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Global Cooling
Last week Russian President Dmitry Medvedev stated that he is not afraid of cold war. The West started discussing possible sanctions against Russia. Trying to forecast what Russia and the world can expect in the near future, Vlast weekly made up a cold war guide-book.
The West vs. Russia
PCA. It’s quite probable that the EU’s first sanction against Russia will be terminating the negotiations about concluding a new Partnership and Cooperation Agreement (PCA). It’s likely to happen during this week’ EU summit in Brussels. To conclude a ground document of this kind, it is necessary that all European states arrive at a consensus. But they didn’t manage to come to an agreement regarding the start of the talks during two years, because first Poland and then Lithuania used their vetoes. Imposing this sort of sanction against Russia appears practically inevitable, but it is not something extraordinary. Since December, 2007 Russia and the EU have lived according to an expired ground agreement, and the two parties often reiterate that there is nothing to fear. The obsolete agreement can be prolonged annually – only the relations with the EU won’t develop.
Visas. You could hear demands to toughen the visa regime with Russia right after the war in Georgia broke out. It was the Baltic states that came up with this initiative. For example, Estonian President Toomas Hendrik Ilves urged that the current agreement for facilitating the visa regime should be cancelled. The agreement concerns several groups of Russian citizens: students, journalists, businessmen, politicians and state officials. Evidently, the European Union won’t toughen the regulations regarding all these groups. The probable sanctions may affect officials only. Even more so there has been a precedent. Last summer, as the Lugovoy case was at its climax, Great Britain, which doesn’t fall under the EU-Russia agreement for facilitating the visa regime, toughened the regulations about issuing visas to those who have service passports. In fact it meant depriving such people of the privileges they had. It’s been a year since they’ve had to apply for visas according to the standard procedure – the time frames of considering an application have been prolonged, and the visa validity has been shortened. It means that if an official sets off for Britain with a delegation, they receive visas for the time of the visit rather than for half a year, which used to be usual practice.
Along with the Baltic states, British Foreign Office Chief David Miliband is likely to lobby this measure. It was on his initiative that London toughened the visa regime last year. Now he’ll probably advise the EU to follow Britain’s example too.
Credits. It’s amazing, but the West has started with imposing sanctions on the Russian business. However, no politician, banker or company in the USA, the EU or any other part of the world can be suspected of doing it deliberately. Here, a purely economic effect of political actions is meant: engaging in a political confrontation always ensues overhauling the risks of the borrower. Back last week S&P and Fitch stated that they were not going to lower Russia’s rating, and last Thursday the ratings of a number of Russian companies were even increased.
For all that, you should bear in mind that Russia’s sovereign ratings are just an assessment of the state’s solvency: the risks of Russian private companies that are credited outside Russia have already gone up, from the creditors’ viewpoint. August’s tax payments (the tax on natural resources mining and profits tax) caused certain problems related to the liquidity in the banking system: last Thursday the Central Bank had to lend over 160 billion rubles to Russian banks. The crediting rates for Russian borrowers within Russia have been growing for some time already. Taking account of the fact that since May-June, 2008 even large businesses haven’t been credited outside Russia (it’s too costly) the hostilities in South Ossetia leave the western credit market closed to Russia for months. As to IPOs, the situation is the same. Outside Russia (and even inside it – the money of western investors and funds plays a crucial role) IPOs are practically unreal to large players till the spring of 2009.
No one’s ill will, which denies Russian companies foreign credits and foreign creditors – Russian profits, has anything to do with the recent developments. “The credit sanctions” is an immediate atonement of economic agents for political decisions taken in Russia and Georgia.
In mid-September the Bureau of the Board of the Russian Union of Industrialists and Entrepreneurs (RSPP) aims to discuss with President Dmitry Medvedev a possibility of relaxing these sanctions, which implies the government’s taking decisions to facilitate the Russian business’ access to western credits. However, if Russia keeps on with its military and political line, a future discussion seems pointless: it’s not by pure chance that the second point on the RSPP’s agenda is asking Mr Medvedev to undertake measures to substitute the western money, which the market lacks, with the state’s investments.
