Ukraine: Current Issues and U.S. Policy

Summary

This report provides an overview of the situation in Ukraine.

Figure 1. Ukraine

Ukraine: Basic Facts

Capital: Kyiv

On May 25, 2014, Ukraine held a presidential election. The winner, Petro Poroshenko, a pro-Western billionaire, took 54.7% of the vote. Voter turnout for Ukraine as a whole was around 60%. The lowest turnout was in the Donetsk and Luhansk regions in eastern Ukraine, the stronghold of former President Yanukovych and where pro-Russia separatist gunmen seized polling places and used threats, kidnappings, and other forms of intimidation to stop the vote.

Ukraine's European future is put at risk as much by enemies within as by external forces. The oligarchs and kleptocrats who controlled Ukraine for decades know their business model will be broken if Maidan reformers succeed in 2016. They are fighting back with a vengeance, using all the levers of the old system: their control of the media, state owned enterprises, Rada deputies, the courts and the political machinery, while holding old loyalties and threats over the heads of decision-makers to block change.⁶

Following the vote, the Fatherland Party quit the coalition on February 17. The next day, February 18, the Self-Reliance Party, expressing its frustration with the reform effort, also pulled out of the coalition. The loss of both parties left the Poroshenko/Yatsenyuk government with only 215 votes in the Rada, 11 votes short of a majority. However, Ukrainian law prohibits the Rada from considering additional no-confidence votes for six months, so Yatsenyuk was given time to make changes and move the reform process forward. Observers believed that although the government had been weakened, all three former coalition partners likely would continue to support the government's reform agenda and provide the votes needed to pass such legislation. Despite this assessment, a new coalition government to be led by a new prime minister had not materialized by mid-March. Speculation has centered on Volodymyr Groysman as a replacement for Yatsenyuk, but Yatsenyuk has refused to resign until a new governing coalition is formed. This has led to typical Ukrainian political maneuverings among the parties.

The United States and the EU, despite their concerns over the pace of reform, did not want the government to collapse and supported the formation of a new coalition, even without Yatsenyuk. Failure to form a new government would require new national elections. The idea of new elections, which could generate nationwide political and economic instability, weaken the parties of both Poroshenko and Yatsenyuk, and further slow reform, appeared not to be a viable option. In addition, new elections would call into question the ability of a new government to be any more dedicated to reform or successful in achieving such reforms.

For some Ukraine observers, the recent shift among the various political leaders has triggered fear among reformers that Ukraine might repeat the failure of the earlier Orange Revolution, the leaders of which, Prime Minister Yulia Tymoshenko and President Victor Yushchenko, quarreled bitterly after attaining power. Their mutual hostility paralyzed the government, alienated voters, and delivered the presidency to Victor Yanukovich in 2010.¹¹ For these observers, history seemed about to repeat itself.

The political turmoil surrounding the Yatsenyuk government was not, however, all bad news. As noted above, U.S. Secretary Nuland, again testifying before the Senate Foreign Relations Committee, said,

Here's the good news: since I last testified before this Committee five months ago, Ukraine has largely stabilized its currency and is rebuilding its reserves; seen some modest growth in the economy; passed its first winter without relying on gas from Gazprom; approved a 2016 budget in line with IMF requirements; passed civil service reform to create competition and transparency; recruited a new corporate board for Naftogaz; broke its own record for greatest wheat exports; stood up an independent Anti-Corruption Bureau and Special Prosecutor; and, begun to decentralize power and budget authority to local communities to improve services and policing for citizens. The very week in February that the current government survived a no-confidence vote, Rada deputies also approved five critical pieces of reform legislation to stay on track with IMF conditions and advance Ukraine's bid for visa-free travel with the EU, including laws on: Privatization of state owned enterprises; Improvements in corporate governance of state owned enterprises; Asset seizure and recovery; The appointment process for anti-corruption prosecutors; and, mandatory asset disclosure for public officials.¹²

Despite the recognized progress made in some areas of reform, opinion polls indicated that public skepticism remained high regarding the Poroshenko/Yatsenyuk government's commitment to make a serious impact in fighting the country's deeply ingrained, crippling problem with corruption and to adopt other legislation seen as necessary to move Ukraine forward. As evidence of what appeared to be a growing trend of disenchantment, some pointed to the October 2015 local elections held throughout the country, in which Yatsenyuk's People's Front did not even participate because polls indicated that the party had experienced a significant decline in support in some regions of the country. In a public opinion poll conducted in November 2015 for the International Republican Institute, only 27% of those polled expressed a favorable view toward President Poroshenko, and only 12% looked favorably on Prime Minister Yatsenyuk.¹³

Although the government survived the political uprising, a new level of disenchantment on the part of an already skeptical public made it unclear just how much success in addressing corruption Yatsenyuk, or a successor, could achieve and how much trouble was in store for Poroshenko.

After Russia proper, the Ukrainian republic was the most important economic component of the former Soviet Union, producing about four times the output of the next-ranking republic. Its fertile soil generated more than one-fourth of Soviet agricultural output.¹⁴ (According to the U.S. Department of State, this remains the case as Ukraine exported a record 33.5 million tons of grain in 2014.)¹⁵ In addition, Ukraine's diversified heavy industry, concentrated in the eastern portion of the country, supplied equipment and raw materials to industrial facilities and mining sites within Ukraine and Russia.

Although its economy was in decline in 2013, some believe Ukraine's primary economic challenges are not all self-inflicted. Many are the result of Russia's aggressive actions against Ukraine. Russia's annexation of Crimea in March 2014 seized 4% of Ukraine's GDP. Subsequently, Russia's support for separatists in eastern Ukraine, a region that accounted for 10% of the country's GDP in 2013, resulted in the region's production plummeting by 70%, costing Ukraine some 7% of its 2013 GDP.

