Economics and politics of an escalating war

 

The costs of the war are mounting

Over one thousand people have been killed, more than three thousand injured, almost a quarter of a million forced to leave their homes. The overwhelming majority of people killed, injured and displaced have been civilians playing no part in the fighting at all. There has been widespread destruction to infrastructure, enterprises, public utilities and homes. The productive economy – that which makes possible the reproduction of human society – is shrinking as a result of the simultaneous contraction of civilian industries and the expansion of the industries supplying the war. Arms and munitions are consumed only by way of their destruction.

The economic decline continues

Prime Minister Yatseniuk predicts that GDP will fall by 6% in 2014, inflation will go up by 19.5% and nominal wages will fall by 6.3%. The rate of unemployment according to the IMF will be between 10 and 15% by year end. These are conservative estimates, but they still represent a further serious decline from an already grave economic position for the great majority of Ukrainian workers, small farmers, students and pensioners. The hryvnia has already devalued by 47% against the US dollar since the start of 2014 ($1=12.2UAH). The combined impact of devaluation and inflation since the beginning of this year has cut the real income of workers by 50% and of middle class professionals by 30%.

Growth of a siege mentality

War inhibits protest against state policies: “All dissent is treason when the castle is under siege” (St Ignatius Loyola) So what will be the outlet for the inevitable social tensions and grievances generated by the economic crisis? Protest and political struggle or more war? Can there be both war and peace in Ukrainian society at the same time? Not for long. One will inevitably overwhelm the other. The “peaceful” area of Ukraine is increasingly on a war footing that will eventually make a democratic political process there unsustainable.

State budget

The revisions to the 2014 budget that were adopted by the Verkhovna Rada on 31 July were driven principally by the need to increase funding for the war effort. The main changes are as follows:

• to increase the budget for the Anti-Terrorist Operation by 18bn UAH, which represents an increase of 28% on the original 2014 defense budget of 63bn UAH. If large scale military operations go on beyond the summer, this requirement will double;

• to introduce a 1.5% war tax on all wages and salaries;

• to cut public services responsible for enforcing standards of environmental protection, quality of medicines, food quality and occupational health and safety,

• ministries will at their own discretion to lay off public sector workers without pay for up to two months in order to balance their budgets

• to decouple the rates of public sector pay, state pensions and student stipends from index linking to the rate of inflation,

• to freeze the minimum wage and official poverty line,

• to reduce workers’ protection against unfair or arbitrary dismissal under the Labour Code,

• to reduce availability of HIV-AIDS treatment,

• to cut support for the resettlement of deported Crimean Tatars.

• to suspend in time of martial law the law on tendering for state contracts to supply the Armed Forces of Ukraine, “other military formations”, law enforcement bodies and other institutions responsible for state security

• to increase the rents paid by businesses for oil, gas and iron ore extracted in Ukraine and destined for sale abroad.

These changes to the state budget were pushed through the Rada at the end of a week of high political drama. First, the parliamentary deputies refused to consider an original set of revisions put to them by Yatseniuk’s government on 24 July, declaring publicly they would not support an “anti-social” budget. Svoboda and UDAR leaders then announced they were quitting the parliamentary coalition with Bat’kivshchyna that was holding up Yatseniuk’s government. Yatseniuk duly resigned, and the country waited for the government to resign in turn, the parliament to be dissolved and new general elections to be called.

This course of events, however, was unacceptable to Poroshenko, because the country would be left without funding for the war while a caretaker government waited for new elections to parliament. Poroshenko persuaded Yatseniuk -or was he colluding with him all along?- to return to the parliament and try again. When a second, renegotiated version of the revisions was published and duly adopted by the Rada on 31 July it turned out the deputies had rejected the original version because it had been unacceptable to their oligarch sponsors, not because it was “anti-social”. Though softened a little at the edges the harsh anti-social character of the revisions to the budget remained in place.

The Rada had refused to consider these July 24 revisions because – according to Minister of Financs Oleksandr Shlapak – they would have increased the rents on the extraction of oil and gas in Ukraine that is then exported to levels that were unacceptable to big business. The biggest loser of all would be Ihor Kolomoisky, governor of Dnipropetrovsk. Kolomoisky runs Ukrnafta, the majority shareholder of which is the state. It is highly profitable, and would have remained so even with the increased rents that were tabled on 24 July. But Kolomoisky did not want to be the fall guy. To make his point he closed all the petrol stations he owns in Ukraine for “stock taking”.

