The Impact of the Ukrainian Conflict on Russia’s Arctic Ambitions

When territory becomes more valuable competition over the land in question becomes more intense. For example, we are currently seeing such a drama unfold in the South and East China Seas due to the regions’ valuable energy resources, the importance of the territories’ shipping lanes, and the pressure that unfavorable demographic trajectories are placing on regional players. In the coming decades we will likely see a similar dynamic unfold in the Arctic, however, the hemorrhaging of capital from Russia due to Moscow’s annexation of Crimea and the need to maintain an active military presence near Ukraine are diverting resources away from other areas of Russian concern. This reality could complicate the country’s Arctic ambitions.

The U.S. Energy Information Administration speculates that the Arctic could hold approximately 22% of the planet’s undiscovered conventional oil and natural gas resources. The region also has significant deposits of nickel, copper, coal, gold, uranium, tungsten, iron and diamonds. Historically, the cost of exploiting these resources has been prohibitively expensive. However, the combination of technological advances, such as improved offshore production systems, three-dimensional seismic surveys, and improved drilling and completion techniques combined with retreating ice sheets are changing this dynamic. The Arctic also has shipping lanes that will see much more use as the planet continues to warm. The Northern Passage, which runs along Russia’s northern coast linking Europe with East Asia, is a transport corridor that is approximately 20% shorter than routes that transverse the Suez Canal. Some estimates predict that by 2030 25% of shipments from Europe to East Asia will use this passage. Though weather, the lack of search and rescue infrastructure, and high insurance costs currently limit the utility of this route at the present it is reasonable to believe that the Northern Passage will see more usage as the planet warms.

Events in Ukraine are distracting Russia at a time when Moscow should be aggressively staking its claims to the Arctic. Resolving the inevitable territorial disputes that will emerge as Arctic shipping lanes become more important and the exploitation of natural resources in the region increase will be a strategic imperative for Russia. It is in Moscow’s interest to aggressively pursues such policies now while the country’s demographic, military and economic strength are stronger than they might be in coming decades. Suffice it to say, the situation in Ukraine is reducing Russia’s ability to protect its long-term interests. Though maintaining Ukraine as a buffer state is a necessity for Russia it is in Moscow’s interest to try and resolve this conflict as quickly as possibly so that the country does not neglect its long term interests in other regions.

Why Russia Will Ultimately Compensate Ukraine for Crimea

Currently, Moscow is facing sanctions from the West (toothless though they may be), there is a significant military build up on the Ukrainian border and, according to the IMF, Russia is in a recession with more capital expected to flee the country. For these reasons the idea that Russia would pay Ukraine for Crimea is not a widely held belief. However, in the long term there are several factors that make it likely that Moscow will ultimately offer some form of payment to Kiev.

Despite current geopolitical and economic obstacles Russia is relatively strong, however, the country is facing significant demographic challenges. Per the World Bank, 1988 was the last time the Total Fertility Rate was 2.1 (the replacement rate). From 1991 to 2011 this metric has fluctuated between 1.2 and 1.6 while the dependency ratio is 40 and growing. This means that Russia will likely be weakened both economically and militarily in the coming decades. For this reason Moscow has an incentive to cement agreements that protect Russian interests while the country is experiencing a period of relative weakness. Sooner or later legitimizing the possession of Crimea via some form of compensation will be necessary. Though the deal will have been forced, it will also have been finalized.

Ukraine owes a significant amount of money to Russian companies, such as Gazprom, as well as international lenders (e.g. the IMF), and a variety of European banks and businesses. By compensating Ukraine for the annexation of Crimea Moscow would essentially be disbursing money which would ultimately flow back into the Russian economy while simultaneously protecting the interests of its European business partners. Essentially, the end result would be that Russia forced the sale of a territory of strategic importance to Moscow since it had become clear that Kiev could not be counted on the protect Russian interests. With the deal legitimized, Ukraine’s debt would be pared down to more manageable levels. That said, a Ukrainian default is still a very real concern. The IMF did not authorize a $17.1 billion bailout out of charity. The financial contagion that a Ukrainian default would engender would be extremely problematic to say the least and thus must be prevented. The IMF deal requires raising taxes and energy prices. Given that Kiev could not afford discounted gas it is unclear how Ukrainians will deal with this price hike. For this reason continued political instability in the country is likely. Despite this problem, any capital inflow (especially a compensation package that does not need to be repaid in the manner that a loan would) could put Ukraine on a path to ultimately regain a degree of economic self sufficiency and in theory become a stronger trade partner for both Russia and Europe. This process will not be easy and will need to be monitored closely.  

Maintaining a favorable buffer against neighboring countries has long been a key concern of Russia. This is why ensuring the compliance of states such as Ukraine and Belarus has been a strategic imperative for Moscow. The leverage that comes with controlling the energy supply for many of its neighbors has been a useful foreign policy tool for Moscow in recent years. Not surprisingly Russia’s neighbors do not like this dependency. There are movements to undermine Russia’s leverage which naturally goes against Moscow’s interests and if Russia is distracted with Ukraine it has fewer resources to undermining these movements. There are numerous areas of concern for Moscow. For example, it is likely that US-Iranian détente will result in the development of energy pipelines linking the Caspian to the Persian Gulf and the further development of infrastructure connecting Azerbaijan with Turkey. We are already seeing some improvements in Azeri-Iranian relations that testify to this. September’s meeting of the Caspian 5 (Russia, Azerbaijan, Iran, Kazakhstan, and Turkmenistan) will be an important summit to monitor. Another story to follow is the memorandum of intent that Ukraine and Slovakia signed on Monday April 28^th. If the deal goes through the reverse flow of gas from Slovakia into Ukraine will commence in October. This will reduce Ukraine's dependency on Russian gas. Presumably, Moscow will try to undermine this deal.

