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West is Unlikely to Slap Heavy Economic Sanctions on Russia. Why?

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The tone of the statements made from Brussels and Washington and their decisions taken with regard to the Russian Federation, Russian businesses and officials imply that West is unlikely to go beyond ‘cosmetic’ sanctions.

Escalation of the Crimean conflict and the risk of further infiltration of the Russian troops into the continental part of Ukraine have raised a concern about international mechanisms of deterrence of the Kremlin policy, economic sanctions being among them. Although Brussels and Washington made rather harsh statements earlier, it is quite improbable that they will really dare impose heavy sanctions on Moscow. This means that the world community now lacks efficient instruments of influence allowing adequate response to the aggression of the countries with nuclear weapons.

The Russian Federation is the third biggest trade partner of the EU (next to the US and China) with the USD 417.4 billion sales turnover in 2013. That is why the sanctions in question may have the reverse effect and thus cause direct loss of about USD 170 billion to European producers. Considering the current state of the EU economy, the results will be grave. At the same time, it is quite remarkable that where the trade is concerned, the biggest losses will be incurred by the Eastern European countries (except Romania), which will result in yet greater misbalance in the EU economy, strengthen the effect of the centrifugal forces impeding stable economic development of the EU countries, and exacerbate economic issues within the EU in general.

Russia is one of the world’s biggest oil producing countries and the world’s second biggest ‘black gold’ exporter. It supplies most of its oil and gas to the EU countries. Hence, the only way to affect Russian economy is slapping sanctions on it that would target Russia’s energy sector. And this implies refusal from Russia’s natural gas supplies resulting in reduction of its state revenues. In 2013, the country’s earnings from oil export amounted to USD 162 billion, from natural gas export — USD 67 billion.

There are more factors which prevent the EU from ‘punishing’ Russia, such as location of Russia’s sufficient energy assets in Europe, complete influence of 11 EU countries on energy supplies from Russia, close partnership with Germany and the Netherlands in the area of gas supplies.

Out of 485 billion cubic meters of gas consumed by the EU countries annually, Russia supplies about 160 billion cubic meters which is almost one third of the total volume. According to the forecast suggested by governments and energy companies, by 2013 consumption may increase up to 585 billion cubic meters annually, and imports from Russia — up to 175 billion. Therefore, Russia’s share in gas supply to the EU will remain about the same.

In its turn, the dynamic of oil import by the EU 2001 through 2013 shows that, despite general decrease in volumes, Russia’s share has never decreased ever since 2005 — it was Kazakhstan, Libya and Saudi Arabia that reduced their exports. Import of natural gas is currently, quite oppositely, increasing steadily, Russia’s share still being the largest.

Talks about compensation of losses caused by lifting some Iran sanctions are absolutely groundless and economically unjustified.
Therefore, ban on Russia’s energy imports will be a blowback to Europe resulting in further aggravation of the current economic crisis. Brussels has no chance to arrange for quick diversification of natural gas supplies. At the same time, sanctions against Russia will result in raising prices for energy resources, which, vice versa, will increase Moscow’s revenues. Moreover, Europe will face economic recession once again, thus negating all anti-crisis programs implemented by Brussels during the last several years. In its turn, this will raise social issues.
So neither the US nor the EU will impose an embargo on oil and gas imports from Russia just because the consequences thereof will have too negative an effect on the global market which is expected to see growth of oil consumption up to 92.5 million barrels daily in 2014. Iran’s Minister of Petroleum Bijan Namdar Zangeneh agrees with this forecast.

Russia’s budget for 2014 was calculated based on the average annual oil price of USD 93 per barrel. In case sanctions become a reality, the prices will well exceed USD 130, and the raise will continue. This will bring Russia additional USD 37 from each exported barrel of oil at the least. Let us not forget that in 2013 Russia exported about 234 million tons of oil and liquid gas.

