Germany's Reaction to NAF's Victory in Debaltseve Bad Sign for Greece

Debaltseve has fallen to the Novorossiya Armed Forces (NAF). What is interesting about David Herszenhorn's story, "Ukraine Forces Withdraw From Debaltseve, a Strategic Town," is he doesn't let on to where the Ukrainian Army is planning to retreat. 

Andriy Lysenko, a spokesman for the Ukrainian national security and defense council, confirmed the retreat at a briefing in Kiev, the capital, on Wednesday afternoon, and said that the pullout was nearly completed. 

“Today, the armed forces of Ukraine are conducting the organized, planned retreat of units of forces of the antiterrorist operation from the city of Debaltseve,” Mr. Lysenko said. “At the moment, almost 80 percent of the Ukrainian units have retreated from this sector, and this operation is to be completed soon.”

Herszenhorn doesn't mention in his story that Debaltseve is encircled by the NAF. There is nowhere for the Ukrainian Army to flee. But in a story yesterday by Andrew Kramer, "Despite Ukraine Truce, a Battle That Continues," it is clear Poroshenko's troops are surrounded and in deep trouble:

As many as 8,000 Ukrainian soldiers are holed up in the city, a rail hub connecting the capitals of the two rebel regions, Donetsk and Luhansk. Rebels have reportedly sent text messages to phones in the town, telling the soldiers that they have been abandoned and should surrender.

The Ukrainian government maintains that the town was not surrounded before the cease-fire took effect, and that European monitors of the truce should insist that the separatist forces halt their offensive and open a corridor to evacuate the wounded.

The main rebel group, the Donetsk People’s Republic, has said it will not observe the agreement in Debaltseve, saying that it was encircled before the cease-fire began and that it is therefore now an internal region in its enclave, not a section of the front.

The only resupply road into Debaltseve is mined, in range of rebel artillery and at times held by pro-Russian infantry. On Friday, eight Ukrainian soldiers reportedly escaped on foot through the fields, and on Sunday, a dozen or so made it out in a truck [one of the soldiers on the truck said it was dumb luck that they made it out alive]. 

On Tuesday, however, Ukrainian rocket-launching trucks and tanks were barreling down the resupply road toward the fighting, though the cease-fire required both sides to withdraw heavy weaponry starting at midnight Monday.

The Saker explains in a post yesterday, "Yet another monumental failure for the junta," that worse is yet to come for Kiev:

All my sources confirm that Debaltsevo is mostly in Novorussian hands and that the junta forces are in full retreat to the south of the pocket. All the top Novorussian brass was on hand today, including Kononov, Motorola, Givi, Mozgovoi and Zakharchenko as were many tens of Ukrainian prisoners. It appears that the junta forces were unable to provide the kind of resistance they showed in Peski, and that make sense because in Peski they were not surrounded and they had the fire support of Ukrainian forces just north and west of them. This time the cauldron is too deep and the "lid" too strong.

You can see that the cauldron "lid" has now closed on Debaltsevo from the north and that the junta forces are either surrendering of fleeing south where there is quite literally nothing for them to do then to wait until they run out of food and ammo. Bottom line: it's over for the Ukie forces in the Debaltsevo cauldron.

Amazingly, the freaks in Kiev as still insisting that there is no cauldron but only a "bridgehead". The good news is that apparently nobody buys that nonsense any more and the mothers and wifes of the men caught in the cauldron are trying everything they can to force the Ukie high command to accept the Novorussian offer of an evacuation corridor. The try to protest in front of the General Staff building in Kiev, then the blocked traffic. In a particularly poignant moment one of these women put a megaphone next to a cellphone to amplify the voice of her son/husband calling from the cauldron and announcing that they had for about 3 hours of supplies left.

All this is truly catastrophic news for the junta in Kiev. First, their policy of denying the issue made it impossible for their forces to get out while it was still possible. According to Russian military experts, about half of all the (comparatively) combat capable units of the Ukrainian military have been surrounded in this cauldron and that means that 50% of the Ukrainian army is now gone. Second, while Poroshenko and the junta freaks tried as hard as they could to completely deny the very existence of the cauldron, thanks to the Internet and the Russian TV channels most folks in junta-controlled Ukraine know that they are being lied to. That, in turns, means that the regime is loosing the very little credibility it might have had with the general public. Last and not least, now there will be a lot of very ugly recriminations from all sides of the political spectrum about who is guilty for that latest disaster. I would not be surprised one bit if the Ukrainian death-squads (aka Azov battalion & Co.) decided to storm Kiev for two reasons: a) to take out their rage on the regime and b) because it is safer to storm Kiev than Donetsk. Poroshenko better watch his back now. By the way, rumor (unconfirmed!) has it that he already evacuated his family to Germany.