The July 24 revisions did not increase the rent on extracted iron ore. Its rate had been increased just recently, in March. But iron ore is one of the main businesses of Renat Akhmetov, Kolomoisky’s rival. And Akhmetov is viewed widely as a renegade oligarch who hedged his bets and secretly backed the separatist movement. Unlike Kolomoisky, Akhmetov does not control “his” province of Donetsk any more.

So the 31 July version that was voted through increased the rent of iron ore once again – at a cost to Akhmetov, Kostiantyn Zhivago (of Ferrexpo infamy) and ArcelorMittal. It also reduced the planned increase on rents of extracted and exported Ukrainian gas and oil and alternative fuels as a further concession to Kolomoisky. And these changes are to be in effect only until the end of 2014, rather than indefinitely.

Thus the battle over the revised state budget sees the oligarchs vying to relinquish the least of their super profits to finance the war effort. The Left Opposition in Kyiv concludes that “the burden of the war is being put fully on the backs of the workers while big business is quietly accumulating its profits”. http://gaslo.info/?p=5344

Western support to Kyiv

Nor should it be forgotten that the Ukrainian state is on the verge of insolvency. Without the $6bn it is has received in loans and grants from foreign governments and their multilateral institutions, it could not hope to balance its budget in 2014 and to carry on the war in the east. Thus, the Western powers are in effect financing the Kyiv government’s prosecution of the war, in addition to the intelligence, advisors, food provisions, bulletproof vests and night vision equipment they are also providing.

The IMF is prohibited by its own charter from lending to a country at war. Conveniently for the Ukrainian government the Russian government is pretending that it is not making war in Eastern Ukraine. President Poroshenko has taken a cue from Putin by not declaring war on Russia either, even as he dons military fatigues and stresses that the Kyiv government is not engaged in a civil war.

Elections in October

The Verkhovna Rada rejected Yatseniuk’s resignation as it voted in the changes to the state budget. Now all the deputies can go to the electorate and say they have taken responsibility for financing the war effort and allowed the government to carry on discharging its functions. They will now prepare for general elections.

The present parliament is widely, if not universally, regarded as unrepresentative of post-Maidan society, inadequate to the tasks the country faces, and discredited by its deputies’ association with the old regime.

So the present parliamentary deputies will seek ways to crawl under the wire into the new parliament with the least number of casualties. The election period will be reduced from 60 to 45 days. This for several reasons: officially to save money; unofficially to have elections before the beginning of the heating season – when heating costs go up. Possibly also, Kyiv is anticipating major advances on the battlefield before election day.

There is also talk in Kyiv about parliament backtracking on Poroshenko’s election promise to hold the next general elections solely on the basis of proportional representation with open party lists. Doing away with single member constituencies as well as closed party lists reduces the opportunities for the rich buying a seat in parliament, either from local power brokers in the constituencies or from the party bosses/oligarchs.

Now the talk is about staying with the mixed system of one half proportional representation chosen from closed party lists and one half majoritarian election in single member constituencies. This was the system that gave the country the dirtiest, most corrupt election since independence and a parliament in 2012 that relinquished its powers to the presidency and made Yanukovych a near dictator. This system will help retain the status quo – as difficult as that might be. It might also prevent Oleh Liashko, the right wing populist allied to UNA-UNSO, from building a big fraction in the Rada.

There is no talk at all about lowering the 5% threshold for parties to enter the parliament on a proportional representation basis. This was another one of the democratic aspirations of the Maidan being left by the wayside.

The elections will most likely be announced on 24 August, Independence Day, and be held as soon as 12 October.

Elections will not touch the old regime

The old regime is still very much alive in the ministries, regulatory bodies, courts and tax authorities that make up the carcass of the Ukrainian state. Politician – public official – private businessman: this is the holy trinity that fears disruption by the current crisis. Elections could threaten its unity if there was a radical, progressive party – a genuine Workers Party – to contest them. But it has not yet appeared, while the forces of the far right both inside and outside parliament do offer the new/old Ukrainian regime a channel to divert the anger and frustration of the lower classes away from themselves. This is a real danger of the current situation.

