Strategic Analysis: Russian Business Activity in Ukraine (Abstract)

When examined visually, and in the aggregate, the global footprint cultivated by Russian state-owned enterprises is complex and especially entrenched within Russias neighboring states. Although these investments are often driven by commercial considerations, there is often a dual-purpose to their activities, with projects chosen that are directly supportive of short- and long-term Russian national security objectives. Indeed, it is also the case that some investments are made without any commercial motivation whatsoever. Regardless of how deliberate and with what level of forethought these entities are positioned abroad, their activities should properly be regarded as indicative of how their state owners perceive and pursue their vital national interests.

In the case of Russian entities operating in Ukraine (particularly in eastern and southern Ukraine), their employment as non-kinetic, soft power projection tools was on vivid display over the four years leading up to and following Russias annexation of Crimea. During this timeframe, the weaponization of these entities occurred in three phases: 1) Russia deployed private or state-controlled enterprise to compromise Ukraine economically, financially and politically; 2) Moscow appeared to prepare the environment for potential military action by using investments and transactions to limit the policy options available to Kiev; and 3) Russia used its enterprises to consolidate its gains by winning the peace.

In Crimea, this came through development and investment and a general effort to provide higher living standards. Throughout the area, however, Russian investment served a kind of economic deterrence particularly in eastern and southeastern Ukraine where the affected populations have been the targets of coercive rhetoric and embargos that have deliberately and thoughtfully involved the presentation of a stark picture of what their economic reality would be like without Russian patronage.

Compromising an adversary does not necessarily require positioning for military action, only a strategy to deploy economic and financial assets in a manner that provides leverage over another state via long-term dependencies, financial flows (many of them subsidized) and other means. Russias use of its state-owned and ‑controlled enterprises to compromise its neighboring states is well-documented, most notably through the use of their energy companies: gas giant Gazprom, oil major Rosneft and nuclear energy firm Rosatom. Strategic objectives can be advanced through the maneuvering of enterprises in other industries as well.

The period from 2004 to 2010 following the Orange Revolution was a stark reminder to Moscow that retaining Ukraine within its orbit was not a foregone conclusion. Although the Yushchenko government turned out to be somewhat dysfunctional, its pursuit of EU and NATO membership sent a clear message. When Moscow-friendly Viktor Yanukovych came to power in February 2010, Moscow wasted no time in fortifying its new position of influence in Kiev. Its priority strategy for doing so was a carefully constructed array of economic and financial targets that would enable Moscow to establish more permanent positions of influence and power within the country. These efforts were far-reaching and aggressively pursued.

For approximately 18 months following his election in February 2010, Ukrainian President Yanukovych tried to accommodate Moscows demands in this domain, hoping that his acquiescence would usher in a new era of mutual respect and brotherly relations. This initial period of open field running following Yanukovychs rise to power included the following sampling of Russian initiatives.

  • Yanukovych agreed to extend Russias lease on Sevastopol from 2017 to 2042 in exchange for a 30% discount on Gazprom deliveries of natural gas;
  • Putin presented Yanukovych with a draft agreement in April 2010 that would provide Russia with de facto control over Ukraines gas production, transmission systems, internal gas trade and export, nuclear power generation and seek the merger of Ukrainian state-owned Naftogaz with Gazprom;
  • Russian-backed lines of credit were offered in 2010 for the acquisition by Russian entities of Ukrainian steel, chemical, shipbuilding, aviation and nuclear enterprises; and
  • pressure was applied on Kiev to agree to some configuration that would put Ukraines critically important natural gas pipelines under the control or ownership of Russian state-owned enterprises.

This period also saw Moscow beginning to come to terms with massive new natural gas discoveries, both offshore Crimea and onshore in the form of major shale gas fields. The larger of these shale discoveries stretched across the eastern Dniepr-Donets region and, by itself, contained enough gas potentially to remove the need for Russian gas imports to meet domestic Ukrainian demand. Moreover, by some early analyses, Crimeas offshore assets could, alone, hold enough natural gas to supply all of Europe for up to five years.

These new realities had profound implications that went even beyond the relationship between these two countries and strengthened the need for Moscow to maintain powerful levers inside Ukraine. As the relationship between Yanukovych and Putin deteriorated and the possibility increased that Ukraine would commit itself to the EU, even under a reputedly Russian-friendly eastern industrialist, Russian activity in Ukraine altered course. Negotiations over the pricing of gas became even more acrimonious and requests were being insisted upon within the E&F domain that made compromise, even with supposedly friendly leadership in Kiev, increasingly unlikely.

In August 2013, a Ukrainian newspaper leaked a 14-page document that it claimed was drafted by the Russian government and its allies in Ukraine that described a covert strategy of infiltrating and undermining Ukraine economically, financially and politically to move the country away from the EU and back towards the Customs Union. Although the authenticity of this document has yet to be verified publicly, the strategies it describes are consistent with actions taken by Moscow and its RSOEs during the relevant period.