Since 2013, Russian trade sanctions have slashed Ukraine's exports to Russia by 70%—accounting for a drop of 18% in Ukraine's total exports. Last year alone, Ukraine's exports to Russia—which included machinery, steel, agricultural goods, and chemicals—fell by half. Logistical issues, the lack of commercial links, and the specialization of some products meant that Ukrainian goods could not be redirected in the short term away from the Russian market to other markets, particularly in Europe. It is estimated that the loss of the Russia market likely resulted in a 6% decline in Ukraine's GDP. In addition, with Russia's aggression in Ukraine still unsettled, few want to invest in what could become an extended war zone. As a consequence, Ukraine's net foreign direct investment, which was slightly over 3% of GDP before the start of hostilities, has evaporated.¹⁶

Since 2014, some good news has been noted. According to the Economist Intelligence Unit's (EIU's) most recent assessment,¹⁷ during 2015 signs of financial and economic stabilization began to appear as a result of a series of measures, including a new $17.5-billion program loan approved by the IMF in March 2015 and a steep rise in interest rates that helped to support the hryvnya (Ukraine's currency). In August 2015, the government announced that a deal on the restructuring of up to $18 billion of Ukraine's public debt had been reached with private creditors. In December 2015, the IMF tweaked its rules regarding lending to countries in arrears to other states, allowing Ukraine to continue to receive IMF funding even though the government has thus far refused to repay a $3 billion bond, issued by the previous government and held by Russia.

In December 2015, the Rada adopted a 2016 budget that included changes to the tax code. The approved budget would attempt to reduce the budget deficit target to 3.7% of GDP, down slightly from the 2015 target of 4.3% of GDP. According to the EIU, this is in line with the government's commitments made as part of its April 2014 IMF loan of $17 billion. Passage of the budget will allow the IMF to continue to lend money to Ukraine. Other commitments made to the IMF included maintaining a flexible exchange rate for its currency, increasing household gas prices to 56% of the import price and heating prices to about 40% of the import price in 2014. The IMF also wanted a commitment to make rapid progress on reforms, including further energy price increases, bank restructuring, governance reforms of state-owned enterprises, and legal changes to implement anti-corruption and judicial reforms.¹⁸ In February 2016, IMF Director Lagarde warned Prime Minister Yatsenyuk that reforms were taking too long and that continued IMF support for Ukraine was in jeopardy unless the pace of reforms was increased.

The budget debate in the Rada was difficult as many parliamentarians noted that the fiscal austerity focus of the budget, the ongoing conflict in the east, and recession have all contributed to a downturn in living standards, leading to a rapid decline in public support for the government.

In late December 2015, the central bank of Poland announced that it would establish a zloty/hryvnya currency swap line with the National Bank of Ukraine. The main purpose of the initiative was to strengthen Ukraine's financial system, stabilizing the hryvnya and promoting an increase in bilateral trade between the two countries.

As noted above, when the free-trade agreement with the EU went into effect in January 2016, Russia suspended its own free-trade deal with Ukraine and banned imports of Ukrainian food—to which Ukraine has responded in kind. In the short term, any positive impact of the EU free-trade deal could be offset by Russia's countermeasures. In 2016, the EIU expects a weak economic recovery, owing to the effect of Russia's trade bans and still high domestic political risk, which could dampen the recovery. The EIU forecasts a growth of around 1% in 2016.¹⁹ On January 25, 2016, the Ukrainian Central Bank issued its own revised forecast, estimating that growth would only reach 1.1% in 2016.

Energy has long been a key factor in Ukraine's relations with Russia as Ukraine has historically been heavily dependent on Russia for its energy supplies. In 2012, 63% of Ukraine's natural gas consumption came from Russia, as well as nearly three-quarters of its oil and other liquid fuels.²⁰ However, Ukraine's vulnerability to Russian pressure has been mitigated by the fact that the main oil and natural gas pipelines to Central and Western Europe transit its territory. In 2014, about 40% of Russian natural gas destined for Europe transited Ukraine. Past Russian efforts to greatly increase gas prices for Ukraine provoked a crisis that resulted in a cutoff of Russian gas to Western Europe for several days in January 2006. A second gas crisis occurred in January 2009, resulting in a gas cutoff of nearly three weeks.

Until recently, Russia had long sought control of Ukraine's natural gas pipelines and storage facilities. Moscow's efforts were unsuccessful, even with friendly governments in Kyiv, due to Kyiv's refusal to cede control of one of its key economic assets. In recent years, Russia, in an attempt to pressure Ukraine over the pipelines, negotiated with several European countries to build pipelines that would bypass Ukraine. Gazprom (Russia's state-controlled energy company), having reached an agreement with Germany, constructed a gas pipeline under the Baltic Sea (called Nord Stream). Moscow had also proposed a pipeline through the Balkans (called South Stream) to Western Europe. However, annoyed by EU objections that the project, as planned, violated EU rules, Russia cancelled the South Stream project in December 2014. Russia then announced that beginning in 2019, it would no longer ship gas to Europe through Ukraine and would build a pipeline through Turkey to the Greek border (dubbed Turkish Stream).

Russia has also used gas prices as a tool in its policies toward Ukraine. Russia had raised the natural gas price for Ukraine from $268 per thousand cubic meters (tcm) while President Yanukovych was in power to $485 per tcm of gas when Ukraine's new government took power, an increase of about 80%. Ukraine refused to pay the increased amount and demanded a new gas contract with a lower price. Russia responded in June 2014 by cutting off natural gas supplies to Ukraine for non-payment of debts. (Ukraine continued to allow gas destined for Western Europe to transit its territory.) In October 2014, the EU brokered a deal between Gazprom and Ukraine on gas supplies at a lower price through March 2015 in exchange for Ukraine's repayment of some of its debts to Gazprom. That agreement was further extended to the end of 2015.

Ukrainian leaders acknowledge that in order to avoid likely future Russian efforts to use energy supplies as a political weapon, Ukraine would have to sharply reduce its dependence on Russian gas. In 2015, Ukraine began to import more significant amounts of gas from Poland, Hungary, and Slovakia by reconfiguring the pipelines to "reverse flow" supplies.

By November 2015, buoyed by lower energy consumption due to the economic slowdown in Ukraine, greater availability of gas from EU countries, increases in the price of gas to its consumers, and the fact that the government no longer had to supply the energy-consuming region of the Donbas, the Ukrainian government ordered Naftogaz, the state-run gas monopoly, to cease buying gas from Russia. The Ukrainian government's decision to stop buying gas from Gazprom is part of a broader trend toward the dismantling of bilateral Russia-Ukraine economic ties. However, according to the EIU, Ukraine is currently only able to do without Russian gas because a deep economic contraction has reduced demand.²¹

In the long term, some believe Ukraine could develop its own shale gas deposits and improve exploitation of its conventional gas reserves; import liquefied natural gas; or import gas from Azerbaijan, Central Asia, and elsewhere via pipelines through the EU's planned Southern Energy Corridor. Ukraine will also have to make much greater strides in energy conservation, which has required a steep and politically unpopular hike in natural gas prices, including for households.

