18/3/2014: Crimea's Fate Sealed, It's Time for Risk-on on Russia

Key takeaways on today's news from Crimea, so far:

• Crimea is now fully legally incorporated into the Russian Federation and this makes the region's split from Ukraine and accession to Russia irrevocable, no matter what sanctions are being put forward.
• President Putin's address to joint meeting of Russian Duma and Federation Council raised a number of very strong geopolitical points. The main one being the role played by the Nato expansion over the last 20 years in triggering the latest crisis. Despite this, President Putin clearly extended a proverbial olive branch to Nato and positioned this offer of continued cooperation on the shared interests footing (mutual respect and coexistence with recognition of the legitimacy of Russian 'Near Abroad' sphere of influence).
• The Crimean crisis was from the start largely a Russia-Ukraine issue. Thus, Western engagement in it became excessively overbearing on the one hand (starting with the EU pushing forward its own Neighbourhood policies toward Ukraine without having any respect for or consideration of the country's massive economic, demographic, cultural and political links with Russia and without engaging constructively with Russia on bilateral basis) and strategically weak and indecisive on the other (with EU offering no constructive platform for a dialogue with either Ukraine or Russia since November 2013).
• Overall, President Putin's speech was yet another signal to the West that he is ready to consider more constructive engagement and dialogue, and that Russia is not interested in any serious acceleration in the confrontation. The latter point was very clear from the onset of the Ukrainian crisis, not just during the Crimean crisis.
• President Putin is correct that the Crimean crisis was resolved without any loss of life, in contrast to Bosnia, Kosovo, etc.
• Putin's speech, by bringing Russia back on track to seek normalisation of its ties with Ukraine and the West, means that Europe and the US are once again being left without any visible strategic alternatives and puts Moscow one step ahead of them in this geopolitical game. Effectively, the US is now firmly stuck in the proverbial corner: it cannot de-escalate vis-a-vis Russia and it cannot accelerate current sanctions to anything more meaningful. Instead, it is now more likely the US will focus its resources on trying to salvage the current Government in Kiev.

Most significantly, Putin can now set out a number of contrasting and legitimising points to the accession of Crimea:

1. The referendum on Sunday stands in stark contrast to the lack of referenda when Crimea was 'gifted' to Ukraine in 1954 and when Ukraine and Russia (alongside with Belorussia) agreed to dissolve the USSR back in 1991.
2. Crimean accession was carried out on the request of the Crimean government that had effectively no less legitimacy than Kiev government has today. It was created on foot of a popular revolt by the democratically-elected parliament (although in the case of Crimea, as far as I am aware, opposition was present at the vote, unlike in the case of Ukraine).
3. Officially (and that is not to say that this is a complete truth, which we may know one day) Russian military presence in Crimea did not exceed the contractually allowed 22,000 troops. Hence, technically, there was no violation of sovereignty. There was no opposition from the Ukrainian army, further confirming the above point (even if this lack of opposition was driven by the confusing orders from Kiev). The role played by militias (subject to the first caveat above) is no different from the role Maidan forces played in Kiev... etc, etc… All of which (not to justify the events that took place) goes to confirm that there is very little difference (at this point in time) between what happened in Crimea and what happened in Kiev.
4. Whilst Ukrainian constitution does not recognise secession referenda held in a single region as valid, it is worth reminding that the same legal reasons for rejecting the Crimean independence were also raised in the event of secession of Ukraine (and Russian and Belorussia) from the USSR in 1991. It is, therefore, kind of hard for Kiev to have the old the cake and still keep it at the same time.

So today's news put the score at Russia 2: West 0. And with it, Russian markets should be shifting into a 'risk-on' mode over the near future.


Note: as I said before, my preference was and remains for the territorial integrity of Ukraine to remain intact. But setting aside my own preferences (and controlling in the above arguments for my imperfect knowledge of the events and facts on the ground), the current outcome is a new status quo. There is absolutely nothing anyone can or should do about it.