As to other probable events that can be described as inevitable economic sanctions of the West against Russia, you can list the following: overall complication of business contacts with the USA, Europe and other states, prolonged negotiations and hesitation to sign contracts. It’s the same category of risks: additional checks of the Russian counter-agent and its offers are unavoidable, and it all will cost money.
Gas. After the current crisis Russia is unlikely to prove to the West that it is a reliable energy carriers supplier to Europe. That’s why the projects of the North Stream and South Stream pipelines, which Europeans didn’t put much trust in, can be regarded as doomed to fail. For example, they haven’t begun building the North Stream, which is planned to be launched in 2011 already. The problem is neither Finland nor Estonia has sanctioned laying the pipe at the Baltic seabed in their economic zones. If it doesn’t happen, you can fairly give up the cherished project of Russia’s incumbent Prime Minister Vladimir Putin and Germany’s former Chancellor Gerhard Schröder. As to the South Stream, everything is even simpler: no construction works have been started so far, and even the route hasn’t been coordinated yet. That’s why it won’t be that difficult to cancel the project.
Instead, Europeans will seek to realize the Nabucco project – the pipeline could transport Caspian hydrocarbons to Europe omitting Russia – through Azerbaijan, Georgia and Turkey. Gazprom tried to convince the Europeans that the resource base of the gas pipeline is inadequate, its building will be inexpedient and the South Stream could easily substitute for it. It seems, no one will listen to Gazprom’s arguments.
Mechanical engineering. The West can deliver quite a blow on Russia cutting energy equipment supplies. Russia’s developing energy industry much depends on machines, drilling rigs and other production items of heavy engineering.
The Olympics. A call to prevent Sochi from hosting the 2014 Olympics was one of the first responses to the beginning of the Russia-Georgian war, which emerged in the West. Congressmen Allyson Y. Schwartz and Bill Shuster even drafted a resolution calling on the IOC to refuse to hold the Winter Olympics in Sochi. Legally, this document has no power – the IOC is not accountable to Congress. Anyway, the USA and the West in general will have an opportunity to boycott the Olympics, which was done in 1980.
The Sochi Olympics may fail to be held due to other reasons as well. First, practically all Olympic facilities in Imeretinsk Bay are located in close proximity to the border with Abkhazia – this might have quite an impression on both investors and the IOC. Last summer few people thought that it would be decided to hold the Olympics on the border-line with a conflict zone. Now it might frighten foreign businesses and sports activists. It need be said that the territory of Abkhazia has been used for preparation for the Games – otherwise it would be impossible to build the Olympic facilities proper.
Besides the Sochi Olympics, Russia has planned another international event, whose holding is now jeopardized, - the 2012 APEC summit in Vladivostok. Washington can use much more levers to influence the organization of this forum. In case the USA, Japan, Australia and a number of other Asia-Pacific states object to holding the summit in Russia, the event will be called off.
International organizations. The media has been speculating about excluding Russia from a number of International organizations. Estonia was the first to suggest this measure: the parliament’s Vice-Speaker has already drafted a resolution for the next PACE session. Interestingly, it was done before the recognition of Abkhazia and South Ossetia. Now even more politicians speak in favor of this measure. They refer to the precedent of 2003 when Russia was denied the vote because of the military campaign in Chechnya. Still, the sanction is unlikely to affect the Russian government badly. Moreover, it will be spared the headache of the constant demand of the Council of Europe to abolish death penalty in Russia. However, the Council of Europe has certain grounds for developing the relations with Russia. For example, excluding Russia from the Council will cause terminating Russia’s cooperation with one the Council’s major institutions – the European Court of Human Rights (ECtHR). In this case Russian citizens will be unable to appeal to the court in Strasbourg complaining about the irregularities of the Russian justice – it’s the key argument of PACE delegates against depriving Russia of its membership in the Council of Europe.
