The Russia-Ukraine-United States Issue And The Implications Of US Sanctions On Moscow

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By Chris Devonshire-Ellis

Even drastic sanctions imposed by the West will be absorbed and can be rectified by Russia. So what happens next?

The on-going issue concerning Ukraine is back in the spotlight with US and Russian Presidents Biden and Putin having discussed the issue last night. At the crux of the matter is the US breaching an old and long requested Moscow request that NATO will not encourage new members in Russia’s neighboring countries. In fact, the US has been somewhat provocative in return, with border nations such as Estonia, Latvia, and Lithuania all now NATO members and with Georgia and Ukraine actively being encouraged to join.

The reasons for this come from turbulent periods in Russian history, with both the French and Nazi Germany invading Russia. Millions died in these conflicts, with the latter still a highly charged and emotive subject in the country. The Ukrainian issue is the most serious – Russia has a 2,295km border with Ukraine, which at its closest is just 490km distant from Moscow.

That is too close for Russia. The rough equivalent would be Russian troops and military units being stationed in the Hamptons, or American battalions being based in Tianjin. Moscow views this as highly provocative.

Putin, having had to deal with a small presence of US and some NATO troops in Ukraine and on the border with Russia, has said that future NATO membership for Ukraine is a ‘red line’. Biden has stated that the US does not recognize anyone else’s ‘red lines’ – a somewhat worrying statement, supporting Chinese, Russian and other nations accusations of bullying and warnings over Washington’s increasing tendency to make up the rules as it goes along and for these to only suit US interests. The EU has in some eyes become subject to a new form of US economic colonialism backed up by military force. Russia does not wish to be part of this.

The summit meanwhile did not make any breakthroughs. Putin stated that NATO troops in Ukraine is a red line, Biden stated Ukraine should be free to choose what it wants. He knows that Kiev is purchasing US military equipment and that US equipment previously in Afghanistan has been redeployed close to the Russia border.

Also in the mix is Ukrainian politics, with Kiev unwilling to invest or support regions of the country that show pro-Russian, rather than pro-Ukranian tendencies. That internal discrimination of Ukraine’s Russian-speaking population has left entire regions of the country under-developed. That manifested itself with the pro-Russian population of Crimea requesting assistance from Moscow, who duly obliged by holding a local referendum (illegal as it was not organized by Kiev) that showed a 95% desire to return to Russian control. The tanks then rolled in, and the annexation was complete. Illustrating the fact that this was desired by the actual inhabitants of Crimea is that it was a peaceful takeover: no-one died and there were no battles. It is a similar situation – albeit a lot more bloody – where pro-Russian areas of Donetsk and the Ukranian east also wish to return to rule from Moscow, but where the Ukrainian military, supported principally by US funding and military, are engaged it what essentially amounts to a civil war.

Recent Russian military buildups on that border have created concerns another Russian takeover of certainly eastern Ukraine is maybe on the cards, and possibly a march onto Kiev itself. That would redraw the borders that the EU has with Ukraine as a ‘buffer state’ and move the de facto Russian controlled border 1,316km west. It would relocate an effectively Russian controlled border to be next to the EU’s borders with Poland, Hungary, Romania, and Slovakia.

The EU nations that were previously part of the Soviet Union, and especially Poland, Estonia and Lithuania are concerned. The latter two especially also contain sizeable Russian ethnic groups who do not always feel well treated in their respective countries. Russian is not an official language for example in either, and schoolchildren and businesses are often discriminated against. These are suppression issues you won’t hear raised in Western media; however they are real. The zenith of these feelings of discontent, suppression and cultural neglect are however in Ukraine. It may well seem odd to pro-Western perspectives, but a sizeable proportion of Ukrainians wish to return to Moscow’s umbrella. Moscow is listening.

The current situation has some EU nations so paranoid that they wish to take actions against Russia before anything has happened. A swift ‘reprisal’ package against Russia – including more US troops and Patriot missiles stationed in the Baltics, cutting off Russia from the SWIFT banking payments system and reinstated sanctions on the Nord Stream 2 gas pipeline – must be installed now in case Russia invades Ukraine, according to the Latvian and Lithuanian foreign ministers.  These are pre-emptive measures and will infuriate Moscow further.

Lithuanian Provocations

Lithuania has gone even further as concerns China and has called for a severe level of EU trade sanctions to be imposed due to Beijing’s downgrading diplomatic ties with Vilnius after it established a trade office with Taiwan. The Lithuanian argument that it is being bullied by China – when it instigated provocative measures – has had the effect of infecting the EU with a curious type of “anti-China” virus, based on the Lithuanian perceived treatment of China’s own Chinese nationals in Xinjiang, and nothing to do with EU-China relations. Meanwhile, Lithuania is sending refugees away from its borders at gunpoint. Some have died in the no-man’s land border forests. The double-standards on display along the EU’s eastern borders at present are shocking, and are adding, not reducing, a sense of unease. Who receives the blame? Russia. However, it is a flawed EU policy of paying countries to keep people out that has created a migrant black market. There is growing unease elsewhere within the EU that chest-beating, anti-China and anti-Russian politicians such as Gabrielus Landsbergis, Lithuania’s Foreign Minister may be using his position a little too boldly and is creating, not solving problems at the behest of the United States – he met with Anthony Blinken, the US Secretary of State in Washington just recently.