Imposing sanctions against the key Russian energy companies — Gazprom, LUKoil and Rosneft —also seems quite doubtful. Most of them signed field development contracts with a number of American and European oil and gas producing companies. Therefore, the blow to Russian oil and gas producing companies will affect their western partners whose business interests are concentrated in this country.

According to Bob Dudley, the Group Chief Executive and a director of BP — which is one of the largest foreign investor in Russia’s oil producing industry owning a 20% share in one of the world’s biggest oil exporters Rosneft — his company is not going to stop investments in Russia. He underlined that BP is immensely interested in investing in this country. BP produces one fourth of its oil and keeps one third of its oil and gas reserves in Russia.

President of the French company Total Christophe de Margerie promised to continue investing in the USD 26.9 Yamal LNG project where Total’s share amounts to 20%, its project partners being Novatekom and CNPC (China). The partner plan on starting liquid natural gas supplies from the arctic field in 2017. “We are there for a long term,” Margerie told reporters at the IHS CERAWeek energy conference. “Total and Yamal will definitely survive through this crisis and I hope not too many others.” At the same conference, Paolo Scaroni, the Chief Executive of Eni, said that sufficient gas reserves give Russia powerful instruments of influence on Europe. He believes that the worst possible scenario would be complete termination of gas supplies from Russia through Ukraine.

On March 5, after Russian troops invaded Crimea, top managers of the British energy producing company BP and the French Total promised to continue investing in Russia, and CEO of the Italian Eni underlined once again that huge gas reserves allow Moscow to hold control over the whole Europe.

According to Rainer Steele, Chairman of the Board of Directors of Gazprom’s partner Wintershall, sanctions against Russia will not settle the issue and will be ineffective. Philipp Mißfelder, member of the German Parliament, also said that sanctions against Russia will affect Germany, and that sanctions are never a good method for export-oriented Germany. German Minister for Foreign Affairs Frank-Walter Steinmeier doubted that Europe would even dare expel Russia from the G8.

Direct EU investments in Russia’s economy are yet another issue. Thus, foreign direct investments from the Netherlands in Russia amount to 12% of the overall investment outflows from Amsterdam, 4.3% from Germany, 3.4% from France, 30% from Cyprus (mostly reinvestments), 3.8% from Ireland.

Investment outflows from Russia to the EU are also quite considerable: 37% — Cyprus, 15.9% — the Netherlands, 2.5% — Great Britain, 2.2% — Germany. This shows that blocking of bilateral financial flows between Russia and the EU is not reasonable from the economic point of view.
According to the disclosed secret documents of the British Parliament, Downing Street also recommends to refrain from closing the British market for Russia, and to not go beyond visa restrictions and exclusion for certain Russian officials. In particular, one of the documents tells that Britain should not impose any trade sanctions or close London’s financial centre for Russian capital.

These recommendations also include evasion of the issue of participation of the North Atlantic Alliance in settling the Crimean conflict. This means that the EU will resort only to some political instruments available to the OSCE and the UN that will be targeted at certain persons and not the whole country.

All in all, Britain and Germany will attempt to not affect their own economy, and this is what will determine further London’s behaviour. We believe that Britain and Germany will only act as diplomats in the Crimean conflict, and they might even try to lobby some nominal sanctions about which the US Senator John McCain gave a hint in his interview after his meeting with the British representatives during which he expressed his disappointment about London’s official standpoint and ignoring history’s lessons on the part of Europe. Basically, he said that the US would like but could not possibly impose certain effective sanctions, and Europe is not ready for such serious measures.

Russia only ranks number 20 among the countries consumers of the US products and is not among the top ten of the countries exporters of goods and services to the US. Therefore, Washington has only financial leverages at its disposal in this situation. Moreover, sanctions similar to Iranian, for example, will affect, and most probably, block economic cooperation between Russia and the EU — scenario which is unacceptable for Brussels. This means that neither the US has any flexible economic leverages against Moscow at their disposal.

