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The Customs Union: Crisis Developments

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These findings are based on the official statistics of the CU (Eurasian Economic Commission), analysis of statements and comments made by the representatives of government, diplomatic and business circles of the Republic of Belarus, Republic of Kazakhstan and the Russian Federation on the situation in the national economies and the social sphere in the framework of the Customs Union.

The results of the analysis showed that the problems and risks identified by us in March 2013, not only deepened by September, but also formed persistent negative trends.
Countries of the Customs Union demonstrate reductions in the mutual trade. Thus, according to the data for the first five months of this year, the mutual trade within the Customs Union and the Eurasian Economic Commission was down 9.9 per cent from the same period last year. The decrease compared to the same period last year happens each month, which is confirmed by the official statistics (see Annex 1). The largest drop in trade performance is observed in Kazakhstan and Russia. In May 2013 the trade performance of Kazakhstan tumbled 15.8 per cent compared to the same period last year, and the trade performance of Russia tumbled 15.1 per cent. This trend indicates a steady reduction of internal trade volume in the CU.
The poor dynamics in the mutual trade between the member countries is caused by the facts that the exports are mainly raw materials and the competitiveness of non-oil commodities is low. The main problem of the turnover between the members of the CU is still a small amount of goods that the participants are willing to offer each other, excluding energy sources. In addition, the increased competition as a result of lower prices for imported goods hits some industry markets. This creates the conditions for crowding out of some domestic producers from the market and for hostile takeovers.
Representatives of Kazakhstan believe that, despite the growth of trade within the Customs Union since 2010, its establishment had little effect on the positions of Kazakhstani goods in the markets of Russia and Belarus, but rather strongly affected the country’s structure of imports, where the share of Russian products has increased. At the same time the commodity structure of exports and imports, as well as the proportion of the volume of these products, have not changed much after the establishment of the CU.
Russia has resorted to external and internal trade wars, as a way of protecting the domestic Russian market.
Low growth rates of the trade within the CU, as well as the crisis developments in the Russian economy, contribute to waging trade wars against internal and external partners on specific product lines. This supports our predictions made in March of this year.
To date, Russia is going through a difficult situation in the economy and in the public sector. The Ministry of Economic Development of the Russian Federation believes that the Russian economy is in a state of stagnation. At the same time, Moscow fears the beginning of a slump, which will lead to a rise in unemployment. The plans of the Russian government to adopt a balanced budget for the fiscal 2015 are obviously impractical. According to the estimates of the Ministry of Finance of the Russian Federation, the budget deficit in 2014 will be at 0.6 per cent of the GDP, which is 0.4 per cent higher than the figure in its earlier forecast. However, such an index will not be achieved, because the reduction of 650 billion roubles in oil and gas and other revenues is expected in 2014, while maintaining the level of expenditure. The proposal of the Ministry of Finance of the Russian Federation to the Ministry of Defence of the Russian Federation to postpone some of the costs of the state armaments program for several years in order to ensure stability of the Russian budget is indicative of problems in the public sector.
According to the Federal State Statistics Service, the GDP growth in the second quarter of 2013 was only 1.2 per cent, well below the forecast of the Ministry of Economic Development. For comparison, the economic growth in the second quarter of 2012 was 4.3 per cent over the same period of 2011. The GDP growth declined to 1.6 per cent in the first quarter of 2013. Thus, 2013 may turn out to be the worst year in terms of economic growth for the entire presidency of Mr. Putin.

