I took part in the Russian TV talk show ’60 Minutes’ yesterday. I speak at about the 29 and 53 minute marks.
I took part in the Russian TV talk show ’60 Minutes’ yesterday. I speak at about the 29 and 53 minute marks.
The Chinese smartphone company ZTE employs 75,000 people and last year sold $17 bn of products. Yet, despite being a booming and profitable concern, this week ZTE shut down its operations. Why? Because the United States has ‘banned American companies from exporting technology’ to it. ZTE phones contain a number of US-made components, as well as US-designed software. Thanks to the ban, the phones can no longer be made. ZTE is out of business, and 75,000 people will lose their jobs – just like that.
The ZTE ban follows American complaints that the company had been circumventing US sanctions against Iran and North Korea. ZTE admitted this and paid a $890 million fine to the US government, but American regulators maintained that it was still not being honest about its dealings – thus the sanctions imposed against it.
Meanwhile, following the US withdrawal from the nuclear deal previously agreed between the USA, Iran, and several other countries, American officials have been warning European companies that they must stop doing business with Iran. The European company Airbus had signed an agreement to sell Iran billions of euros worth of passenger aircraft. More than 10% of those aircraft, however, consists of American parts. Conseqently, the US has now prohibited Airbus from selling them to Iran because of sanctions re-imposed on Iran following the US withdrawal from the nuclear deal. Airbus could, of course, sell the planes anyway, but it would then find itself being fined huge sums of money in the USA and, like ZTE, have its American supplies cut off.
Any other non-American companies who rely on US components or software, and who are considering doing trade with Iran are now going to have to seriously reconsider their position. European governments and the European Union are none too happy with this. French Foreign Minister Jean-Yves Le Drian complained that, ‘We feel that the extraterritoriality of their [American] sanction measures are unacceptable. The Europeans should not have to pay for the withdrawal from an agreement by the United States, to which they had themselves contributed.’ Meanwhile, French Finance Minister Bruno de Maire asked yesterday, ‘Do we want to be vassals who obey decisions taken by the United States while clinging to the hem of their trousers? Or do we want to say we have our economic interests?’
European politicians are now considering what measures they can take to protect themselves from American efforts to force them to comply with American sanctions policies. According to de Maire, the EU is considering various avenues. One of these, he says, involves ‘looking at Europe’s financial independence – what can we do to give Europe more financial tools allowing it to be independent from the United States?’ Connected with this is a ‘proposal is to set up a purely European finance house to oversee euro-denominated transactions with Iran’
For some time now, a number of Russians who disagree with their government’s economic policy have been complaining that by seeking to integrate Russia more and more into the world economy, the government has undermined national sovereignty and made it vulnerable to financial pressures from potential enemies, notably the United States of America. Economists such as Sergei Glazyev have for a while been urging the Kremlin to increase Russia’s financial independence by, for instance, ‘the creation of a system of exchanging information between banks, analogous to SWIFT but independent of the USA and the EU,’ the establishment of ‘our own rating agencies,’ pricing exported goods in rubles rather than dollars, and so on. For very good reasons, the Russian government has resisted going down this route. Economic autarky tends not to turn out well. Integration into the global economy has its benefits. Having said all that, it seems to me that examples like those above are going to add to the pressure not only on Russia but also on other countries around the world to go in the direction the likes of Glazyev are suggesting, albeit gradually and with caution. Looking at the fate of ZTE and Airbus, any senior manager of an international company worth his or her salt is going to have start thinking about how to reduce the company’s dependence on US suppliers. Politicians are also going to have to put more thought into how to strengthen their economic sovereignty. This is not something which is going to happen overnight, but the impulse to move in that direction must be stronger this week than last.
Some steps have already been taken. We see new financial structures outside US control beginning to emerge, such as the Asian Infrastructure Investment Bank and the petro-yuan. Already financial journalists are speculating that the US decision to renege on the Iranian nuclear deal will strengthen the latter. I tend to the view that such developments are an inevitable part of the global shift in economic power. As the US declines in relative economic terms, its grip on international institutions is bound to weaken. But decisions such as that concerning Iran can only accelerate this process. Very gradually, but nonetheless more and more perceptibly, other countries are going to want to distance themselves from the United States.
