Putin's High Tolerance for Pain and Europe's Reluctance to Inflict It

Former Georgian President Mikheil Saakashvili, whose country was invaded by Russia in 2008, revealed to an audience of Ukrainians what Vladimir Putin thought of their nation.

As a cease-fire emerges in Ukraine that gives Putin a lot of what he wants, the comments are a reminder of how the country remains trapped between the weight of Russian history and the force of European economics. In this squeeze, Putin’s narrative backed by Cold War memories is coupled with leaders unwilling to blow up ties with a major trading partner and energy supplier.“I had 36 meetings with Putin,” Saakashvili said in a visit to the Ukrainian city of Lviv in August, five months after the annexation of Crimea. “At almost each one he repeated that Ukraine is not a real state but Russian territory. He will go as far as he is allowed.”

“Some EU member states just don’t care that much about Ukraine,” Paul Ivan, a former Romanian diplomat now with the European Policy Centre in Brussels, said this week. “There are countries with historical ties and good relations with Russia, and for some others they think they’re far away from Ukraine and they’re willing to compromise that country’s territorial integrity for their own economic interests.”

Putin says he is protecting Russian speakers in Ukraine, which Russia annexed in the mid-17th century and reluctantly relinquished as the Soviet Union collapsed in 1991. He has overwhelming support at home, even as the economy starts to shrink on the back of plunging oil prices and an almost 50 percent tumble in the value of the ruble since August.

For the European Union, penalties like trade sanctions and visa restrictions are unlikely to be tough enough to bring Russia to heel, especially on a continent flirting with its own recession and coping with the legacy of a debt crisis.

“Putin has much more at stake,” said Dmitri Trenin, director of the Moscow Carnegie Center. “Putin’s will and Russia’s willingness to suffer for a cause is his asset.”

The theater of conflict is the Donbas region of eastern Ukraine and the cities of Donetsk and Luhansk. Pro-Russia separatists want to establish an autonomous state because they say the Ukrainian government in Kiev tries to suppress their language and sever ties to Russia. Almost 5,500 people have died in the fighting since April, according to the United Nations.

The EU, saying Russia supports the insurgency, agreed to its first sanctions in March 2014. Since then, the 28-member bloc maintained sufficient unity to blacklist further individuals and companies linked to the conflict and impose some limits to Russian companies’ market access.

A cease-fire agreement in Minsk this week starting on Feb. 15 came after 18 hours of talks involving Putin, French President Francois Hollande, Ukrainian President Petro Poroshenko and German Chancellor Angela Merkel.

Putin’s adversaries were under “no illusions” after the accord, which offered just a “glimmer of hope,” Merkel said.

It’s clear that European governments know the limit of their sanctions policy, said Steven Blockmans, an analyst at the Centre for European Policy Studies in Brussels.

They know that the impact sanctions are having on Russia, combined with a fall in oil prices and a declining ruble leads to “an impoverishment of the Russian people which over time is in no-one’s interest, Putin’s or Europe’s,” he said.

That means the Russian energy industry, the main driver of the economy, remains relatively unscathed while its banks still are connected to the international system. When Iran was isolated, there were sanctions on energy exports and it was cut off from the SWIFT banking network.

“Some European countries, for months now, have been suffering economic pain so political leaders have a message to sell to their own constituencies,” Blockmans said. “At the same time there’s an escalating conflict in Ukraine which makes it difficult for them to get off their high moral horses.”

Exports from the EU to Russia dropped by about 12 percent, or 14 billion euros ($16 billion), last year, based on Eurostat data for the first 11 months.

Nationally, exports range from 1 percent or less of outgoing goods for countries like Portugal, Ireland and the U.K. to as high as 21 percent in Lithuania, one of the three Baltic states that used to be part of the Soviet Union, according to data compiled by Bloomberg. They also rely on Russia for all their gas imports; for Ireland it’s zero.

Germany, the region’s largest economy, gets 37 percent of its gas from Russia, according to Eurogas. It sent 2.8 percent of its exports the other way in the first 11 months of 2014. Companies that are among the largest foreign investors in Russia include Volkswagen AG and Siemens AG, which generated 1.8 billion euros in Russia last year, or 2.5 percent of its total.

As well as energy companies such as Royal Dutch Shell Plc, BP Plc and France’s Total SA with stakes in Russian producers and projects, Russia is also the third-largest market for French carmaker Renault SA. It jointly controls OAO AvtoVAZ, the producer of Ladas. Deliveries last year fell 7.4 percent to 194,500 vehicles, which were about 7 percent of global sales.

Renault’s “opportunity for profitability has been practically washed out” by the crisis, Chief Executive Officer Carlos Ghosn said on Thursday. Still, “we consider that Russia must remain a pillar for our group,” he said.

Getting results through diplomatic channels is the main task, a senior EU diplomat said.

During discussions on the best way to tackle Putin, several countries said that while sanctions have an effect on the Russian economy, they also acknowledge they are not changing the Kremlin’s policy, the diplomat said, speaking on condition of anonymity because the negotiations are ongoing.

The Russian central bank has said the economy may shrink 3.2 percent from a year earlier in the first half of 2015 because of the combination of sanctions imposed by the U.S. and EU and the slumping price of oil.

At the same time, 85 percent of Russians approve of Putin’s actions as president, the independent Levada Center found in a poll of 1,600 respondents published last month. The figure is only slightly down on a peak of 88 percent in October.

The intertwining of Russia, Ukraine and Belarus goes back to the ninth century and the formation of a loose federation whose capital was Kiev. Russia started annexing Ukraine in 1654 and the country became a provider of cheap labor and agricultural goods to the Russian Empire and then the Soviets.

There was little development of the Ukrainian nation because most of the elite over the centuries were assimilated with Russia, according to Nataliya Kibita, who teaches Soviet history at Edinburgh University.

The first real opportunity to build a nation state in Ukraine came with the demise of the Soviet Union, something that Putin has referred to as a catastrophe.

“Ukraine did very little after 1991 to break with the Soviet legacy so society evolved more quickly than the state,” said Kibita. Sanctions “do not change the situation in Ukraine or force Putin to change his opinion on Ukraine,” she said.

The conflict has pummeled an already fragile economy, and one more important to Russia based on hard statistics. Ukraine accounts for 4.7 percent of Russian trade and 0.4 percent of EU trade, according to figures compiled by Bloomberg.

Ukraine devalued its currency by 31 percent on Feb. 5 as it tried to win more support from the International Monetary Fund. The Washington-based organization on Thursday announced a $40 billion bailout to help avoid a default.

President Poroshenko has to tackle corruption and Soviet-style management of the economy, said Kibita, who grew up in a Russian-speaking family in western Ukraine.

“If you want to get the conflict to go away you need to connect the Ukraine government with the people,” she said. “The problem is inside Ukraine and Putin knows this.”

The most recent precedent for the current conflict was in Georgia in 2008. The country is about a tenth of the size of Ukraine by population and land mass and the war lasted just five days, yet the events point to where Ukraine might be headed.

While the French brokered a cease-fire, the EU balked at sanctions against Russia because of reliance on energy imports at a time of faltering economic growth. The Russian military remains in the breakaway regions of Abkhazia and South Ossetia, while Georgia now has a government promising to mend ties with Russia after Saakashvili stepped down in 2013.

“The EU doesn’t want the war, they are afraid of it,” said Emzar Jgerenaia, a professor at Ilia University in Tbilisi, the Georgian capital. “The Georgian example wasn’t a large enough lesson for the world.” —With Henry Meyer, Michael Winfrey, Mathieu Rosemain, Benedikt Kammel, and Daryna Krasnolutska.