Novorussian intel is reporting that the junta is trying to assemble three battalion tactical groups and numerous MLRS north of the cauldron to try to rescue the surrounded forces, but this will be too little too late. The Novorussians are used to Ukie artillery and they don't fear their armor or, even less so, infantry. Besides, I bet you that now that they are inside Debaltsevo, the Novorussians will deeply dig in. When is the last time that the junta forces succeeded in an urban assault operation? Exactly.

Bottom line: yet another brilliant victory for the Novorussian forces and yet another humiliating defeat for the junta in Kiev.

Judging from the reaction to Debaltseve by various participants at Minsk last week, The Saker is on the money: This is another titanic blunder by the junta which bodes ill not just for Kiev but for the West and Russia as well.

First, Herszenhorn reports Putin's reaction as follows:

[Poroshenko's] comments [asserting bizarrely that Ukrainian troops had accomplished their mission in Debaltseve], however, came after the separatists boasted of controlling the town, and after President Vladimir V. Putin of Russia suggested on Tuesday in Hungary that Ukraine should accept its defeat at Debaltseve by separatist forces he described as “underdogs.”

“Life is life; it just goes on,” Mr. Putin said. “No need to dwell on it.”

Germany's reaction is troubling: more sanctions, more blame for Russia. According to Herszenhorn:

Ms. Merkel’s office condemned the separatist offensive, calling it a clear violation of a cease-fire. 

At a regular government news conference, Steffen Seibert, Chancellor Merkel’s spokesman, said Europe was prepared to support a new round of sanctions against Russia if the situation in Ukraine continued to deteriorate. 

“There has been a massive violation of the cease-fire which took effect on Sunday,” Mr. Seibert said, according to Reuters. He said it was too early to say whether the Minsk peace deal had collapsed. 

“The hopes linked to the Minsk agreement have been seriously damaged,” he said. “We must push for the implementation of the package of measures.” 

“We see the U.N. resolution as an impulse in this direction, and in the coming days, we will work with the possibilities that we have,” he said.

To blame the NAF solely for a violation of the Minsk 2.0 ceasefire is not credible. Even the extremely biased Gray Lady reports that the Ukrainian Army violated the ceasefire. All indications are that the West is going to continue to back the junta. Hopefully, The Saker is right and Kiev will collapse from within either due to a new Maidan uprising or another Right Sector putsch. Because of the lifeline the West keeps extending to Poroshenko, change will have to come from within, and that appears to me to be a longshot.

Germany's insane behavior -- doing the same thing (sanctions) and expecting a different result (surrender of the NAF) -- does not bode well for the outcome of loan negotiations between Greece and the troika. Germany's institutional obtuseness has to be factored in.

On the other hand, one might argue that what determines German behavior is what Washington wants. Germany did not want a civil war in Ukraine, but Merkel has gone along with the disastrous U.S.-backed ATO in the Donbass. Washington supports some flexibility for Greece (see today's NYT unsigned editorial, "Give Greece Room to Maneuver"); Obama has voiced support, albeit meekly, for the Syriza-led government being allowed to implement some of its pro-growth policies. The idea here, as expressed in an "Upshot" today by Neil Irwin, "A Possible Day of Reckoning, Again, for Greece and Europe," is that eventually Germany will capitulate in favor of European unity:

If Greece ends up dropping out of the euro currency zone entirely, with unpredictable ripple effects across the Continent and the world financial system, the events of the last few days will look like a turning point that led to that moment. As of Tuesday, to be clear, markets were predicting nothing of the sort. European stock markets were down only slightly, and the value of the euro was actually up a bit. In effect, markets have seen this show before: the sturm und drang of threats and counterthreats that end in a last-minute deal.

The hedge fund manager Mark Dow offered on Twitter a way to think about the tense negotiations: “EZ bears underestimate the short-term resolve of EZ policy makers. EZ bulls overestimate the long-term viability of the exchange rate system.” 

Here’s what Mr. Dow is saying. We have seen again and again that this generation of European leaders, who built their careers on the altar of European unity, will eventually do what it takes to prevent the common currency from ripping apart. If this recent history is a guide, then the drama of the last few days is merely the theatrics required to get these finance ministers to arrive at a deal. 

On the other hand, Mr. Dow also points out, Europe really does have a big and plausibly unsolvable macroeconomic problem.

One more way to look at it is if Germany goes against her interests in Ukraine by supporting the Washington war drive then she earns the right to lead in negotiations with Greece. This means that the Moscovici document that Varoufakis was willing to sign but that was withdrawn at that last moment by Jeroen Dijsselbloem at Germany's behest will not be recycled. There are reports in the media that this is what is in the works.