US Instability

President Putin meanwhile is a long-term leader and will far outlast what will almost certainly be a one-term Biden Presidency – almost certain to be the second consecutive short-term administration for the US. This does not bode well for American political continuity other than promoting a basic, ill-defined assertiveness until something more stable comes along.

That has yet to materialize. The US – and President Biden – have shown inconsistencies in their approach to Russia and in dealing with President Putin. On one hand, there is Biden stating “We don’t accept anyone else’s Red Lines’ when Putin has already stated that Ukrainian membership of NATO is exactly that. However, Biden has refused to endorse any prospect of US-Russia military clashes other than sending a small number of US troops. This means that Putin’s Red Line will not be fully supported by any significant US military intervention, suggesting that Russia is capable of militarily repossessing the country and that neither the US nor EU have the stomach for conflict.

Sanctions

That then turns the focus onto “What would happen if…” type scenarios. What would the US (and EU) be prepared to do should Moscow choose to invade part, or all of Ukraine? Sanctions were discussed at yesterday’s summit with Biden telling Putin to be ‘in no doubt’ about what the US would do. These could include:

The Bond Markets

In April this year, the US issued a ban on US financial institutions buying new issues of Russian government bonds. Washington could go further and sanction the secondary market in Russian bonds, where they are resold and packaged with other investments.

However, Russian Government bonds are sought after as the Government has some of the highest asset backed reserves, and lowest foreign debt in the world. Bonds would merely be sold elsewhere with a negligible impact.

Nord Stream 2

The gas pipeline from Russia to northern Europe has been completed, but it has not been certified for use by the German energy regulator. Members of the new German government coalition have expressed skepticism about the project, and it is possible it would be cancelled altogether in the event of a Russian invasion of Ukraine.

However, the loser here would be the EU, who would instead have to commit to higher volumes of more expensive and less eco-friendly US gas – a position favorable to Washington but not to Brussels. This autumn’s EU shortages have also shown that the EU’s own energy infrastructure and supply chains are not capable of sustaining power without Russian supplies and that EU policy is ill-defined. Russia supplies about 35% of Europe’s gas, which would need to be replaced. The US energy companies are itching to get such contracts.

Russia meanwhile would simply sell its gas elsewhere, with major volume clients waiting in the form of China, India and other buyers in Asia and Africa.

Sanctions On Russian Banks And Corporations

The United States could impose full-blocking sanctions on large Russian banks, energy companies, and defense firms and/or impose sweeping prohibitions on investment and provision of services to conventional Russian oil projects. Two possible financial targets are the huge VTB Bank, and Gazprombank.

This would damage Russia’s international trade however the fall-out would be significant with Russian clients being very much resistant to such a move, including within the EU, and India.

It would create a schism between countries able to follow US sanctions on Russia and those who would prefer not to have to choose. Much of Asia would be extremely distressed at perceived US meddling in their trade with Russia and the EAEU with howls of protest arriving on Washington’s doorstep. To counterbalance that, many nations would require compensation in the opening of North American consumer markets, and it remains unclear how much Washington would be prepared to move its own markets to show allegiance to Kiev. It would cause problems both for Russia, but the EU, ASEAN, China, India, and many other nations expecting alternatives if the Russian market is sealed off.

Sanctions On Oligarchs

The US treasury has been hesitant to impose sanctions on Russian oligarchs, after previous measures taken against Oleg Deripaska had an impact on the activities of his aluminum company, Rusal, in Ireland, causing a major rift with Dublin. In the wake of an invasion of Ukraine, the US Congress is likely to add more Putin-friendly oligarchs to a blacklist. Family members of Putin’s circle could also be more extensively targeted.

However, ownership changes and the moving around of equity mean this is both hard to track and would anyway provide minimal effects. Most individuals likely to be targeted have already taken pre-emptive measures.

SWIFT

The biggest threat to Russia is to have Russia excluded from the global electronic payment system, SWIFT, which is based in Belgium but acts to US instructions. It was one of the most crippling measures used against Iran and would cut Russia off from international finance.

Russia, China, and many other nations including the BRICS grouping, Iran, Turkey, and others have long been critical of the US threat to use what should be a global banking network as a tool to impose US Foreign policy.

Consequently, alternative, non-SWIFT payment mechanisms are being devised. Although being excluded from the SWIFT network would damage Russia enormously, it would simultaneously destroy international faith in the SWIFT system and ultimately lead to its breakup as competing regional systems would emerge.

Both China and Russia have been increasingly using non-dollar designated transactions on a bilateral basis as have increasing numbers of other countries. China’s UnionPay network is already extensive within Russia and although short term pain would be severe in Russia and elsewhere, new systems would rapidly emerge to replace SWIFT. It would ultimately leave the US with a diminished global payment system that many members would view as untrustworthy.

