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Forecast 2018: Challenges and Opportunities

10 January, 2018 0 11002

Forecast 2018: Challenges and Opportunities
The think tank Ukrainian Institute for the Future published a forecast for year 2018

Forecast 2018: Challenges and Opportunities

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22 Dec 2017 18:24

The analytical forecasts of the Ukrainian Institute for the Future (UIF) for years 2017 and 2018 under the general title of "Challenges and Opportunities" – are collections of conclusions of UIF experts on the future of informational processes in the spheres of international and domestic policy, national security and defense, economy, education, law enforcement and judicial system, which are examined on the basis of general tendencies of the spheres’ development during the year .

The aim of publishing an annual collection of expert forecasts – is the informational influence on the widening of the horizon of country's development and, as a result, the adoption by the top management of the state of a successful strategy for the next 10-15 years.

uifuture.org publishes a full online version of the publication of the forecast "2018: Challenges and Opportunities".

Upload: FORECAST 2018: CHALLENGES AND OPPOTRUNITIES PDF

2018: Difficulties preserving the past, trepidation about the future

Yuriy Romanenko, head of UIF Foreign and domestic policy

Winston Churchill once said: “Do not be afraid of the future. Take a hard look at it, do not be deceived, but do not be afraid. Yesterday I was on the bridge, watching the mountainous waves, and this ship – which is no pup – cutting through them and mocking their anger. I asked myself, why is it that the ship beats the waves, when they are so many and the ship is one? The reason is that the ship has a purpose, and the waves have none. The ship with the purpose takes us where we want to go.”

The events of the outgoing year 2017 have confirmed this truth. Such diverse leaders as Xi Jinping, Elon Musk and Muhammad bin Salman provided examples of how players who set clear goals and have the will to achieve them lead their states and organisations to new heights. On the contrary, passivity and unwillingness to adequately observe the situation, or stupid obstinacy to leave things as they are amid profound transformations in the world only deepen adverse situations and provoke new challenges. What lessons did 2017 teach us so that we can make the appropriate conclusions for 2018?

Let’s start with a reminder of what the UIF wrote in December 2016, when our first forecast appeared. Then, after Donald Trump’s win in the presidential elections in the United States, the situation for Ukraine for 2017 seemed rather discouraging, because of a predicted attempt by the new White House incumbent to negotiate with the Kremlin on terms which would be disadvantageous for Ukraine.

Let us remind that we considered that on a world-wide basis in 2017 three basic scenarios were possible: Peacemaker (G1), Pragmatic (G2) and Confrontational (G3). Ukraine’s high dependence on external factors determined the format of internal scenarios. We defined them as “Stable”, “Controlled destabilisation”, and “Uncontrolled destabilisation”.

In December 2016, after Donald Trump’s win in the presidential elections in the USA, the situation for Ukraine for 2017 seemed rather discouraging.

The “Peacemaker” scenario considered that the key players of the global system (the USA, China, the EU, Russia) could come to a consensus on the main issues at the global and regional levels. At the same time, the dependence of regional and local players on their global patrons was determining the nature of the concessions they were making “for peace and prosperity on the whole planet.” Agreements were seen as being implemented within existing global institutions (UN, NATO, WTO and others). Process controllability was solid.

The “Pragmatic” scenario considered that, in general, the current status quo would not fundamentally change due to possible shifts and turbulence at the regional level, where the present architecture of the world order is being shaken. Within this scenario, the players prefer the principle “every man for himself” whereby actors with strong growth dynamics (for example, China, Turkey) are gradually strengthening their positions at the global and / or regional level, while players with weak dynamics (EU, US, Russia) are focused on maintaining their positions. Parties with low dynamics often get into a stalemate situation or zugzwang, as far as they lack will and resources to alter the status quo. This leads to an accumulation of challenges that are exacerbated by management impotence.

This scenario is clearly seen through the examples of the Catalan crisis in the EU and in Ukraine. This scenario means that players can withdraw from it either to the “Peacemaker” scenario, or proceed to the “Confrontational” scenario.

The “Confrontational” scenario unfolds when one or more players try to alter the balance of forces in their favor, using violence as an enforcement tool for other players to a new balance. In other words, this means war (regional or global) amid exhaustion of all conflict solution mechanisms.

Within these three scenarios, we considered that the most likely sequence of events in 2017 would be: Donald Trump, thrilled after winning the presidential election, will try to solve one of the key problems in relations with Russia, Europe and Asia at the stroke of a pen within the framework of the “Peacemaker” scenario, but in half a year will stub his toe against obstacles, and then the situation will cross over to the “Pragmatic” scenario. We believed that it was the “Pragmatic” scenario that would be the prevailing mode at the global level, as far as tension between players with strong and weak growth dynamics determines their interest to maintain the greatest room for maneuver. This particular scenario predetermines the current situation.

We did not exclude the fact that the “Confrontational” scenario might develop in particular regions, but did not consider it at the global level, since none of the big players is interested in such total escalation.

As for Ukraine, we predicted that with his actions in the Middle East and Ukraine, Putin risked to strengthen the position of hawks both in the Trump camp and in the US Congress. “The “hawks” will stand aloof at the first stage, when Trump enters the Oval Office and tries to implement his plans to mitigate relations with Russia. However, as the implementation of the G1 scenario progresses, their influence will start to increase and the USA position will strengthen.”

We also predicted that “on the part of the United States, sanctions against Russia within this scenario will, at least, remain at the present level.” At the same time, Europe will also maintain its sanctions regime. Trump will seek to boost oil and gas production, which will keep oil prices at a level of $40 – $60. This will increase the burden on the Russian budget, limiting its potential to expand escalation.

We stated that “in relationships with Europe, the United States will begin to strengthen their allies in the Eastern and Southeastern Europe in the area of security, while Germany and France will be in stagnation. Poland, Romania and the Baltic states can receive additional assistance from the United States through loans for the rearmament of their armies and the redeployment of additional small contingents of the American army on the territory of these countries.”

