To understand the situation, it is useful to remember how Kernes came to power. Kernes was the City Council Secretary in 2010 when he became the Party of Regions candidate for Mayor. His opponent was former Kharkiv Governor (under Yushchenko) Arsen Avakov. The October 2010 National Local Elections were the first conducted under Viktor Yanukovych and according to the US Embassy statement, “did not meet standards for openness and transparency”. Avakov campaigned aggressively and using his substantial media resources (locals cite that he controls about 70 percent of the Kharkiv media) held a narrow lead as the votes were counted. However an intentionally delayed vote counting process allowed Kernes to squeak out a 30.1% to 29.5% victory despite wide scale allegations of fraud, use of administrative resources, and vote buying. A little more than a year later, criminal charges were opened against Avakov for “illegally transferring land” and he was detained in Italy while traveling abroad. In April 2012, Avakov was placed under house arrest by Italian authorities, although they did not honor the Yanukovych government’s demands for extradition. In October 2012, Avakov was elected to Parliament with the Bloc of Yuliya Tymoshenko and received full immunity from prosecution. As a result, a court ruling canceled the measures against him and he returned to Ukraine in December of that year. Suffice to say, that Kernes and Avakov are mortal enemies. Thus, when Avakov became Interior Minister in February 2014, the tables were turned against Kernes as Avakov openly advocated for his arrest.
Under the previous Prosecutor General Vitaliy Yarema, Kernes and Kyiv maintained a uneasy truce. However with the possibility of his arrest pending, there is a real danger of Kernes switching sides again. In the last two weeks there have been two attempts to declare “Russia as an aggressor” during sessions of the Kharkiv City Council. The most recent vote was just a handful of votes short of a majority. Both times Mayor Kernes spoke against the motion and instructed his faction to vote against it. In addition, many local business elites are openly siding with Kernes and offended by the possibility of his arrest. This has led to phone calls and face to face meetings with key members of the Kharkiv branch of the Prosecutor’s Office, Militia and other law enforcement structures to ask, “are you with us (Kernes) or Kyiv?” Unlike the Donbass which exported around half its production to Russia and the other half to Europe, Kharkiv industry exports more than 80% to Russia and is heavily entertwined with the Russia economy. The real danger is if Mayor Kernes and his majority on the city council were to pass a resolution in favor of joining Russia. This of course is illegal under Ukrainian law and punishable with prison time, however that didn’t prevent the Crimean Parliament from taking such an action (albeit without a majority and behind closed doors). More importantly, Putin doesn’t need much encouragement to intervene in Ukraine and an invitation from a democratically elected, city council of the country’s second largest city and first capital would be seismic. This would be exactly the legitimacy Putin seeks to trumpet to the international community, that the puppet governments in the so called DPR (Donetsk People’s Republic) and LPR (Luhansk People’s Republic) have failed to provide. In such a case, Putin wouldn’t need to use his army to conquer territory like in the Donbass, their territorial claims will be legitimized through democratic mechanisms. Any complaints from the Ukrainian government would give Russia a justification to escalate the conflict, and parachute in their forces into Kharkiv under the guise of protecting the rights of ethnic Russians. For the last year, Russia has tried relentlessly to gain a foothold in Kharkiv and have stepped up their efforts in recent months. As a result, in the last year there have been 43 terrorist acts in Kharkiv city including seven since New Years. However, if not for the vigilance of Avakov’s team, relationships with local leaders, and knowledge of the city, these acts may have caused greater casualties and separatist support may have grown. Now with outside pressure coming from the “Kharkivski Partizani”, an FSB backed terrorist group based in Belgorod (30 kilometers away inside Russia) which exploded a bomb last month in the city, as well as car bomb targeting Ukrainian Speical Battalion “Slobzhanshcina” Commander Andrei Angolenko last week, the intensity has been turned up in Kharkiv city. In addition, there are almost 140,000 Donbass refugees that have been relocated to Kharkiv. These “down on their luck” refugees make prime recruitment targets for terrorists acts and espionage against Ukraine. Thus, we estimate that the chance of Kharkiv switching to support the Russian side at 35% .
