Show Hide image

Trouble ahead at the Treasury

Unnoticed, the Lib Dems are driving through changes to the structure of personal tax allowances. And

For many politicians, tax cuts are the elixir of politics. In times of plenty they are deployed triumphantly as evidence of a thriving economy; in times of hardship they are handed down by chancellors as a salve to a hard-pressed public. So it should come as no surprise that, even in this parliament - dominated as it has been by arguments about fiscal austerity, tax rises and lower spending - there will be a growing debate about which taxes to cut.

Political gravity will ensure this is the case. As the economy gradually recovers - at the same time as the pain of the deepest and longest wage squeeze in living memory maintains its grip on family bank balances - politicians will be desperate to offer hope of better times ahead. They will know that tax cuts won't solve the structural problem of stagnant wages, nor will they deal with the rising pressures on the cost of living. And there will still be sharply differing views about whether tax cuts for some mean tax rises for others, as opposed to further cuts to spending. But have no doubt: all party leaders will be forced to offer respite to a public whose anger about falling living standards will reach boiling point over the next few years.

So, how will the coming tussle over tax cuts play out? There will be a few early skirmishes following the Budget, which inevitably included a few popular giveaways - such as the cut in fuel duty and support for first-time housebuyers - along with a tax cut for business (and let's not forget that George Osborne has already proved capable of pulling rabbits out of a hat, as with his dramatic promise to raise the inheritance-tax threshold in October 2007 - a move that skewered Labour's plans for an early general election).

Osborne clearly wants to burnish his credentials as a Lawson-like tax reformer as well as a spending cutter, so in the months ahead he'll talk up the radicalism of his long-term ambition to merge National Insurance and income tax. But the challenges involved in this are daunting, and the Conservatives are very unlikely to go into the next election having just raised the basic rate of income tax by 12p, so don't expect this to yield practical policies any time soon.

Indeed, it says something about the topsy-turvy state of today's politics that we need to look first at the Liberal Democrats to understand the shifting politics of tax. It is perhaps the least remarked-upon story in Westminster that the smaller and deeply unpopular coalition partner is driving one of the biggest changes in domestic policy - and in a department it doesn't even control. Not since the days of David Lloyd George have Liberal politicians had such influence over the Treasury's tax policies.

The ambitions of senior Lib Dems are not to be underestimated. Nick Clegg knows what he wants. He has been fighting hard for it internally and he is going to succeed in getting most of it - notably, a £10,000 income tax personal allowance at a total cost of more than £13bn (having already secured a commitment to a rise in the personal allowance from £6,475 to £7,475, increased in the Chancellor's 23 March Budget to £8,105 in April 2012.

Clegg's party has been emboldened by the quiescence of its Conservative partners. That is in part because the £10,000 commitment is a central fact of the coalition agreement, but it has also served the Conservative leadership's purpose to go along with something that deflects irritant calls from Boris Johnson and the Tory right to prioritise the removal of the 50p tax rate for the top 1 per cent of earners - a move that would delight Labour - just as it provides Tory leaders with a ready-made and voter-friendly tax-cutting agenda to talk about.

This context helps explain why senior Liberal Democrats, battered on so many fronts, are more ideologically self-confident than their coalition partners on this naturally Conservative terrain. They are the ones making the political weather on tax. Buoyed by this, they have set about working on what they should be seeking to achieve by 2015; and, more significantly, what their distinct Liberal ambitions for the tax system should be in 2020.

As part of their wider ideological journey, Clegg and those around him view themselves as the authors of a new "fiscal liberalism". This blends the spirit of John Stuart Mill's call for a generous, tax-free allowance sufficient for "life, health and immunity from bodily pain" with the modernising zeal of last year's Mirrlees Review (produced for the Institute for Fiscal Studies), which sets out far-reaching proposals for simplifying the UK tax system.

The priority is to achieve and then surpass the totemic commitment to increasing tax-free allowances. Don't be surprised when Liberal Democrat outriders call for a detailed plan for securing the £10,000 allowance in this parliament and £15,000 in the next.

The belief is that a "liberal tax system" should protect a greater chunk of individual earnings from the state, a sharp contrast with the social-democratic view that support for families, funded through progressive income taxes and tax credits, is the beating heart of a fair tax system. Nor do the Lib Dems' ambitions end here. Clegg is likely to push for further increases in green taxes - putting him on a direct collision course with Conservative backbenchers who want big cuts to fuel duty - and for raising more revenue from "unearned income".