 As for Ukraine, we believed that “the USA will not support Kyiv financially, under Obama, “but by the end of the year, Kyiv may obtain lethal weapons consignment under the assistance program for 2017.”

In general, we were right about the major issues of 2017.

Finally, concerning Europe, we believed that in a pragmatic scenario in France, a figure like Alain Juppe, whose policy on Russia would be quite strict, would win. At the same time, we expected that “in Germany, under such scenario, the uncertain victory of Angela Merkel’s party in the parliamentary elections to the Bundestag with a slight advantage is possible. In this case, Merkel will not have stable positions that will prompt her into compromises with other political forces in Germany.”

As can be seen, in general, we were right about the major issues of 2017. At the beginning of his presidential candidacy Donald Trump tried to act out the G1 scenario, but quickly bumped into the realities of the US political and state security apparatus. Republicans’ and Democrats’ consolidated resistance led to unprecedented pressure on the White House. This was followed by the resignation of Michael Flynn as National Security Adviser, just a month after his appointment. Moreover, information on the unprecedented pressure that Russia had exerted during the presidential election led to the positions of the American “hawks” sharply strengthening, and in the summer Congress passed a law on sanctions against Russia, dramatically expanding the possibility of pressure on Moscow. Simultaneously, Trump was off-balance because his colleagues and partners fell under the watchful eye of American law enforcement agencies because of perceived close ties with Russia. The tendency to strengthen US policy towards Russia gained momentum throughout the year 2017, and hurt all, even remotely important areas of national security. As Churchill stated, “The Americans will always do the right thing… after they’ve exhausted all the alternatives.”

Concerning the EU, our G2 assessment has also been close. After setbacks because of Brexit, 2017 became a year of relative strengthening of the positions of “Eurocentrics”. In France, Emmanuel Macron won the presidential election, consolidating his victory with impressive results in the parliamentary elections just a month later. And in the elections in Germany in September, as we predicted, Angela Merkel at the head of the CDU / CSU achieved a less than confident win.

As for Russia, let us remember our forecast in G2. Timescale is crucial, as sanctions act as a drag on the economy of the Russian Federation. Although, as we later showed in the report “The Limits of Russia’s Sustainability” at the end of May 2017, we should not overestimate the impact of sanctions on Russia’s stability. Even at a price of $20 per barrel, Russia has from 3 to 5 years margin of safety. In 2017 Vladimir Putin acted according to the logic of “minimising costs, maximising benefits due to asymmetric actions on sites, vulnerable for the USA and Europe.” In the framework of Putin’s logic in 2017, Russia both failed and achieved a number of victories regionally. Russia’s biggest failure in 2017 was its unjustified bet on Donald Trump. Currently, there is no doubt that Russia actively intervened in the US election process in order to increase Trump’s chances for victory. At the same time, the new American President would probably be happy to establish closer relations with Putin, but the tight control by Congress and the need to compromise with the Republican Party pushed him into the “hawks’ claws”. American experts call the trio of Vice President Mike Pence, National Security Adviser H. R. McMaster, and Pentagon chief James Mattis, the most hawkish in the last 30 years. Consequently, instead of dilution of sanctions, they became further entrenched and the Washington-based pivot on providing Ukraine with lethal weapons became clear by the end of the year to a specific financial plan of Congress and its approval by the relevant state institutions. In fact, today the final decision was left only for Donald Trump.

In the EU, Russia’s fortunes suffered a setback due to the failure of nationalists in the presidential and parliamentary elections in France. The election results in Germany, where Angela Merkel just about managed to win the election, can be considered tactically disastrous for the Kremlin. However, the result of the right populist AfD and the left Die Linke shows that the German electorate is beginning to spread out from the center to more radical political forces.

Under these conditions Putin managed to achieve significant success in the Middle East, especially in Syria, where thanks to the Kremlin’s military support, Bashar Assad managed to strengthen his position. The so-called Islamic State was defeated before the end of November, which allowed the Kremlin to make a statement about the imminent de-escalation of its military operation in Syria. We see that these days Russia, along with Iran and Turkey, is trying to develop a format for resolving the conflict in Syria, and it has managed to make significant progress in this direction. You can read more on this in the chapter by Ilya Kusi on the Middle East.

Basic global scenarios in 2018

Let us highlight the motivations of key players, whose positions are essential for understanding the prospects of Ukraine in 2018. There were no significant changes compared to 2017.

The United States will take strategically defensive positions, continuing to reformat domestic and foreign policy. But simultaneously they can put forward an aggressive policy at regional platforms. The Americans will probably strengthen their stance on Russia, enhancing cooperation in the security sphere with the countries of Central and Eastern Europe. At the same time, they will try to make complicated compromises with an ascendant China to influence the position of the DPRK, which turned into a real headache because of its ongoing missile development program. Asia is a priority for the United States. For this reason, Washington is trying to enhance relations with its allies in Eastern and South-Eastern Asia. A detailed analysis of the situation regarding foreign and domestic policy is provided in the chapter by Mykola Beleskov.

The European Union will be focused on its internal challenges in 2018. Emmanuel Macron, Angela Merkel, Jean-Claude Juncker and Donald Tusk have proposed a large-scale program of EU reforms, aiming at launching them on the eve of the European parliament elections in 2019. Therefore, the EU will focus on internal restructuring and will try to avoid additional risks. This position was clearly documented at the last Eastern Partnership Summit in Brussels on November 24th. More details on this issue are covered in the chapter by Nadiia Koval.

China during the 19th Congress of the CPC charted a new road map based on the “two centenary goals”.

The first Centenary Goal aims at building a “moderately prosperous society” till the 100th anniversary of the founding of the CPC in 2021. Under this objective China must achieve mass prosperity and virtually eliminate poverty.

The second Centenary Goal is to turn the country into a “fully developed and advanced country by the year 2049”.

Thus, China aims to expand its influence and strengthen the country as a world power. Beijing is not interested in military conflicts with the USA, since it will take another 20 years to bring its military capabilities to America’s level. However, its foreign policy is becoming more and more active, especially in the Asian region, which is gradually turning into Beijing’s “backyard”.

