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Ukraine Deal Gives Little Relief as War Set to Rumble On

Within hours of Ukraine’s gas deal
with Russia, fighting flared up in the country’s easternmost
regions, highlighting the challenges in bringing peace to the
country after a year of upheaval.

While the pact brokered by the European Union is designed
to keep homes warm through the winter, rebels still hold large
chunks of the country’s east and are planning a controversial
election for Nov. 2. Crimea remains under Russian control and
the Kremlin, bristling at an EU agreement Ukraine signed this
year, is testing NATO with daily airspace violations.

The next flashpoint may be the vote in the self-proclaimed
republics of Donetsk and Luhansk, which sparked a diplomatic row
between the EU and Russia. The separatists are pushing ahead
even as daily clashes test a truce signed Sept. 5. The
insurgents violated the wobbly cease-fire 45 times in the past
24 hours, according to the Defense Ministry in Kyiv.

“The separatist elections planned for Nov. 2 matter a lot
more in terms of the big picture than the gas deal,” Arkady
Moshes, the head of the EU’s Eastern Neighborhood and Russia
research program at the Finnish Institute of International
Affairs, said by phone. “The overall conflict is in a state
where too many parties simply don’t want to have any solution.”

Unity Needed

Ukrainian President Petro Poroshenko called on his
parliamentary party today to support Arseniy Yatsenyuk as Prime
Minister, saying the country needs to be united “as never
before” following Oct. 26 elections.

“We have to make the first proposal, to show that we take
very responsibly the formation of the government and the content
of the coalition agreement,” Poroshenko told newly elected
representatives in Kyiv.

The International Committee of the Red Cross, in a
statement sent by e-mail, said today that “despite the cease-fire in eastern Ukraine, acts of indiscriminate shelling and
security incidents continue to put civilians at risk.”

“The approaching winter makes the situation of both
residents and displaced people even more difficult,” according
to the statement. “The ICRC remains committed to helping people
affected by conflict.”

Russian ‘Challenge’

Russian President Vladimir Putin may be telegraphing his
intentions with his fighter jets, which forced the North
Atlantic Treaty Organization to scramble its own warplanes
several times this week. The alliance has tracked more than 100
Russian aircraft so far this year, more than triple the number
in 2013, Secretary General Jens Stoltenberg said yesterday.

“The airspace interceptions around Europe in the past few
days show that Russia is willing to challenge NATO and has no
interest in de-escalation,” Stefan Meister, an analyst at the
German Council of Foreign Relations in Berlin, said by phone.
“I don’t see this gas deal as a step forward.”

Russia’s worst conflict with the U.S. and its allies since
the Cold War has also lingered in the diplomatic sphere. The EU
yesterday rebuked Russian Foreign Minister Sergei Lavrov, who
said that his country would recognize the planned separatist
elections.

The government in Moscow brushed off the ballot’s criticism
by Ukraine and the EU. The world “should be happy” that these
elections are being held as they will give credibility to rebel
authorities, Vladimir Chizhov, Russia’s envoy to the 28-nation
bloc, said on Rossiya-24 TV today.

‘Tension Areas’

On the ground, daily clashes have intensified between
rebels and government forces, with Russia sending more supplies
to the region, according to the Ukrainian army. The Kremlin has
denied any military involvement in its neighbor’s crisis.

“Crimea, east Ukraine and the EU association agreement
still remain as the main tension areas between Russia and
Ukraine,” Alexei Makarkin, deputy director of the Center for
Political Technologies in Moscow, said by phone.

While the tensions remain, Russia also signaled a possibly
softer stance by recognizing Ukraine’s Oct. 26 parliamentary
election and urging politicians in Kyiv to quickly form a
government. Pro-EU parties dominated the vote, which
marginalized Russian-leaning forces, with the vote disrupted in
their main power base.

Sanction Effect

That may be a sign of the Kremlin chafing under the effects
of sanctions and the dropping price of energy, Russia’s main
revenue earner.

The central bank in Moscow today raised its benchmark
interest rate by 1.5 percentage points to 9.5 percent to halt
the ruble’s slide, which has forced policy makers to sell about
$27 billion this month in an effort to prop up the currency.
There’s a 70 percent chance of a recession in the next 12
months, according to the median estimate of 27 economists in a
Bloomberg survey.

“The most optimistic reading of the situation would be
that this is part of a larger deal that results from a lot of
pressures that the Kremlin has recently faced,” Viacheslav
Morozov, a professor of EU-Russia studies at Tartu University in
Estonia, said by e-mail. “The gas issue is a separate one, and
we cannot draw any conclusions about the wider agenda.”

The EU has also signaled its skepticism, with Danish Prime
Minister Helle Thorning-Schmidt saying Oct. 28 that further
sanctions remain a possibility.

‘Pressing Russia’

“We’re pressing Russia to act on the ground,” Thorning-Schmidt said. “There’s been many words about intentions but
very little action.”

The insurgency makes any de-escalation difficult and the
gas issue is likely to crop up again after the interim deal,
which requires Ukraine to pay $3.1 billion by the end of the
year to partially cover its debt.

The government has to come up with the cash as it’s
struggling to keep afloat an economy that shrank 5.1 percent in
the third quarter from a year earlier, the most in almost five
years. The hryvnia is the world’s worst-performing currency this
year with a 37 percent plunge against the dollar and the
International Monetary Fund says a $17 billion bailout may not
be enough to avert a default.

“The gas issue is solved for a short period only, for the
winter,” Evgeniy Minchenko, the head of the International
Institute of Political Expertise in Moscow, said by phone.
“Tensions around rebel republics will last for decades.”

To contact the reporters on this story:
Daryna Krasnolutska in Kyiv at
dkrasnolutsk@bloomberg.net;
Ott Ummelas in Tallinn at
oummelas@bloomberg.net;
Stepan Kravchenko in Moscow at
skravchenko@bloomberg.net

To contact the editors responsible for this story:
Balazs Penz at
bpenz@bloomberg.net
Torrey Clark, Kevin Costelloe