Footloose families

One of the great political advantages of having a single, emblematic tax policy is that, in contrast to many of the tax changes of the Blair/Brown years, it is an easy thing to communicate. Quite simply, people are likely to get it. So where's the rub? The hard truth that Clegg and his team have largely sidestepped is that the simplicity of the allowance policy comes at a sig­nificant price: the distributional effects of the strategy are distinctly odd. Some high-income households (often with no children) gain quite a lot each time the allowance is raised, while many middle-income families with children gain nothing and, indeed, are set to lose a great deal (see chart 1), and the very poorest, who don't pay tax, won't get a penny.

This is not an accident: it is a direct result of tax cuts based on individual rather than household income. Further, because this year's increased tax allowance will be linked to a reduction in the income level at which the 40p tax rate kicks in, an extra 700,000 higher-rate taxpayers will be created in April.

For now, Clegg will shrug off these charges with the broad-brush argument that individual beneficiaries are overwhelmingly basic-rate taxpayers. He will not be so relaxed if a popular sentiment emerges that his prized tax strategy offers little to precisely those working (and politically footloose) middle-income families that hold the key to the next election.

A

All of this gives the Labour leadership plenty to reflect on. Apart from airing its internal travails over the 50p rate, and Ed Balls's recent call for fuel to be exempt from the January VAT increase, Labour has said remarkably little about tax. Many on the political right, together with much of the media class - and some former New Labour figures - have already written off Miliband and Balls as big-state high taxers with no "feel" for the concern of people striving to get on in life, nor the discipline to rein in a party hard-wired to tax and spend. That is likely to be a serious misjudgement.

It was Balls and Miliband who came of age masterminding the commitment to stick to Tory spending plans, and showed the steel necessary to peg Labour to pre-1997 basic and top rates of tax. You don't go through that experience in your late twenties only to forget it in your early forties.

Recently Miliband has said that he supports "genuine" tax relief for low-to-middle-income earners but won't back a "tax con" in which a personal allowance giveaway is funded out of a hike in VAT. For now, that is a reasonable position: many low-to-middle-income earners will be worse off once increased allowances and VAT are taken into account; painfully so, once cuts to tax credits are factored in. But stick to this position for too long, and Labour will be badly exposed. Few expect the recent increase in VAT to be reversed come the next election. As chart 2 shows (below), the VAT rate has long been converging on the basic rate of income tax - Labour in power tends not to cut Conservative increases to VAT, whatever it says in opposition. Nor is there much prospect of it reversing the coalition's increased tax allowances and, in doing so, dragging many modest earners back into the tax system.

So, the risk is that Miliband ends up entering an election in 2015 saying little more than: "I now realise that I agree with Nick." Labour strategists with the ear of the leader are well aware of this conundrum and are starting to work out how to respond.

Their belief is that the coalition has made a big mistake in focusing so much of the pain of cuts on working families with children, and above all women. But they are also acutely aware that to make targeted tax cuts, at the same time as they rebuild their reputation for fiscal credibility, will be no mean feat.

N

Miliband's team is heartened by private polling that it has seen on how the Obama 2008 campaign managed to break out of the Republican tax trap. With targeted tax cuts for the middle classes, the Democrats were able to change the framing question from whether each party was "for or against tax cuts" (the Democrats typically being "against") to "who do you want tax cuts for?". That freed Barack Obama to outpoll John McCain as a tax cutter for "middle-class America" at the same time as he won widespread support for tax rises for the richest 2 per cent. Labour thinks there are lessons to be learned.

Return of the 10p rate

So what are the likely directions for the different parties? No one should mistake the Conservatives' current focus on measures to boost growth with what is likely to become their agenda as we get closer to 2015. It is almost inconceivable that Osborne won't build up a formidable war chest over the next few years to fund a major commitment to cut the tax burden on families, as well as abolish the 50p rate, should the Tories win the election.

The Lib Dems have the immediate political task of reaping some popular reward for this April's increased tax allowances, and a deeper challenge - perhaps an insurmountable one - in making their strategy more appealing to middle-income families with children. One option would be to attempt to persuade the Treasury to build a child allowance into the tax system for basic-rate payers. But, apart from difficult questions about the administrative feasibility, this would ignite a huge row with the Tories, who still want to introduce a married couple's allowance. Even more significantly, senior Lib Dem strategists whisper that, in the longer term, they may need to open up a debate about moving from independent taxation to a system based on household income - as was the case before 1988. The implications of this should not go unmissed: any public contemplation of ditching one of the proudest achievements of modern feminism in the name of liberal tax reform would be explosive.