Right now, given Germany's reaction to the fall of Debaltseve, it looks like continued impasse between the troika and Greece.

Ukraine's Economic Predicament

As the Minsk 2.0 ceasefire dies aborning because Poroshenko refused to admit that 8,000 troops of the Ukrainian Army were surrounded in Debaltseve, Michael Hudson has a tremendous article, "Ukraine Denouement – The Russian Loan and the IMF’s One-Two Punch," that reminds us that at the root of the civil war is a U.S.-backed neoliberal orthodoxy. It is always a fruitful exercise to remind oneself that the Maidan sprang to life when Yanukovych balked at signing an association agreement with Europe because, after crunching the numbers, it was apparent to him that the cost was not sustainable politically.

So Yanukovych took the Russian lifeline instead, and not too long thereafter the Ukrainian president was fleeing for his life.

Hudson begins his piece by outlining Ukraine's current dire economic straits:

The fate of Ukraine is now shifting from the military battlefield back to the arena that counts most: that of international finance. Kiev is broke, having depleted its foreign reserves on waging war that has destroyed its industrial export and coal mining capacity in the Donbass (especially vis-à-vis Russia, which normally has bought 38 percent of Ukraine’s exports). Deeply in debt (with €3 billion falling due on December 20 to Russia), Ukraine faces insolvency if the IMF and Europe do not release new loans next month to pay for new imports as well as Russian and foreign bondholders.

Finance Minister Natalia Yaresko announced on Friday that she hopes to see the money begin to flow in by early March. But Ukraine must meet conditions that seem almost impossible: It must implement an honest budget and start reforming its corrupt oligarchs (who dominate in the Rada and control the bureaucracy), implement more austerity, abolish its environmental protection, and make its industry “attractive” to foreign investors to buy Ukraine’s land, natural resources, monopolies and other assets, presumably at distress prices in view of the country’s recent devastation.

Looming over the IMF loan is the military situation. On January 28, Christine Lagarde said that the IMF would not release more money as long as Ukraine remains at war. Cessation of fighting was to begin Sunday morning. But Right Sector leader Dmytro Yarosh announced that his private army and that of the Azov Battalion will ignore the Minsk agreement and fight against Russian-speakers. He remains a major force within the Rada.

Poroshenko is on record -- not that this means anything for a junta predicated on one fiction peddled after the next -- saying that he will declare martial law if the situation in the Debaltseve is not resolved to Kiev's satisfaction. Given that the junta needs the IMF funds to remain afloat, this provides a powerful incentive for the Novorossiyan Armed Forces (NAF) to keep the 8,000 Ukrainian soldiers bottled up in the Debaltseve cauldron.

Hudson's piece does a good job explaining how the IMF might give short shrift to the €3 billion loan Russia extended to Ukraine:

The IMF has been drawn into U.S. confrontation with Russia in its role as coordinating Kiev foreign debt refinancing. It has stated that private-sector creditors must take a haircut, given that Kiev can’t pay the money its oligarchs have either stolen or spent on war. But what of the €3 billion that Russia’s sovereign wealth fund loaned Ukraine, under London rules that prevent such haircuts? Russia has complained that Ukraine’s budget makes no provision for payment. Will the IMF accept this budget as qualifying for a bailout, treating Russia as an odious creditor? If so, what kind of legal precedent would this set for sovereign debt negotiations in years to come?

International debt settlement rules were thrown into a turmoil last year when U.S. Judge Griesa gave a highly idiosyncratic interpretation of the pari passu clause with regard to Argentina’s sovereign debts. The clause states that all creditors must be treated equally. According to Griesa (uniquely), this means that if any creditor or vulture fund refuses to participate in a debt writedown, no such agreement can be reached and the sovereign government cannot pay any bondholders anywhere in the world, regardless of what foreign jurisdiction the bonds were issued under.

This bizarre interpretation of the “equal treatment” principle has never been strictly applied. Inter-governmental debts owed to the IMF, ECB and other international agencies have not been written down in keeping with private-sector debts. Russia’s loan was carefully framed in keeping with London rules. But U.S. diplomats have been openly – indeed, noisily and publicly – discussing how to “stiff” Russia. They even have thought about claiming that Russia’s Ukraine loans (to help it pay for gas to operate its factories and heat its homes) are an odious debt, or a form of foreign aid, or subject to anti-Russian sanctions. The aim is to make Russia “less equal,” transforming the concept of pari passu as it applies to sovereign debt.