Financial statements of large-scale enterprises in the Russian Federation indicate that the fall in investment since April is more than 5 per cent. This is indirect evidence and a leading indicator of pitching into recession.
It is expected that the Russian government will have to cut down on its budget. Thus, the amount of federal revenues in the first half of 2013 was 48.6 per cent of the projected amount approved by the Federal Law on the Federal Budget for 2013 and for the Planning Period of 2014 and 2015. At the same time, Moscow will try to avoid a budget sequester, which will create new political tensions in Russia.
This means that the Kremlin is interested in establishing a maximum level of protectionism and import substitution for goods from third countries and for goods originating in the countries of the Customs Union with the aim of maximum load of Russian companies, growth of budget revenues and GDP.
A similar situation can be observed in Belarus. Thus, the GDP of Belarus in January to July 2013 in current prices was 340.1 trillion roubles and increased compared to the same period last year, in comparable prices, by 1.4 per cent. The forecast for 2013, in accordance with the Decree of the President of the Republic of Belarus of 25 September 2012 No. 418, anticipates its growth by 8.5 per cent that, given the current momentum, is not possible.
Establishing of the CU has led to increase in prices of particular commodity groups. On one side this is happening due to increase in customs tariffs leading to increase in prices for commodities imported from third countries, and, from another side, due to equation of prices within the CU. As a result, Kazakhstan has to resort almost to fixing of prices for socially important commodities and introduction of state regulation of prices. There is a significant increase in primary commodities observed at the market against decrease in purchasing capacity. Thus, in the RB there is constant high inflation rate which has been 36.1 per cent according to the results of 2012.
Protectionism is able to provide a temporary boost to industrial growth within the CU. However, such measures may cause industrial upgrading of the member countries to inhibit.
So far, the protective barriers affect trade. Thus, sources in diplomatic circles in Kazakhstan linked the reduced trade performance of the country in 2012 with protective barriers set by other participants. This is particularly true for food products, in some cases, these barriers are of technical nature. Discrimination against Astana is happening in the market of alcoholic beverages, confectionery (Russian legislation allows to import only a part of the product range) and in import VAT matters. For example, the Russian-made juice relating to child nutrition falls under the rate of 10 per cent, whereas the same juice made in Kazakhstan is taxed at 18 per cent.
We would like to draw your attention to the fact that the food production sector is equally developed in Kazakhstan, Belarus and Russia. This explains the fact that Russia is creating trade conflicts primarily in these sectors.
Despite the fact that the factor of rapprochement between Ukraine and the EU is indeed present in the motives of behaviour of the Federal Service for Supervision of Consumer Rights Protection and Human Well-Being, the underlying economic causes of introduction of protective barriers by Russia are precisely the crisis of development and trade inside the CU. This is confirmed by the fact that Russia has recently banned imports of not only Ukrainian goods, but those of other countries (including EU members), as well.
Thus, on August 12, 2013, the Federal Service for Veterinary and Phytosanitary Surveillance reported on the inspection of 6 enterprises producing food of animal origin in Turkey: three of them were specializing in dairy products and other three — in fish products and seafood. On the same day the Federal Service for Veterinary and Phytosanitary Surveillance restricted imports of Fonterra (a New Zealand-based company) products because of the causative agent of botulism. On August 15, 2013, 133 Germany-based companies were excluded from the list of food suppliers “because of the numerous detections of violations of the requirements of Russia and the Customs Union during the laboratory safety monitoring and systemic deficiencies recorded during inspections of German enterprises”.
In recent weeks, Russian officials have made claims to the quality of Polish food products and to the Polish suppliers. It started with Polish pork and continued 4 days later with Polish vegetables and fruits in connection with the alleged presence of nitrates and pesticides in the imported fruit and vegetable products. At the same time, Moscow does not confirm its accusations with specific facts. It must be emphasized that the intensification of the Russian-Polish trade claims is against the background of growth of exports from Poland to Russia by 12.8 per cent (EUR 3.9 billion) in the first half of 2013, while imports of Russian goods to Poland fell by 12.4 per cent (EUR 9.5 billion). The drop was primarily due to the decline in world prices for oil and gas that Warsaw buys mainly from the Russians.
This confirms our findings that Moscow is imposing trade sanctions against its economic partners to hide and balance the negative and crisis developments in its own economy and the one of the CU, and to create the illusion of effectiveness of the Customs Union.
We would like to note that not only the Kremlin uses this tactic, but also the official Minsk.
This is clearly shown by the situation where the leadership of Belarus attempts to regain control over the export of potash without the participation of Russian business by unprecedented action against Uralkali. We would like to note also that this tactic does not add to the stability of the Custom Union, but leads to political conflicts that may ultimately affect the functioning of the Union.

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It Is Crucial to Watch Changes among the Russian Elites

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Georgia’s and to a large extent any other post-Soviet state’s foreign policy depends on what happens in/to Russia.

Problems in the Russian economy might be causing reverberations in Georgia, Moldova, Ukraine, Kazakhstan, etc., but it still is not a long-term problem. What should matter more fundamentally to us are internal developments within the Russian ruling class, changes in the government, struggle among powerful groupings, and relations between the civil and military branches.