And Labour? It will try to home in on the electoral sweet spot - modest- and middle-income families with children, on a household income of between roughly £25,000 and £50,000. Less clear is what it wants to offer this group. There is already scepticism in senior circles about whether it would be enough merely to reverse some of the coalition's cuts to tax credits; a fundamental rethink is needed. This would involve looking at benefits as well as taxes and grappling with thorny problems such as child benefit - something not lost on Labour strategists, who are quick to point out that "we never said all aspects of universalism are sacrosanct".

The idea would be to create a simpler way for the tax and benefit system to support modest-income families that are going to lose from cuts to tax credits, as well as middle-income families that are going to be hit by the axing of their child benefit. At the same time, Labour will have to act to support the very lowest-paid. An intriguing option here, which would also help make peace with Labour's recent past, would be to consider a reduced tax rate for the lowest earners: might we see the return of the 10p rate?

The cost of cuts

Above all, Labour will have to balance intense and contradictory pressures for tax cuts, targeted increases in spending and the rebuilding of its fiscal credibility. Harder still, any new tax cuts will be expensive. Given the size of low-to-middle-income Britain, a few billion pounds won't stretch far; a meaningful cut is likely to cost over £10bn. In view of the fiscal outlook, Labour strategists realise that they will have to raise taxes for some in order to cut for others - as do those Lib Dems who accept that, by the next election, public spending will need to recover with growth rather than be cut further.

When it comes to income tax, there is very little room for manoeuvre. The 40p rate already kicks in at a relatively low and falling level, and there is no support for raising the 50p rate. A further increase in VAT is out of the question. This suggests the need for new ways of raising revenue from wealth and high-value housing. Expect to hear squeals in response to a Labour version of a "mansion tax", a continued push on bankers' bonuses, further savings on pension-tax relief for the highest earners and new ideas for raising money from capital gains and inheritance. Generating income from these sources will be a stiff test of Labour's resolve: the party will face bitter opposition.

In the years ahead, however, the crisis of living standards will lead to something rather like a primal scream from low-to-middle-income households, demanding relief as they become even more resentful of growing wealth at the top. The politics of taxing affluence in 2015 won't be the same as they were in 2010, never mind 1997: on this matter, the past doesn't provide a guide to the future. As Obama showed in 2008, it is possible to forge a common set of interests between low- and middle-income earners and a narrative on tax that speaks to the extraordinary times in which we are living.

Gavin Kelly is chief executive of the Resolution Foundation

Gavin Kelly is a former Downing Street adviser to Gordon Brown and Tony Blair. He tweets @GavinJKelly1.

This article first appeared in the 28 March 2011 issue of the New Statesman, Why Libya? Why now?

LOUISA GOULIAMAKI/AFP/GETTY IMAGES
Show Hide image

How Vladimir Putin lost Ukraine

Putin’s war cost Russia its centuries-long shared identity with its neighbour. Now, Kyiv risks betraying the spirit of the Maidan revolution.

When the Russian inquest finally comes, the answer will be clear. It was President Vladimir Putin who lost Ukraine – after a millennium of shared east Slav identity. When the Ukrainian inquest into who lost the ­Euromaidan’s “Revolution of Dignity” finally comes, the answer, on the present evidence, will also be clear. It was an elite core of politicians and oligarchs who first worked a miracle in fighting Russia’s military Goliath to a stalemate – only to revert to kleptocratic business as usual when the acute threat eased.

Ukrainians’ consolidation of a distinct national identity after centuries of being regarded as a fuzzy subset of the dominant Russians – and after a quarter-century of independence – began in February 2014. It sounds banal to say that when one nation attacks a neighbour, especially if the two have regarded each other as brothers for a thousand years, the victims feel aggrieved and pull together against the attacker. But this is what happened when Putin launched his undeclared war on Ukraine, sent hooded “little green men” to take over Crimea’s regional parliament by intimidation, and then annexed the peninsula. The mutation of this early tactical success into strategic failure is best traced by reviewing the players and the dynamics as Ukraine held off Russia and crystallised its singular new identity.