Poroshenko escalates war

There is no doubt in my mind that both Poroshenko and Putin want to end the war. Each, however, has his own terms, and these terms are still too far apart for either side to stop fighting now. Many people voted for Poroshenko in May in the hope and expectation that he would enter into negotiations for a peace settlement. Indeed, Poroshenko and Putin both put forward their representatives and negotiations did begin – and are still ongoing even as the fighting escalates.

However, Poroshenko set about strengthening the Ukrainian armed forces in order to apply overwhelming convential military power over what was still in May a lightly armed guerrilla force of some five thousand men with few seasoned fighters to lead them. Military victories against them would decisively strengthen Kyiv’s position in any peace negotiations. That still seems to be the objective of the Ukrainian government as it uses heavy weapons on the ground and in the air, as it orders a second call up to relieve soldiers who have been in the field for four months, and as it expands the military budget.

Putin now builds an army, not an insurgency in Eastern Ukraine

Putin responded to Poroshenko in kind. He is no longer trying to stimulate an insurgency in Eastern Ukraine, which in Putin’s original plan was to give birth to an autonomous statelet beholden to Russia. Rather, he is trying to match and surpass Ukrainian heavy weapons with Russian ones and to build an army. Russia has lots of surplus heavy weapons mothballed since the end of the Soviet Union. So, Putin is building up the equipment of a conventional army –armoured personnel carriers, tanks, vehicle mounted missile batteries. For such equipment one needs trained soldiers and specialists, hierarchical command, co-ordination and command centres – an army, not a guerrilla force. Where will this army’s soldiers and officers come from? The DNR and LNR? Hardly. Either Putin has lost his bearings or he is planning to station an army under Russian command in Eastern Ukraine.

Putin is not about to back off. He is counting on being the last man standing. As long as he keeps the border open into eastern Ukraine Russia can supply the DNR and LNR forces indefinitely, and indeed build an armed force of considerable firepower. But if it wants to use this firepower to its full potential Putin will have to bring hundreds more, if not thousands of Russian servicemen over the border into Ukraine.

Negotiations, but on whose terms?

According to the Independent on 4 August Germany and Russia are in secret talks about political settlement. The proposals on the table include: the West recognising the annexation of Crimea by Russia; Russia withdrawing from eastern Ukraine; some autonomy for eastern Ukraine; $1bn payment to Ukraine by Russia for the final lease of Sevastopol port for its fleet; and gas supplies and gas transit prices to Ukraine guaranteed by Russia. Once again, the Russians and the Germans regard the transnationally mobile oligarchs as the keys to any deal between Ukraine and Russia:

“Central to the negotiations over any new gas deal with Gazprom is understood to be one of Ukraine’s wealthiest businessmen, the gas broker, Dmitry Firtash. Mr Firtash – who negotiated the first big gas deal between Ukraine and Russia between 2006 and 2009 – is now living in Vienna fighting extradition charges from the Americans. But he has close relations with the Russian and Ukrainian leaders – he supported Mr Poroschenko – and has been acting as a go-between behind the scenes at the highest levels.”

A Ukrainian government facing imminent general elections, insolvency, a deepening economic crisis, massive reconstruction costs in the east, and likely protests from various domestic quarters will have few options of its own: either to negotiate a peace with Russia that recognises the DNR and LNR as legitimate parties to further negotiations, or to carry on fighting them and the Russians.

However, Ukraine’s government can match Russia’s resources in the long run only with Western support, which will mean relinquishing more of its sovereign policy making power to Western governments and institutions. Which will in turn weaken its domestic and interstate authority.

An erosion of Ukrainian state capacity and authority may in turn force the western powers to become even more directly involved in the war in the east. And it will naturally increase the chances that the big powers – USA, Russia and Germany – will put together a “solution” of their own. Such a pessimistic scenario is brought to mind by the real forces and circumstances that have come together over the past three months.

Petro Poroshenko: the Chocolate King walks onto a sticky wicket

Marko Bojcun

A crowded polling station in Shevchenko District, Kyiv on 25 May

Why Poroshenko won in the first round

Petro Poroshenko emerged as the clear winner of the presidential elections in the first round. With 95% of the votes counted, Poroshenko had 54% of the vote, followed in the distance by Yuliya Tymoshenko with 13% and a string of other candidates.

