MOSCOW BLOG: Will Russia sanctions be lifted this year?

MOSCOW BLOG: Will Russia sanctions be lifted this year?
Sanctioned skyline: The Moscow Kremlin / bne IntelliNews
By Ben Aris January 25, 2016

Will EU sanctions on Russia be lifted this year? Several players on the Western side are suggesting it is possible as Europe struggles with its refugee crisis and economic recession. The Russians have also signalled that "enough is enough" as their counter-measures also recoil at home.

The West is caught between sticking to its values and sanctioning Russia on principle on the one hand, and doing a deal to help end the war in Syria that is driving millions of refugees westward, as well as reopen the Russian market to Western business and regain a major source of profits.

The result of this dilemma has been a fudge. Western politicians repeat the mantra that Russia needs to fulfill the requirements of the Minsk II agreement, while concurrently skating over the fact that everyone failed to meet the deadline of December 31, 2015 and currently the deal is a bust. This suspension of reality can be maintained for a while, but not for long.

However, the signs are hopeful that a last-ditch push can be achieved; at least it increasingly seems that everyone wants to end the conflict. Both the US and Russia have indicated in the last month that they are open to a deal.

Most recently, US Secretary of State John Kerry said withdrawal of US sanctions to Russia in the future is "attainable" in his speech at the World Economic Forum in Davos on January 23.

"Earlier this week, here in Davos, Vice-President [of the US, Joseph] Biden and I met with the Ukrainian president [Petro] Poroshenko, to help ensure full implementation of the Minsk agreements. And I am sure that under the condition of mutual efforts and sincere and legitimate effort to solve the problem in the coming months is possible to perform the Minsk agreement and come to the point where sanctions could be - in connection with the full implementation – [ended] "- said Kerry.

Europe is also clearing looking for a way out of the imbroglio. Sanctions against Russia could be removed "this summer", said French Minister of Economy Emmanuel Macron. "The goal that we all share, is to be able to lift the sanctions this summer if they meet the conditions of the Minsk Agreement", AFP reports. His comments follow closely on the heels of similar remarks by French President Francois Hollande.

"I note that you need to take more effort. On the Ukrainian side should be adoption of the constitutional reform. This is a condition of performing the Minsk Agreement. The Russian side is to put pressure on  the East of Ukraine to hold indisputable elections. Then we can move to the final phase - the restoration of the border between Russia and Ukraine, and the removal of European sanctions against Russia, " Hollande said in an address to the diplomatic corps of the country, reports the Russian daily Vedomosti.

Notably, the return to Kyiv's control of Crimea, annexed by Russia in March 2014, is not mentioned in the Minsk II agreement, removing a potentially insurmountable obstacle to the lifting of the sanctions.

For its part, Russia has also signalled that it had enough of the mutual sanctions war and wants to do a deal. With fresh falls in the oil price that dragged the ruble down with it, Russia's 2016 budget is now unsustainable – even if it uses all its available reserves – and Putin can no longer afford to maintain costly wars in either Syria or the Donbas. Much has been made of his decision to upgrade Russia's representation to the contact group on the East Ukraine settlement.

"A signal that Russia could be trying to seize the initiative in the peace process is the call to Boris Gryzlov – a leader of the ruling United Russia party, a long-time former head of the State Duma, and a close colleague of President Putin – to act as Russia’s representative in the contact group," political analysts Wojciech Gorecki and Wojciech Kononczuk from East West Institute (OSW) wrote in a paper this week. "This appointment raised the status of the Russian delegation (the previous representatives have been professional diplomats, including Azamat Kulmukhametov, a former Russian ambassador to Syria)."

And the meeting between Vladislav Surkov, Putin's chief ideologue and close adviser, with top US diplomat Victoria Nuland in Kaliningrad on January 15 was also seen as significant.

Ball in Kyiv's court

The fact that Kerry was meeting with Poroshenko to discuss the implementation of the conditions and not Putin is significant in that half of the problem is that Kyiv has also failed to meet its obligations under the Minsk deal.

There are 13 points in the memorandum. The first three concern bring an end to the fighting that was raging at the time of the agreement in February 2015. There two clauses that deal with Russian troops in Ukraine (points 9 and 10), the second of which calls for the "pullout of all foreign armed formations, military equipment, and also mercenaries", which clearly hasn't been met by the Russians. However, there is no deadline attached to this demand and the Russians have been taking the de facto line that it will not comply until the Ukrainian side fulfils its obligations, most of which did have a specific deadline attached to them.