On the Russian side only one actor matters: Putin. When the old Soviet Union split apart in 1991, its kleptocracy was replicated in its two biggest east Slav successor states. By 2015 Russia ranked a joint 119th out of 167 countries on Transparency International’s Corruption Perceptions Index. Ukraine was 130th. A Wild East capitalism prevailed, in which emergent oligarchs carved up the state’s wealth through murky privatisation deals. But there was one main political difference between the two countries. Putin quickly restored the primacy of politicians over Russian tycoons after he became president. In Ukraine, oligarchs were able to use their new wealth to dominate politics.

When Putin suddenly broke out from Europe’s seven-decade peace order in February 2014, Western policymakers asked the diminished number of Kremlinologists in their midst why he was acting this way. Some, such as Dmitry Gorenburg, an associate at Harvard’s Davis Centre for Russian and Eurasian Studies and a military analyst, pointed to fear as the Russian president’s root instinct. Putin has shown little interest in economics; he has not worried about looming inflation or capital flight, or Russia’s distorting reliance on oil and gas revenues. What he was afraid of, it seemed, was unchecked democratic contagion: as transmitted from Poles in the 1980s to restive East Germans and then Czechs in 1989, to Ukrainians in the mid-2000s, and even on to Muscovites in 2011/12 before Putin managed to stop their street protests.

This analysis is plausible. In 1989, as a young officer of the Soviet Committee for State Security, Putin was serving with the KGB’s Dresden outpost. He saw the Berlin Wall fall – overnight, under the press of East Berliners who mistakenly thought it had been officially opened. He later faulted the then Soviet Communist Party chief, Mikhail Gorbachev, for failing to intervene militarily when the wall crumbled, or when protesters stormed the Stasi headquarters across the street from his office to halt the incineration of incriminating files by East Germany’s adjunct of the KGB. He watched Moscow’s 20 top divisions, which encircled Berlin for half a century after the glorious Soviet victory over Hitler in 1945, retreat ingloriously a thousand miles to the east.

Putin further witnessed the swift break­away of Moscow’s external empire, in the stampede of the freed central Europeans, from Estonia to Romania, to join the European Union and Nato, and the 1991 break-up of Moscow’s internal Soviet empire. He called the collapse of the Soviet Union the “greatest geopolitical catastrophe” of the 20th century. And as late as 2008 – 17 years after more than 92 per cent of Ukrainian citizens, including the 21 per cent ethnic Russian minority, had voted for independence – he told President George W Bush, “You have to understand, George, that Ukraine is not even a country.”

***

Most agonising of all, in his first term as Russia’s president in the 21st century, Putin had to listen to American triumphalism about the series of pro-democracy “colour revolutions” in the streets of ex-communist Serbia in 2000, Georgia in 2003 and Ukraine in 2004. For him, as a career secret policeman, these revolutions represented no broad social yearning for “dignity”, as the Polish Solidarity leader Lech Walesa first phrased it. Rather, it was an inexplicable victory by American CIA manipulations – in what was Moscow’s own sphere of influence, by right – over the manipulations of Russia’s FSB, successor to the Soviet KGB.

The uprising that aroused the most angst in the Kremlin was the Orange Revolution on Kyiv’s main square, or maidan, where protesters demanded and won a repeat of the 2004 election after blatant vote-rigging in favour of the then prime minister, Viktor Yanukovych, the pro-Russian heir apparent to the Ukrainian presidency. It was bad enough for Moscow when the west Slavs in Poland and Czechoslovakia instantly ditched their Slavic identity for a European one in the 1990s: Poland uprooted systemic corruption, built robust democratic and judicial institutions, and went from having a poverty rate that matched Ukraine’s to a per capita GDP three times the size of its neighbour’s today. It was devastating when the Little Russians, too, began to do so, rejecting Yanukovych and Russia’s network of control in the rerun of the vote in 2004.

In the event, Putin need not have worried. The Orange Revolution self-destructed in the fratricide between its two top leaders, who forfeited leadership to Yanukovych in the reasonably fair 2010 election.

On the Ukrainian side of the 2014 Euromaidan revolution, four figures stand out. The two chief rivals are the Ukrainian president, Petro Poroshenko (worth $979m, and number six on Novoye Vremya magazine’s 2015 list of the richest Ukrainians), and the then governor of Dnipropet­rovsk in central Ukraine, Ihor Kolomoyskyi (number two on the list, at $1.9bn).