The European Union will focus on internal restructuring and will try to avoid additional risks.

Russia takes up a strategically defensive position, trying to survive in conditions when its social and economic model does not have time to adapt to such a fluctuating world. The Russian President acknowledged that low prices for hydrocarbons are one of the main threats to Russia’s national security. Therefore, to hang onto a semblance of being a leading global state, Russia began to use chaos as a form of defense. Generating a series of crises on regional platforms, Russia is trying to disguise its weaknesses. Russia began to use chaos as a form of defense.

Putin intensified the conflict in Syria, coming in on the side of Assad and provoking such intensity of the conflict that gave rise to approximately one million refugees setting off for Europe. The same situation is observed with the DPRK, where Russia played a key role in accelerating its missile program, which allowed Pyongyang to be considered by many as a real threat to the United States and its allies. As a consequence, we can observe how Washington frantically tries to find levers of influence on the DPRK, and the Kremlin is biding time until the “client” is ready for a new agreement. However, Putin is not omnipotent. Such large-scale games require enormous resources. This causes huge problems that generate a fracture in the state model formed under Putin. Pavlo Shchelin analyses this issue in the chapter on Russia.

 

G2 “PRAGMATIC” – THE BASIC SCENARIO OF 2018

We believe that the G2 “Pragmatic” scenario will remain the baseline scenario in 2018. This is due to the fact that global players will find it extremely difficult to reach agreement on all key conflicting positions.

As Andrew Bacevich, an Honorary Professor of History and International Relations at Boston University, notes in his article in the authoritative Foreign Affairs for this year: “An “America first” response to ongoing changes in the international order should begin with a recognition that the unipolar moment has passed. Ours is a multipolar era. Some countries, such as China and India, are just now moving into the first rank. Others long accustomed to playing a leading role, such as France, Russia, and the United Kingdom, are in decline while still retaining residual importance. Occupying a third category are countries whose place in the emerging order remains to be determined, a group that includes Germany, Indonesia, Iran, Japan, and Turkey. He considers that “As for the United States, although it is likely to remain preeminent for the foreseeable future, preeminence does not imply hegemony.

Within the framework of such a model, contradictions on some regional platforms do not prevent finding a consensus on others, supporting the fragile balance at the global level as a whole.

This scenario is well illustrated by the development of the situation in the region of the Middle East and the Maghreb, where during 2017 the USA, EU countries and Russia reached a fragile consensus on the situation in Syria, which involves several major regional actors such as Iran, Turkey, Saudi Arabia, Israel, Qatar, and the Kurds.

Due to such agreements in the Middle East, a situation prevails whereby the “Peacemaker” and “Confrontational” scenarios can be implemented.

Since we are mostly interested in Ukraine, we will try to answer the question, what the global “Pragmatic” scenario means for our country.

Trump’s first year at the helm of state demonstrated that the extravagant Twitter politics of the new American President could not overcome the realities of the US system of checks and balances. Therefore, in 2018, the trend for clipping Trump’s wings by Congress will go on. As the latest statements made by Michael Flynn in late November 2017 on Russia’s influence on the US presidential election show, new information on the interaction of Trump’s team with Russians will appear. Therefore, it is possible to forecast that the tendency to intensify pressure on Russia from the United States will be prolonged. Trump will depend on Congress if there is to be any “quick peace” with Russia, as he tried to speed up in January 2017. As top American officials have repeatedly stated, reducing such pressure will be directly related to Russia’s actions in the Donbas. The complete implementation of the Minsk agreements by the Kremlin will lead to a reduction in sanctions. And on the contrary, in case Vladimir Putin continues to procrastinate on a solution for the Donbas, Washington will be ready to supply Ukraine with lethal weapons. Moreover, the whole legislative base has been prepared for this aim and only Trump’s signature is needed.

However, Russia has its own logic, which contradicts the American one. On the one hand, it needs a break in order to optimise its expenditures on active foreign policy and internal losses that have emerged under the conditions where oil prices are no longer extremely high. This requires avoiding conflicts, especially since in 2018 Russia has two important symbolic events – the presidential elections and the football World Cup. On the other hand, the image of being “a winner” demands from Putin new victories that legitimise his power. For so long as there are such victories, his power is secure, even if the population and elites incur great losses because of his adventurous policies. However, as soon as the regime goes through its own “Stalingrad”, its resource base begins to fall apart quickly leading to a failure.

Adolf Hitler was trapped in the same situation in the 1930s. He was constantly raising his bets, gambling to force his own order. Nevertheless, such a tactic was effective only until the Allies began appropriate mobilisation, which ended up as the Second World War.

According to this logic, the USA in 2018 will have to extend sanctions against Russia, simultaneously strengthening security across Central and Eastern Europe. Washington will endeavour to completely disrupt the construction of the Nord Stream-2 gas pipeline in 2018, in order to improve its chances to enter the EU energy market with liquefied gas and preserve Western Europe’s dependence on supplies through Ukraine and Poland. In return, Russia will try to frustrate the European Union’s sanctions policy, with the benefit of the context of parliamentary elections in Italy and the growing dissatisfaction of a number of EU countries with losses from sanctions. Russia will also keep on building a new security architecture in the Middle East assisted by Iran and Turkey, making attempts to consolidate its success in the region after a successful year in Syria.

The image of being “a winner” demands from Putin new victories that legitimise his power. For so long as there are such victories, his power is secure, even if the population and elites incur great losses because of his adventurous policies.

At the same time, we cannot exclude the possibility that the Kremlin will decide upon an operation from Donbas without waiting for February 2, 2018, when Trump is able to sign the introduction of new extended sanctions based on a new law passed by Congress in the summer of 2017. Putin’s initiative on UN peacekeepers in the fall of 2017 and the activation of Volker-Surkov group demonstrate that the Kremlin would not wish for such a scenario. The probability of such a step is estimated at 30-40%. In more detail, this motivation was researched by Igar Tyshkevych in the chapter “Forecast” on the Donbas.