That is why Washington now counts on, first of all, imposing sanctions by its European partners aimed at limiting access for the Russian President’s wingmen and partners to their bank accounts and financial flows within the territory of Europe. Therefore, they expect some upward pressure, sparking discontent among the political elite which would make it possible to prepare grounds to exert influence on the Kremlin. However, it is not probable that such measures will turn out to be effective.

It is fair to say that the international checks and balances system elaborated back in 1945 is efficient no more, and the depth of integration of the global economy no longer allows control over the countries with nuclear weapons and critical shares in the global export. In view thereof, despite all the strivings of the world community, there are no more ‘innocent’ leverages to exert effective pressure on such players as Moscow, Washington and Beijing. Any instruments which may help achieve the desired results are going to bring serious consequences for the global economy and the initiators of the sanctions. At the same time, as the ‘Crimean precedent’ may be used without any dramatic consequences only by three countries, and Washington and Brussels understand that no mass chain reaction will follow, and most incidents may be precluded by means of traditional diplomatic and economic instruments.

This means that the world is gradually approaching the new round of the Cold War which today, as strange as it may sound, may have a stimulating effect on the development of the key national economies.

Therefore, according to our forecast, West is likely to resort to financial aid for Ukraine instead of further complicating relations with Russia, thus preventing the risk of economic loss in the context of the current crisis. This means that neither Washington nor Brussels will dare impose serious economic sanctions against Russia. Hence, these instruments are unlikely to considerably influence the Kremlin’s policy with regard to Ukraine in the medium term.

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Putin’s post-Soviet world remains a work in progress, but Africa already looms

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Russian civilisationalism is proving handy as President Vladimir Putin seeks to expand the imaginary boundaries of his Russian World, whose frontiers are defined by Russian speakers and adherents to Russian culture rather than international law and/or ethnicity.

Mr. Putin’s disruptive and expansive nationalist ideology has underpinned his aggressive

 approach to Ukraine since 2014 with the annexation of Crimea and the stoking of insurgencies in the east of the country. It also underwrites this month’s brief intervention in Kazakhstan, even if it was in contrast to Ukraine at the invitation of the Kazakh government.

Mr. Putin’s nationalist push in territories that were once part of the Soviet Union may be par for the course even if it threatens to rupture relations between Russia and the West and potentially spark a war. It helps Russia compensate for the strategic depth it lost with the demise of communism in Europe and the collapse of the Soviet Union.

However, equally alarmingly, Mr. Putin appears to be putting building blocks in place that would justify expanding his Russian World in one form or another beyond the boundaries of the erstwhile Soviet Union.

In doing so, he demonstrates the utility of employing plausibly deniable mercenaries not only for military and geopolitical but also ideological purposes.

Standing first in line is the Central African Republic. A resource-rich but failed state that has seen its share of genocidal violence and is situated far from even the most expansive historical borders of the Russian empire, the republic could eventually qualify to be part of the Russian world, according to Mr. Putin’s linguistic and cultural criteria.

Small units of the Wagner Group, a private military company owned by one of Mr. Putin’s close associates, entered the Centra African Republic once departing French troops handed over to a United Nations peacekeeping force in 2016. Five years later, Wagner has rights to mine the country’s gold and diamond deposits.

Perhaps surprisingly, the Russian mercenary presence persuaded President Faustin-Archange Touadera that the African republic should embrace Russian culture.

As a result, university students have been obliged to follow Russian-language classes starting as undergraduates in their first year until their second year of post-graduate studies. The mandate followed the introduction of Russian in the republic’s secondary school curriculum in 2019.

Mr. Touadera is expected to ask Mr. Putin for Russian-language instructors during a forthcoming visit to Moscow to assist in the rollout.

Neighbouring Mali could be next in line to follow in Mr. Touadera’s footsteps.

Last month, units of the Wagner Group moved into the Sahel nation at the request of a government led by army generals who have engineered two coups in nine months. The generals face African and Western sanctions that could make incorporating what bits of the country they control into the Russian world an attractive proposition.