Poroshenko was a second-tier oligarch who had served briefly as foreign minister in the Orange Revolution government and as minister for trade and economic development under Yanukovych in 2012. He helped fund the pro-Europe, anti-corruption protest against Yanukovych’s authoritarian rule from the movement’s spontaneous inception in November 2013, and his TV news outlet Channel 5 gave full coverage to the three-month agora and its estimated one million participants.

After Yanukovych finally sent his special police to suppress the protest by killing dozens of the demonstrators in late February, the Ukrainian president’s own Party of Regions deserted him. He absconded to Russia overnight with an estimated personal fortune of $12bn, amassed in four years in office. Parliament, by a majority that suddenly included the Party of Regions, appointed an interim president and government and set presidential elections for May 2014. The “Chocolate King”, as Poroshenko was nicknamed for his confectionery empire, was duly elected president of the new Ukraine with a 54 per cent majority.

Kolomoyskyi, who also holds Israeli and Cypriot citizenship, was called back to Ukraine from his Swiss residence by the improvised government just as Russia was annexing Crimea. He was appointed governor of his own regional stronghold of Dnipropetrovsk with a mandate to mount a defence against the Russia-stoked secession brewing in neighbouring eastern Ukraine. Kolomoyskyi was famed for his hostile takeovers of rival banks as well as oil, media and other firms. He quickly raised and underwrote several militias among the 40 to 50 volunteer battalions that sprang up to fight against westward spread of the start-up separatist Donetsk (DPR) and Luhansk (LPR) People’s Republics. These battalions were instrumental in holding the line against separatist/Russian forces and giving the Ukrainian state time to rebuild the army that Yanukovych had bled of its budget.

Two oligarchs who did not cast their lot in with post-Euromaidan Ukraine were Rinat Akhmetov (at $4.5bn still the richest Ukrainian, even after losing more than half of his wealth over the past year) and Dmytro Firtash, whose net worth has fallen to $1bn. Both had been leading supporters of Yanukovych and his party, and since his departure they have hedged their bets between Kyiv and Moscow. Their recent losses have resulted partly from a redistribution of their wealth to other oligarchs.

Akhmetov, the son of a coal miner who rose to become the “godfather” of the Donetsk clan – and the owner of Shakhtar Donetsk football club – has his coal and iron base in the war-ravaged Don Basin (Donbas) and relies on Moscow’s goodwill there. Firtash, who under President Yanukovych controlled the lucrative distribution of Russian gas through Ukrainian pipelines to Europe, is also dependent on Russia. In spring 2014, he asked the Russian oligarch Vasily Anisimov to pay a record Austrian bail of €125m ($141m) in cash to get him out of jail. Under the bail terms, Firtash is barred from leaving Austria as he awaits the final legal decision on a US extradition request on charges of international bribery. Yet from Vienna he still wields his political clout, funds several Ukrainian parties across the political spectrum and, it is widely reported, brokered a division of power between Poroshenko and Vitaly Klitschko in the run-up to the May 2014 presidential election, in which Klitschko stood down as a candidate. (The former world heavyweight boxing champion is now mayor of Kyiv.)

***

Putin no doubt saw his annexation of Crimea – and his follow-on campaign to reconquer Catherine the Great’s “Novorossiya”, comprising the eastern 40 per cent of today’s Ukraine – as compensation for the abrupt downfall of his acolyte Yanukovych, and thus the end of Russia’s rightful suzerainty over all of Ukraine. Europeans, Americans and Ukrainians, on the contrary, saw the first formal takeover of a neighbour’s land in Europe since the Second World War as Putin’s return to a 19th-century concept of “might makes right”, as well as a violation of international law and treaties Moscow had signed to respect Ukrainian borders.

The West was cautious in reacting. It baulked at getting sucked into another intervention in a theatre of complicated logistics and little geopolitical interest. It knew as well as Putin did that Moscow enjoys escalation dominance in its home region by virtue of geography, its claim to a vital interest in Ukraine that the West lacks, and the Russian president’s willpower in a world of European peace and US exhaustion. It had no desire to put Putin’s repeated brandishing of his nuclear weapons to the test over a second-order confrontation. The West therefore responded by imposing financial rather than military sanctions, which Putin prematurely scorned as a pinprick.