 

Ukraine in 2018

This year, we decided to focus more on the situation in Ukraine. Accordingly, much attention was paid to the positions of internal actors in the political process. The development of the situation in Ukraine in 2017 fully fit into the plan as stated in our “Forecast for 2017.” We predicted that in 2017 among three scenarios (stable, controlled destabilisation, uncontrolled destabilisation), the second scenario will be the norm. It has several sub-options at the outset:

  • Two options of early elections to the Verkhovna Rada;
  • mass protests aiming at provoking early elections;
  • an attempted coup d’état that could be staged by either Petro Poroshenko via martial law or by one of his adversaries (for example, Kolomoisky).

It is obvious that attempts to provoke early elections failed, but limited protests became a trend in autumn 2017. Firstly, we consider the street force variant as a slim probability.

So, let’s sum up the results of 2017 in Ukrainian politics, outlining key processes, players and factors that will influence the events of 2018. To begin with, let’s analyse the positions of the main players, with the help of which we will reveal the key storylines in Ukrainian politics.

 

Petro Poroshenko and half-completed success

The President of Ukraine Petro Poroshenko succeeded in maintaining a balance which is profitable for him. This fact enables him to be on top of the mountain. Despite numerous contradictions with coalition partners, Poroshenko showed off the wonders of his political balancing skills and managed to protect the coalition from collapse. He understands that early elections to the Verkhovna Rada are a risky undertaking as new problems are likely to arise. Poroshenko managed to organise a situational alliance with Rinat Akhmetov, which enables him to get timely support from the Verkhovna Rada and in the east of the country, where Akhmetov has strong positions. It is equally important that the President succeeded in developing a rapport with the leading founder of the People’s Front Oleksandr Turchynov, who can take on leadership of the headquarters during the presidential election in 2019. Turchynov assists Poroshenko in making compromises with politicians within his party, which is important considering Arsen Avakov’s increased influence. Poroshenko and Avakov’s personal positions determine the boundaries of stability of the ruling coalition. The conflict that took place on October 31 involving the arrest of Avakov’s son, Oleksandr, by the NABU became a test for the coalition’s integrity. Despite tough talks from both sides, the situation has shown that Poroshenko and Avakov currently are not ready to extend their confrontation, due to the virtually zero rating of the People’s Front and low ratings of Petro Poroshenko Bloc. Thus, at the level of the ruling coalition by the end of 2017 we have an unstable balance, which is supported by the Petro Poroshenko Bloc and the People’s Front, based on the mercantile interests of retaining power. Obviously, this interest will restrain both sides, at least until the presidential elections.

Poroshenko and Avakov’s personal positions determine the boundaries of stability of the ruling coalition.

Another important victory for Petro Poroshenko was the nationalisation of PrivatBank, which weakened the position of oligarch Igor Kolomoisky. The nationalisation was quite painless for both the Ukrainian economy and Kolomoisky, who had the opportunity to withdraw money to foreign accounts. Evidently, this operation was part of the agreement between Kolomoisky and Poroshenko under US pressure, which put the PrivatBank nationalisation as one of the key requirements for getting assistance. But Kolomoisky’s further actions demonstrate that he is not ready to take it as it comes and will stand in the way of the incumbent President.

From our point of view, Petro Poroshenko’s crucial internal political blunder in 2017 was an attempt to deprive Mikheil Saakashvili, the leader of the “New Forces Movement”, of citizenship. The ad hoc way of awarding citizenship to Saakashvili led to a legally dubious attempt to deprive him of it. That, in turn, enabled Saakashvili’s dramatic break through the Poland-Ukraine border. This demonstrated to the whole world that the Ukrainian state does not control its border, not only in the east, but even in the west. Moreover, the conflict between Poroshenko and Avakov has been illuminated. The head of the Ministry of Internal Affairs did not want to use violence during Saakashvili’s illegal border crossing, rightly believing that this would cast him in negative light in the eyes of the West and voters. Consequently, Saakashvili, who in spring 2017 had a rating of 5-6%, gained an excellent coverage opportunity, which turned into a series with protests near the Verkhovna Rada. Such players as Igor Kolomoisky and Yulia Tymoshenko considered Saakashvili a tool with which the positions of the President and the ruling coalition could be weakened. The twist of fate lies in the fact that Poroshenko initially used Saakashvili as a tool against his own rivals, including Kolomoisky, Tymoshenko and Yatsenyuk. The situation with Saakashvili showed once again that the inability of the Ukrainian elite to properly estimate the strategic consequences of its tactical steps is its genetic curse.

Due to the dominance of tactical motivations, Petro Poroshenko’s achievements in foreign policy also seem to be dualistic.

On the one hand, worsening relations with the USA, Germany and France, which was expected in 2016 was avoided. The results of the elections in France and Germany turned out to be the most favourable for Ukraine among those which could be expected. Furthermore, after Poroshenko’s mistake in judgement in 2016 regarding an unambiguous bet on Hillary Clinton, the relationship with the new administration of President Donald Trump started from a shaky foundation. At the same time, the strengthening of the “hawks’” positions in Congress led to a series of unprecedented steps in order to increase pressure on Russia. In particular, the law on sanctions against Russia, Iran and the DPRK, was carried out. In view of this, we can state that relationships with the USA, France, and Germany in 2017 developed as best as could be hoped for.

In 2017, Poroshenko’s great victory was the enactment of the Association Agreement between Ukraine and the European Union and a visa-free regime. Despite serious problems with the launch of the visa-free regime and Association Agreement because of the political situation in the EU (especially after a consultative referendum in the Netherlands), Ukraine managed to complete the process that, it should be remembered, in 2013 provoked the EuroMaidan.

It can be stated that Ukraine’s relationships with the USA, France, and Germany in 2017 developed as best as could be hoped for.

 

HOWEVER, there were obvious problems as well.