On the other hand, the Council of Europe may benefit from Russia’s temporary exclusion. The thing is Moscow has blocked the EctHR reform, which virtually paralyzes its work (Russia is the only European country which hasn’t ratified the 14th Protocol to the European Convention on Human Rights). Without Russia’s ratification, they can’t launch the reform, because all decisions in the Council of Europe require consensus. Excluding Russia will help arrive at consensus and launch the reform. After it they may admit Russia once again.
Apart from the Council of Europe, Russia is running the risk of being excluded from some more international clubs. It won’t have direct consequences, rather, it will damage Russia’s reputation much. The G8 is the first point on this list. Although some of Moscow’s standing critics (like British Foreign Office Chief David Miliband) don’t believe it’s necessary to oust Russia from the Group of Eight, the West can omit all those formal procedures. De facto, Russia has been excluded form the G8: the Foreign Ministers of the G7 convened to discuss the situation in Georgia without inviting their Russian counterpart. Similarly, they may fail to invite Russia to the summits of the G8. Or they can invite it without letting it discuss a range of crucial maters.
There is one more club, where Russia’s membership is questionable – the Quartet on the Middle East. Stepping up military cooperation with Arab countries, for example with Syria, Moscow automatically loses Israel’s credit, that’s why it won’t be able to mediate the peace process. In recent years the Russian government has raised the question of Moscow’s hosting a conference on the Middle East – a forum similar to last year’s summit in Annapolis. In case the cold war resumes, you can abandon this ambitious project.
NATO. Russia’s hard line on Georgia has already prompted the Georgian and Ukrainian governments to press for the NATO membership action plan. At April’s NATO summit in Bucharest Germany, France and Italy doubted the expediency of giving those republics the MAP. But now nothing can stop them from overhauling their position. No doubt, Washington, which has lobbied for admitting Kiev and Tbilisi to the alliance, will try its best to win over its colleagues. In December it will have a good chance to do it – a summit of NATO Foreign Ministers is planned for that month.
Azerbaijan may become the next applicant to ask for NATO membership. The country has been an alternative route of energy carriers supplies to the West via the Baku-Tbilisi-Ceyhan oil pipeline and the Baku-Tbilisi-Erzurum gas pipeline. Azerbaijan’s First Deputy Prime Minister Yagub Eyubov has stated on several occasions that his country effectively integrates in the North-Atlantic bodies and seeks NATO membership. “We intend to join the alliance, and we have a program to achieve it – an individual partnership action plan,” Mr Eyubov stated.
Building up military presence round Russia can be another possible measure the USA will take. Such a necessity will emerge during the realization of the Nabucco gas pipeline project, which omits Russia and is thus “hated” by Gazprom. No doubt, the US administration will suggest a few measures to guard the pipe even better. According to the harshest scenario, it can lead to setting up military bases in Azerbaijan, Georgia, Kazakhstan or Turkmenistan.
AMD. The war in Georgia has already played into the hands of those in the American establishment (mainly from he Republican Party) who lobby deploying AMD elements in Eastern Europe. It’s the first time in the history of the matter that Congressmen openly state that Russia’s aggressive policy is another proof that an AMD shield is a pressing need. It is virtually the first quasi-official confession that the AMD elements, in case modified and strengthened, can be used to control Russia. That’s why if cold war starts, these plans can be realized. It need be added, however, that a major group within Barack Obama’s team objects to AMD in Europe as such, which means that the pessimistic scenario is more likely in case John McCain triumphs in the elections.
If Russia responds to the construction of a radar in the Czech Republic and the deployment of interceptors in Poland with aiming its missiles at Europe, the USA may take counter-measures. The Baltic states, for example, will require American military presence to secure them against the Russian threat. And Washington will have difficulty refusing. It will mean a full-scale arms race, which, as history shows, can strike a blow on Russia’s economy.
