slightly improved since the last survey in July, while Russian attitudes toward Ukraine have somewhat worsened. 

Asked “how do you regard Ukraine in general,” 55 percent of Russians answered in the negative (up from 49 percent), and 33 percent in the positive (down from 37 percent). Asked the same question about Russia, 48 percent of Ukrainians answered “good” or “mostly good” (up from 45 percent), while 32 percent said “bad" or “mostly bad” (down from 38 percent). The same poll also found that 45 percent of Russians believe that Ukraine and Russia “should be independent, but friendly states, with open borders, without visas and customs,” with 32 percent advocating closed borders. Fully 50 percent of Ukrainians preferred open borders with Russia, while 39 percent favored a closed regime. 

“The attitude of many Ukrainians toward Russia is something I always find quite surprising; it’s a kind of unrequited love,” says Vladimir Paniotto, director of KIIS. “But it’s not that simple. When asked about their attitude toward the Russian leadership, only 11 percent of Ukrainians say it’s positive. If you ask about Russian people in general, up to 70 percent say their attitude is good. It seems that Ukrainians do not know, or are prepared to ignore, the fact that around 80 percent of Russians support Putin’s course.”

Unique products made for Russia 

The mutual economic blows of the past few years have done irreparable harm to what was once a largely integrated Russian-Ukrainian economic space. Most of the damage has fallen upon Ukraine, which lost about 15 percent of its industrial potential and most of its once rich coal resources through the destruction of war and separatism in the east Ukraine; it seems increasingly unlikely it will ever be recovered. In addition, most of the great industries of eastern Ukraine have been idled through the loss of Russian markets for their unique products – things like giant turbines, railroad carriages, helicopter engines, tractors, and missile parts.

“You can call it de-industrialization,” says Alexander Kirsch, a liberal deputy of the Ukrainian parliament from the industrial city of Kharkiv. “We also have a huge outflow of labor resources. People are leaving to find work elsewhere. That’s not politics, it’s the consequence of war.”

Ukraine still earns as much as $3 billion annually in fees for transiting Russian gas to Europe through the old Soviet Druzhba (Friendship) pipeline. But that is set to end, or be deeply scaled back, when the current contract expires next year and alternative Russian pipelines like Nord Stream II under the Baltic Sea, and another under the Black Sea to Turkey, come online.

Some 4 million Ukrainians, or 16 percent of the working-age population, have left the country to find work abroad. Ironically, many of them go to Russia, where they now number about 2 million.

One of Ukraine’s most promising industries, the legendary aviation firm Antonov, has virtually ceased working. After 2014 it closed down several joint projects with Russian firms, and ended cooperation with the Russian military to build a powerful new medium-range transport plane, the An-70. New orders for Antonov aircraft, or offers of collaboration, have not materialized from the West, leaving the sprawling Antonov works in Kiev almost empty and reduced to repairing old aircraft to remain in business.

“It should be pointed out that many of those big industries, concentrated in eastern Ukraine, had no future anyway. They were inefficient and wasteful,” says Mr. Okhromenko. “But of course they need to be replaced by smaller, effective industries, and there are still very few of those.”

Russia has suffered too, and is still scrambling to find substitutes for some of the high-quality Ukrainian goods – particularly military components – that it once depended upon.

“A lot of Ukrainians would like to continue doing business with Russia, but it’s impossible now,” says Alexander Paraschiy, an economic expert with Concorde Capital, a Kiev-based brokerage. “We do see some increase in trade turnover with the EU countries, but those markets severely restrict our agricultural goods. We are refocusing on markets in the Middle East and Asia, but it is slow going.”

The failure of the West to significantly help Ukraine as it slugs it out with Russia is the source of some bitterness. And it may be something the Kremlin is counting on as it continues to apply politically-selective sanctions on leading Ukrainians, and waits for next year’s round of Ukrainian elections.

“The West made promises to us, but it seems they understood that in a different way from us,” says Mr. Kirsch, the parliamentarian. “We expected more support from the West, because there is no place in the world where people have sacrificed as much for the sake of a European choice as the people of Ukraine have.”