Foreign Policy

BY JOSEPH HABERMAN | MAY 14, 2020, 3:59 PM

There has been rising optimism that the COVID-19 pandemic and economic crisis that has hit both Russia and Ukraine have shifted strategic priorities in the Kremlin, presenting an opportunity to end the ongoing war in eastern Ukraine, where Russia has propped up separatist forces in the Donbass region since 2014. In a recent op-ed, three former U.S. ambassadors to Ukraine argue that the current crisis could lead to a resolution of the conflict on terms acceptable to both Kyiv and Washington. Whereas Russia has thus far been willing to bear the costs of U.S. and European retaliatory sanctions, the authors argue that the pandemic’s economic fallout could elevate this burden to the point where Russian President Vladimir Putin feels compelled to sue for peace. This is wishful thinking. Their argument both overestimates the economic pressures facing Russia and understates the political, noneconomic rationale driving Russian policy toward Ukraine. It also ignores the likelihood that Kyiv, not Moscow, may soon feel compelled to capitulate.

To be sure, the Kremlin will face new pressures to alleviate economic suffering. Russian COVID-19 cases have surged, and the country now finds itself in the inevitable recession brought about by the twin shocks of collapsing oil and commodity prices and the government-imposed shutdown of economic activity in response to the pandemic.

While the recent agreement on production cuts between Russia, Saudi Arabia, and other oil-producing countries seeks to stabilize prices, there is only so much that can be done on the supply side of global energy markets. As the virus continues to depress global economic activity, the demand for—and price of—oil will likely remain lower for longer, even with production cuts. Russia’s budget depends on oil revenues and is designed to balance with a price of $42 per barrel. (Urals crude, the standard Russian grade, hit a low of $16.55 in April and currently sells for around $30.) The resulting deficits have been exacerbated by a weekslong nationwide work holiday that has stifled economic activity and will result in massive losses in tax revenue while requiring new expenditures to keep civilians afloat.

However, Russia is in a position to withstand the brunt of the crisis, at least for now. Thanks to many years of conservative macroeconomic policy, the government has built up a massive $560 billion strategic reserve of gold and foreign currency. That amount is more than the entire external debt of both the government and Russian companies and serves as an insurance against the kind of balance-of-payments crisis that might strike other petrostates or emerging markets. Russia has also used surplus oil revenues in past years to amass a $150 billion National Wealth Fund, which is now helping to offset the budget deficit. Furthermore, the Russian ruble’s floating exchange rate provides an additional shock absorber: As the ruble weakens due to the economic troubles, the cost of producing oil and other commodities in Russia goes down relative to the revenues generated by selling these commodities, which are priced in dollars.Russia is in a position to withstand the brunt of the crisis, at least for now.

This doesn’t mean that Russia will remain unscathed. The International Monetary Fund (IMF) projects that Russia’s GDP will contract by 5.5 percent this year, and the Russian government has projected an unemployment rate of up to 10 percent, though some experts have warned that it could reach as high as 15 percent.

Relief from Western sanctions—the reward for ending the war—could lessen this decline, though there is disagreement about how much it would help. In their op-ed, the ambassadors link to a 2019 IMF report to argue that sanctions have contributed to a 1 percent annual reduction of Russian GDP growth since 2014. However, that same report acknowledges that falling oil prices have been the most significant factor in this decline. Sanctions, the IMF says, account for only a 0.2 percent reduction in Russia’s annual growth.

Nonetheless, any relief would be welcome, and Russia has already called for sanctions to be lifted on humanitarian grounds. But while Russia certainly seeks that reprieve, it is not desperate for it. Given the country’s macroeconomic fortitude and the relatively low impact of sanctions, it becomes very difficult to believe that the Kremlin would abandon key strategic priorities for such minor relief.

Ukraine is certainly among those key strategic priorities. Not only does Russia consider Ukraine to fall within its historical sphere of influence, but it sees the territory as a critical buffer against what Moscow believes to be an encroaching Western threat. The Kremlin thus views Kyiv’s desire to distance itself from Russia and move toward Western institutions such as the European Union and possibly NATO as a threat to its national interests. By intervening in the Donbass, Russia has sought to prevent Ukraine from asserting its independence and withdrawing from Russia’s sphere of control. The emergence of a robust Ukraine is unacceptable to Putin, who has been willing to accept diplomatic isolation and sanctions to prevent it.

The Kremlin also knows that withdrawing from the Donbass could cause a severe backlash at home. Abandoning the conflict would be seen as a capitulation to the West and an abdication of Russian power abroad. For a regime that has staked its legitimacy on its unyielding strength—in a country where 88 percent of people believe maintaining Russia’s superpower status is important—such a blow to its domestic image and international prestige would do more damage than sanctions.The Kremlin also knows that withdrawing from the Donbass could cause a severe backlash at home.

In fact, the political pressures produced by the pandemic may harden the Kremlin’s resolve on Ukraine. The coronavirus has already forced Putin to postpone indefinitely a referendum on constitutional amendments that would extend his right to remain in power. More painfully, the pandemic forced the Kremlin to cancel the May 9 celebrations commemorating the 75th anniversary of the Soviet victory over Nazi Germany, the historical memory of which has become central to the regime’s legitimacy and its moral claim to great-power status. The loss of these two immediate opportunities to consolidate the regime’s standing will only make Putin more reluctant to accept any unnecessary shocks to the system, such as surrender on Ukraine.

Meanwhile, the crisis could compel Ukraine, and not Russia, to capitulate first.