Further, Hudson limns the rent-seeking logic that -- from Ireland and Greece to Ukraine -- lies behind the IMF's austerity diktats:

IMF loans are made mainly to enable governments to pay foreign bondholders and bankers, not spend on social programs or domestic economic recovery. Sovereign debtors must agree to IMF “conditionalities” in order to get enough credit to enable bondholders to take their money and run, avoiding haircuts and leaving “taxpayers” to bear the cost of capital flight and corruption.

The first conditionality is the guiding principle of neoliberal economics: that foreign debts can be paid by squeezing out a domestic budget surplus. The myth is that austerity programs and cuts in public spending will enable governments to pay foreign-currency debts – as if there is no “transfer problem.” 

The reality is that austerity causes deeper economic shrinkage and widens the budget deficit. And no matter how much domestic revenue the government squeezes out of the economy, it can pay foreign debts only in two ways: by exporting more, or by selling its public domain to foreign investors. The latter option leads to privatizing public infrastructure, replacing subsidized basic services with rent-extraction and future capital flight. So the IMF’s “solution” to the deb problem has the effect of making it worse – requiring yet further privatization sell-offs.

This is why the IMF has been wrong in its economic forecasts for Ukraine year after year, just as its prescriptions have devastated Ireland and Greece, and Third World economies from the 1970s onward. Its destructive financial policy must be seen as deliberate, not an innocent forecasting error. But the penalty for following this junk economics must be paid by the indebted victim.

In the wake of austerity, the IMF throws its Number Two punch. The debtor economy must pay by selling off whatever assets the government can find that foreign investors want. For Ukraine, investors want its rich farmland. Monsanto has been leasing its land and would like to buy. But Ukraine has a law against alienating its farmland and agricultural land to foreigners. The IMF no doubt will insist on repeal of this law, along with Ukraine’s dismantling of public regulations against foreign investment.

This is what Greece is fighting to free herself of. Since it is the very logic of Western capitalist hegemony, Yanis Varoufakis has repeatedly arrived at impasse with his interlocutors in Brussels. All he is asking for is a bridge loan of six months to discuss the technicalities of the troika's bailout. Not allowed.

And this is why war must continue in Ukraine. The IMF prescriptions Kiev must implement can only be carried out if the public is distracted by war. But herein lies the rub. The IMF cannot loan to a nation at war. Finally then after a year it seems that the Kiev junta has arrived at a day of reckoning.

Hudson holds out the possibility that Europe will come to its senses suddenly and break with the United States and align with Russia:

We can now see why the EU/IMF austerity plan that Yanukovich rejected made it clear why the United States sponsored last February’s coup in Kiev. The austerity that was called for, the removal of consumer subsidies and dismantling of public services would have led to an anti-West reaction turning Ukraine strongly back toward Russia. The Maidan coup sought to prevent this by making a war scar separating Western Ukraine from the East, leaving the country seemingly no choice but to turn West and lose its infrastructure to the privatizers and neo-rentiers. 

But the U.S. plan may lead Europe to seek an economic bridge to Russia and the BRICS, away from the U.S. orbit. That is the diplomatic risk when a great power forces other nations to choose one side or the other.

Sadly, I don't see this happening. The hive mind in Brussels, Berlin and other European capitals is still too melded with Washington D.C. If the junta can't get money from the IMF because Poroshenko has declared martial law, Kiev will widen the war and likely receive billions in direct military aid from the West. The war will go on until Kiev collapses.

Europe on Brink of Trade War with Russia

I think we're headed for another significant shift in Ukraine. The present ceasefire was agreed to by the junta because of the success of the Novorrosiya Armed Forces (NAF) in creating a southern front and threatening the large industrial seaside city of Mariupol, where Ukrainian president Petro Poroshenko was yesterday proclaiming solidarity with residents and vowing that the city would never be yielded to the NAF.

The preliminary report on the crash of flight MH17 was released this morning, and it cautiously reaffirms conventional wisdom, namely, that shrapnel coming from NAF-controlled territory or western Russia was responsible for the midair breakup of the Malaysia Airlines Boeing 777. While the report doesn't say a BUK missile was the source of that shrapnel, a.k.a., high-energy objects, it doesn't have to. Western reporters and government spokespersons will color in the missing parts based on what they already accept as fact. The Russians did it.