The electorate decisively rejected the two far right candidates – Oleh Tiahnybok from Svoboda (1.2%) and Dmytro Yarosh from the Right Sector (0.7%). Three reasons were given by political commentators in the mass media and by activists I talked to in Kyiv: first, far fewer Ukrainians identify with them ideologically than their prominence in the winter Maidans had led some Western observers to claim; second, in Western Ukrainian towns where Svoboda did have significant support and so gained control of local governments they quickly alienated their electors by behaving in the same corrupt and authoritarian ways as the other parties. And third, people just do not want their national leaders associated with far right or fascist politics of any sort.

The prevailing view is that Poroshenko was elected in the first round mainly because of the urgent need felt by the Ukrainian public to stop the war in the east. This was the feeling right across the political spectrum. Even some people on the left said they were suspending their misgivings about voting for Poroshenko, an oligarch, “a capitalist pig”, because there is a foreign intervention underway that needs to be stopped. No-one wanted the presidential elections to be drawn out over two rounds. They wanted to empower a leader with a democratic mandate who appeared most able negotiate an end to the war with the separatist movement and its sponsors in Russia. People also wanted to show by their turnout that the great majority continue to support an independent and united Ukraine.

The elections were severely disrupted in Donetsk and Luhansk where only around 6% of the eligible electorate of some 3.5 million actually voted. Opinion polls conducted over the telephone indicated that at some 28% of voters in these two oblasts were prepared to go and vote if there was a polling station open nearby. The rest were either too frightened to try or were opposed to casting a vote in these elections. But the majority of polling stations remained closed because their election committees had been threatened by the militias, their ballot papers were burned and their electronic equipment seized.

Poroshenko’s priority

Poroshenko’s election in the first round places enormous pressure on him to respond quickly to the high expectations placed on his shoulders. As soon as exit polls suggested he would win, Poroshenko’s team announced he would go to Donetsk as soon as possible. And already at 2.15 am on 26 May Poroshenko told journalists in Kyiv that he was ready to meet Putin:

“We can’t talk about serious security in our region without Russia’s involvement. We will find the right format and for sure there’ll be meeting with Putin”.

He went on to say that he was ready to negotiate with Russia on a bilateral basis or within the framework of the Geneva Accords – that is to include the USA and the EU in the talks as well.

The separatist movement replied to these initial overtures by declaring martial law in Donetsk, occupying part of Donetsk airport in the morning of 26 May and demanding that Ukrainian government forces holding the perimeter of the airport withdraw. Their move was clearly aimed at preventing Poroshenko from getting into Donetsk.

Ukrainians remain soberly realistic about the gravity of the challenge they face and what one man can possibly do about it, regardless how high his state office. Nor has it been forgotten that the Maidan fought to return the country to a parliamentary republic and to strip the presidency of executive powers. Poroshenko can do nothing on his own and he is well aware of it. He has already said that early elections to the Verkhovna Rada (parliament) must be called to renew its popular legitimacy and to create an effective governing majority. But he hasn’t said anything since the election about constitutional reforms that will restore a parliamentary republic or decentralise real power down to regional and local governments. The latter is a key demand both of Russia and the moderate, non-separatist forces seeking autonomy for the Donbas.

Donbas separatism: attempted revanche of the old regime

The separatist movement in the east has become more radical and intractable since it first appeared three months go. Let us recall that his movement is at its core a revanche of the Yanukovych regime, a regime of the Ukrainian oligarchs that also served Russian state and big business interests in Ukraine. When it became clear in February 2014 that this regime had lost all legitimacy and authority across western and central Ukraine the Party of Regions (PR) in the eastern oblasts revived its Russian nationalist wing there in a desperate bid to avoid total defeat.

After his election to the presidency in 2010 Viktor Yanukovych had silenced the PR’s nationalist wing by co-opting its leaders into the party’s patronage and power sharing networks in government. But upon his ejection from Kyiv Russian nationalism was needed to spur a whole set of initiatives – People’s Fronts, anti-Maidan rallies, self defense militias. Their declared common aim was to protect Russian speakers from Ukrainian “fascists and banderites”, but their real aim was to prevent the spread of the Maidan movement into the east and its possible transformation into an-anti-bourgeois movement that could threaten the oligarchs’ property and power in their eastern industrial heartland. The dying Yanukovych regime clung to this platform in the east and started to rock it so as to upend the interim Kyiv government that came to power after Yanukovych fled Kyiv into Donetsk on 21 February.