Freezing accounts. Last week the US media speculated about imposing sanctions, which would affect the Russian elite most without hurting ordinary people. The most quoted measure is freezing the accounts of Russian officials in western banks. Washingtonpost reads, “The U.S. Justice Department should aggressively prosecute any instances of Kremlin-connected market manipulation, fraud, tax evasion and money laundering that fall within its reach. Crucially, pursuing the oligarchs through the courts would not require the United States or Europe to take a single action "against Russia". U.S. and allied governments could note that these activities are consistent with overarching Western efforts to curb public and private corruption.”
Another measure is freezing the Central Bank’s assets, including its gold and exchange currency reserves as well as the money referred to as the Stabilization Fund. However, there are too few precedents of freezing assets in the USA and Europe, and they mainly concern only the military and industrial complex.
Belarusian history shows that the method of targeted freezing of bank accounts proves quite effective. After the USA blocked the accounts of Belarus’ major enterprise – Belneftehim – Alexander Lukashenko got more emollient and released his foe Alexander Kozulin.
On the other hand, similar sanctions turned out ineffective in the Iraqi case: Saddam Hussein didn’t make any concessions.
The media. Another cold war is likely to be coupled with a tougher media confrontation. For instance, the West, guided by the examples of the past, will allocate funds for creating on-line media in the Russian language. The USA has recently allocated much money for financing such propaganda mass media, which broadcast only in the rigid states (Cuba or Iran).
The Russian government will have to resort to jamming the broadcasting. But it’s difficult to do it in the 21st century. It is more likely to follow the Chinese pattern of censoring the web. They will have trouble, however, making Microsoft or Google concede – the Russian market is far less important to these companies than the Chinese one. President Medvedev has stated on several occasions that there should be no censorship on the Internet. But the situation can change under the new circumstances. In the Russian livejournal there have been numerous calls to censor the posts that “slander Russia”.
Russia vs. the West
Civil rights activists. There is a traditional sign indicating that the relations between Russia and the West escalate – spy scandals and accusations made against civil rights organizations. So, it’s natural to presume that in case of a serious aggravation of the relations, western NGOs (Human Rights Watch, Amnesty International and others) will be the first to fall victim to it. The British Council is likely to cease its work, and a number of western embassies will find some of their staff missing – they will be expelled because of “their activity that has nothing to do with diplomacy”.
Foodstuff. One of the inevitable consequences of the crisis the USA and Europe may suffer from is a decrease in foodstuffs exports to Russia. Last Thursday Vladimir Putin said that 19 US agro-industrial businesses producing poultry will be denied access to the Russian market. (The US chicken export to Russia accounts for some $3.5 billion annually.) The Russian government took the “chicken blow” decision this spring when it got evident that Russian poultry farming can’t compete on equal terms with western companies. Other measures may concern meat and other foodstuffs, which can be substituted with third-party businesses’ production.
Iran. One of the key threats Russia can pose to the West is its reluctance to cooperate in the Iranian file matter. In theory, Moscow can use its veto when an anti-Iranian resolution is introduced in the UN Security Council. More to the point, it can provide Iran with nuclear technologies. It is going to be the West’s true headache. On the other hand, it’s not clear whether Russia is interested in it. The Russian Foreign Ministry and Vladimir Putin reiterated that they mind Iran’s becoming a nuclear power. In this connection, the Russian government agreed with the West’s arguments claiming that it is committed to the principles of the Non-proliferation Treaty and it fears that Iran’s developing an atomic bomb can jeopardize the peace in the Middle East.
International treaties. There is one more deterrent Russia can use – it may quit the Intermediate-Range Nuclear Forces Treaty (INF) of 1987. Russian military and politicians made no secret of the fact that it can become Moscow’s response to the deployment of American AMD elements in Eastern Europe. Last year, at the peak of the dispute with Washington regarding the deployment of AMD systems, Russia’s political and military leaders threatened to quit the INF Treaty. In particular, Yury Baluyevsky, the then Chief of the General Staff, stated it adding that it was “the US activity related to deploying AMD systems in Eastern Europe” that prompted that sort of Russia’s demarche. Later Vladimir Putin and Sergey Ivanov stated the same. The latter openly called the US-USSR treaty “a relic of the cold war” pointing out that Russia should possess intermediate-range and short-range missiles because India, Pakistan, Korea, China, Iran and Israel already have them.