In other words, we need to pay closer attention to the Russian elites which govern the country and therefore control the country’s foreign policy. This is important since Russia’s internal situation often has a bearing on foreign policy, and that is where it matters to us.

To be sure, watching developments in a country’s ruling elites is crucial for almost every modern state which is geopolitically active. But with Russia, this is even more important as the political power in the country does not derive from the people as in the European democracies, but rather from powerful security and military agencies which enable the central government in Moscow to control efficiently large swathes of territories, usually of unfriendly geographic conditions.

The way modern Russian elites operate is very similar to the way how Soviet and imperial (Romanov) governments worked. Quite surprisingly, in all the cases Russian elites have been always perceptible of changing economic or geopolitical situation inside or outside the country.

It is often believed that a ruler, again whether during the imperial or Soviet times, wielded ultimate power over the fate of the population and the governing elites. The same notion works for Vladimir Putin. Westerners often portray him as a sole ruler to all the affairs Russian and non-Russian and a major voice in what should be done. True, the incumbent president is powerful, but he gained this authority more as a balancer among several powerful groups of interests such as military, economic, security, cultural and numerous smaller factions inside each of these large groups.

To many, it might seem strange and hardly possible that the Russian president balances rather than rules, but generally a Russian ruler, despite the historically autocratic models of government, always had to pay attention to changing winds among the country’s elites. In the beginning, if all goes badly, the elites might be silent for the fear of oppression, but slowly and steadily they would always try to influence the government. If this did not work, the Russian elites would not hesitate to abandon the ‘sinking ship’.

Indeed, Russian history shows how powerful the Russian elites are and how vital their support for a government is.

Take the example of the Romanov dynasty before World War I. There was a big disenchantment with the way the government operated and once the Tsarist rule failed in the Russo-Japanese war of 1904-1905 and the WWI, the result was immediate: the elites turned their back on the Romanovs and the Empire ceased to exist in 1917.

Perhaps an even better example is how the Soviet Union collapsed in 1991. Though there were military problems, corruption as well as economic woes, it was still in the minds and hearts of the ruling Russian and Ukrainian, Georgian and other governing circles that the idea of a common state failed.

Nowadays, Russia is experiencing serious problems, ranging from economic and educational to purely geopolitical. There are occasional signs that the Russian elites are getting more worried about the future prospects of the country. Where before the Ukrainian crisis there was still hope of final European-Russian rapprochement and the idea that Russians had to model themselves on Europe, now this idea is dead.

Thus, along with social and foreign policy troubles, the Russians are also experiencing a purely spiritual problem. All point to the fact that there are too many issues which have accumulated during Putin’s rule, which, surely, will not be easy to change overnight, but there is a growing understanding that this chosen way is not getting Russia to a spectacularly good place in the world arena.

This brings us to the pivotal question of what Russia will be like after Putin. Is a change to the existing status quo possible? Many developments show that it is a plausible scenario. Considering how many problems have accumulated and considering how troublesome historically it has been for the Russian elites to act openly against the government, it is possible that once Putin is out, internal infighting among elite groups will take place. As a result, reverberations to foreign policy will follow. It is not about wishful thinking on the part of the western community, but rather the result of an analysis of Russian history and the Russian mentality. Almost always, changes at the top of the government, whether peaceful or otherwise, have an impact on the foreign and internal situation.

This is what should be meticulously studied by the Georgians.

Author’s note: first published in Georgia Today

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Experts Campaign to Enlist Russia’s Commitment to Africa

Kester Kenn Klomegah

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Roscongress Foundation and Integration Expertise LLC (Intex) have signed an agreement on cooperation between their organizations to work collaboratively on the “Russia-Africa Shared Vision 2030” in preparation for the forthcoming Russia-Africa Summit. The agreement directed towards collecting and collating expert views for the project “Russia-Africa Shared Vision 2030” that could be incorporated into the final Summit Declaration.

A group of Russian experts plan to present a comprehensive document titled “Russia-Africa: Shared Vision 2030” at the forthcoming Russia-Africa Summit scheduled on 23–24 October in Sochi, southern Russian city.

Sochi, located in southern Russia, has an excellent heritage. In both winter and summer, the city hosts world-class global international events, such as the Olympics, the World Festival of Youth and Students, and many others. Sochi has one of the largest congress complexes in the country.