However, not only would an attack by Russian backed forces on Mariupol cause great bloodshed, the economic effects of losing the Azov Sea port would likely plunge Ukraine deeper into recession. Mariupol is Ukraine’s second largest port behind Odesa and ships a third of the country’s agricultural produce (mostly grain). If that port was no longer controlled by Ukraine, the agricultural production used for exports would have to be shipped by rail west to Odesa before being shipped abroad. This would cause a notable increase in export prices and make Ukrainian agricultural goods more expensive overseas. The same situation applies for the two large steel mills in Mariupol which are owned by Rinat Akhmetov. The factories are currently operating at around 60% capacity due to the war but remain operating since steel is a key part of Ukraine’s economy. If the steel mills were no longer operating (or under Russian control), Ukraine’s exports would take another substantial hit. In addition, Ukraine’s coal and iron ore and shipped primarily out of the Mariupol port. Thus, it’s loss would not only be devastating militarily but also economically painful as respected economist Anders Aslund has pointed out. The loss of Mariupol would require an additional IMF intervention which will saddle Ukraine with debt which will take years to repay (if at all).
Dates to Watch:
March 12: Anticipated Arrival Date of IMF Money: tomorrow is the date that Ukraine’s economy is waiting for. An estimated $5 billion is expected to arrive and will be split between the government and national bank. Given that the NBU has just $5.4 billion in reserves remaining, this is likely to strengthen the hryvna – at least for the time being. Both President Poroshenko and NBU Chief Gontraeva have predicted a stabilization of the hryvna at “20-22” to US Dollar. We will know soon…
March 12: One Year Anniversary of the Arrest of Oligarch Dmitro Firtash in Vienna. The arrest of Firtash in Vienna last year shocked Ukrainian big businessmen who thought that the events of Euromaidan would herald just another “business as usual” environment in Ukraine. It is also dispelled the belief among some oligarchs that Western public relations was all that is necessary to whitewash their nefarious pasts. Firtash was arrested on an FBI warrant for bribing Indian’s businessmen to obtain the rights to a titanium mine. He was later released on a record $175 million dollars (125 million Euros at the time) bond. The Vienna court is expected to decide whether or not to extradite Firtash to the US to face charges on April 30.
March 14: Deadline under Minsk II for Parliament to pass a decree determining a list of Donbass districts with special economic and political status. Keep an eye on what Parliament does with this requirement of Minsk II. The DPR and LPR leaders are already licking their chops over this prospect.
March 22: Gagauzia Gubernatorial Elections in Moldova: as expected, former Communist turned pro-Kremlin Socialist Iryna Vlah leads in the polls with 57% to 23% over Nicolae Dudoglu her nearest opponent. Interestingly, the Socialists received exactly 57% of the vote in Gagauzia during the November 30, 2014 Parliamentary Elections in Moldova.
June: IMF Talks with Bondholders Completed
October 2015: National Local Elections for Mayor and City Council: for the first time, the Ukrainian Ministry of Foreign Affairs acknowledged the possibility (likelihood?) that LPR leader Igor Plotnytskiy may be elected as the legitimate representative leader of the region. All the OSCE monitors in the world can’t change it either, in fact, they will help legitimize it.
February 2016: Arbitration Hearings on Ukraine’s Alleged Gas Debt to Gazprom. Be sure to reserve your court room seat for next year’s gas dispute hearings at the International Arbitration Court in Stockholm. The court will decide whether or not Ukraine owes Gazprom an additional $4.5 billion in payments for gas under its’ pirate-like “take or pay” gas deal of 2009. A counter claim initiated by Naftogaz Head Andriy Kobolev seeks $6 billion in fees from Gazprom and has been combined into the case. A court ruling is expected next June.