Another international treaty Russia can easily quit is the Kyoto Protocol. The Federal Law On the Ratification of the Kyoto Protocol to the United Nations Framework Convention on Climate Change was passed in 2004. It came into force a year later. But it’s only this year that Russia is ready with all procedures to apply the provisions of the Kyoto Protocol.
Ukraine. Europe and the USA have every reason to fear that after the conflict with Georgia Russia will take up Ukraine to return it into its orbit. Ukraine’s West-oriented leader Victor Yushchenko irritates the Kremlin like Mikhail Saakashvili. Moscow has inspired separatist sentiments in the Crimea and Ukraine’s traditionally pro-Russian regions. (Some Duma MPs and Moscow’s Mayor Yury Luzhkov have made several statements regarding the issue. The latter has been even declared persona non grata for his idea to initiate the process of returning the Crimea to Russia.)
The support of Ukrainian breakaway movements may even grow. According to the information of Vlast weekly, the list of the anti-Ukrainian measures that have been recently discussed in Moscow, includes the following: creating a network of pro-Russian NGOs and the youth’s unions in Ukraine, supporting rusins (an East-Slavic ethnic group) in the Zakarpattia Region and inspiring them to struggle to set up their autonomy, creating the most favorable conditions for the residents of the Crimea to get Russian passports – it has already been tested in Abkhazia, South Ossetia and Transdnestr.
Besides, Moscow has an ability to complicate the life of the Orange government in Ukraine. It can simply increase the Russian energy carriers prices. There is another effective measure against Victor Yushchenko – cancellation of the current preferential terms of Ukrainians’ staying in the Russian Federation. Leader of the Party of the Regions Victor Yanukovich is still regarded as Moscow’s true ally – he has already supported Russia’s recognition of Abkhazia and South Ossetia.
Kyrgyzstan. Russia has a chance and a desire to complicate the US life in Central Asia too. In these terms, the American base Manas in Kyrgyzstan may become Moscow’s key target. The base is used by the anti-terrorist coalition in Afghanistan. Moscow has always sought to make Bishkek quit the base deployment agreement with the USA. In 2005 the SCO members demanded that the USA dismantle all its bases on the territory of Central Asia and especially in Kyrgyzstan. But Kyrgyz leader Kurmanbek Bakiyev managed to maneuver between Moscow and Washington. He didn’t oust Americans form Manas – they only had to pay more for using the base.
If the row with the West turns into a global confrontation, Russia will have another motive to deprive the USA of this strategic facility. In this case Bishkek, which is Moscow’s ally in the framework of the Shanghai Cooperation Organization (SCO) and Collective Security Treaty Organization (CSTO) will be able to do nothing but obey.
Missiles. Russia’s incumbent Prime Minister Vladimir Putin stated as he was President that Russia can aim its missiles at Eastern Europe, at the AMD systems in Poland and the Czech Republic in the first place. Israel’s mass media reported a couple of weeks ago that Russia has prepared a plan of countering the deployment of AMD elements in Poland and the Czech Republic. According to their data, the plan envisages deploying Iskander missiles in the Kaliningrad Region and Syria. No Russian official confirmed this information, and Syria’s President Bashar al-Assad told Kommersant that he hasn’t received any offer of that kind, but he is ready to consider it in case he gets it.
As to cooperation with Syria, there has been much speculation about Russia’s intention to deploy a Naval base in the Mediterranean, in Syria’s port Tartus. However, the Syrian government denies this information as well.