As the ceasefire disintegrates -- I don't see how it can hold for too much longer -- and the Dutch MH17 report gets spun according to the current Russophobia, Europe is going to be in for some pain. The EU has voted on a new round of Russian sanctions that target financing for Rosneft and Transneft and Russia has threatened to prohibit European commercial airlines from using its airspace. Andrew Higgins has an informative story this morning, "Brushing Off Threats, E.U. Votes to Toughen Its Sanctions on Russia," which offers the reader a glimpse of the mess Europe has got itself in by supporting the U.S.-backed coup-makers in Kiev:

The European Union has given strong support to the cease-fire but, skeptical about Russia’s intentions after the swift collapse of previous efforts at a settlement, decided on Monday to expand existing economic sanctions. Diplomats say the measures include tight restrictions on access to capital in Europe by the two state-controlled Russian energy giants, Rosneft and Gazprom’s oil affiliate, and the state pipeline operator, Transneft. 

“The sanctions aim at promoting a change of course in Russia’s actions destabilizing eastern Ukraine,” Herman Van Rompuy, the president of the European Council, which represents member states, said in a statement. He said the measures would go into effect “in the next few days.” 

There was no immediate reaction from Moscow, which responded to an earlier round of European sanctions by banning a broad range of dairy, meat, fruit and vegetable exports from Europe. 

Russia has worked hard to fan divisions within the European Union, and Prime Minister Dmitri A. Medvedev warned in an interview published early on Monday in Moscow that his government would “have to respond asymmetrically” to any new sanctions, perhaps by banning Western airlines from flying through Russian airspace, as many do on long-haul flights to Asia. 

“If Western carriers have to bypass our airspace, this could drive many struggling airlines into bankruptcy,” Mr. Medvedev said in a lengthy interview in the Russian newspaper Vedomosti. “This is not the way to go. We just hope our partners realize this at some point.”

Measures endorsed by leaders of the European Union’s 28 member states normally go into effect within hours. But Finland, hard hit by the Russian ban on food imports, and some other countries anxious to see whether the cease-fire holds in coming days, appealed for a slower schedule.

***

Some smaller European countries, notably Slovakia, had argued strongly against new sanctions, warning that they would only hurt Europe’s anemic economic recovery and were “meaningless.” But bigger countries, particularly Germany, which was itself initially hostile to sanctions, have increasingly lost faith in Russia’s trustworthiness and been exasperated by Moscow’s insistence, despite strong evidence to the contrary, that it has not sent soldiers or weapons into eastern Ukraine.

It was the downing of MH17 which buffaloed Merkel into accepting the U.S. position on sanctioning Russia. Up until that point I was under the impression that Merkel would not be bumrushed into a trade war with Russia. But that is where we are now.

I don't think that there is a way to avoid a trade war, absent a coup in Moscow by a U.S.-friendly oligarch. Medvedev is on record saying Western commercial air carriers are in the crosshairs. Russians believe more in honor and personal integrity and standing by what you say than Western politicians. When Russia responds, if the European Union doesn't publicly fray, then at least there will be those member nations who tacitly flout the trade restrictions, setting up secret bilateral agreements with Moscow.

And then the United States, losing the main weapon in its arsenal -- having the Europeans restrict economic relations with Russia -- will be left with increasing military support for an incompetent, mendacious junta as its remaining option (one that is sure to fail).

Before signing off this morning, there are a few good stories to inspect today. First, Rod Nordland reports on the acrimony at the annual ceremony honoring Ahmed Shah Massoud, leader of the Northern Alliance whose assassination by Al Qaeda two days prior to 9/11 prefigured the attack on the U.S. homeland.  Abdullah Abdullah has said that he will not acknowledge the results of the Afghan presidential recount, which apparently will declare Ashraf Ghani the victor.

Next, check out Tim Arango's Q.&A.-session. Arango is the Baghdad bureau chief for the Gray Lady, and over the years I have found him to be the best reporter, along with David Kirkpatrick, that "the newspaper of record" has to offer. Here is an example:

Q. How do you rate the Obama administration’s actions in Iraq?— eragon38 

It’s not my job to rate the Obama administration’s actions in Iraq. But I will tell you that after 2011, the administration basically ignored the country. And when officials spoke about what was happening there, they were often ignorant of the reality. They did not want to see what was really happening because it conflicted with their narrative that they left Iraq in reasonably good shape. In 2012, as violence was escalating, I wrote a story, citing U.N. statistics, that showed how civilian deaths from attacks were rising. Tony Blinken, who was then Vice President Joseph R. Biden’s national security guy, pushed back, even wrote a letter to the editor saying that violence was near historic lows. That was not true. Even after Falluja fell to ISIS at the end of last year, the administration would push back on stories about Mr. Maliki’s sectarian tendencies, saying they didn’t see it that way. So there was a concerted effort by the administration to not acknowledge the obvious until it became so apparent — with the fall of Mosul — that Iraq was collapsing.