Russia’s stock market dropped by 10% and the cost of insurance on Russian sovereign risk soared after President Vladimir Putin recognized the independence of Donetsk and Luhansk, the regions of East Ukraine controlled by pro-Russian separatists since 2014. Putin’s maneuver parallels the 1993 recognition of South Ossetia and Abkhazia, two breakaway districts of Georgia, after the Russian-Georgian War.
Moscow’s declaration changes nothing on the ground. Donetsk and Luhansk have been under Russian control for years. But it leaves Ukraine in a state of permanent instability, and it adds bargaining chips to Russia’s side of the table in any future negotiations over Ukraine’s status. Russia’s Duma last week passed a resolution calling for the recognition of the two regions.
A number of Western commentators immediately declared that recognition of Donetsk and Luhansk portended a Russian invasion of Ukraine. It is, however, unclear why Putin’s move would imply an invasion of the rest of Ukraine. The Russian declaration escalates pressure on the European members of NATO to find a solution acceptable to Moscow, while an actual invasion would force them into unequivocal support for the American stance. As matters stand, Putin has all options open.
How the West will react is unclear. US Secretary of State Antony Blinken warned earlier that Russian recognition of the breakaway districts would be a severe violation of international law that would demand a response, but the nature of the response is far from clear. NATO has no forces to set against Russia’s modernized armed forces. NATO could impose sanctions on Russia, to be sure, but it has no substitutes for Russian oil and gas.
The cost of insuring Russian five-year sovereign bonds denominated in US dollars jumped today to 3.3 percentage points above the London interbank rate, a recent record. On February 14 the cost of protection (as gauged by the market in credit default swaps) had risen to 2.75 percentage points. Russia has $630 billion in foreign exchange reserves and a current-account surplus equal to 5% of its GDP.
The United States has threatened sanctions in the event of a Russian invasion of Ukraine, but recognition on paper of facts already on the ground does not rise to that standard. It is unlikely that European governments would support substantive sanctions against Russia in the absence of actual troop movements into Ukraine.
In a television address, Putin claimed that NATO already had plans underway to incorporate Ukraine, and that this would lead to stationing of military aircraft and short- and medium-range missiles on Russia’s border. “That would give NATO control of the entire airspace up to the Ural Mountains,” Putin said, and it would allow “missiles to hit Moscow or Kharkov in a few minutes.”
Putin also repeated the Russian claim that the United States and other NATO countries had promised in 1990 not to expand NATO eastward. The German news magazine Der Spiegel pm February 19 published a 1991 protocol by one of Germany’s top diplomats that appeared to be a smoking-gun confirmation of the Russian claim.