Firstly, if we consider the relationship with the EU, it is obvious that Ukraine has come to a certain maximum engagement that can be achieved in the existing format. This was demonstrated by the Eastern Partnership Summit, which took place in Brussels in late November 2017. The European Union is currently engaged in internal transformation and does not want to undertake serious responsibilities. This is clearly demonstrated through the EU’s moving beyond the Eastern Partnership Plus initiative, which considers closer cooperation with the countries that have already received Association status (Ukraine, Georgia, Moldova).

First of all, if we consider the problem of conflict in the Donbas, Ukraine continues taking its lead from its Western allies, actually offering alternative solutions. The emergence of the US special representative for Ukraine, Kurt Volker was a good sign that Washington decided to take a systematic approach in order to solve the Ukrainian problem. Moreover, Volker possesses deep knowledge of the contradictions between Ukraine and Russia. But this does not exclude the possibility that for resolving the conflict in the Donbas, Washington will view Ukraine through the lens of its relationship with the Kremlin. Detailed information on this issue may be found in the chapter on Donbas. However, the strengthening of negotiating positions in dialogue with the West and Russia is inextricably linked with enhancing Ukraine’s domestic political positions and economy. The absence of solid breakthroughs in these areas causes foreign-political passivity and the weakness of Ukrainian positions.

This became clearly evident during conflicts between Ukraine and Hungary because of the law “On Education” and the tension between Ukraine and Poland on historical interpretations. It is obvious that Hungary and Poland have their own internal factors that make them harp upon challenging issues in relations with Ukraine. It is evident that some demands of Budapest and Warsaw are unfair towards Kyiv, and are clearly aimed at using Ukraine’s present weakness for their domestic political purposes. But, nevertheless, Ukraine should not forget the simple truth – if you are weak, you are in an aggressive competitive field and do not understand the consequences of your steps. So you’d better not take steps that can turn your weakness into collapse. That is, you can not make mistakes, hoping that the mistakes of other players will justify yours. From this point of view, Kyiv has made all the possible mistakes to complicate relations with Hungary and Poland at the wrong time. For example, the scandalous amendments to the 7th article of the law “On Education” were adopted at the last moment exclusively from conjectural considerations, in order to take advantage of voters’ patriotic feelings, who were convinced that the extension of the Ukrainian language’s functioning in educational institutions is a victory over Russia. However, the haste of Verkhovna Rada deputies has completely ignored the foreign policy consequences of such a deed. And Petro Poroshenko, who must have all levers of influence on the adoption of the law, did not intervene at the right time. This situation and other successive steps taken by the authorities, for example, the renaming of “Moskovsky Avenue” in Kyiv into “Bandera Avenue” (followed by the corresponding actions of the Polish parliament), leave no doubt that Poroshenko will use such steps in humanitarian policy during the presidential elections 2019. Therefore, we are not dealing with an error, but with a systematic policy that in autumn 2017 led Ukraine to problems in relations with Hungary, Poland, and Romania. These contradictions could become a more serious shift in Central and Eastern Europe, whereof our western neighbors are already starting to meditate. It consists of more strict and pragmatic mutual policy. Ukraine is absolutely not ready for this very shift. The quote of Witold Yurash, the head of the Warsaw Center for Strategic Studies, may illustrate this statement: “There are reasons to suppose that Poland is preparing to “reload” relations with Russia. Of course, the Russians will have to offer something in exchange to Warsaw (the other possible option will involve such a provocative conflict with Berlin, which will be used as a lesson to teach us. But I hope this will not happen). In this situation the other question arises: will the people who are active in Polish foreign policy be able to get something specific in return for Poland’s willingness to make a deal, or will everything be limited to useless, but well sold in the media, things? Unfortunately, I would place a bet on the second option, because Poland has playable cards, but it does not know how to play. It would be a success for Poland to become an active player in Ukraine and Belarus. In this case, our point of view will be taken into account. We consider that cooling in relations with Kyiv and the failure of the “reloading” with Minsk are aiming at signalling a thaw in relations with Russia. Thus, Warsaw demonstrates a complete misunderstanding of the situation: it is convinced that it sits down at the negotiating table having no card up its sleeve. The policy is centered in the ability to play several grand pianos, that is, to use two or three instruments simultaneously, but our standpoint is that it is enough to use them in sequence.

This diagnosis of Polish foreign policy is fully relevant to the Ukrainian one, perfectly demonstrating the trap of tactical reality, which has led to a complication of Ukraine’s relations with its western neighbours in 2017.

Thus, the year’s results for Petro Poroshenko, as well as for the whole country, are half-completed. On the one hand, the worst scenarios in domestic and foreign policy were avoided, and on the other hand, the policy of restoring the old system became more evident, which was manifested in the confrontation between NABU and the GPU, deceleration of reforms, numerous corruption scandals, high-profile murders of politicians, social activists and law enforcement officials. All these facts reflected the real paralysis of a state machine that operates in a reactionary mode in context of a collapsing economic base.

 

Arsen Avakov – PARAMILITARY JOKER

During 2017, Arsen Avakov strengthened his position by taking the leading role in the People’s Front after Arseniy Yatsenyuk resigned in the spring of 2016. Avakov’s control over the Ministry of Internal Affairs and a number of paramilitary organisations along with the existence of a net of alliances at the level of Kyiv and regional elites made him a severe headache for Poroshenko. The President cannot fully control the state without comprehensive control over the security services, but the President cannot get rid of Avakov without consequences for the ruling coalition. In addition,, the general weakness of the security services, confirmed by several high-profile murders in the center of Kyiv, leaves the matter open: what can Petro Poroshenko do in case Avakov-allied paramilitary groups unite with political parties, which act as opponents of the President? As a matter of fact, by the end of 2017, it can be stated that Arsen Avakov plays the role of “a joker”, able to choose his allies during the next cycle of the political game. As a result, in the summer of 2017 rumors about Yushchenko’s negotiations with Yulia Tymoshenko appeared in the media.