While compensation for Crimea will not likely be paid out anytime soon such an action would help legitimize Russia’s claim to Crimea and could help ensure potential investors that the country is safe for business. Keep in mind it is in both Moscow’s and Western businesses’ interest to keep political instability in Russia at a minimum. Compensation is a means towards that end. For this reason, if Moscow starts making noise about offering some form of compensation for Crimea it could be a sign of improving business conditions in Russia.  

The Impact of Russian Demographics on the Crisis in Ukraine

There are numerous driving factors for Russia's involvement in Ukraine. These include the strategic imperative to retain a malleable border state, the need to ensure Russia's ability to maintain military bases in the country (especially the warm water naval base in Sevastopol), and the capcity to use Ukraine as a transit state for Russia oil and natural gas. A pro-Western administration in Kiev complicates these demands. All of these issues explain Moscow's actions, however, there is another factor in play here. The unfavorable demographic trajectory which Russia's faces and the need to make economic and security arrangements during at time when Moscow is relatively strong.

Russia is seeing a declining population. The CIA’s 2013 estimate for population growth was -0.02%. In fact population growth has usually been negative since the end of the Cold War and 1988 was the last time that the country has the replacement fertility rate of 2.1. These unfavorable trends will complicate Moscow's ability to project its authority in the future. Despite this challenge the country is relatively strong at the moment. For this reason it makes sense for the Moscow to try to cement deals while it is in a position of strength. The reality is that Crimea is of strategic importance to Russia and it is of much less significance to Europe and the Untied States. Of course Western leaders will condemn any effort to annex the territory of another country but they will not back their words with actions, as it is not in their interest. The United States has no stomach to become involved in another foreign conflict and forbidding US firms from conducting business in Russia is unlikely to say the least. Many European powers are dependent upon Russia for energy and trade and have made it clear that though they disapprove of Russia’s actions business will continue as normal. Moscow’s history of shutting off energy flows when it has a dispute has also demonstrated that Putin is willing to hurt the Russian economy in order to advance the country’s political and security interests. In short Russia knows that the West is all talk and no action and the West knows that Russia has no problem with acting on its threats.

By annexing Crimea Moscow will solve a potential security problem. Russia will presumably compensate Ukraine as such an action is necessary as it will add a degree of credibility to whatever form of treaty ends this impasse. The compensation would also make a Ukrainian default less likely. Though the Russian economy has taken a hit since the conflict began Moscow can afford the bill now far more easily than it might be able to in the future. Preventing Ukraine from defaulting is essential as it could lead to the spread of financial contagion into the European, Russian and global banking systems (this is also why the US offered Kiev a billion dollars in loans. That wasn’t altruism. That was self-interest). The situation in Ukraine also sends a message to country's in Russia's Near Abroad who harbor designs for greater integration with Europe. Moldova and Georgia certainly come to mind here. The likelihood of anymore countries in Russia’s Near Abroad joining NATO and the European Union is less likely. After all if Russia were to invade a member of NATO or the EU concrete action would need to be taken. Neither Brussels nor Moscow has a interest in allowing stakes to rise that high. Negotiations will continue between the EU and countries seeking greater integration but as long as Russia is capable of protecting its interests these talks will come to nothing.

The US has threatened consequences for Russian actions. Though military operations or bans on US businesses working in Russia are highly unlikely it is possible that the US will try to aid other powers in diversifying away from Russia energy. We might see increased activity in developing shale reserves in countries such as Poland where, after initial excitement, major energy firms pulled out as unfavorable geology made fracking uneconomical. Promoting Western interests by subsidizing such operations is not an impossible course of action, though it remains to be seen what form such a policy would take. The cooperation between Turkey, Georgia and Azerbaijan will likely be encouraged though that approach will encounter challenges due to Russian pressure on Georgia and Azerbaijan and current political tensions in Turkey. US-Iranian détente could also see the development of pipelines which transverse Iran. Russia of course understands these threats and for the time being is capable of countering them. In the long term unfavorable demographic trends will likely see Moscow lose a great deal of influence. However, for the time being we can expect Moscow to bully the weaker powers in its Near Abroad while trying to strike a more conciliatory tone with more powerful states. The intent will be to secure treaties which can help protect Russian interests while it is relatively weak. One way or another the situation in Crimea will be resolved in a manner which will be favorable to Russia. In the coming years it is likely that we will see some form of resolution to conflicting territorial claims in the Arctic between Russia and countries such as Norway and Canada. Moscow will also use a combination of threats and economic incentives to try and enlarge Russia’s Customs Union. In the meantime the political and social instability will continue in Ukraine while global markets remain vigilant of the financial contagion that could result if Kiev defaults on its debts.