Given the significant domestic problems facing the Poroshenko government, the scope of Ukraine's foreign policy is focused on a few main foreign policy priorities. These include to secure international support for Ukraine's sovereignty and territorial integrity, including non-recognition of Russia's annexation of Crimea; to reorient its economy as quickly as possible toward Europe; and to seek continued international assistance to ameliorate the country's dire economic situation.

In December 2014, the Ukrainian parliament overwhelmingly renounced Ukraine's former neutral, "non-bloc" status and indicated a preference for closer relations with NATO. After taking office, President Poroshenko requested assistance from NATO for its military. At the September 2014 NATO summit in Wales, the alliance agreed to set up four trust funds to help Ukraine's military in such areas as logistics, command and control, military personnel issues (including wounded soldiers), and cyberdefense.²²

Ukraine has been a priority country within the EU's Neighborhood Policy and the Eastern Partnership for several years. The EU policy is intended to forge a close relationship that encompasses political association and economic integration that could prepare Ukraine for eventual membership in the union. The desire by a least some segments of the Ukrainian public for stronger relations with the EU and the West fueled the initial protests in late 2013 that culminated in the collapse of the former Yanukovych regime.

In response to the crisis in Ukraine, in March 2014, the European Commission unveiled an initial support package of €11 billion (about $15.5 billion) focusing on the comprehensive reform process initiated by the new government in Ukraine. The package included €1.6 billion (about $2.2 billion) in macro-financial assistance loans to support Ukraine's government finances. The EU also agreed to provide some €1.5 billion (about $2.17 billion) in grant aid between 2014 and 2020 to assist Ukraine's reform efforts. The package includes up to €9 billion (about $11.16 billion) in loans from the European Investment Bank and the European Bank for Reconstruction and Development. The package also included close to €110 million (approximately $112.5 million) aimed at developing the private sector, including small and medium enterprises.

The European Union's main instrument to promote European values (such as human rights, fundamental freedoms, rule of law, political dialogue, and reform) and deepen economic ties with Ukraine is the association agreement (AA). The AA includes a free trade agreement with the EU, formally known as a deep and comprehensive free trade agreement (DCFTA). Although the DCFTA further opens potentially lucrative EU markets to Ukraine, it also requires Ukraine to adopt EU legislation and standards and to gradually expose Ukrainian firms to tough competition from EU imports. Approximation to EU norms could also lead to increased foreign investment in Ukraine.

The EU and Ukraine signed the parts of Ukraine's association agreement dealing with political issues in March 2014, and the parts dealing with economic issues (including the DCFTA) were signed on June 27. Ratification of the pact was delayed due to Russian threats to block Ukrainian imports from its markets unless the pact was modified to protect Russia's interests. The EU and Ukraine refused to do so, and the European Parliament and the Ukrainian parliament ratified the accord on September 16, 2014. Moscow responded by closing off the import of selected Ukrainian products. However, the EU and Ukraine did appear to bow to Russian threats by agreeing to postpone implementation of the DCFTA until 2016. In the interim, Ukraine was granted unilateral trade preferences from the EU.

The association agreement with the EU came into effect on January 1, 2016, with the promise of a gradual improvement in the Ukrainian economy once the trade relationship begins to take hold and matures. As expected, as soon as the agreement went into force, Russia suspended its own long-standing free-trade deal with Ukraine and banned imports of Ukrainian food.

In addition to the aid package and the association agreement, the EU established a High Level Investment Forum/Task Force and created a dedicated Ukraine Support Group, composed of experts from EU institutions and member states in different sectors, to provide advice and support to the Ukrainian authorities in the mentioned reform sectors.²³ The EU also committed to help modernize Ukraine's natural gas transit system and to work on reversing the flow of pipelines through Slovakia so that Ukraine can receive gas from the west. Finally, the EU agreed to accelerate its Visa Liberalization Action Plan to allow Ukrainians to travel throughout the EU.

Ukraine was the center of the first eastern Slavic state, Kyivan Rus, which during the 10^th and 11^th centuries had become one of largest and most powerful states in Europe. Kyivan Rus was eventually incorporated into the Grand Duchy of Lithuania and subsequently into the Polish-Lithuanian Commonwealth. During the latter part of the 18^th century, most Ukrainian territory was absorbed by the Russian Empire. Following the collapse of czarist Russia in 1917, Ukraine achieved a short-lived period of independence (1917-1920), but was reconquered and endured Soviet rule until Ukraine achieved independence in 1991 following the dissolution of the Soviet Union. Although independent, Russian political and economic influence over Ukraine remained strong, with Moscow determined to ensure that despite any changes in the government in Kyiv, Ukraine would remain on good terms with Russia.

In some ways, recent Russian perspectives on Ukraine are seen as the culmination of long-standing Russian resentment of the outcome of the Cold War. In 2005, Russian President Vladimir Putin called the collapse of the Soviet Union "a major geopolitical disaster." Russian leaders have also asserted that nations in the post-Soviet region should remain of privileged interest to Russia. Part of the justification for that assertion is an alleged right to protect Russian citizens and "compatriots" (persons deemed to be linked to Russia by language, culture, or ethnicity).

Moreover, Ukraine has a particularly important place in Russian psychology, according to many experts. Putin has referred to Ukrainians as "brothers" of the Russian people. Eastern Orthodox civilization, in which Russians see themselves as the leading force, got its start in Kyvin Rus when Prince Vladimir converted to Christianity in AD 988. Russians often point out that their ancestors spilled a great deal of blood to incorporate Crimea and most of the rest of Ukraine into the Russian Empire, and a great deal more to keep it within the empire (and its successor, the Soviet Union) through several wars.