The Russian state encouraged and supported the revanche of the old regime because Moscow was losing the guarantor of its own interests in the person and regime of Yanukovych. And its own oligarchs’ biggest investments and markets (as well as their main competitors) lay in the steel, chemical and petroleum processing industries in the eastern oblasts.

Russian sponsorship

The Russian state gave the emerging separatist movement international diplomatic cover, strengthened its voice though Russian mass media internationally and in Ukraine itself. It launched a powerful campaign to discredit the Kyiv government as a “fascist junta” and to legitimise the separatists as defenders of Russian speakers from an allegedly impending ethnic cleansing by the Right Sector. This campaign of cynical and racist lies proved effective enough to alienate many people in the eastern oblasts from the Maidan movement that was beginning to take hold in their region. At the same time the Russian campaign enthralled the apologists of Stalinism in the west, who now see in Putin the resurrection of their Great Leader and in the Ukrainian people the old bogeyman of bestial fascism: the Cold War reincarnated.

Russian interest

But the separatist campaign is needed above all to serve Moscow’s interest to undermine the Kyiv government. Putin wants Kyiv to bow to Russian imperialist ambitions and Russian transnational capitalist ambitions. Those ambitions were served first when Russia seized the Crimean peninsula, of great military significance and with a maritime shelf full of shale gas. They now require maintaining a long term destabilising force inside Ukraine.

So Moscow has awakened its sleeping agents in Ukrainian state institutions. It has channelled money, arms and veterans of counterinsurgency campaigns in the Caucasus into the eastern oblasts to give backbone and leadership to the separatists. It has mobilised its armed forces onto the border with Ukraine so as to maintain corridors through it for ongoing transport and communications. The last reported major operation by Russian forces on the border was to open a corridor to let the insurgents remove five truckloads of corpses from the overflowing morgue in Slovyansk.  The unburied dead threatened an epidemic on the separatists’ stronghold. Apparently this transport of death failed to get over the border into Russia.

The separatist campaign has grown in three months and taken effective military control over many government buildings, police stations, state security buildings, weapons stores, transport arteries and communications facilities. It acquired an initial social base by recruiting to its ranks local lumpen elements, unemployed youth and criminal gangs who were given firearms and paid to man the block-posts on the roads.

However, this local source of recruits dried up. The separatists’ military commander, the Russian citizen Igor Girkin (nom de guerre “Strelkov”) recently complained publicly that local residents were coming to take arms from his stores, only to return home to use them to protect their own communities, rather than to serve in the separatists’ militias. He declared that his forces would start to recruit women. But locals have proved hard to recruit and the most recent reinforcements to the separatists’ fighting units are mercenaries coming over the border from Russia. A truckload of them was filmed in Donetsk on 25 May as they arrived to take part in a public rally in defiance of the presidential elections. When asked by reporters they freely admitted they were veterans of campaigns in Chechnya.

Ukrainian state’s fragility and the spread of instability

The Kyiv government has itself contributed to building public support for the Donetsk and Luhansk People’s Republics by its poorly conducted and at times bungled Anti-Terrorist Operation (ATO), It has cost lives of innocent civilian bystanders and damaged people’s homes and farms. Russian mass media has additionally and falsely charged the ATO with responsibility for some deaths and damage it had nothing to do with at all, including the deaths of its own Ukrainian troops. All this has generated more hostility among the local population towards the Kyiv government.

The war fighting in general has intimidated and effectively silenced everyone without a gun. An estimated ten thousand people from the east have been internally displaced, seeking safety in other parts of the country. Once open opponents of the separatist campaign there have been forced to go underground or to leave the region altogether. There are at least one hundred left wing activists among them from Donetsk and Luhansk who are currently taking refuge in Kyiv. And there is an effort underway to help others to get safe passage out.

People are still camping on the Kyiv Maidan

The war in the east has generated enough anxiety and instability as to provoke the beginnings of a dangerous militarisation of Ukrainian society in other parts of the country. First, the Maidan in Kyiv remains in place as an encampment, with its inhabitants settled in for an indefinite period. The Maidan was meant to end after the presidential elections were over. Some people living there in tents plan to stay on, while otthers told me they will now strike camp and go to fight in the east.