Avakov’s problem (and for the “People’s Front” as well) lies in the absence of rating positions that can be built upon during the presidential and parliamentary elections of 2019. The best way is to unite the “People’s Front” with the BPP (Petro Poroshenko Bloc), so that the party of power acts as a single front. Such a situation can be recalled during Leonid Kuchma’s presidency, when the party of power struggled to act as a united front, having set up for the parliamentary elections the PDP projects in 1998 and the electoral bloc “For a United Ukraine” in 2002. Both projects failed. Now the negotiations on the merger of the “People’s Front” and the BPP have slowed down because of competitive interests. Therefore, the project’s future is foggy.

Poroshenko cannot fully control the state without comprehensive control over the security services, but the President cannot get rid of Avakov without consequences for the ruling coalition.

However, Arsen Avakov’s strategy to play niche political projects with a “power flavour” is being more visible now. The “National Corps” led by Andrii Biletsky can become such a force from the right flank, as he carefully arranges the organisational structure and is potentially able to involve other right-leaning organisations. The attempt to set up a “socialist project” led by the provoking Illia Kiva is clearly observed on the left flank. In case the Verkhovna Rada decides to reduce the electoral barrier for political parties approximately to 2%, such projects will get a reasonable chance to enter parliament during the next election. One more element of Avakov’s policy in 2017 is his public position as a “hawk”. For instance, on November 28, on his Facebook page the head of the Ministry of Internal Affairs provided a tough post addressed to Western allies of Ukraine, where he noted that the Ukrainian crisis is Continent-wide, and the West must fulfil the responsibilities which it undertook in the Budapest memorandum.

 

Yulia Tymoshenko, ALWAYS “aGAINST

During 2017, Yulia Tymoshenko strengthened her activity by positioning herself as “the main fighter against the corrupt regime.” Sociological surveys demonstrate that she definitely has the highest rating, but it is only a remnant of her former glory. In fact, Tymoshenko and Poroshenko have more or less the same 8-10% rating. When sociologists only include those who have made up their minds, the percentage increases to 13-15%. However, these results are practically unreasonable, as they do not reflect the real state of things in a situation where about 50-60% of voters did not chose sides yet or are not planning to vote. That means that sociologists describe the situation of the sentiments of no more than 40-45% of those who made their decisions. All real potential candidates for presidency and political parties keep apace with each other with 4-10% ratings. At the same time, according to research conducted by the Ukrainian Institute for the Future in November 2016, 70% of Ukrainians do not trust any politician. For the year then ended the situation did not change, but only deteriorated. Lack of public confidence in the government and key figures is the main characteristic of the current moment.

In this situation, the logic of the political struggle, which we have outlined in the past forecast, is functioning: political forces are divided into two hypothetical camps based on basic motivations.

Motivation for status quo

Motivation for change

Faction in the Rada (persons)

Rating (%)

Faction in the Rada

(persons)

Rating (%)

Petro Poroshenko Bloc

138

Approximately 10%

is falling

Opposition Bloc

43

Approximately 6-8%

Has slightly increased

“Fatherland” (“Batkivshchyna”)

20

 

8-10%

Is increasing

 

People’s Front (Narodny Front)

81

1-2%

no

“Freedom” (“Svoboda”)

4-5

3-4%

Is fluctuating

UKROP in the sphere of influence

Approximately 15-20, but have no faction

 

 

Minimal rating

Self Help (Samopomich)

25

5-7%

has fell

“Democratic alliance”

no

0,6-1%

 

Mikheil Saakashvili’s Party

no

Approximately 4-6%

 

Oleh Lyashkos Radical party

20

6-7%

stable

Rabinovich and Muraiev’s party “For life”

 

2

 

Approximately 6-7%

 

“People’s Will” group (Volia Narodu)

18

majoritarian conglomerate

Anatolii Hrytsenko “Civic position”

no

 

From 4 to 6%

 

Party “Revival” (Vidrodzhennia)

26

No rating, the main positions are on the majoritarian

 

 

 

The first camp includes political parties with the largest factions in the Verkhovna Rada, but low or falling ratings. The logic of their actions is aimed at keeping the situation, that is, the preservation of power. These are the BPP, the People’s Front, the Radical Party, part of the Opposition Bloc, connected to Rinat Akhmetov, who acts as a Poroshenko situational ally.

Interposition is occupied by Self-help, some of whose representatives are actively involved in protests under the Saakashvili flag and favoring fresh elections to the Verkhovna Rada and Bankova, but at the same time the party itself lost much voter support. High-ranking political forces are in another camp. But they have small factions in the Verkhovna Rada, or they are outside parliament with growth potential: “Fatherland”, Anatolii Hrytsenko’s “Civic position”, Igor Kolomoisky’s UKROP and Self-help in the persons of Semen Semenchenko and Yegor Sobolev, the part of the Opposition Bloc centered around Sergii Liovochkin, Mikheil Saakashvili with his “Movement of the New Forces”, Valentyn Nalyvaichenko with the “Justice” movement, Viktor Medvedchuk’s political projects, including Nadia Savchenko, and Vadim Rabinovich-Yevgenii Muraev’s party “For Life.”

Within this logic, it’s easy to explain why Yulia Tymoshenko and Valentyn Nalyvaichenko publicly supported Mikheil Saakashvili in his conflict with Poroshenko, and Semenchenko and Sobolev, who are tied to Igor Kolomoisky, became the basic element of the “Liberation” protest movement. All of them seek to change the existing balance, as it opens opportunities for expanding their influence.

At the same time, Tymoshenko, as the biggest player in the opposition camp, is now trying to act as a consolidating force for all the disaffected. Therefore, on the one hand she supports the protests near the Verkhovna Rada initiated by Saakashvili, and on the other hand, keeps somewhat at a distance, not to be seen negatively in case of their defeat. It’s a paradox, but Saakashvili, who in 2015-2016 acted as her competitor, creating a threat to her electoral field, has been turned into a tool in her fight against Poroshenko, and, consequently, into his problem as well.