Ethnic Russians make up around 17% of Ukraine's population, according to the 2001 census. They are concentrated in the southern and eastern parts of the country. They make up approximately 58% of the population in the Crimea. In addition, many ethnic Ukrainians in the east and south also tend to be Russian-speaking, are suspicious of Ukrainian nationalism, and have supported close ties with Russia. Soviet leaders concentrated important heavy industries (including defense industries) in eastern Ukraine, which tied the region to Russia economically and fostered what many analysts have viewed as a lingering Soviet-style mindset there. This is particularly true of the Donbas region, on the border with Russia.

Until the collapse of the Yanukovych regime in February 2014, Putin preferred using indirect methods of influence in Ukraine. These included "carrots," such as lucrative business deals with Ukrainian politicians and oligarchs, but also "sticks," such as de facto economic sanctions and using Russian media (which was and is still popular in Ukraine) to attack uncooperative leaders.

Russia reacted with great hostility to the emergence of a new, more pro-Western leadership in Ukraine in February 2014 by seizing Ukraine's Crimean peninsula. Starting on February 27, heavily armed Russian-speaking troops poured into Crimea, seizing airports and other key installations throughout the peninsula. At the time, Russian President Vladimir Putin claimed that the troops were not Russian Federation military forces, but only local Crimean self-defense forces. On March 16, the Crimean authorities held a referendum on Crimea's annexation to Russia. According to Crimean officials, Crimea's union with Russia was allegedly approved by 96% of those voting, with a turnout of 83%. Ukraine, the United States, the European Union, and other countries denounced the referendum as illegal and not held in a free or fair manner. Russian President Vladimir Putin signed a "treaty" with Crimean leaders on March 18, 2014, formally incorporating Crimea into Russia. In April 2014, Putin suggested that Russian Federation military forces did in fact invade Crimea.

Since then, the Crimea front has been relatively stable as the reality of its return to Ukraine continues to fade. Recently, however, an incident involving a disruption in the supply of electricity from Ukraine to Crimea resulted in recriminations and accusations of sabotage and a discontinuation of trade between Ukraine and the peninsula.

Sources: Map created by CRS. Map information generated by [author name scrubbed] using data from the National Geospatial Intelligence Agency (2016), Department of State (2015), Esri (2014), and DeLorme (2014).

Recognizing the failure of the Minsk-1 protocol to end the conflict and begin the process of achieving a political resolution to the Donbas crisis, the presidents of France, Russia, and Ukraine and Chancellor Angela Merkel of Germany met again in Minsk in early February 2015 to try to secure a new agreement to stop the fighting. On February 12, a cease-fire agreement was signed to take effect on February 15. The Minsk-2 agreement entered into force on February 15, 2015 (see box).²⁸

As most of the terms of the agreement were similar to those of the original Minsk-1 protocol, which failed to secure the peace, some observers expressed skepticism about whether this agreement was any more likely to be implemented than the previous one.

Under Minsk-2, the cease-fire is monitored by the OSCE. The agreement called for local elections in rebel-held regions and, more importantly and controversially to Kyiv, for legal and constitutional reforms to be negotiated with the rebels to give a special "decentralized" status to the region. The elections and reforms were to be implemented before the end of 2015 (now slipped to sometime in 2016). The return of control to Ukraine of its side of the Russia-Ukraine border is conditioned on the implementation of these decentralization reforms.

Some expressed concern that the Minsk-2 agreement amounted to a step toward transforming the occupied parts of Donbas into a new Transnistria²⁹ and that the main difference between the Minsk-1 agreements and the Minsk-2 agreement was that more conditions had been placed on Ukraine. Another point made by skeptics was the fact that Putin, the architect of the crisis, managed to avoid binding himself through the agreement. In fact, Minsk-2 contains no obligations whatsoever for Russia, which is not even mentioned in the agreement. Minsk-2 was not even signed by Putin but by Mikhail Zurabov, Russia's ambassador to Ukraine.³⁰

By the beginning of 2016, little had been accomplished in fully implementing the Minsk-2 provisions despite commitments by both sides to do so. A tenuous cease-fire continues to hold, although sporadic fighting does flare up, initiated mostly from the rebel areas, and Ukrainian soldiers and rebels continue to be killed. Some of the rebels' heavy weapons and military personnel supplied by Russia have been withdrawn from the front lines but have not been removed from Ukraine altogether. And, as noted above, although President Poroshenko won a hard-fought victory in initially moving legislation to grant the increased autonomy for the Donbas called for in the Minsk-2 agreement through the Rada, he does not have the necessary votes to pass this legislation as an amendment to the constitution. He is unlikely to secure those votes unless major progress is made by the other side. On the other hand, the separatists appear to have no intention to ensure free and fair elections in the disputed regions, and Russia seems little inclined to push for a resolution of the conflict. The elections in the Donbas have become a major sticking point in the peace process. Ukraine claims that Russia and the separatists have not honored the steps necessary to move the election process forward, including the provision of security. Because there is no real cease-fire, OSCE observers cannot safely enter the disputed areas to begin preparations. It is unclear whether Ukrainian government officials will be allowed into the region to help set up polling stations, print ballots, or even determine how ballots would be counted and reported. Ukrainian political party candidates are not yet permitted to campaign in the Donbas.

Moscow so far has declined to recognize the Donetsk and Luhansk "People's Republics" as independent countries or to annex them to Russia. However, Russian official statements and the Minsk-2 cease-fire agreement view the separatist regimes as legitimate interlocutors for Kyiv in determining the future of Ukraine. Russia has also made demands on the subject of Ukraine's political future. Russian Foreign Minister Lavrov has called for making Russian the second official language in Ukraine and for constitutional reforms that would confirm Ukraine's neutral status. Moscow also has insisted on the decentralization of Ukraine, under which the various regions would have wide autonomy in the areas of the economy, finance, culture, language, education, and external economic and cultural ties with neighboring countries or regions.