While it is unlikely that Mr. Putin would want to formally welcome sub-Saharan and Sahel states into his Russian world, it illustrates the pitfalls of a redefinition of internationally recognised borders as civilisational and fluid rather than national, fixed, and legally enshrined.

For now, African states do not fit Mr. Putin’s bill of one nation as applied to Ukraine or Belarus. However, using linguistics as a monkey wrench, he could, overtime or whenever convenient, claim them as part of the Russian world based on an acquired language and cultural affinity.

Mr. Putin’s definition of a Russian world further opens the door to a world in which the principle of might is right runs even more rampant with the removal of whatever flimsy guard rails existed.

To accommodate the notion of a Russian world, Russian leaders, going back more than a decade, have redefined Russian civilisation as multi-ethnic rather than ethically Russia.

The Central African Republic’s stress on Russian-language education constitutes the first indication in more than a decade that Mr. Putin and some of his foreign allies may expand the Russian world’s civilisational aspects beyond the erstwhile Soviet Union.

Some critics of Mr. Putin’s concept of a Russian world note that Western wars allegedly waged out of self-defense and concern for human rights were also about power and geopolitical advantage.

For example, pundit Peter Beinart notes that NATO-led wars in Serbia, Afghanistan, and Libya “also extended American power and smashed Russian allies at the point of a gun.”

The criticism doesn’t weaken the legitimacy of the US and Western rejection of Russian civilisationalism. However, it does undermine the United States’ ability to claim the moral high ground.

It further constrains Western efforts to prevent the emergence of a world in which violation rather than the inviolability of national borders become the accepted norm.

If Russian interventionism aims to change borders, US interventionism often sought to change regimes. That is one driver of vastly different perceptions of the US role in the world, including Russian distrust of the post-Soviet NATO drive into Eastern Europe and independent former Soviet states such as Ukraine.

“People with more experience of the dark side of American power—people whose families hail from Guatemala, Chile, Brazil, Haiti, or Mexico, where US guns have sabotaged democracy rather than defended it—might find it easier to understand Russian suspicions. But those Americans tend not to shape US policy towards places like Ukraine,” Mr. Beinart said.

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Neighbours and Crises: New Challenges for Russia

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Through all the discussions that accompanied the preparation of the Valdai Club report “Space Without Borders: Russia and Its Neighbours”, the most clear question was whether Russia should or should not avoid repeating the historical experience of relations with its near abroad. This experience, in the most general terms, is that after Russia pacifies its western border with its foreign policy, the Russian state inevitably must turn to issues related to the existence of its immediate neighbourhood. With a high degree of probability, it will be forced to turn to its centuries-old method for solving problems that arise there: expansion for the sake of ensuring security.

Now Russia’s near abroad consists of a community of independent states that cannot ensure their own security and survival by relying only on their own forces; we cannot be completely sure of their stability. From Estonia in the west to Kyrgyzstan in the east, the existence of these countries in a competitive international environment is ensured by their link with one of the nuclear superpowers. Moreover, such connections can only complement each other with great difficulty. As the recent developments in Kazakhstan have demonstrated, they are not limited to the threat of an external invasion; even internal circumstances can become deadly.

The dramatic events in that country were intensified by external interference from the geostrategic opponents of Russia, as well as international terrorists, but it would be disingenuous to argue that their most important causes are not exclusively internal and man-made. We cannot and should not judge whether the internal arrangements of our neighbours are good or bad, since we ourselves do not have ideal recipes or examples. However, when dealing with the consequences, it is rational to fear that their statehood will either be unable to survive, or that their existence will take place in forms that create dangers which Russia cannot ignore.

In turn, the events experienced now in relations between Russia and the West, if we resort to historical analogies, look like a redux of the Northern War. The Great Northern War arose at the beginning of the 18th century as the result of the restoration of Russia’s power capabilities; the West had made great progress in approaching the heart of its territory. Within the framework of this logic, victory, even tactical victory, in the most important (Western) direction will inevitably force Russia to turn to its borders. Moreover, the reasons for paying more attention to them are obvious. This will present Russia with the need to decide on how much it is willing to participate in the development of its neighbours.