The key issue emerging from many policy experts is a fresh call on Russian Government to seriously review and change some of its policy approach currently implemented in Africa. It’s necessary to actively use combined forms of activities, an opportunity to look at the problems and the perspectives of entire Russian-African partnership and cooperation in different fields from the viewpoints of both Russian and African politicians, business executives, academic researchers, diplomats and social activists.

The Russia-Africa Summit will be the first platform to bring African leaders and business executive directors to interact and discuss economic cooperation of mutual interest with Russian counterparts, nearly 30 years after the collapse of the Soviet Union.

Even as the historical event draws nearer and nearer with preparations underway, Russian officials at the Kremlin and Ministries, particularly Ministries of Foreign Affairs, and Economic Development and Industry, are still lip-tight over what African leaders have to expect from the Summit.

On the other hand, competition is rife on the continent, with many foreign countries interested in Africa. Resultantly, African leaders have been making rational and comparative choices that enormously support their long-term Sustainable Development Goals (SDGs).

Roscongress Foundation along with the Integration Expertise information-analytical company said in a recent news brief that collaborative writing team of Russian and African experts have been working on a document that would outline the main areas for interaction between Russia and African countries.

An expert analysis, including macroeconomic reviews, and an analysis of political systems and inter-country development strategies would be used to reach conclusions about opportunities for cooperation, make recommendations, and define specific goals for the development of Russian-African relations in the period until 2030.

Anton Kobyakov, an Adviser to the Russian President, noted that “Russia has traditionally prioritized developing relations with African countries. Trade and economic relations as well as investment projects with the countries of the African continent offer enormous potential. Major Russian businesses view Africa as a promising place for investment.” 

Andrei Kemarsky, Director of the Department of Africa of the Russian Ministry of Foreign Affairs, said the work on the series of expert reports united by the common theme “Russia-Africa Shared Vision 2030” would make a significant contribution to intensifying Russian-African cooperation and would further promote Russia’s interests on the African continent.

“This project seems to be particularly relevant given the fact that the Russia-Africa Summit is scheduled to be held in Russia with the participation of heads of all African countries,” Kemarsky said.

In December 2017, Russian Export Center became a shareholder of Afreximbank. Russian Export Center is a specialized state development institution, created to provide any assistance, both financial and non-financial, for Russian exporters looking for widening their business abroad.

 “We are seriously looking at multifaceted interaction with Africa. Russia has a long historical connection with the continent since the time African states started gaining their independence. However, that has lost its momentum in early 90s. It is our major goal now to rebuild the trust and the connections with the African countries to make the strong foundation for further business cooperation,” the General Director of the REC, Andrei Slepnev, told me in an emailed interview.

“We’re witnessing a clear growing interest from the both sides to establish the new level of relationships which means it is a perfect timing to boost the economic agenda we have, create a platform to vocalize these ideas and draw a strong roadmap for the future,” stressed Slepnev.

“Given the growing interest in Africa, Russian organizations, both private and public, need a high-quality guide that will help to avoid at least some of the mistakes that have already been made and provide pointers on some of the most promising mechanisms for collaboration,” Roscongress Foundation CEO, Alexander Stuglev, said.

Alexandra Arkhangelskaya, a Senior Lecturer at the Moscow High School of Economics said that Russia and Africa needed each other – “Russia is a vast market not only for African minerals, but for various other goods and products produced by African countries.”

Currently, the signs for Russian-African relations are impressive – declarations of intentions have been made, already many important bilateral agreements signed – now it remains to be seen, first of all, how these intentions and agreements would be implemented in practice with African countries, according to Arkhangelskaya.

During the signing of an agreement between the Integration Expertise and Roscongress Foundation, Yevgeny Korendyasov, a Senior Researcher at the Institute of African Studies of the Russian Academy of Sciences, said that intensifying Russian-African cooperation was now among the list of current priorities of the Russian government and the business community.

“Preparations for the Russia-Africa Summit as a new platform for the Russian-African partnership are in full swing. In this situation, ensuring that relations between countries reach a new level requires a rethinking of approaches, mechanisms, and instruments for cooperation based on their heightened significance in the new conditions of world politics and economics,” according to Yevgeny Korendyasov.

