Merkel Warns Putin Of "Massive Damage", Russia Continues Piling Troops, Pro-Russia Oligarch Arrested, Gazprom Speaks

Tyler Durden's picture

It's crunch time for Ukraine.

With just over two days to go until the Crimea referendum, all the actors are stepping up the diplomacy to a fever pitch in a desperate attempt to talk Putin out of formally annexing the peninsula following results which are well-known in advance will show the population's allegiance to mother Russia. But while the generic rhetoric is well-known, one surprising place of escalation over the past 24 hours has been Germany's Angela Merkel, who for the most part had been willing to stay on the sidelines in the war of words, has suddenly stepped up her own phrasing, and warned Moscow on Thursday that it risked "massive" political and economic damage if it refused to change course on Ukraine, saying Western leaders were united in their readiness to impose sanctions on Russia if necessary.

Reuters reports that the chancellor, using her strongest language since the start of the crisis and removing any suspicion that Germany might seek to avoid a confrontation with President Vladimir Putin, said his actions would lead to "catastrophe" for Ukraine and much more.

"We would not only see it, also as neighbours of Russia, as a threat. And it would not only change the European Union's relationship with Russia," she said in a speech in parliament. "No, this would also cause massive damage to Russia, economically and politically."

Merkel has acknowledged that her efforts to persuade Putin to negotiate via a "contact group" with the transition government in Kiev - which he accuses of ousting Russian-backed president Viktor Yanukovich unlawfully - have failed and time is running out.

"To be absoultely clear, none of us want it to come to such measures but we are all ready and determined to if they are unavoidable," said Merkel.

Germany receives over a third of its gas and oil from Russia and over 6,000 German firms are active there. A poll last week showed that a majority of Germans oppose sanctions against Russia. So is Merkel doing the Western thing, and bluffing in a last-ditch effort to convince Putin she isn't, or does Putin still believe he has all the trump cards, and can bring the German economy to a crawl if Merkel acts out on her threat? We will known as soon as Sunday night.

Elsewhere, John Kerry headed out to London for some last ditch Russia talks on Ukraine. Expect this "effort" too to lead exactly nowhere.

In the meantime, Russia's response is well known, which is more of the same - and the Russian Ministry of Defense made it quite clear what the next steps are when it announced that the large-scale maneuvers near the Ukraine border now involve some 8,500 troops, 270 tanks and 180 APCs.

An indication of how "seriously" Russia takes the diplomatic threats was the news that it is ready to impose counter-sanctions. WSJ reported that Russia’s economy ministry is looking at what the consequences of possible sanctions from the West would be and stands ready to impose similar penalties, deputy economy minister Alexei Likhachev said Thursday.

We are ready for any developments, all options are being considered. But we hope that it will impose specific political sanctions but not a wider range of some trade and economic decisions,” Mr. Likhachev said.

 

Mr. Likhachev said Europe is unlikely to impose harsh sanctions against Russia as both sides have strong business and trade ties.

 

Unlike Europe, which is Russia’s major trading partner, the U.S. has more room to impose sanctions, he added.

 

“Our sanctions will be symmetric,” Mr. Likhachev said.

But it wouldn't be a Russian response if Gazprom didn't make an announcement or two. Which it did:

  • Gazprom CEO: Ukraine’s Failure to Repay Gas Deliveries Debt Puts Company Dividend Policy At Risk
  • Gazprom CEO: Ukraine Debt for Gas Deliveries Now at $1.8 Billion, Keeps Growing
  • Gazprom CEO: Ukraine Political Crisis Detrimental For Company’s Investment Program
  • Gazprom CEO Seeking Clarity On Gas Payments From Ukraine
  • Gazprom CEO Doesn’t “Want A Gas Crisis”
  • Gazprom CEO Doesn’t Address Cutting Off Gas Supplies In Statement

And while diplomacy is failing all around, and a trade and all too real war are potentially on the horizon, the real issue was and continues to the money. Which is why it was surprising to learn that earlier today the a Ukrainian oligarch, Dmytro Firtash, was arrested in Vienna this week at the request of U.S. authorities, the Austrian government sources said on Thursday.  Reuters reports that Firtash, 48, is one of Ukraine's richest men, an oligarch whose close links to Russia and involvement in the gas, chemicals, media and banking sectors gave him substantial influence, notably during the administration of recently ousted, Moscow-backed President Viktor Yanukovich.

The Federal Criminal Office, had identified the man taken into custody only as Dmitry F. and said he had been under investigation by the U.S. Federal Bureau of Investigation since 2006.

As a reminder, Stratfor's take on the richest Ukrainians was that they would play a "decisive role" in the conflict:

With presidential elections set for May 25 and parliamentary elections likely to be held later in the year, Ukraine's current administration will need the continued support of the oligarchs. More immediately, with Crimea on the verge of leaving Ukraine, the new government's urgent challenge is to keep mainland Ukraine together. Eastern Ukraine is crucial to this -- the region is a stronghold for pro-Russia sentiment and the main site of opposition, after Crimea, to the Western-backed and Western-leaning government.

 

The oligarchs are key to keeping control over eastern Ukraine, not only because Ukraine's industrial production is concentrated in the east -- thus anchoring a shaky economy -- but also because many of the oligarchs have a stronger and more manageable relationship with Russia than the current government, which Moscow sees as illegitimate. Many of these business leaders hail from the industrial east. They have business ties to Russia and decades of experience dealing with Russian authorities -- experience that figures such as Klitschko and Yatsenyuk lack.

 

So far, the new government has been able to maintain the support of the country's most important oligarchs. In general, the oligarchs want Ukraine to stay united. They do not support partition or federalization, because this would compromise their business interests across the country. But this support is not guaranteed over the long term. There have been recent complaints about the new government, for example over the arrest of former Kharkiv Gov. Mikhail Dobkin. Akhmetov came out in Dobkin's defense, saying the government should not be going after internal rivals right now, but rather focusing on concerns over Russia. This can be seen as a warning to the new administration: The oligarchs' loyalty to the current regime is conditional and should not be taken for granted.

 

Ultimately, the biggest threat to the oligarchs is not the current government, over which they have substantial leverage, but Russia. The oligarchs stand to lose a great deal if Russia intervenes in eastern Ukraine. If Russia takes over eastern territories, it could threaten the oligarchs' very control over their assets. Therefore they have an interest in bridging the gap between Russia and Kiev, but it is Moscow they fear more. The oligarchs have substantial power to shape the Ukrainian government's decision-making as it moves forward. Their business interests and the territorial integrity of the country are at stake.

As always, follow the money, especially when some of the richest money ends up directly in prison in a country far away, under the orders of that global moralizer, the United States.