The second demand on the Russians (point 9), to return control of Ukraine's borders, does have a deadline of the end of 2015, which has been missed. But the clause explicitly says Russia doesn't have to comply with this point until clause 11 has been fulfilled: "Restore control of the state border ... by the end of 2015, on the condition of fulfillment of Point 11."

Point 11 requires Ukraine to pass constitutional changes, "with a new constitution to come into effect by the end of 2015, the key element of which is decentralisation (taking into account peculiarities of particular districts of Donetsk and Luhansk oblasts, agreed with representatives of these districts), and also approval of permanent legislation on the special status of particular districts of Donetsk and Luhansk oblasts in accordance with the measures spelt out in the attached footnote, by the end of 2015."

And there is the rub. Russia has not met its conditions but Ukraine has also failed to fulfil three of its major commitments: put an amnesty for all fighters into place (the law has been passed but the president has not signed it into law); hold local elections in the region; and change the constitution.

Poroshenko said last week that he would not allow the conflict in the east of the country to become "frozen". But with the lack of action on both sides and the failure to meet the December 31 deadline, even if the conflict is not already de facto frozen, the "temperature" around it is falling fast.

The West's patience with this conflict is also fading fast as it has bigger fish to fry in Syria and the swelling refugee camps across Europe. Kyiv is running out of time in the face of growing "Ukraine fatigue" in Brussels (and to a lesser extent in Washington) and the government's plunging popularity at home.

"The challenge for Kyiv is the West's 'Ukraine fatigue', and its blaming of Ukraine for sabotaging the Minsk agreement by not accepting the decentralisation reforms and the special status for Donbass by the deadline (the end of last year)," the OSW analysts wrote.

The ball is now clearly in Ukraine's court. If Poroshenko can push through the constitutional changes then Russia would clearly be forced to immediately return the state control of the border under the terms of Minsk II. For this to be meaningful, Russia would be forced to immediately comply with point 10 and ensure the demilitarisation of the conflict zone, which means cutting of mercenary formations in Donbas, and withdrawing the troops it deployed in the region but denies have there.

Flawed package

But that won't be easy. The Minsk II agreement is fundamentally flawed as actually the onus to do the hardest parts – like organise regional elections and change the constitution – were foisted on Kyiv. Russia was not even a signatory to the agreement, which was formally negotiated between Kyiv and the rebel's representative to the contact group. While Russia is clearly the aggressor in the conflict it sat at the table in Belarus as one of the adjudicators of the deal. In effect, Putin managed to get himself into a position where he could impose many of his demands on Ukraine but take little responsibility for his actions.

Minsk II was a bad deal for Ukraine and especially forcing through the constitutional changes is tantamount to political suicide for Poroshenko. The preliminary vote on the changes squeaked through with a simple majority, but the president's efforts to raise more than 300 votes for the supermajority needed to amend the constitution are going badly: According to Ukrainian media reports, only 280 deputies are currently willing to support the change.

"The failure of the vote would have negative repercussions for both domestic and foreign policy," the OSW report said. "On the one hand, it would allow Moscow to blame the Ukrainian side for the failure of the peace process, and would increase criticism of Kyiv from the West. On the other, it would deepen the crisis in the ruling coalition and bring about early general elections."

And the prospects for the constitutional change passing got even more challenging after Ukrainian Prime Minister Arseniy Yatsenyuk has called for a referendum on the proposed changes, which will only delay the vote further.

"It is time for the Ukrainian people to speak: should there be new Ukrainian constitution in the new European Ukraine? No one but the people of Ukraine have the right to determine what will be the basic law," Yatsenyuk said on January 24 on the Ukrainian TV programme "10 minutes with the Prime Minister".

Any more delays could become very costly for Ukraine. The International Monetary Fund (IMF) is also losing patience: there has been some progress, but the momentum was being lost as the economy stabilised at the end of last year. The IMF has already delayed releasing two tranches woth $3.3bn of its overall $17.5bn support package agreed in 2015. And despite parliament passing an IMF-compliant new tax code, the Fund has attached even stronger strings to the release of the next tranche that "may" come in March if progress on reform and anti-corruption measures is made.