However, the problem with Tymoshenko lies in the fact that big players consider (and for good reason) her as a threat, and a large part of voters simply do not trust her. Although, for the sake of objectivity, it should be noted that Tymoshenko has the highest popularity among those who made their choices. First of all, it happens due to the fact Yulia Tymoshenko keeps her sympathisers on their toes with her charisma and they resemble a cult of believers who are insensitive to any criticism. It is clear that the abovementioned core of “believers” strengthens Tymoshenko’s position on the eve of the presidential elections, but in order to increase her odds of winning, she needs to solve the problem of expanding her electoral field and conclude alliances with other big players. Igor Kolomoisky, who puts his eggs in different protest baskets, could become the number one candidate for the role of such an ally. Information on Igor Kolomoisky’s financing of Tymoshenko’s structures has recently emerged in the Ukrainian media.

Tymoshenko needs to solve the problem of expanding her electoral field and conclude alliances with other big players. Igor Kolomoisky, who puts his eggs in different protest baskets, is the number one candidate for the role of such an ally.

 

Volodymyr Groysman and paternalism

Volodymyr Groysman was initially perceived as Petro Poroshenko’s appointee, but in 2017 he came out of the President’s shadow and became an independent player. In November, Groysman in his capacity as the Prime Minister, took a step that was a surprise to the President by raising the minimum wage. During 2017, Groysman consistently developed the image of a strong economic manager who builds roads from morning till night, sorts out key issues and cares about state employees. The Prime Minister has clearly targeted the paternalistic electorate, accounting for about 70-80% of the population and has achieved some success in this regard. The program of subsidising the population made it possible to reduce social pressure on the government, despite initial fears of a social explosion. Volodymyr Groysman’s administrative influence makes him an attractive partner for other players. Therefore, the Prime Minister managed to create a group of allies in the Verkhovna Rada, including representatives of the BPP and the People’s Front, the Radical Party and other political forces. According to the results of the year, it can be said that Groysman has 40-50 deputies in parliament who take into account his position. Groysman’s personal ambitions led to a conflict with Poroshenko and his entourage. Therefore, in the autumn of 2017 the head of the state considered dismissing the Prime Minister. However, the development of the conflict with Mikhail Saakashvili and tension with Avakov forced the President to give up this idea. Groysman’s visit with the People’s Front congress on November 11, 2017 provided more evidence of his current search for allies amid his unstable relationship with the head of state.

 

Rinat Akhmetov AND CHALLENGES FOR UKRAINIAN OLIGARCHY

For Rinat Akhmetov, the year 2017 had half-completed results as well. On the one hand, on March 15, 2017 his Metinvest declared a complete loss of control over the functioning of all its assets on temporarily uncontrolled territory. The same misfortune happened to all the other  Akhmetov-related enterprises. Oleh Ustenko, the well-known economist and executive director of the Blazer Fund, believes that in 2017 Ukraine lost at least 1.5% of GDP or about $1.5 billion due to the ORDLO (separate districts of Donetsk and Luhansk regions) blockade and the nationalisation of Ukrainian enterprises by militants. Much of these losses affected Akhmetov’s business. Before the war with Russia started, Rinat Akhmetov’s fortune was estimated at 32 billion dollars.

However, Akhmetov’s situation is not as severe as it may seem. He was still included in a list of billionaires published by Forbes magazine on March 27, 2017. More specifically speaking, he appeared to be the richest Ukrainian, while his place in the general rating rose from 771st in 2016 to 359th. As of the end of March 2017, during the last 12 months, his fortune doubled – from $ 2.3 billion to $ 4.6 billion.

For comparison, according to Forbes list (which we consider quite irrelevant), partners from the Privat group, Gennady Bogolyubov and Igor Kolomoisky, took 1468th and 1795th positions, with fortunes of $ 1.4 billion and $ 1.1 billion.

Rinat Akhmetov’s minor renaissance was supported by the “Rotterdam+” formula, which is the basis for calculation of electricity prices in Ukraine. Akhmetov’s monopoly position in the electric power industry gave him the opportunity to boost his profits after electricity prices increased. However, this was facilitated not only by a good combination of circumstances, but also by the fact that Petro Poroshenko allegedly took a personal business interest in Akhmetov’s “electric power industry.” As People’s Deputy Sergii Leshchenko reported on his Facebook page, “during his presidency Petro Poroshenko became the actual co-owner of Akhmetov’s DTEK (Donbas Fuel and Energy Company) company. The reason for this was buying-up DTEK Eurobonds and company debts to international banks.” This information is confirmed by other sources as well. Therefore, the symbiosis of Poroshenko and Akhmetov is based on general economic interests. This situation resembles the latter days of Yanukovych’s presidency, when the president, according to relevant sources, received a share in Akhmetov’s business.

Akhmetov’s monopoly position in the electric power industry gave him the opportunity to boost his profits after electricity prices increased. However, this was facilitated not only by a good combination of circumstances, but also by the fact that Petro Poroshenko allegedly took a personal business interest in Akhmetov’s “electric power industry.”

The alliance with Poroshenko is a safe bet for Akhmetov, after he lost his economic and electoral region in the Donbas. This fact resulted in reduction of his influence on the Verkhovna Rada and the Cabinet of Ministers. Akhmetov has spent three years adjusting to new realities and looking for new collaborators. In addition to the situational alliance with Poroshenko, an alliance with Oleh Lyashko, who had left Sergii Liovochkin together with the Radical Party faction, became such partners. “Radicals”, while conducting an active “anti-oligarchic struggle”, simultaneously manage to promote Akhmetov’s agenda, using rhetoric about support for the national producer. In fact, Lyashko acts as a BPP satellite, hiding behind populist rhetoric.

Forming new verticals at the level of several regions is one more adaption strategy. Theoretically, it should help to form a new electoral base, in order to develop independent political projects during subsequent stages. In addition to the Ukrainian-controlled part of the Donetsk region, where Akhmetov undoubtedly dominates, this refers to the Zaporizhia region, where Akhmetov has seriously strengthened his position, and part of Dnipropetrovsk (primarily Kryvyi Rih), which should give a stable electoral base in the next election.