The developments in Kazakhstan in early January 2022 showed the objective limits of the possibilities of building a European-style sovereign state amid new, historical, and completely different geopolitical circumstances. More or less all the countries of the space that surrounds Russia, from the Baltic to the Pamir, are unique experiments that arose amid the truly phenomenal orderliness of conditions after the end of the Cold War. In that historical era, the world really developed under conditions where a general confidence prevailed that the absolute dominance of one power and a group of its allies creates conditions for the survival of small and medium-sized states, even in the absence of objective reasons for this.

The idea of the “end of history” was so convincing that we could accept it as a structural factor, so powerful that it would allow us to overcome even the most severe objective circumstances.

The Cold War era created the experience of the emergence and development of new countries, which until quite recently had been European colonies. Despite the fact that there are a few “success stories” among the countries that emerged after 1945, few have been able to get out of the catch-up development paradigm. However, it was precisely 30 years ago that there really was a possibility that a unipolar world would be so stable that it would allow the experiment to come to fruition. The visible recipes of the new states being built were ideal from an abstract point of view, just as Victor Frankenstein was guided by a desire for the ideal.

Let us recall that the main idea of our report was that Russia needs to preserve the independence of the states surrounding it and direct all its efforts to ensure that they become effective powers, eager to survive. This desire for survival is seen as the main condition for rational behaviour, i.e. creating a foreign policy, which takes into account the geopolitical conditions and the power composition of Eurasia. In other words, we believe that Russia is interested in the experiment that emerged within the framework of the Liberal World Order taking place under new conditions, since its own development goals dictate that it avoid repeating its past experience of full control over its neighbours, with which it shares a single geopolitical space.

This idea, let’s not hide it, prompted quite convincing criticism, based on the belief that the modern world does not create conditions for the emergence of states where such an experience is absent in more or less convincing forms. For Russia, the challenge is that even if it is technically capable of ensuring the immediate security of its national territory, the spread of the “grey zone” around its borders will inevitably bring problems that the neighbours themselves are not able to solve.

The striking analogy proposed by one colleague was the “hallway of hell” that Russia may soon face on its southern borders, making us raise the question that the absence of topographic boundaries within this space makes it necessary to create artificial political or even civilisational lines, the protection of which in any case will be entrusted to the Russian soldier. This January we had the opportunity to look into this “hallway of hell”. There is no certainty that the instant collapse of a state close to Russia in the darkest periods of its political history should be viewed as a failure in development, rather than a systemic breakdown of the entire trajectory, inevitable because it took shape amid completely different conditions.

Therefore, now Russia should not try to understand what its further strategy might be; in any case, particular behaviour will be determined by circumstances. Our task is to explore the surrounding space in order to understand where Russia can stop if it does not want to resort to the historical paradigm of its behaviour. The developments in Kazakhstan, in their modern form, do not create any grounds for optimism or hopes for a return to an inertial path of development. Other states may follow Ukraine and Kazakhstan even if they now look quite confident. There are no guarantees — and it would be too great a luxury for Russia to accept such a fate.

This is primarily because the Russian state will inevitably face a choice between being ready for several decades of interaction with a huge “grey zone” along the perimeter of its borders and more energetic efforts to prevent its emergence. It is unlikely that Moscow would simply observe the processes taking place on its immediate periphery. This is not a hypothetical invasion of third forces — that does not pose any significant threat to Russia. The real challenge may be that in a few decades, or sooner, Moscow will have to take on an even greater responsibility, which Russia got rid of in 1991. Even now, there seems to be a reason to believe that thirty years of independence have made it possible to create elements of statehood that can be preserved and developed with the help of Russia.

from our partner RIAC

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Do as You’re Told, Russia Tells the Neighborhood

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The Kremlin has always argued that it has special interests and ties to what once constituted the Soviet space. Yet it struggled to produce a smooth mechanism for dealing with the neighborhood, where revolutionary movements toppled Soviet and post-Soviet era political elites. Popular movements in Georgia, Ukraine, Moldova, Kyrgyzstan, and most recently Kazakhstan have flowered and sometimes triumphed despite the Kremlin’s rage.