In addition, Putin misread Ukraine’s military resilience. Easy success in Crimea – and strong domestic approval of his boasts that he was restoring Russia’s greatness in the world – emboldened him to probe further in eastern Ukraine. Ukraine’s ragtag army had put up no resistance in Crimea, for three reasons. First, years of embezzlement of defence budgets had left it with only 6,000 combat-ready soldiers and with two-decade-old weapons. Second, it was subverted by the many Ukrainian officers who were loyal to Moscow rather than Kyiv. Finally, there was Ukrainians’ sheer disbelief – despite Stalin’s mass starvation of Ukrainian peasants in the 1930s – that Russians would actually shoot at their proclaimed younger brothers.

Putin expected an equally cost-free operation in the Donbas. He seemed to believe his own propaganda that disgruntled Russian-speaking citizens of eastern Ukraine were Russians manqués and would rush to rebel against Kyiv, if only the charge were led by a few Russian commandos. Eastern Ukraine was, after all, the part of the country in which identity was most blurred; easterners paid little attention to differences between Ukrainians and Russians in everyday life, and most had cousins in both Russia and western Ukraine. In a way, the region was the ideal test of Putin’s construct of a unifying goal to fill the vacuum left after futurist communist ideology evaporated. The campaign was first presented as Putin’s dream of a Eurasian Union, but that was dropped once it became clear that Ukraine would not be a part of it. Thereafter it was repackaged as gathering in fellow ethnics left outside the “Russian world” by the Soviet collapse, and then as retaking the tsarist Novorossiya.

At first, the Russian-backed secessionists took quick control over roughly two-thirds of the Donetsk and Luhansk oblasts, or provinces. Putin, however, overestimated the warrior zeal of the easterners and the usual gripes of any province about the meagre payouts it gets from central government. In the early days, the local people warmed to the promises of higher pensions made by the separatists. And grandmothers visibly enjoyed acting as civilian shields by surrounding local administration buildings that were occupied by separatists and preventing Ukrainian soldiers from reclaiming the offices. But as the novelty wore off and the hardship of war increased, Moscow and the secessionists it sponsored increasingly had to rely on a motley band of mercenaries and Donbas criminal gangs that did well in firefights only when they were assisted by Russian “volunteers” and armed with the heavy weapons the Russians were shuttling across the border.

In purely military terms, Putin probably could have escalated in the spring of 2014 from the kind of limited, disguised and therefore deniable warfare that the West calls “hybrid”, replacing the hooded “little green men” with regular Russian soldiers in marked uniforms in an all-out invasion of the Novorossiya oblasts. That was certainly the Russian president’s threat in massing 80,000 troops on the northern, eastern and southern borders of Ukraine and exercising them on high alert.

As late as September 2014 Putin boasted to President Poroshenko that if he so desired, “Russian troops could be in Kyiv within two days – and also in Riga, Vilnius, Tallinn, Warsaw, or Bucharest.” But he did not invade when Ukraine’s provisional government was still shaky – and still reeling under the Russian show of force.

Three reasons for Putin’s decision not to order an invasion in spring 2014 might be inferred. The first was a tactical reduction of his bellicosity at a time when the European Union was still debating financial sanctions on Russia for annexing Crimea. The second was the weakness of the novice Ukrainian government, which could foreseeably have collapsed and left Kyiv with a political vacuum the Russians could fill without firing a shot. The third was perhaps a premonition in the Russian army that it was being overstretched and that an occupation of its neighbour, given Ukraine’s strong military tradition, might turn into a quagmire of messy guerrilla warfare.

Putin’s military threats to Ukraine were counterproductive and stoked Ukrainian anger. In May 2014 a Pew survey found that 77 per cent of Ukrainians, including 70 per cent of those living in eastern Ukraine outside the Donbas war zone, thought that their country should remain united instead of breaking up. And in early July, even before the shooting down of the Malaysian Airlines MH17 civilian jet by a Russian-made Buk missile fired from insurgent territory, Pew reported that 60 per cent of Ukrainians had a general negative view of Russia. It was a sharp reversal from 2011, when 84 per cent of Ukrainians had viewed Russia positively.