The Americans are like a man sinking in quicksand.: the more he struggles in an effort to get out, the faster he sinks. As their relative power declines, the Americans are fighting with all their might to retain their hegemony, striking out in sometimes rather peculiar directions. But the very act of struggling just sucks them down further. In the aftermath of Trump’s decision on Iran, the sound of the sand sucking America under can be heard louder and clearer than ever before.
‘Стоим на краю пропасти. Надо идти вперед.’ (Apocryphal statement attributed to Leonid Brezhnev)
Russian-Western relations appeared to plummet even further into the abyss yesterday with the coordinated decision of around 20 Western countries to expel Russian diplomats as a response to the poisoning of Sergei Skripal in England. Leading the way was the United States, which is expelling 60 Russians. The next largest contingent of expelled Russians is in Ukraine, which announced that 13 Russians must leave the country. (I find it odd that Ukraine should take this act in response to something which happened in the UK, but not to what it regularly calls ‘Russian aggression’ on its own territory, but so be it.) Third on the list was Canada which is chucking out 4 Russians and refusing to accredit another 3 who had been due to arrive. Germany, meanwhile, is expelling 4 diplomats. Overall, about 100 Russians are getting their marching orders.
This is quite unprecedented. Diplomatic expulsions are normally a response to something which directly affects one’s own country. I can’t think of a precedent for a country throwing out diplomats for something unconnected to it. Perhaps such a precedent exists, but I doubt that there has ever been a mass expulsion across so many countries as this. It is a quite extraordinary act of diplomatic disapproval.
That said, it is largely symbolic. It will make it harder for Russian embassies to do what they were previously doing (which in some cases undoubtedly involves espionage), but in due course new personnel will arrive and get to work, and things will get back to the way they were before. Western diplomats will be expelled from Russia in response, temporarily messing up the work of the embassies in question, but likewise things will eventually get back to normal. People will be irritated. Mutual distrust will be stronger than ever. Attitudes will harden. It will have a decidedly negative effect. But real, concrete interests won’t suffer too much.
In this way, the refusal of the United Kingdom (and also of its allies) to take more radical measures against Russia is quite striking. It appears that the West isn’t too interested in hurting its own bottom line. And in that regard, Russia got some very good news today. Germany has granted all the permits required for the construction of the German segment of the North Stream 2 gas pipeline. A spokesman for the pipeline project stated that he was confident that the other countries involved – Denmark, Sweden, Finland, and Russia – would similarly grant the required permits in ‘the coming month’.
Yesterday Germany expelled four Russian diplomats. But today it gave the go-ahead for North Stream 2 – a symbolic slap on Russia’s wrist, followed by a extremely valuable decision in Russia’s favour. If I was Russian, I’d be far more pleased by the latter than annoyed by the former. Perhaps, when it comes to what really matters, things aren’t quite as bad as they seem. The West is willing to stamp its foot and shake its fist, but it isn’t willing to put its money where its mouth is. Real progress on real issues may be possible after all, and we can move back from the abyss and forward in another direction.
In my recent post about the Canadian House of Commons defence committee’s report on Ukraine, I complained that the committee had recommended strengthening sanctions against Russia without producing any evidence that sanctions were an effective tool in changing Russian behaviour. As luck would have it, I have acquired a copy of a recent report which analyzes the effect of sanctions on the Russian economy. I thought, therefore, that I should share the report’s conclusions with you.
Before doing so, it’s first necessary to point out that damaging the Russian economy isn’t the ultimate point of sanctions. If sanctions are to have any meaningful purpose, then that purpose has to be to change Russian behaviour, specifically vis-à-vis Ukraine, given that Ukraine was the pretext for the sanctions. That said, sanctions aren’t going to make Russia change its behaviour if they don’t damage the Russian economy. Coercion has to hurt if it is to coerce. No pain, no gain, as it were. So are they hurting?