Most of the members of the Kyiv Maidan’s self defense sotni (hundreds- 17 in all) have already gone into the Ukrainian armed forces and their sotni have been officially disbanded. But some have gone into various independent armed militia, who set up their own training camps and maintain their own check points on roads and near vital installations like dams. On the highway between Kyiv and Odessa there are numerous checkpoints where vehicles are routinely stopped and searched. These checkpoints are manned separately by the traffic police (DAI), or by special forces of the Interior Ministry or the State Security Service (spetsnazy), or by independent militias. The relationships between these forces is unclear and is never disclosed to the people being searched.

The independent militias are of different ideological persuasions ranging from outright support for the Kyiv government to outright rejection of it. Militias hostile to the Donetsk and Luhansk People’s Republics are being formed on their territories as well.  However, all such militia are united in the belief that the Kyiv government is losing control and becoming incapable of maintaining order. The belief justifies their assumption of local authority by force of arms.

Community self defense

One also hears reports about the beginnings of organised self defense of neighbourhoods, either by the communities themselves or by civilians patrolling together with the regular police. The low paid regular police traditionally get little respect from the public. They have long been regarded as petty bribe takers who break the law themselves. The upheavals of recent movements showed just how powerless they are to protect people from violence and intimidation. And so their authority has been diminished all the more.

However, some local communities are supporting the police in trying to maintain order. Some leftists in the West have dismissed the patrols in Mariupol and other eastern towns, which are composed of steelworkers and miners walking with the police, as merely an attempt by the employers to protect their own property from the separatists. This is quite untrue. The employers have supported such patrols, but that was after working class communities in Mariupol, Alchevsk and elsewhere initiated them on their own in defense of their neighbourhoods, well before their employers jumped in and agreed to support them.

With or without the employers’ agreement or co-operation, these communities urgently need to restore a peaceful and safe environment for people going to work in factories and fields, for children going to school, for those travelling the roads, making deliveries, and so on. And we in the West should find ways to support them because without the organised self defense of workers’ and farmers’ neighbourhoods there can be no collective political action by them either.

Ongoing economic decline

Then, of course, there is the deteriorating socio-economic situation in the country. Industrial wage earners and salaried employees have seen their real income drop between 30 and 50%. Wage arrears are mounting.  Industrial production has been disrupted. Exports, to which over half of the national economy is devoted, are not getting out of the country. Investment is at a standstill. There is a growing need for state social assistance, but the state is effectively bankrupt as it takes loans from the IMF just to cover the interest on outstanding debts.

Eventually such a process of economic disintegration will provoke a social explosion. Which way the pent up frustration and anger of the people is channelled will depend in great part on the political leadership and basic organisations available to the working classes. Those are not available, or only just appearing, which is one reason why there was no credible challenger to Petro Poroshenko coming from the left.

Still, a lot of people want to believe that Petro Poroshenko can turn the tide around. The record of his career, summarised below, suggests he could unite the Ukrainian oligarchs and take a common position from them into negotiations with Putin. But can Poroshenko unite the broad masses of Ukrainian citizens in the east and the west whose poverty and political marginality have up till now been the preconditions of the oligarchs’ wealth and power?

Petro Poroshenko, born 1965, is a billionaire involved in the food processing, automobile and bus production industries. He owns Ukraine’s Channel Five television station. The biggest market for the “Chocolate King’s” confectionary products is in Russia, where he also owns a processing plant.

Well educated in law and international relations, he went into politics and was elected to parliament in 1998, 2002, 2006 and 2012. He became Secretary of the National Security and Defense Council in 2005, head of the National Bank of Ukraine in 2007, foreign affairs minister in 2009 and minister of economic development and trade in 2012.

A distinguishing feature of his political career has been Poroshenko’s frequent movement between political parties and coalitions, He started in the United Social Democratic Party, then established the Solidarity party at the end of the 1990s, passed briefly through the Party of Regions and ended up with Viktor Yushchenko in the Our Ukraine coalition in 2001. He stayed there through the 2004 Orange Revolution and its subsequent governments, but after Viktor Yanukovych became president he went to serve in Prime Minister Azarov’s government in 2012.