However, Akhmetov, as well as other large and medium-sized Ukrainian business should be ready for one more forthcoming problem, which they had not encountered until recently but deserves special attention. “Brain drain” is leading to a terrible shortage of skilled personnel. The Ukrainian Institute for the Future began preparing a major report on the prospects for a conflict in the Donbas. Within the framework of this project we visited Mariupol, where we held a number of interesting meetings with local businesses, community activists and local government. During these meetings, we received convincing evidence that the existing business model in Ukraine is rapidly collapsing.

For example, Akhmetov’s metallurgical plants, where 40 thousand people work, need welders, mechanics and other related professions. But the shortage stands at 600 people and they cannot be employed even for high, according to local standards, salaries. Half of school graduates leave immediately after graduation, the rest – after graduating from local higher educational establishments. In a city with a population of 500 thousand people, about 190 thousand are retirees. In fact, in the city only about 50 thousand people are properly economically active (Akhmetov’s two metallurgical plants + port). That is, only one in ten persons is employed. This leads to a heavy load on business, from which the state demands more and more taxes to keep the budget afloat.

Ukrainian business faces a challenge that will have far-reaching consequences. Attempts to keep salaries at the current level will intensify the labor famine, which will result in a risk of business collapse.

Consequently, there are several possible solutions:

The first solution is raising the wage according to the formula “Poland minus 200 euros”. That is, if in Poland, to where most Ukrainians emigrate, Ukrainians are on average paid 700 euros, so the average salary should be approximately 500 euros. In this case, it will be profitable for Ukrainians to stay at home, since from salaries of 700 euros in Poland about 200-300 euros must be spent on housing and food. As a result, having one’s own housing, a Ukrainian will receive income comparable to that he or she would earn in Poland.

The second solution is importing cheap labor from Central Asia, but there are not so many options. This is due to the fact that in Asia the cost of labor has significantly increased.

The third solution is reducing the corruption that hikes the cost of products and services. Put simply, there is a motivation for a radical change in the political system, which currently allows the existence of corruption rents totaling at least $ 20 billion a year.

The fourth solution is creating all kinds of obstacles in the path of labor escaping from Ukraine, leading to additional conflicts. Such “re-enslavement” seems almost impossible under our conditions, both because of the state’s weakness and the European Union’s possible reaction. In this situation, such oligarchs as Akhmetov, who for two decades neglected human capital, face a situation where its degradation has begun to harm their business. And this creates a demand for radical change in the existing model of state and social relations, which we will discuss further.

 

IGOR KOLOMOISKY – “OPERATOR OF CHAOS”

Igor Kolomoisky’s influence rested on “three pillars”: monopoly positions of PrivatBank, vertical integrated Ukrnafta – Kremenchuk oil refinery – a network of retail gas stations, and “1+1” TV channel, which holds a 25% share in the Ukrainian market. Over many years, control over these assets allowed Kolomoisky to put critical pressure on the state and competitors in key situations. The nationalisation of PrivatBank on December 19, 2016 became the cutoff point, from which Kolomoisky’s position fundamentally changed.

The oligarch has lost influence on the financial system, although through compromises with the authorities he was allegedly allowed to withdraw several billion dollars from Ukraine. Having lost one of his key assets, Kolomoisky didn’t wallow for too long and began to strike asymmetrical blows to his opponents. In early February 2017, representatives close to Kolomoisky’s volunteer battalions began a blockade of the ORDLO. This hit Akhmetov’s positions, which needed coal for his power stations from the occupied territories. The nationalisation of Ukrainian enterprises in the so-called LNR and DNR confronted the Ukrainian authorities with an accomplished fact that the ORDLO blockade should be introduced officially. But Kolomoisky did not rest on his laurels. Spurred on by the oligarch, part of “Self-help” in the persons of Semen Semenchenko and Yegor Sobolev began promotion of nationalisation of Akhmetov’s assets, such as Burshtyn TPP, which sells electricity to the EU.

The nationalisation of Ukrainian enterprises in the so-called LNR and DNR confronted the Ukrainian authorities with an accomplished fact that the ORDLO blockade should be introduced officially.

In September, structures affiliated with Kolomoisky were encountered during Mikheil Saakashvili’s break-in through the Poland-Ukraine border and then again during setting up a tent camp near the Verkhovna Rada. The conflict with Saakashvili during his governorship in the Odessa region did not prevent Kolomoisky from considering Saakashvili as a situational ally. Kolomoisky’s ability to be a ringleader of protests is a balance-keeping tool that will help to retain control over other assets and influence within the country.

In addition to the “protest torpedoes”, Kolomoysky has strong positions in several regions, particularly in Dnipropetrovsk, Volyn, Ivano-Frankivsk and Kharkiv regions. The parliamentary faction of the “Revival” party is Kolomoisky’s core group, which is represented by strong majority district winners. Along with the loss of “Privat”, a shift in balance in the city of Dnipro is fundamental for Kolomoisky, where his former colleague and mayor Boris Filatov established relations with BPP. No less important is the fact that Igor Kolomoisky has lost much of his organisational capacity in the person of Gennady Korban. Korban, who became a hostage of the Kolomoisky - Poroshenko conflict, was arrested. Then he arranged matters with the investigation team and escaped to Israel. Korban has not publicly accused Kolomoisky, but it is obvious that the relationship between them has been damaged. In reality, Kolomoisky has lost the support of two key people from his immediate surroundings, which must surely affect his political prospects. In general, we can state that these days Kolomoisky has lost a significant part of his influence, but he is one of those people who love to make surprises.

Perhaps, nomination of Volodymyr Zelenskyi, the “Kvartal 95” studio actor and comedian, for the presidency, could be a fresh surprise from Kolomoisky. Zelenskyi’s successful TV series on 1+1 “Servant of the People” about a high school teacher who becomes  President of Ukraine, is essentially a visualised presidential program that can be successfully implemented along the lines of a “Ukrainian Beppe Grillo”.

 

“Self-help” as an example of creative self-destruction

In the situation with “Self-help”, everything is quite clear. Having made a broad statement in 2014 as a party of the urban middle class, the party failed in consolidating a nationwid

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