Many experts on Russia have stated that Putin's key objective in Ukraine has been and continues to be to weaken and discredit the pro-Western government in Kyiv and Western policy generally. And, according to some, Moscow's policy in Ukraine's east is starting to look more likely to strengthen the so-called Donetsk and Luhansk People's Republics. For instance, according to the International Crisis Group, after showing little interest in building political institutions in the DNR and LNR or enthusiasm for funding social policies, Moscow has begun in the past four or five months to bankroll pensions, social benefits, and salaries to local officials and the separatist military, suggesting that the measures are increasingly clear signs Moscow has decided to transform the crisis into a frozen conflict.³¹ At best, the outcome would likely amount to a cease-fire in place, with Russia continuing to control the Russia-Ukraine border, given the unlikelihood of an agreement between Kyiv and the separatists on elections and decentralization. Such an outcome could still provide Moscow with leverage over Kyiv but might not afford the same opportunity to destabilize Ukraine as continuing the war.

On the other hand, some observers believe that Putin will eventually create the conditions for an election and reintegration of the Donbas region into the country, not because he is prepared to give up the region but because by reintegrating it and having pro-Russians elected to the Rada, Moscow could gain even more leverage in Kyiv. Russia's proxies could control a certain bloc of votes on key issues. This has raised some concern in Kyiv and has led some to suggest this could only become a politically divisive problem.³²

On another note, what has largely disappeared from official Russian rhetoric for now is the concept of "Novorossiya"—that is, expanding the Russian-controlled area to include most of eastern and southern Ukraine, perhaps linking Russian-controlled areas in southern Ukraine with Crimea. This goal may have seemed easily achievable to Putin in mid-2014 when he first used the term. Since then, however, Ukrainian forces have become somewhat more capable, and it may appear to Putin than such an objective would now likely require a massive, and perhaps politically unacceptable, infusion of Russian military forces to realize. There also may be financial considerations in that Russia does not want to incur major new expenses in the current economic environment created by falling oil prices and Western sanctions as well as Russian commitments in Syria. Nevertheless, given Putin's past unpredictability, such a scenario cannot be ruled out.

Some, particularly in Europe, are pushing the Ukrainian government to move forward with the implementation of Minsk-2 to put pressure on Moscow to forge a settlement. They also believe that there are severe financial consequences, created by falling oil prices and Western sanctions as well as by Russian commitments in Syria, that Russia does not want to incur in the current economic environment by prolonging the crisis.

However, many observers believe this argument misses the entire point of why Putin seized Crimea and supported the separatists in the first place—the destabilization of Ukraine and the reversal of its Western orientation. For these observers, the EU and U.S. pressure on Ukraine to comply with Minsk-2, something not favored by many Ukrainians, is misplaced, as few believe that either the pro-Russia separatists or the Kremlin have any intention of complying with their parts of the Minsk-2 agreement. These observers contend that Putin is not interested in a solution that would otherwise allow Kyiv to turn its full attention to its Western ambitions.

In an opinion piece written on February 12, 2016, Roman Sohn, a columnist for Ukrainska Pravda and a civil society activist, suggested that Minsk-2 was essentially a "farce" and that U.S. and EU leaders pursued it to avoid a larger conflict in Europe "at almost any cost to Ukraine." He also argued that Putin knows "that it is much easier for the West to put pressure on Ukraine to accept bad terms than to forge a consensus [to keep or retain] tougher sanctions on Russia."³³ In his article, Mr. Sohn reminded the reader that while President Putin has not insisted that the separatists comply with one single point in the Minsk agreement, blaming Kyiv instead for not living up to its commitments, the EU is piling pressure on Ukraine to fulfill its part of the Minsk agreement by devolving more power to the Russia-occupied part of Ukraine.³⁴

This pressure seemed to be on full display when the foreign ministers of France and Germany met with President Poroshenko in February. While praising some of the reforms already implemented to address corruption and the economy, they reiterated their desire to see enacted constitutional reforms aimed at the Donbas region.³⁵ Similarly, Denmark's foreign minister, Kristin Jensen, suggested on February 5 that Ukraine had to uphold its part of the Minsk agreement or risk collapse of support for EU sanctions against Russia.³⁶

These "suggestions" (threats for some) from some Europeans have led others to question the motivations of the Europeans. For some, the pressure on Kyiv to meet the Minsk-2 requirements, including amending the Ukrainian constitution, will permanently reward the separatists, seen by many as mere street thugs with guns, for taking sovereign territory from their own country at the point of a gun and could label those members of the Rada who vote for these measures as national traitors. This approach, in the eyes of some, reinforces resentment of the West and suspicions of Europe's goals and raises the question of whether Europe's real priority is quality and lasting political reform or implementation of the Minsk agreement.³⁷

The United States and the European Union strongly condemned the Russian military invasion and annexation of Crimea and Russia's ongoing efforts to destabilize eastern Ukraine as violations of international law. Since 2014, the United States, in coordination with the EU and other countries, has imposed sanctions against Russia in order to increase the costs to Russia of its aggression, with the objective of pressing it to implement a genuine political settlement with Ukraine.

On March 17, 2014, the day after Crimean authorities held a referendum on joining Russia, the European Union imposed a visa ban and an asset freeze on 21 figures from Ukraine and Russia who played roles in Russia's seizure of Crimea. In March 2014, after President Putin signed an agreement with Crimean leaders incorporating the region into Russia, the EU imposed sanctions on 12 additional Russian figures. By May 2014, the EU had added at least 28 additional names of Russian officials and two companies based in Crimea.

The EU list included some senior government officials and members of the Russian parliament, but also fairly low-level figures directly involved in the Crimea operation and efforts to destabilize Ukraine. In contrast to the United States, the EU has stopped short of sanctioning Putin's "inner circle" or key firms associated with them.³⁸

For its part, the United States suspended most bilateral cooperation with Russia. On April 2, 2014, the Administration announced that it was suspending several projects planned under the aegis of the U.S.-Russia Bilateral Presidential Commission as well as some law enforcement cooperation activities and planned to use that funding for aid instead to Ukraine. The United States has also placed additional restrictions on defense-related exports to Russia.

In March 2014, the Administration issued an executive order imposing visa bans and asset freezes against persons who "undermine democratic processes and institutions in Ukraine; threaten its peace, security, stability, sovereignty, and territorial integrity; and contribute to the misappropriation of its assets.... "³⁹ The Administration then issued two additional executive orders (EO) expanding the scope of the sanctions and announced visa bans and asset freezes against several senior figures from Russia and the secessionist Crimean government. The EOs permit the Administration to freeze the assets of persons working in key areas of the Russian economy, including "financial services, energy, metals and mining, engineering, and defense and related materiel."