The report I have in hand is entitled ‘What difference have sanctions made and is that about to change?’ It was published in September by Macro Advisory Eurasia-Russia Consulting which describes itself as ‘the leading independent macroeconomic and political strategy firm specialising in the Eurasia region, including Russia and the CIS states.’ The report concludes that, ‘it is impossible to say categorically that sanctions have either significantly contributed to the economic decline [in Russia since 2014] or that they have helped the economy survive what would otherwise have been a more severe recession.’ However, the report’s authors tend more towards the latter option, saying that ‘sanctions helped in many respects.’
According to the report, the Russian economy was slowing down even before 2014. The major cause of the subsequent recession was the collapse in the oil price. The impact of sanctions was very small. However, sanctions did affect the way that the Russian government responded to the oil-price-driven recession. Following the global financial crisis of 2008, the government reacted by spending large amounts of its reserves on propping up the ruble, and also by increasing government spending more generally in a type of Keynseian counter-cyclical strategy. In 2014, it abandoned this policy. Instead it allowed the ruble to become a free-floating currency, while it also exercised a tight monetary policy designed to drive down inflation.
The report’s authors credit this latter strategy with preventing the post-2014 recession from becoming as deep as many feared it would be. They write:
Sanctions removed, or made more difficult, the soft options of borrowing and spending … The combination forced the state to be much more fiscally disciplined and more flexible with monetary policy. The ruble free float would not have happened without sanctions. … the decision to stop supporting the currency was the single most important action taken by the government and one of the key reasons why sectors, such as agriculture, have become more competitive and started to grow. … [Therefore] it can be argued that the 2014 sanctions actually helped Russia avoid a steeper recession and a more severe financial crisis.
The report says also that the sanctions forced the oil and gas sector to become more efficient, resulting in an increase, not a decrease, in production after 2014. In general, says the report,
Russia is in good financial shape. … Russia is the sixth-lowest indebted nation and has the sixth-largest financial reserves. … As a result of the sanctions, Russia was forced to repay $250 bn of external debt between 2014 and 2016. That represented 12.5% of pre-devaluation GDP and 25% of post-devaluation GDP. Not many countries in the world could have done that and still avoid a catastrophic crisis. It shows the resilience in the macro-economic and social-political system.
What then of the future?
On this Macro Advisory is a little more cautious. It claims that a lot depends upon the effects of the latest sanctions legislation passed by the US Congress. With this legislation, Congress has effectively seized control of sanctions from the president. Given past experience (e.g. with Cuba, Iran, and the Jackson-Vanik amendment which imposed sanctions against the USSR), the likelihood is that the existing sanctions against Russia will remain for a very long time, regardless of what happens with US-Russia relations more broadly. The new legislation is disturbing, moreover, because it contains stipulations which could be used to dramatically increase sanctions against Russia in the future. This possibility creates a degree of uncertainty which deters foreign direct investment (FDI) in Russia. Currently FDI in Russia is rising again, but that could easily change. A much harsher sanctions regime is possible, and that, says the report, could have a negative effect on the Russian economy.
The report lays out three possibilities. The first involves a relaxation of sanctions by European powers. The second sees sanctions remaining as they are. The third envisages much tighter US sanctions. The report assesses that in the first scenario, growth in Russian GDP will pick up to 3.0% by 2020, accelerating to 4.5% by the end of Putin’s final term in office in 2024. In the second scenario, growth will gradually rise to 3.0% by 2022 and remain roughly constant at that level thereafter. In the third scenario, growth will drop to 0.8% by 2020 before increasing to 2.3% by 2024.
Personally, I suspect that scenario two is the most likely – things will continue on much as they are. If the authors are correct, therefore, we should expect that, barring some external shock such as another global recession, during Putin’s final term in office the Russian economy will experience steady if not extremely rapid growth, ending up with three years of 3.0% growth per annum. That’s not enough to catch up with the West, but it’s not bad either, and certainly sufficient to put a noticeable amount of extra money in Russians’ pockets. If that’s really true, then economically speaking Putin’s last years will be a moderate success from an economic point of view.