The Euromaidan spirit drew in ever more Ukrainians who had been politically passive. Volunteers flocked to enlist in the army, in the revived National Guard and in the private militias raised and paid for by Kolomoyskyi and other oligarchs. Civilian volunteers cooked and delivered food to recruits. Techies designed and built their own surveillance drones from scratch to observe border areas that Ukraine no longer controlled.

Ukrainian veterans who had once formed the backbone of the Soviet army’s rough equivalent of Western non-commissioned officers, together with local Afgantsy – veterans of the Soviet army’s doomed expedition in Afghanistan in the 1980s – gave the rookies accelerated basic training. Weapons factories in Ukraine that had once supplied the Soviet army managed to repair 20-year-old tanks and build new ones even as the battles raged. And morale was vastly better on the side of Ukrainian defenders against a threat to their very existence than it was among opportunistic rebel mercenaries and criminal gangs. By mid-August 2014, Ukrainian troops had recaptured most of the rebel territory and reduced the Donetsk and Luhansk People’s Republics to two small pockets.

That was too much for Putin. At the end of August, he signalled his red line in the sand: he would not let his proxies be defeated. He sent elite airborne troops into the Donbas to mount a counteroffensive alongside separatist/Russian ground forces armed with Russian heavy weapons. Within days, they broke the Ukrainian siege and restored the secessionists’ control of about half of the territory that the DPR and LPR had ruled at their height.

President Poroshenko understood the message and immediately proposed a truce, and the German chancellor, Angela Merkel, brokered the Minsk ceasefire of 5 September. The shaky agreement at least reduced the scale of violence for five months, until the separatist/Russian forces made a fresh effort to break through strengthened Ukrainian lines in January and February of 2015 – and failed. A further shaky “Minsk-2” truce followed. But on 1 September 2015 the heavy guns abruptly fell silent and, for the most part, remained silent. For the first time in a year, overjoyed babushkas in the separatist Donbas enclave could walk across the front lines to reach Ukrainian-held towns seven kilometres away and buy salo (pork rind), butter and eggs at far cheaper prices. They returned to tell journalists that their greatest wish was simply for the fighting to stop.

***

At the end of September Putin opened a front in Syria, and reportedly redeployed some special forces from Ukraine to the new battlefield. Ukraine dropped off Russian TV bulletins. The war there had
caused 8,000 deaths and forced 2.4 million people from their homes. It was clear that Putin was belatedly acknowledging that the war also had strategic costs for Russia.

He had first lost all of Ukraine, with the exception of Crimea, to the Euromaidan that he despised. He had failed to salvage Novorossiya for Russia. He had failed, too, to maintain the shelled and charred Donbas region in any form he wanted to annex or subsidise – and keeping it as a zone of frozen conflict for future mischief-making wasn’t much of a consolation prize. He had provoked the West into resuscitating Nato and imposing sanctions that damaged the Russian economy. He had alarmed Belarus, Kazakhstan and Turkmenistan into distancing themselves somewhat from Moscow.

Moreover, the Russian war in Ukraine raised the spectre of the failed Soviet invasion of Afghanistan that killed 15,000 Soviet soldiers in the 1980s and gave birth to the Russian Committee of Soldiers’ Mothers, which tries to ferret out facts about their dead sons. Last May, after many inquiries by the committee about Russian casualties in Ukraine, the Duma passed legislation banning the spread of information about Russian casualties across the border. In this context, it seemed unlikely that Putin would risk incurring a rise in Russian deaths by resuming heavy fighting in Ukraine.

This appraisal, however, takes the pressure off the Ukrainian oligarchs to grow beyond the robber-baron stage and become patriotic philanthropists. On the present evidence, they no longer sense much urgency with regard to implementing reform legislation, installing the rule of law, building democratic institutions and rooting out kleptocracy as opposed to exploiting it.

Putin has surely lost Ukraine. The Ukrainian oligarchs have not yet surely lost their own country. But how ironic it will be if he manages to melt their urgency into complacency by easing the pressure on Ukraine, thus paving the way for that final loss of the Revolution of Dignity. It would give the last laugh to Georgy Arbatov, the Kremlin’s leading Americanist who prophesied as the Cold War ended: “We are going to do to you the worst thing we possibly could – we are going to take your enemy away.”

Elizabeth Pond is based in Berlin and is the author of several books about Germany, Europe and the Balkans. They include “Beyond the Wall: Germany’s Road to Unification” (Brookings Institution)

This article first appeared in the 05 February 2015 issue of the New Statesman, Putin's war