A Game of Chess: Russia versus West

The ex-USSR still holds mythological fascination for the West and the constant unrest in that region is of political interest even after the Cold War has ended. The interest in Ukraine for EU, USA or UK has always been Russia. Ukraine with 1300 km (800miles) has the second-largest joint border with the EU. Russia is an unknown power – not very cultured in the ways of more democratic countries and a history to be feared.

For Russia, the loss of Ukraine in 1991 was inevitable but not wise. Ukraine had a lot of underground nuclear storage bunkers like Balaklava in Crimea which were consequently plundered as Ukraine did not have the necessary resources to manage them. Russia’s interest in Ukraine is understandable. At the height of the Cold War, the USSR Navy that was located in Crimea and it controlled the Black Sea – it was a symbol of Soviet Power which has since declined. Ukraine is also important for Russia as their gas pipeline passes through Ukraine and supplies 12 EU countries. Crimea, particularly Sevastopol provided Russia access to the Mediterranean, and to the South Atlantic and Indian Oceans and beyond.

EU’s advances towards ex-USSR countries (Ukraine, Georgia and Moldova) on 27 June, 2014 was not appreciated by Moscow. Neighboring countries to Russia were erupting in civil unrest and when Russia decided to interfere in Georgia in 2008, the rest of the world watched in fascinated silence (USA was busy interfering in Afghanistan and Iraq among other places and was preoccupied). After a long time the naval ships in Crimea were put to use in managing the Georgia situation in 2008.

To understand Russia’s perspective on Crimea and Ukraine we need to travel back in time. Sevastopol in Crimea was founded as a naval base in 1783 by the Empress Catherine the Great and it was the HQ of the Soviet Black Sea Fleet. The dissolution of USSR had Russia and Ukraine engaging in hostile disputes about division of the fleet and access to the Black Sea for which an agreement was reached in 1999. The agreement allowed Russia to “lease” till 2017, a network of over 1000 naval facilities in Crimean Peninsula. The agreement included strategic points like the naval base in Sevastopol, two airfields and the Feodosia training facility. This allowed a military presence of 25000 personnel, 22 airplanes, 132 armored trucks and 24 artillery complexes. In 2010, this agreement was extended to 2042 under the Kharkiv Accords by President Dmitry Medvedev and Ukraine’s President Viktor Yanukovych in exchange for discounted natural gas supplies. The Kharkiv Accord also states “military formations can carry out security measures at their dispositions and during movements in accordance with procedures established in the Russian Armed Forces, with cooperation from competent authorities in Ukraine.”

For Ukraine, Russia had pledged to acknowledge their territorial integrity in the Budapest Memorandum document signed in 1994 and witnessed by US, UK and France. NATO’s constant presence near Russia has not been favourably received by Moscow. Five days after a pro-Russia referendum, Moscow formally annexed Crimea on March 21, 2014 and by March 24, Ukraine pulled troops from Crimea.

One strong move in this game of chess was the gas Russia supplied EU. 15% of the EU’s gas supply is supplied from Russian and piped through Ukraine. In the past, Russia had supported the instable Yanukovych’s government by selling Ukraine discounted gas (@ $268.50 per thousand cubic meters) from Gazprom and this price was hiked by 80% in April 2014. As of 16 June, 2014, Russia’s Gazprom said Ukraine’s Naftogaz owed them $ 4.5Bn, while Naftogaz counter argued they had overpaid Gazprom $10 Bn from 2010. EU was trying to negotiate a settlement of less than $1Bn as initial payment as the stoppage of supply threatened the supply to EU if unrest escalated in Ukraine. In August, Ukraine retaliated saying the price was “unacceptable” and they would “limit or even exclude some companies from piping gas through the country”. Which meant the EU countries may get affected since Russia supplies them and more importantly Ukraine was asking for the same subsidy from European countries like Norway which have already said it is not possible. This is an interesting dilemma.

On 17 July, a commercial passenger airline MH 17 was shot down in Ukraine and all personnel on board died. While Ukraine and Russia blamed each other, the West was quick to blame pro-Russian separatists and therefore the Russian government. On 17 of July (quick investigation of facts!!), the U.S. Department of the Treasury imposed sanctions on Russia focusing on financial services, energy, and arms or related materiel sectors of Russia, and on those impacting Ukraine’s sovereignty. By 29 July more sanctions against the Russian economy were announced. There was some worry that this move was not well thought of as the global dominance of the US dollar was fading and there was a perception that it would hasten the move away from the dollar.

On July 29, the EU also imposed sanctions on Russia focusing on the financial sector through state-owned banks, agreeing to an arms embargo and restricting sales of sensitive technology and exports of oil related equipment.

Russia retaliated on August 7, by imposing a total ban on EU, USA and food imports. This was a surprising move for a country that imports 40% of its food and that too 30% from the West!. The West was unprepared for the counter-move. Countries like Poland (apples), Norway (salmon), Denmark (Dairy products), Netherlands (Cheese), Belgium (pears) and USA (chicken) are struggling immediately. The farmers were upset with the decision Brussels initiated as it opened the competitive market for other countries in South America and Asia (Turkey) to exploit the void. Greece is worried about the impact these sanctions will have on its recession and demanding it be removed. Poland is threatening to demand compensation from EU for losses up to $1Bn. And Germany may still be the hardest hit as it is Russia’s biggest trading partner. 10% of EU food exports go to Russia (it is the largest consumer of food and fruits from EU) and it is valued $14.7Bn while Russia imports $1.3Bn from USA in food and agricultural products (2nd largest consumer of poultry from USA). By losing food imports, EU would face unrest i from small businesses and specifically farmers which will further undermines the lack of popularity of Brussels.

Food Exports to Russia

Russia bites Back

In this game of chess, Moscow has said they are willing to review their import ban conditions if the West was willing to dialogue. Meanwhile in this battlefield of international relations, diplomacy and international business – social media has been added to the fray. Russia’s Deputy Prime Minister Dmitry Rogozin tweeted a photo comparing Putin and Obama’s preference in pets (leopard versus dog). The caption said it all “We have different values and allies”. Check Mate? Or Stale Mate? We will have to wait and see what “gifts” the Russian humanitarian convoy brings. 

 

Title Picture Source: http://www.zerohedge.com/news/2014-03-01/russia-vs-ukraine-infographic?page=1

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About Melodena

Professor Marketing Strategy & Branding Passionate about Branding, Entrepreneurship (especially social entrepreneurship), Place Marketing, and Crisis Management. Working to educate the world about MENA regional opportunities!
This entry was posted in Crisis Management, Diplomacy, EU, International Business, Strategy, Trade and tagged . Bookmark the permalink.

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