The United States established diplomatic relations with Ukraine in 1991, following its independence from the Soviet Union. According to the U.S. Department of State, U.S. policy is centered on strengthening a democratic, prosperous, and secure Ukraine more closely integrated into Europe and Euro-Atlantic structures. The U.S.-Ukraine Charter on Strategic Partnership, established in 2008, highlights the importance of the bilateral relationship and outlines enhanced cooperation in the areas of defense, security, economics and trade, energy security, democracy, and cultural exchanges. The United States has granted Ukraine market economy status, giving Ukraine permanent normal trade relations status. The United States and Ukraine have a bilateral investment treaty. The U.S.-Ukraine Council on Trade and Investment was established under the trade and investment cooperation initiative and works to increase commercial and investment opportunities by identifying and removing impediments to bilateral trade and investment flows.⁴⁰

According to the Office of the U.S. Trade Representative, Ukraine is the 80^th-largest trading partner of the United States, with $2.2 billion in total trade in 2014. U.S. exports to Ukraine include coal, machinery, vehicles, agricultural products, fish and seafood, and aircraft. U.S. imports from Ukraine include iron and steel, inorganic chemicals, oil, aircraft, and agricultural products. U.S. foreign direct investment in Ukraine amounted to $931 million in 2013 (latest year data are available).

Since the beginning of the crisis in Ukraine in late 2013, the focus of U.S. efforts has been to support Ukraine's efforts to reform and increase its cooperation and integration with the European Union. The United States, in cooperation with the EU and international financial institutions, is providing financial and technical assistance to Ukraine.

The United States has also provided non-lethal aid to Ukraine's security sector, including its army, but has declined so far to provide weapons to Ukraine, out of concern of escalating the conflict with Russia and making a political settlement less likely. Nevertheless, President Obama said in February 2015 that providing defensive weapons to Ukraine was an option the Administration was continuing to consider if diplomatic efforts fail. In a late 2015 visit to Ukraine, Vice President Biden, while restating U.S. support for Ukraine, warned that the government had a window of opportunity to implement systemic changes to deepen reforms in all aspects of life and at all levels of government but that Ukraine had to seize the moment and press forward and deliver on the promise of the Maidan.⁴¹

According to the U.S. Agency for International Development (USAID) "Greenbook" website, the United States obligated over $4 billion in aid to Ukraine from FY1990 through FY2012.⁴² Since the crisis that began in late 2013, the United States has committed to provide over $760 million in assistance to Ukraine, in addition to two $1 billion loan guarantees. U.S. economic and technical advisers advise almost a dozen Ukrainian ministries and localities.⁴³

In its FY2017 budget request, the Administration asked for $192.4 million in Economic Support Funds (ESF) for Ukraine to continue to address corruption, government reform, support for civil society, and other initiatives. The Administration also requested $15 million in International Narcotics Control and Law Enforcement (INCLE) funding to support justice and law enforcement reform. The request also included $2.9 million in International Military Education and Training (IMET) funds and $42 million in Foreign Military Financing (FMF) aid for Ukraine from the Overseas Contingency Operations (OCO) account.⁴⁴

U.S. technical assistance has been aimed at helping Ukraine stabilize its financial sector; carry out reforms in the agricultural sector; improve the business climate; support constitutional reforms; bolster civil society to participate and monitor the reform process; and support independent media.

Assistance is also devoted to helping Ukraine develop laws and regulations to fight corruption, one of Ukraine's biggest challenges. Technical assistance is also being used to improve its energy security, including by enhancing energy efficiency. In addition, the United States provides humanitarian assistance to Ukraine in cooperation with the U.N. High Commissioner for Refugees (UNHCR) and other international organizations to improve Ukraine's ability to assist internally displaced persons (IDP). U.S. aid has been used by Radio Free Europe/Radio Liberty and Voice of America to produce Russian-language news broadcasts that are aired in Ukraine.

In her March 2016 testimony before the Senate, U.S. Assistant Secretary Nuland stated,

Since there can be no reform in Ukraine without security, over $266 million of our support has been in the security sector, training nearly 1200 soldiers and 750 Ukrainian National Guard personnel and providing: 130 HMMWVs, 150 thermal goggles and 585 night vision devices, over 300 secure radios, 5 Explosive Ordnance Disposal robots, 20 counter-mortar radars, and over 100 up-armored civilian SUVs. In FY16, we plan to train and equip more of Ukraine's border guards, military, and coast guard to help Ukraine secure its border, defend against and deter future attacks, and respond to illicit smuggling.⁴⁵

In February 2015, Lieutenant General Ben Hodges announced that a U.S. Army battalion has been training Ukrainian forces in Poland, including on how to operate against Russian electronic warfare and how to protect themselves from Russian and rebel artillery.

Some critics have claimed that U.S. military aid had been slow to arrive in Ukraine due to bureaucratic impediments. Moreover, some Members of Congress have expressed support for going beyond the non-lethal support given by the United States so far to provide "defensive weapons" such as man-portable anti-tank weapons. Other suggested assistance includes additional non-lethal items, such as secure communications equipment, reconnaissance drones, and radars capable of tracking longer-range heavy artillery, not just mortars.⁴⁶

Ukraine faces two serious internal political challenges. First, the collapse of the governing coalition and the current political discord over how to create a new government and avoid national elections has stymied the political process and fueled doubts within the public. This instability has been driven in part by the reemergence of powerful oligarchs and others with entrenched interests in not seeing too much change and attempting in subtle ways to derail the reformist agenda. The second challenge appears to be a dispute between those who do not want to implement parts of Minsk-2 or accommodate the separatists at all and those who want to keep the process moving forward as long as the other side appears willing to do so. These challenges threatened the ability of the Poroshenko/Yatsenyuk government to address other pressing reforms and called into question the future of Yatsenyuk's government. The close vote on a no-confidence motion saved Yatsenyuk for the moment. However, with little public confidence in his willingness to seriously tackle some of the oligarchs who seem to be the root cause of much of the corruption, and with Poroshenko's supposed loss of support for the prime minister, the stage had been set for a potentially significant period of instability and the possible necessity of a new national election, which all sides thus far have tried to avoid.