Export. Europe depends on Russian fertilizers supplies. However, Russia depends on European agricultural export too. There are only few sectors Russia can use for its attack. For example, Boeing è Airbus can lose much because of Russia’s blocking rolled titan supplies, but it’s no mortal danger: air liners delivery will be postponed for a couple of months, and, what’s more, the demand for new jets is not that high now.
Afghanistan. A full-scale confrontation of Russia and the West is likely to ensue an overall halt in anti-terrorist cooperation – Moscow has been proud of this achievement regardless of the fact that such kind of cooperation doesn’t always prove effective. Another sphere that may fall victim to a new cold war is cooperation with NATO. Last week Russia’s Ambassador to NATO Dmitry Rogozin stated that Russia freezes its cooperation with the alliance in practically all areas for half a year. Enumerating these spheres showed that the cooperation is not that important in fact: it is mainly visits, excursions and internships that got cancelled. The only significant sphere of cooperation is preserved despite the problems of Moscow and Brussels – the Afghan transit route: Russia lets NATO ship non-military cargoes via its air corridor. Without this agreement, it’s impossible to carry out the operation in that country. The Russian government emphasizes it whenever it has the opportunity without mentioning that it no less interested in the success of the operation than the members of the alliance. The thing is the Taliban movement was Russia’s foe before it was toppled in 2001. At that time Russia was sure that the Taliban regime jeopardized all Central Asian republics. In the first place its existence increased a possibility of Muslim revolutions in Tajikistan and Uzbekistan. Now that the North-Atlantic Alliance interfered, which guards the CIS southern borders, this concern vanished. However, we can presume that closing the Afghan transit route will be Russia’s last resort – it will affect NATO as well as Russia proper.
Transdnestr. After Moscow recognized South Ossetia and Abkhazia, Europe fears that Moscow will keep on. During one of his interviews France’s Foreign Minister Bernard Kouchner expressed his concerns that Ukraine and Moldova can become Russia’s new objectives – it will seek to cut the Crimea and Transdnestr from them. In theory, Moscow could recognize Transdnestr like South Ossetia and Abkhazia. But so far Moscow’s aim is eliminating Moldova’s NATO ambitions. And there is a plan to be realized. The day before he signed the decrees to recognize the two breakaway republics Russian President Dmitry Medvedev met with his Moldovan counterpart Vladimir Voronin. Mentioning that “the Georgian government has virtually gone mad”, Mr Medvedev told Mr Voronin that “There is an opportunity to resolve the Transdnestr problem”. This said, Moscow tried to demonstrate the world that it can settle frozen conflicts by means of restoring the territorial integrity of states without using brutal force. A Kremlin official told Vlast weekly that there is no point prolonging with the Transdnestr settlement.
Gas. Russia can implement a number of other measures that will affect the West badly, but those are less probable because they can cost Moscow too much. Such measures include provoking a gas crisis in the EU in the winter of 2009. Russia, which accounts for 27% of gas supplies to Europe, is able to provoke an increase in prices in Germany, Finland, Great Britain and Italy at the peak of cold weather this winter and paralyze the markets of Ukraine, Poland, Hungary and a part of Greece. But the losses Gazprom will have to bear will be excessive.
More serious sanctions are usually hard to realize, although the public considers them quite probable. For example, it’s impossible to redirect the pipes from Europe to China – the Russian economy won’t endure it. Moreover, China is not ready to consume such volumes of energy carriers at global prices. There are no pipelines going from the peninsula of Yamal to China – the whole infrastructure is Europe-oriented. The Kovyktinskoye field could become a source of energy carriers for China. But in this case the fields of Russia’s richest gas area – Yamal – would be closed.
It’s obvious that regardless of the sanctions imposed, the war in Georgia has told on the relations between Russia and the West. From now on any step either party undertakes will be regarded as unfriendly and aiming to escalate the tensions.
Mikhail Zygar, Vladimir Solovyov, Dmitry Butrin
All the Article in Russian as of Sep. 01, 2008
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