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Wednesday, December 17, 2014

Fragile economies in Russia and Ukraine may help ceasefire in east to hold

On Friday the fragile ceasefire extended after the recent "Day of Silence" called for by the Ukrainian president Petro Poroshenko, appeared to be holding for the most part.

Petro Poroshenko in 2010 (Kathrin Mobius)

Poroshenko had called for the "Day of Silence" back on Tuesday December 9. Poroshenko hoped that the move would lead to a more durable ceasefire and eventually peace talks. Although eastern separatists agreed to the truce, the Ukrainian military accused them of violating the agreement. A ceasefire agreed to back on Sept. 5 has been continually violated by both sides. UN estimates are that there were more than 10 casualties a day on average after the agreement up to the Day of Silence. Ukraine, and NATO as well, claim that Russia has thousands of its own troops in rebel-held areas. Russia vehemently denies this.  
Andriy Lysenko, a spokesperson for the Ukrainian military, said Thursday that three soldiers had been killed in the last 24 hours and that there had been 22 violations of the ceasefire since the Day of Silence began. Talks scheduled for this week had been called off due to the level of continuing violence. 
However, on Friday Ukrainian President Petro Poroshenko sounded a much more positive note. While speaking in Sydney, Australia, he said that Friday was the "first 24 hours in the last seven months when we have had a 'real' halt to clashes." Although a spokesperson for the Ukrainian military said that one soldier was wounded by gunfire the truce was holding generally on both sides. The eastern separatists said they remained interested in discussions. 
The Russians are facing a deepening economic crisis. The economy is being hurt by western sanctions but even more by falling oil prices. The ruble has dropped over 40 percent in value against the dollar since June. The Ukrainian economy is even worse shape. The value of Ukrainian currency has also fallen drastically and foreign reserves are falling so quickly that some analysts think that there may be a default within weeks.
 Ukraine will also face stringent conditions attached to loans from the IMF. The loan is denominated in dollars and euros. To make payments Ukraine will no doubt sell off its assets at fire sale prices to western buyers. The loan is discussed in detail here. Late in November, Ukraine cut off financial ties with areas held by the rebels. While this will save sending pension money and other payments to the areas, it will make the rebels more dependent on Russia and in effect confirms that they do not have the rights of other Ukrainians. Citizens in the area will no longer be able to use international credit card and banking transactions. Loans made to those in rebel held territories are unlikely to be repaid after this move I should think. Both Russian and Ukrainian oligarchs have little to gain by moves such as this. 
While Ukrainian oligarchs are anxious to develop greater ties with the west, it makes little business sense to completely cut off profitable ties to Russia. Even the chocolate king Poroshenko has, or had, profitable investments in Russia. So far Russia has apparently held back from explicit monetary support for the rebels but it may now be under pressure from the rebels to do so. 
Russian Foreign Minister Sergei Lavrov also expressed optimism: “A real chance has emerged to restore peace in Ukraine. It was difficult, but there is still a truce and a cease-fire.” Lavrov also said that Russia viewed rebel-held areas as part of Ukraine's future. He called for "political dialogue, which should ultimately lead to constitutional reform in Ukraine with the participation of all regions and political forces in the country". Nevertheless Russia appears to be supplying more military equipment and personnel to rebels according to Lysenko, the Ukrainian military spokesperson. 
Meanwhile the US has increased sanctions on Russia while sending arms and other aid to the Ukraine: Significantly, the bill authorizes the president to make available defensive weapons, services and training to Ukraine, including anti-tank weapons, crew weapons and ammunition, counter-artillery radar, tactical troop-operated surveillance drones, and command and communications equipment. It also includes additional aid for Ukraine, earmarked to help Ukraine loosen its reliance on Russian energy, and strengthen civil society. This will add even more tension to already tense US-Russia relations. In spite of huge debts, Ukraine will double its defense budget next year, as noted on the appended video. 

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