Andrei Maslov, an Expert at the Valdai Discussion Club, noted that Russia’s partnership with the African continent was also a major focus at the Valdai International Club’s  discussion platform, which hosted an expert session titled “Russia’s Return to Africa: Interests, Challenges, and Prospects” held in March 2019.

On March 19, under the Chairmanship of Yury Ushakov, an Aide to the Russian President Vladimir Putin, the Organizing Committee on Russia-Africa held its first meeting in Moscow. The Russia–Africa summit is expected to be attended by roughly 3,000 African businessmen, according to the official meeting report.

As a way to realize the target goals, a preliminary Russia-Africa Business Dialogue as part of the St. Petersburg International Economic Forum (SPIEF) will take place on June 6–8, and will be followed by the annual shareholders meeting of African Export-Import Bank. Russian Export Center became a shareholder in December 2017.

The Roscongress Foundation, established in 2007, is a socially oriented non-financial development institution and a major organizer of international business conventions, together with Russian Export Center are the key institutions responsible for preparation and holding of the all events. President Vladimir Putin put forward the Russia—Africa initiative at the BRICS summit (Russia, Brazil, India, China, and South Africa) in Johannesburg in July 2018.

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Russia and North Korea: Key areas for cooperation

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The April 25 meeting in Vladivostok between President Vladimir Putin and Kim Jong-un was their first since the North Korean leader came to power in 2011. Arriving on his armored train, Kim Jong-un said that he had always dreamed of visiting Russia and hoped that his first visit would not be the last.

“We talked about the history of our bilateral relations, about the current situation and the development of relations between our two countries,” Vladimir Putin said wrapping up the opening phase of the negotiations, which lasted for two hours – twice longer than originally planned.

Kim Jong-un said that the two leaders “had a very meaningful and constructive exchange of views tete-a-tete on all pressing issues of mutual interest.”

“I am grateful for the wonderful time I have spent here, and I hope that our negotiations will similarly continue in a useful and constructive way,” he added.    

The talks later continued in an expanded format and ran for three and a half hours.

“We had a detailed discussion of all issues on our agenda: bilateral relations, matters related to sanctions, the United Nations, our relations with the United States and, of course, the central issue of the denuclearization of the Korean Peninsula, focusing on different aspects of all these problems,” Vladimir Putin said during the final press conference.

The main outcome of the talks, however, was the two leaders’ repeated emphasis on the need to restart the six-party talks on the denuclearization of the Korean Peninsula, as well as Russia’s readiness to act as a de-facto mediator between Pyongyang and Washington. Representatives of Russia, North and South Koreas, China, Japan and the United States regularly met between 2003 and 2008 (under Kim Jong-il), but those meetings were eventually suspended by Pyongyang following Washington’s refusal to ease the sanctions regime and its attempts to revise existing accords.

Ahead of the Vladivostok summit, the US Special Envoy for North Korea, Stephen Biegun, made a brief visit to Moscow to discuss the terms of the new Korean settlement parley. The US State Department described the diplomat’s visit as a desire to “discuss respective bilateral engagements with North Korea and efforts to achieve the final, fully verified denuclearization of North Korea.”

However, Mr. Biegun’s visit only underscored the lingering differences in the negotiating sides’ views on resolving the situation on the Korean Peninsula and regarding the mechanisms and mutual steps needed to make this happen. While North Korea, Russia and China are holding out for a phased lifting of sanctions on Pyongyang in exchange for North Korea gradually rolling back its nuclear missile program under international security guarantees, the United States insists on Pyongyang’s prior cessation of its entire nuclear missile development effort. According to Vladimir Putin, Kim Jong-un then asked him to convey his position and expectations to Washington.

“Chairman Kim Jong-un personally asked us to inform the American side about his position and the questions he has about what’s unfolding on the Korean Peninsula,” Vladimir Putin told reporters after the summit.  He promised to do this at upcoming international forums – including in China, as part of the Belt and Road Initiative.

The North Korean leader had thus decided to get back to Pyongyang’s previous practice of “balancing” between the leading world powers in an effort to achieve maximum possible concessions. This balancing act is important for Pyongyang primarily with Washington and Moscow – especially after the failure of the US-North Korean summit held in Hanoi in February.

According to Andrei Kortunov, director of the Russian International Affairs Council, “Kim Jong-un’s trip to Vladivostok means that he is looking for outside support amid his stuttering talks with the United States.”.