On the other hand, the pro-separatist rebels in the Donbas do not seem to be moving forward in implementing their parts of the Minsk-2 agreement. Although elections are supposed to take place in the disputed territory, it appears unlikely at this time that the pro-separatists will allow a totally free or fair election. It also appears unlikely that pro-Kyiv political candidates will actually be permitted to campaign in the region or that the separatists will allow government officials from Kyiv into the region to help organize the elections, print ballots, and monitor polling places. And, although President Putin apparently told the Normandy Group that the OSCE would have total access to the area to monitor the elections, many seem doubtful that the rebels would allow such access to all voting places or guarantee the election observers' safety.

This, of course, could change as Putin observes the political chaos in Kyiv and assesses the mood of European countries and United States to support Kyiv. Putin could offer to hold elections anyway, though they likely would be flawed. He could conclude that for the West, progress—however imperfect—would nevertheless be progress, and that would be good enough for Putin's overall plans for Ukraine.

All of this, whether it is the internal political dynamics in Kyiv or the evolution of a "frozen conflict" in the east, makes it more difficult for the government in Kyiv to address political reform, corruption, and economic growth. If the current government, or its successor, shows weakness or loses its base of power and thus its ability to get things done, a new political crisis could arise among the frustrated general public, which is becoming increasingly skeptical of the ability of any political figures in Kyiv to significantly address problems facing the country. Any such political crisis could also result in a slowing of the implementation of Minsk-2 and further movement toward a "frozen conflict" in the east in which Russia would be able to manipulate the intensity of political unrest and future fighting in order to further hinder Ukraine's economic and political consolidation, as well as its integration with the West.

According to some, the growing political crisis in Kyiv could tempt Moscow to make further efforts to undermine Kyiv's efforts to reform the country and pose substantial risks for the interests of the United States and the EU to promote stability, security, and economic development in Ukraine.⁴⁹

After an initial round of sanctions imposed on Russia for its annexation of Crimea and military activity in eastern Ukraine, the United States and the EU continued to add additional travel freezes, visa restrictions, and economic sanctions on Russia for its failure to cease its support for the pro-separatists actions in the Donbas regions of eastern Ukraine.

On March 20, 2014, the Administration announced asset freezes on 16 high-ranking Russian government officials and members of parliament. Four additional persons, all wealthy businessmen, were sanctioned as members of Putin's "inner circle." One bank, Bank Rossiya, was also sanctioned due to its role as the personal bank of senior Russian officials.⁵⁰

On April 28, the Administration imposed asset freezes on an additional seven senior Russian officials. They include Igor Sechin, the president of Rosneft, Russia's leading oil company, and former chief of staff to Putin. The Administration also sanctioned 17 entities, including banks and other businesses. The companies appear to have been chosen due to their links to sanctioned persons in Putin's inner circle, such as energy trader Genneddy Timchenko and bankers Arkady and Boris Rotenberg, or to Bank Rossiya.⁵¹ Due to privacy laws, the names of those receiving visa bans have not been made public, but it is likely that they include those persons under asset freezes.

On July 16, 2014, the United States imposed sanctions unilaterally on key firms in Russia's financial, energy, and military technology sectors—including Gazprombank, Vnesheconombank (VEB), Novatek, and Rosneft. U.S. firms and persons are barred from dealing in new equity or loans of greater than 90 days maturity for these companies. On July 27, the Administration responded by adding Bank of Moscow, VTB Bank, and Russian Agricultural Bank to the list of companies with restricted access to U.S. capital markets. In addition, the U.S. assets of United Shipbuilding Company were frozen.

In September 2014, in response to a separatist offensive in Ukraine supported by Russian combat troops, the United States imposed sanctions against additional key Russian companies, including Transneft, Lukoil, Gazprom Neft, Rostec, Surgutneftegaz, and Sberbank.⁵²

On December 19, 2014, the President issued an executive order to bar any U.S. person from participating in new investment in Crimea; imports from and exports to the Crimea region; and any financing, facilitation, or guarantee of any related transaction by a U.S. person.⁵³

After the Malaysian Airlines tragedy on July 17, 2014, the EU largely matched and even in some cases went beyond U.S. sanctions. On July 22, EU foreign ministers agreed to expand Ukraine-related sanctions against Russia by adding individuals and companies to the existing travel ban and asset freeze list, including some persons in Putin's inner circle.

On July 29, the EU agreed to impose sanctions on Russia's financial, defense, and energy sectors. These sanctions were strengthened in September, in response to a massive Russian-supported offensive in Ukraine. The sanctions barred EU nationals and companies from providing loans to five major Russian state-owned banks and barred trade in new bonds, equity, or similar financial instruments with a maturity exceeding 30 days, issued by the same banks. The same restrictions were also extended to three major Russian defense companies and three major energy companies. The EU banned certain services necessary for deep water oil exploration and production, Arctic oil exploration or production, and shale oil projects in Russia. The EU has also banned exporting dual-use goods and technology for military use in Russia. The EU also added new persons to its travel ban and asset freeze list.

In December 2014, the EU banned or restricted most European investment, trade, and tourism with Russian-occupied Crimea. As of January 2015, the EU has sanctions on 150 persons and 28 entities. The EU is currently considering additional sanctions in response to Russian support for a separatist offensive in eastern Ukraine in January and February 2015.

Author Contact Information

Footnotes

Stephen Blank, "Perspectives on Russian Foreign Policy," Army War College Strategic Studies Institute, September 2012.

Some of the information in this report appeared in previous versions written by [author name scrubbed].

Testimony of Assistant Secretary of State Victoria Nuland, in U.S. Congress, Senate Committee on Foreign Relations, Testimony on Ukraine, hearings, 114^th Cong., 1^st sess., October 8, 2015.

Ibid.

Economist Intelligence Unit, Country Report on Ukraine, January 18, 2016.

Testimony of Assistant Secretary of State Victoria Nuland, in U.S. Congress, Senate Committee on Foreign Relations, Ukraine Reforms Two Years After the Maidan Revolution and Russian Invasion, hearings, 114^th Cong., 1^st sess., March 15, 2016.

