Russia and West risk rush towards catastrophe

By bne IntelliNews March 14, 2014

bne -

Crimea is due to hold a referendum March 16 that will probably result in the Russophile region breaking away from the rest of Ukraine. The crisis threatens terrible consequences for Russia's relations with Europe and the US.

To the West, Sunday's secession referendum in Crimea is unconstitutional and a fraud because Russian troops have essentially taken over the Black Sea peninsula. The US and EU have threatened sanctions. But to Russian President Vladimir Putin, the referendum offers a chance for the mostly pro-Russian Crimean residents to decide if they want to realign their region - home to Russia's Black Sea fleet - with Moscow after the political strife in Ukraine that ousted Viktor Yanukovych from the presidency in February.

Last-ditch efforts are ongoing to take a step back from the brink. On March 14, US Secretary of State John Kerry and Russian Foreign Minister Sergei Lavrov are due to hold talks in London, at which time Kerry will spell out the serious steps that a referendum on Crimea breaking away from Ukraine and joining Russia would entail.

German Chancellor Angela Merkel has warned of "catastrophe" unless Russia changes course. At the UN, US Ambassador Samantha Power warned time is running out for a peaceful solution. Reports say the US has drawn up a draft Security Council resolution that would declare the referendum illegal.

At the same time, the EU is doing its bit to throw its support behind the new pro-Western government in Kyiv. The interim Ukrainian government that was borne out of the protests - known as Maidan - said it hopes to sign off as soon as next week on the EU free trade and association pact that the ousted Yanukovych failed to agree, sparking the protests.

Both these momentous decisions - the referendum and the Association Agreement - are of dubious legitimacy.

The Crimean voters are faced with only two choices: join Russia or revert to the autonomous status it briefly enjoyed in 1996. The option of the status quo is not even on the ballot. The speedy organisation of the referendum by Crimean authorities with a dubious mandate has many questioning if there can be a free and fair vote, especially with Russian troops on the streets.

Yet the Maidan government has no clear mandate to make such a momentous decision as to choose to move towards the EU. Of the five parties that were in the pre-revolutionary government, only two are represented in the current government: former Ukrainian PM Yulia Tymoshenko's faction Fatherland and the right-wing nationalist Svoboda.

Fatherland dominates the cabinet and draws its support largely from the Ukrainian nationalist strongholds in western Ukraine. Svoboda was a fringe party and appeals to a vocal minority, but is also strong in the western regions. That means half the country, some 20m, have no real representation in the government.

It's a situation Moscow is keen to leverage. Kyiv has warned Russia could move its military occupation into the south and east of the Ukrainian mainland. One died and several were hospitalised on March 13 as rival protestors clashed in the eastern city of Donetsk. Meanwhile, Russia launched new military training exercises close the the Ukrainian border, while Nato troops are conducting war games in the Baltic.

That has only increased the rate at which tension is rising as the March 16 crunch date approaches.

On March 12, the Crimean authorities announced plans to takeover Ukrainian state-owned energy assets, including the country's main offshore explorer. That presents a serious challenge to the Kyiv government, which needs to expand domestic production of oil and gas in order to reduce dependence on Russian supplies. Moscow has long used its dominance over Ukrainian energy as a point of leverage.

Meanwhile, EU and US officials have spent the week promising to launch sanctions against Russia immediately should the vote go through. Brussels is expected to implement travel bans and asset freezes for select Russian nationals. While the extent of the action remains limited by reticence - particularly in Germany - to disrupt trade relations in a major way, there is some concern evident in Moscow.

Former Russian finance minister, and economic advisor to President Putin, Alexei Kudrin said on March 13 that he's apprehensive about possible sanctions. He said the banking sector has already effectively launched action, stating that "credit line limits for Russia are being closed." He also warned that the situation will only boost capital flight - a major headache for the sluggish economy over the last few years.

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