“With the failure of the Hanoi summit, Kim Jong-un needs to confirm that he is generally committed to denuclearization, but within the framework of the Russian-Chinese phased plan. Donald Trump and his team reject this and demand a complete denuclearization of the DPRK as a condition for lifting the sanctions,” Go Myung-hyun of Seoul’s ASAN Institute of Policy Studies said.

“What Pyongyang now needs following the failure the Vietnam summit is at least a semblance of minimal diplomatic success,” Andrei Lankov, a professor at Kookmin University in Seoul, said.

The list of countries Kim Jong-un can now turn to for diplomatic support is very short. These are essentially Russia and China. However, his visit to Beijing is not in the best interest of China, which is currently locked in tense trade negotiations with the United States.

Therefore, Kim Jong-un apparently hopes that his talks with Russia will send a signal to Washington that since political pressure on Pyongyang is not working, the Americans should proceed to a phased lifting of sanctions against North Korea in exchange for Pyongyang partially coming across on its nuclear missile program.

“North Korea’s strategy always has been walking a tight-rope between the conflicts of the world powers and getting concessions that way,” the BBC commented.

With the successful Russian-North Korean summit, which reaffirmed the two countries’ shared desire to breathe new vigor into the Korean settlement process, the ball is now in the US court, and President Trump’s well-known predilection for quick fixes and spectacular moves inspires hope for his next, third, meeting with Kim Jong-un.

During his recent visit to Washington, South Korean President Moon Jae-in underscored the need for a new such meeting between Trump and Kim. When meeting with Donald Trump, President Moon stressed that his “important task” is to “maintain the momentum of dialogue” toward North Korea’s denuclearization while expressing “the positive outlook, regarding the third US-North Korea summit, to the international community that this will be held in the near future.” Donald Trump responded in his peremptory manner: “I enjoy the summits, I enjoy being with the chairman,” he said, adding that his previous meetings with the North Korean leader had been “really productive.”

Although there has been no word yet about when exactly this meeting could happen, Kim Jong-un has already made it clear that he is ready “to be patient and wait for the American president by the end of the year.”

Seoul, another target of Pyongyang’s political signals, factors in very importantly in the diplomatic activity currently swirling around North Korea. 

“Kim launched the inter-Korean phase of the “new way” immediately after the meeting in Hanoi. It involves ratcheting up pressure on South Korea to demonstrate greater independence from the US,” The Hill commented.

“Of course, while it is awkward for South Korea to say so openly, there is no gainsaying the fact that the failure to make really meaningful progress in implementing the detailed agreements negotiated during the inter-Korean summits in Panmunjom and Pyongyang is due to the constraints imposed by South Korea’s support for the US’ North Korea policy.”

“South Koreans truly may be the most effective mediators precisely because they are caught between the parties: the Americans with whom they share long-term, common interests; and the North Koreans with whom they share an existential, common national identity,” the publication concluded.

In addition to general political issues and the problem of the denuclearization of the Korean Peninsula, economic projects in energy and infrastructure, including the construction of a gas pipeline and a railway line linking the two countries are an equally important aspect of cooperation between Russia and North Korea.

All these things, however, depend very much on the overall situation on the Korean Peninsula and the prospects for the normalization of inter-Korean relations.

“I spoke about this. We have been talking about this matter for many years. This includes direct railway traffic between South Korea, North Korea and Russia, including our Trans-Siberian Mainline, opportunities for laying pipelines – we can talk about both oil and gas, as well as the possible construction of new power transmission lines. All of this is possible. Moreover, in my opinion, this also meets the interests of the Republic of Korea, I have always had this impression. But, apparently, there is a shortage of sovereignty during the adoption of final decisions, and the Republic of Korea has certain allied obligations to the United States. Therefore, everything stops at a certain moment. As I see it, if these and other similar projects were implemented, this would create essential conditions for increasing trust, which is vitally needed to resolve various problems,” President Vladimir Putin said about this particular aspect of the talks with his North Korean counterpart.

Any further progress in the Korean settlement process depends directly on the kind of relationship we are going to see happening within the framework of the “six” world powers. Anyway, the summit, which has just closed up shop in Vladivostok, gives reasons for optimism. 

 First published in our partner International Affairs

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