Of course, these are all just projections and, as we know, economists often get their projections wrong. Nevertheless, none of this is good news for those who think that sanctions are an effective tool against ‘Russian aggression’ or who imagine that the collapse of the ‘Putin regime’ is just around the corner.
Today the Canadian government announced that it had added Ukraine to the Automatic Firearms Country Control List, which is a list of countries deemed to be permitted destinations for the export of firearms. This does not necessarily mean that Canadian companies will immediately start exporting weapons to Ukraine, but it does mean that they are now allowed to do so.
Ukraine, of course, is hardly short of firearms. It’s hard to see what difference a few from Canada will make. Nevertheless, one can see this as another victory for Canada’s Ukrainian lobby, coming just a day after the House of Commons Standing Committee on National Defence issued a report on Ukraine which included a recommendation to add Ukraine to this list. The report drew heavily on statements by Ukrainian officials, the president of the Ukrainian Canadian Congress, Paul Grod, and some other Canadian-Ukrainian activitists such as Taras Kuzio and Lubomyr Luciuk. The fact that the government acted on one of its recommendations within a day must be something of a record for speed.
There’s a lot wrong with the standing committee’s report, which you can read here. I won’t bother listing all its problems, but they include a poor understanding of the origins and nature of the war in Donbass, and an extremely one-sided perspective on all issues relating to Ukraine and Russia. But that’s not what I want to talk about here. What concerns me is the detachment of the policy recommendations from any clear objective, and the lack of evidence to support the recommendations.
When presenting any policy proposals, what one needs to do is first explain one’s objective, and second explain how the recommended policies will help one to achieve the objective. If the objective isn’t credible, and if the policies won’t help one achieve it, then the recommendations are worthless. In this case, the defence committee report recommends, among other things, that:
My question to the committee is this: ‘What is this all meant to achieve?’ The report doesn’t actually lay out any objectives, so we can’t tell whether these recommendations are relevant or how one could measure their success. This is a pretty serious failing.
About the only place where there is a hint of the committee’s idea of what it hopes for is a section entitled ‘Conflict Resolution and Prevention in Ukraine’. In that section, we are told that , ‘Canada and the international community are trying to find peaceful solutions to the conflict in Ukraine’ So, the committee wants to promote peace in Ukraine. But what does the committee think a peaceful solution would look like? That’s not clear, as the report doesn’t say. But it does cite Paul Grod as follows:
Mr. Grod noted that, as long as Russia is not prepared to ‘have a resolution and stop the ongoing conflict and military aggression,’ Minsk II will never be implemented. In his opinion, Minsk II is ‘stale-dated’ and the ‘simple way’ to ‘bring peace and stability’ to Ukraine is ‘to force Russia’s hand to remove their military, their equipment, and their financing of the separatists’ in the Donbas region; Russia must agree ‘to stop the war in Ukraine.’
In other words, the objective is the total surrender of rebel Donbass, and the chosen means of achieving this end is ‘to force Russia’s hand’ – i.e. coercion.
This is dumb. It’s dumb because it is totally unachievable. The rebels in Donbass aren’t just going to give up. The report says that the rebels have 35,000 men under arms. I have never heard of an undefeated army of that size simply deciding one day that they’ve had enough and will lay down their arms to their enemies and put themselves at their mercy. It won’t happen. The report seems to think that everything depends on Russia, and that if Russia can simply be coerced sufficiently it will abandon Donbass. It won’t. Russia won’t stop supporting the rebels without receiving something extremely tangible in return. Complete Ukrainian victory of the sort apparently favoured by the defence committee is a fantasy.
The report says that, ‘Witnesses told the Committee that Canada and the international community must stand together in trying to find a peaceful solution to the armed conflict in Ukraine.’ So, if a peaceful solution can’t take the form of the total surrender of Donbass, what could it take the form of? The only two alternatives are: a) a negotiated peace settlement, and b) a complete ceasefire, perhaps enforced by peacekeepers, dividing the sides and in effect freezing the conflict. Will the report’s recommendations help achieve either of those?