"Resignation of Reformist Minister Sheds Light on Rampant Corruption," EURAtive.com, February 3, 2016.

Ibid.

Op. Cit.

"Ukraine: What Happens in the East Starts in Kiev," Stratfor, February 4, 2016.

Elizabeth Pond, "Gunfight at the Ukraine Corral," Institute for International Strategic Studies, February 4, 2016.

Testimony of Assistant Secretary of State Victoria Nuland, in U.S. Congress, Senate Committee on Foreign Relations, Ukraine Reforms Two Years After the Maidan Revolution and Russian Invasion, hearings, 114^th Cong., 1^st sess., March 15, 2016.

Public opinion survey of residents of Ukraine conducted between November 19-30, 2015, by the Rating Group of Ukraine for the International Republican Institute.

CIA, The Word Factbook, January 5, 2016.

Testimony of Assistant Secretary of State Victoria Nuland, in U.S. Congress, Senate Committee on Foreign Relations, Testimony on Ukraine, hearings, 114^th Cong., 1^st sess., October 8, 2015.

Anders Aslund, "Russia's War on Ukraine's Economy," July 9, 2015.

Economist Intelligence Unit, Country Report on Ukraine, January 18, 2016.

See https://www.imf.org/external/np/sec/pr/2015/pr1550.htm.

Op. cit.

U.S. Energy Information Agency, Country Brief: Ukraine, http://www.eia.gov/todayinenergy/detail.cfm?id=15411.

Economist Intelligence Unit, Country Report on Ukraine, December 2015.

For more on NATO's response to the Ukraine crisis, see CRS Report R43478, NATO: Response to the Crisis in Ukraine and Security Concerns in Central and Eastern Europe, coordinated by [author name scrubbed]. See also http://www.nato.int/cps/en/natohq/news_112695.htm.

See http://europa.eu/rapid/press-release_MEMO-14-159_en.htm.

The Donbas region refers to area comprised of the Donetsk and Luhansk Provinces.

"MH17 Ukraine Disaster: Dutch Safety Board Blames Missile," BBC News, October 15, 2015.

For an unofficial translation of the Russian-language original, see, for example, http://www.ft.com/intl/cms/s/0/21b8f98e-b2a5-11e4-b234-00144feab7de.html#axzz3RXfwD5VC.

Some experts believe Russian troop levels in Ukraine are significantly lower. U.S. Ambassador to NATO Douglas Lute has said Russian troops in Ukraine are mainly intelligence officers serving a command and control function and Russian servicemen operating highly sophisticated, specialized equipment, such as that used for electronic warfare and air defense. See http://www.reuters.com/article/2015/02/04/us-ukraine-crisis-nato-usa-idUSKBN0L81S220150204.

For an English-language translation of the Minsk protocol, see http://www.kyivpost.com/opinion/op-ed/osce-releases-the-12-point-protocol-agreements-reached-between-ukraine-russia-and-separatists-in-minsk-363816.html. For the Russian-language original, see http://www.osce.org/ru/home/123258?download=true.

Transnistria is a strip of eastern Moldova that separated from Moldova and is supported by Moscow, including with some 1,500 Russian military personnel on the ground.

Anders Asland, "Minsk-2: President Putin's Tactical Victory," RBC Daily, February 13, 2015.

"Russia and the Separatists in Eastern Ukraine," International Crisis Group Briefing No. 79, February 5, 2016.

"Why Reintegrating the Donbas is Suicide for Ukraine," Alexander Motyl, World Affairs, February 25, 2016.

"Minsk-2: The big farce of Western policy on Russia," EURActive.com, February 12, 2016.

Ibid.

"France and Germany tell Ukraine 'time is running out,'" EURActive.com, February 23, 2016.

"Denmark loses patience with Ukraine over Minsk compliance," EURAtive.com. February 8, 2016.

"Note from Berlin: How to react to Kyiv's political crisis," Gustav Gressel, European Council on Foreign Relations, March 2016.

For the sanctions decision and the initial list of names, see http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014D0145&rid=5. For the March 21 additions, see http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014D0151&rid=2. For the April 28 additions, see http://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014D0238&rid=1. For the May 12 additions, see http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2014.137.01.0009.01.ENG.

See http://www.whitehouse.gov/the-press-office/2014/03/06/executive-order-blocking-property-certain-persons-contributing-situation.

U.S. Department of State, Country Notes: Ukraine, 2015.

Vice President Biden's meeting with Ukraine President Poroshenko.

Testimony of Assistant Secretary of State Victoria Nuland, in U.S. Congress, Senate Committee on Foreign Relations, Testimony on Ukraine, hearings, 114^th Cong., 1^st sess., October 8, 2015.

Department of State, Congressional Budget Justification: Department of State, Foreign Operations, and Related Programs, Fiscal Year 2016, February 2, 2015, at http://www.state.gov/documents/organization/236395.pdf.

Op. Cit.

For a report by former senior U.S. officials advocating U.S. defensive arms for Ukraine, see http://www.thechicagocouncil.org/sites/default/files/UkraineReport_February2015_FINAL.pdf.

See http://www.durbin.senate.gov/newsroom/press-releases/durbin-portman-lead-bipartisan-senators-calling-for-increased-military-assistance-to-ukraine.

See for example http://www.brookings.edu/research/opinions/2015/02/06-aiding-ukrainian-military-goad-putin-war-gaddy-hill.

Steven Pifer, "Crisis over Ukraine," Council on Foreign Relations, October 2015.

For a list of Russian figures sanctioned in March, see http://www.treasury.gov/press-center/press-releases/Pages/jl23331.aspx. For the text of the executive order greatly expanding the scope of sanctions, see http://www.whitehouse.gov/the-press-office/2014/03/20/executive-order-blocking-property-additional-persons-contributing-situation.

For a list of Russian figures sanctioned in April, see http://www.treasury.gov/press-center/press-releases/Pages/jl2369.aspx.

See http://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20140912.aspx.

For more on U.S. sanctions on Russia, see CRS Insight IN10048, U.S. Sanctions on Russia in Response to Events in Ukraine, coordinated by [author name scrubbed]. For more on the economic impact of sanctions on Russia, see CRS Report R43895, U.S. Sanctions on Russia: Economic Implications, by [author name scrubbed].