Russia’s responses have differed in each case, although it has tended to foster separatism in neighboring states to preclude their westward aspirations. As a policy, this was extreme and rarely generated support for its actions, even from allies and partners. The resultant tensions underlined the lack of legitimacy and generated acute fear even in friendlier states that Russia one day could turn against them.

But with the activation of the hitherto largely moribund six-nation Collective Security Treaty Organization (CSTO) in Kazakhstan seems to be an entirely different matter. Here, for the first time since its Warsaw Pact invasions, Russia employed an element of multilateralism. This was designed to show that the intervention was an allied effort, though it was Russia that pulled the strings and contributed most of the military force.

CSTO activation is also about something else. It blurred the boundaries between Russia’s security and the security of neighboring states. President Vladimir Putin recently stated the situation in Kazakhstan concerned “us all,” thereby ditching the much-cherished “Westphalian principles” of non-intervention in the internal affairs of neighboring states. The decision was also warmly welcomed by China, another Westphalia enthusiast.

In many ways, Russia always wanted to imitate the US, which in its unipolar moment used military power to topple regimes (in Afghanistan and Iraq) and to restore sovereignty (in Kuwait.) Liberal internationalism with an emphasis on human rights allowed America and its allies to operate with a certain level of legitimacy and to assert (a not always accepted) moral imperative. Russia had no broader ideas to cite. Until now. Upholding security and supporting conservative regimes has now become an official foreign policy tool. Protests in Belarus and Kazakhstan helped the Kremlin streamline this vision.

Since Russia considers its neighbors unstable (something it often helps to bring about), the need for intervention when security is threatened will now serve as a new dogma, though this does not necessarily mean that CSTO will now exclusively serve as the spearhead of Russian interventionist policy in crises along its borders. On the contrary, Russia will try to retain maneuverability and versatility. The CSTO option will be one weapon in the Kremlin’s neighborhood pacification armory.

Another critical element is the notion of “limited sovereignty,” whereby Russia allows its neighbors to exercise only limited freedom in foreign policy. This is a logical corollary, since maneuverability in their relations with other countries might lead to what the Kremlin considers incorrect choices, like joining Western military or economic groupings.

More importantly, the events in Kazakhstan also showed that Russia is now officially intent on upholding the conservative-authoritarian regimes. This fits into a broader phenomenon of authoritarians helping other authoritarians. Russia is essentially exporting its own model abroad. The export includes essential military and economic help to shore up faltering regimes.

The result is a virtuous circle, in the Kremlin’s eyes. Not only can it crush less than friendly governments in its borderlands but it also wins extensive influence, including strategic and economic benefits. Take for instance Belarus, where with Russian help, the dictator Aliaksandr Lukashenka managed to maintain his position after 2020’s elections through brutality and vote-rigging. The end result is that the regime is ever-more beholden to Russia, abandoning remnants of its multi-vector foreign policy and being forced to make financial and economic concessions of defense and economics to its new master. Russia is pressing hard for a major new airbase.

A similar scenario is now opening up in Kazakhstan. The country which famously managed to strike a balance between Russia and China and even work with the US, while luring multiple foreign investors, will now have to accept a new relationship with Russia. It will be similar to Belarus, short of integration talks.

Russia fears crises, but it has also learned to exploit them. Its new approach is a very striking evolution from the manner in which it handled Georgia and Ukraine in 2008 and 2014, through the Belarus and Armenia-Azerbaijan crises in 2020 to the Kazakh uprising of 2022.

Russia has a new vision for its neighborhood. It is in essence a concept of hierarchical order with Russia at the top of the pyramid. The neighbors have to abide by the rules. Failure to do so would produce a concerted military response.

Author’s note: first published in cepa

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