The answer is no. A negotiated settlement would have to take the form of something like Minsk II, but unconditional support of Ukraine of the sort proposed by the committee doesn’t provide any incentives to Kiev to change its current policy of refusing to enact the Minsk provisions. The report’s recommendations merely encourage Kiev to carry on its current course. The recommendations therefore undermine peace, not promote it.
As for the frozen conflict option, the Canadian recommendations are equally irrelevant. The report spends a lot of time talking about a potential peacekeeping operation. This is absurd. There is currently no peace to keep. In any event, the committee totally supports the Kiev government’s line on what a peacekeeping operation should consist of – forces deployed throughout the rebel republics, including on the border with Russia. Neither the rebels nor Russia will ever agree to this. It’s pointless proposing it. Insisting on this formula serves only to rule out the possibility of an alternative which could actually stop the killing – a peacekeeping force along the front lines. By rejecting this latter formula, the Canadian committee is once again working against peace, not in favour of it.
What we see here, therefore, is a stubborn refusal to choose achievable objectives combined with recommendations which are in any case detached from any objective, and without the provision of any evidence that the recommendations can help produce successful results. The committee, for instance, favours increased sanctions versus Russia without providing any data which shows that sanctions have in any way altered Russian behaviour in a desired way, justifying the decision solely on the basis of unbacked assertions by certain interested parties. This is not ‘evidence-based policy.’
There was a time when Canada was seen as a peacekeeper and an ‘honest broker’ in international relations. Alas, those days are in the past.
Yesterday the Canadian Senate passed the lengthily-titled Act to provide for the taking of restrictive measures in respect of foreign nationals responsible for gross violations of internationally recognized human rights and to make related amendments to the Special Economic Measures Act and the Immigration and Refugee Protection Act, more commonly known by its ‘short title’, Justice for Victims of Corrupt Foreign Officials Act (Sergei Magnitsky Law).
The Act gives the government of Canada the authority to seize, freeze, or sequestrate the property of a foreign national in the event that the said foreign national does any of the following things:
(a) is responsible for, or complicit in, extrajudicial killings, torture or other gross violations of internationally recognized human rights …
(b) … acts as an agent of or on behalf of a foreign state in a matter relating to an activity described in paragraph (a);
(c) … is responsible for, or complicit in, ordering, controlling, or otherwise directing, acts of significant corruption. …; or
(d) … has materially assisted, sponsored, or provided financial, material or technological support for, or goods or services in support of, an activity described in paragraph (c).
On the face of it, this is all very fine. If people are responsible for “extrajudicial killings, torture, or other gross violations of internationally recognized human rights,” or for “acts of significant corruption,” then why should Canadians tolerate them? Aren’t sanctions against them a perfectly reasonable response?
It’s hard to argue against that. If one does, one appears to be saying that “gross human rights violations” and “significant corruption” are perfectly fine, which of course they’re not. So what could possibly be wrong with this Act?
The Bow Group, ‘the United Kingdom’s oldest conservative think tank’, is as ‘Establishment’ an institution as one could hope to find. Its board includes prominent former Conservative cabinet ministers such as Norman Tebbit and Geoffrey Howe as well as right-wing academics like philosopher Roger Scruton. I was intrigued, therefore, to hear its chairman, Ben Harris-Quinney, announce last week that, ‘the theory of neo-liberal interventionism is bankrupt.’
The context of Harris-Quinney’s remarks was the publication of a new Bow Group report entitled ‘The Sanctions on Russia’. In the report’s introduction, editor Adriel Kasonta declares:
Given that many people in Ukraine actually consider themselves to be Russian, and that the justifications for sanctions may have shifted, it appears necessary to revise our approach to what could be considered one of the greatest challenges of the 21st century. We might do worse than explore for [sic] a peaceful solution to this crisis, engaging EU member states and Russia in a meaningful and inclusive dialogue.