Russia is also commodity-rich – it can barter energy and other reserves instead of using the US dollar, or switch to other currencies such as China’s RMB, which would see China’s currency rise as an alternative to the US dollar in many other global markets. That would depress the value and usage of the dollar and create problems for the US Treasury.

What Happens Next?

This is the big question. The United States is engaging in serious levels of brinksmanship with Putin, who will not countenance a NATO presence in Ukraine so close to Moscow. This can be resolved if the US makes commitments that this will not occur, but Biden refused to do so yesterday and stated that Russia needed to reduce the ‘threatening’ nature of the movements of Russian troops near the Ukrainian borders and outlined sanctions measures that the United States and its allies would be ready to apply in the event of a further escalation of the situation.

Putin stressed that the responsibility should not be shifted onto the shoulders of Russia, since it is NATO that is making dangerous attempts to conquer Ukrainian territory and is building up its military potential at our borders,” the Kremlin statement said. “Therefore, Russia is seriously interested in obtaining reliable, legally fixed guarantees excluding the expansion of NATO in the eastern direction and the deployment of offensive strike weapons systems in the states adjacent to Russia.”

In short, there is an impasse. With several other Russian border nations having joined NATO following specific requests from Moscow not to permit this, the show of strength between Washington and Moscow over who really controls and influences the region is coming to its end game. Belarus, which also borders Ukraine and is Russia’s only other buffer state with NATO, has also undergone significant demonization this year from the West with specific involvement in attempting to destabilize the regime. Russia is resisting for the same reasons – a Belarus as part of the EU and NATO would bring American troops again within 600km of Moscow.

One has to wonder what the motivations are. From the Russian perspective it has been subjected to an ongoing and covert series of deliberate attempts to belittle the country and to threaten it.

Washington appears to be following that through with exactly a strategy of diminishing Russia on its doorstep, to gain regional influence and effectively subjugate Moscow to its will. If it cannot succeed, then the fallback position appears to be a return to a new Cold War with lines being drawn once again across Western and Eastern Europe. Countries such as Lithuania have already been putting up fences to keep people out. US weapons sales too, and influence over the EU would also massively increase – a point Eurocrats may care to think about in terms of who really controls Brussels.

Washington’s threats of sanctions meanwhile can all be overcome in time by Moscow, meaning that unless Washington gets serious about supporting Ukraine with advanced military on the ground – with a major risk of war – it is hard to see where Washington can effectively win over Moscow, unless it really views the EU as the de facto prize.

What is also interesting about the Biden-Putin summit is that the rhetoric has all been about punishing Russia than about defending Ukraine. It’s almost as if Washington has dared Putin to act.

Simultaneous Conflicts

The approach by both Biden’s administration and the Washington Hawks towards Messer’s Putin and Xi could however backfire spectacularly on the United States. Washington has been constantly pushing lines to see how far it can push both Moscow and Beijing and are taking both on at the same time.

Combined, both China, Russia and several other countries will be damaged by increased Western sanctions, which would also spell the end for globalization and plunge the world into a new trade Cold War. Collaboration and cooperation would cease, to be replaced by mistrust and animosity.

The immediate danger is that Beijing and Moscow could also decide to take on the challenges posed by Washington, call their bluff, and invade both the Ukraine and Taiwan simultaneously.

Quite how prepared, or even willing the US is to fight on two fronts – especially after the debacle in Afghanistan – may well be a flexing of muscle they wish to take to demonstrate they remain militarily competitive. If so, the Biden Presidency will go down with even less regard than that afforded his predecessor. America is playing a dangerous game with its own destiny right now, and with global peace and security.

Conversely, it is possible that American analysts have concluded that the previous 25 years of Chinese and Russian development has gotten beyond the capabilities of the US to defend against, in which case the longer-term solution would be to cede a few buffer territories and to bring about a Cold War, with the US and Western Europe on one side, coupled with a few farther flung territories such as Australia and the UK, and therefore concentrate in building up domestic and Western friendly alliances and technological developments without the need to compete with China.

That would usher in a Washington/Brussels axis against a Moscow/Beijing axis with many nations, such as India and Turkey, being courted by both. If so, this would indicate conflicts in Taiwan and Ukraine fit into the US global strategy – this part for you, and that part for me. The answers may come fairly quickly, with the end of 2022 potentially looking rather different from the geopolitical perspective, than the end of 2021.

Putin though, under the threat of sanctions, may just bide his time and wait until they can be better negated. The Biden-Putin summit achieved one major issue: the United States has apparently shown its hand. Putin still has his to play. And like all Chess Grandmasters participating in contests, he will take plenty of time to think through his next move – unless he feels boxed in and needs to break Russia free from the threat of more NATO troops and US military hardware on his doorstep being aimed at Russians.

If Ukraine becomes a pawn, the question then becomes ‘how truly global did Washington want globalization to be?’ We may soon be finding out what a new Cold War looks like unless Washington starts to understand that it might just have prodded Russia once too often.

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Russia Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Eurasia, including China, Russia, India, and the ASEAN nations, assisting foreign investors into the Eurasian region. Please contact Maria Kotova at russia@dezshira.com for Russian investment advisory or assistance with market intelligence, legal, tax and compliance issues throughout Asia.

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