MOSCOW BLOG: US declares economic war on Russia

MOSCOW BLOG: US declares economic war on Russia
US has declared economic war on Russia says Russian PM Dmitri Medvedev / kremlin.ru
By Ben Aris in Berlin August 12, 2018

“The US has declared economic war on Russia,” Russian Prime Minister Dmitry Medvedev said on August 10 in remarks that set the stage for a real military clash between the two countries.

Tensions between Moscow and Washington have been escalating steadily since the start of this decade, but these rising tensions have only become visible in the last seven years. Now they are coming to a head.

The US announced yet another round of sanctions on Russia earlier in the week that explicitly target Russian domestic treasury bills, OFZs. If these sanctions are passed into law then they will be the most significant yet and will really hurt the government’s ability to finance its budget deficit. The Ministry of Finance has an ambitious RUB2.5 trillion ($37.4bn) borrowing programme for next year, and given the tense geopolitics it was intending to raise most of this money on the domestic market. That will be a lot harder if the new sanctions are put in place. By targeting the bonds these sanctions are specifically designed to do real and lasting damage to the Russia economy.

"Western partners argue that the Russians are bad, they carry out the wrong policy, that the government of the Russian Federation should change its position on a number of issues, but to a large extent this [is a] restriction of our economic power," Medvedev said.

If the sanctions are imposed then growth will slow by between 0.5% and 1.5% and the standard of living will decline further. Medvedev said the Kremlin would not accept these sanctions without some sort of response, although he gave no specifics as to what that response would be.

Since Russia’s capital market was hooked up to the international financial system by joining Clearstream and Euroclear in 2012 the bond market has flourished. Able to buy Russian domestic bonds from the comfort of their trading desks in London and New York, international investors have piled into the OFZs, holding a record 34% at the start of this year. That has been a boon for the Ministry of Finance, making it easier and cheaper to fund the budget deficit without having to expose itself to international regulators with sovereign Eurobond issues on the international markets.

But each round of sanctions have become progressively tougher as relations between the US and Russia go into a death spiral. The original sanctions imposed in 2014 following Russia’s annexation of the Crimea were little more than a symbolic list that named a few state officials and some generals directly involved in taking over the Crimea, but had little economic consequence. The sanctions regime became more serious a year later when investors were barred from lending to blacklisted Russian companies that included some of the biggest names in the country.

Tensions have continued to rise since the 2016 US presidential elections where Washington accused Moscow of meddling in the vote. Things ratcheted up again with the April 6 round of sanctions that for the first time barred US investors (or investors that operated in the US) from dealing with specific existing bonds or shares. Investors were ordered to dump their stocks and bonds in Rusal and other companies belonging to Kremlin insider Oleg Deripaska, among others, causing chaos on the metals market and significant damage to a number of big western investors that were left holding the now unsellable assets.

These rising tensions have also impacted the bond markets. While OFZs were a la mode last year, investors have been selling out this year. First was the Countering America’s Adversaries Through Sanctions Act (CAATSA) sanctions that threatened to target OFZs but didn’t, that came out in February, followed by the April round. Foreign holding of OFZs fell to 28% in June and were down to 27% in July. After the latest Defending American Security Against Kremlin Aggression Act (DASKAA) bill and Defending Elections from Threats by Establishing Redlines Act (DETER) sanction proposals introduced in the last two months (neither of which is passed yet) the sell-off is bound to accelerate to the point where the Ministry of Finance’s borrowing plans are already in doubt.

At the same time the ruble has already begun to weaken, which will drive up inflation, and so any hope the Central Bank of Russia (CBR) had of making more badly needed interest rate cuts this year to bolster the moderate economic growth are dead.

Getting ready for war

So Medvedev’s talk of war is not too far off the mark. While the ultimate goal of war may not be to destroy an economy per se, that is how you win them. The US tipped the balance in WWII as it simply massively out produced Nazi Germany once it had put its economy on a war footing. Likewise, the Soviet Union fell as it couldn't keep up with the west in both military and civil production at the same time. No great power has won a classic war that lasted more than a few months where it had the weaker economy. (Guerrilla wars like the US vs Vietnam and the Turks vs the Arabs are a different matter.)  

The prospect of war doesn't worry the US as it believes it can bring unbearable pressure to bear on Russia and keep upping the ante until Moscow caves. It feels that its sovereignty has been threatened and will not back down. It has in effect revived the Monroe Doctrine first expounded in 1823 that says it is in the interests of the US to stymie the development of any country in another region which threatens US ability to exert its own interests there. Certainly that is how the Kremlin sees it.

Medvedev in his speech recalled that sanctions against Russia were introduced, "in the last 100 years" and Russia "existed in conditions of constant sanctions pressure." He said he was sure that this was done in order "to remove Russia from among the powerful competitors on the international field".

The root of the current clash probably started with the US decision to unilaterally withdraw from the ABM treaty (Anti-Ballistic Missile Treaty) back in 2002. The treaty was signed in 1972 and was one of the pillars of European security, as it limited the deployment of anti-ballistic missile systems used to defend against nuclear attacks and hence limited an arms race between the adversaries.

Russia saw the withdrawal as an attack on its sovereignty and began rearming shortly afterwards. US ABM missiles went live at a base in Romania last year, with another ABM base due to go live in Poland soon.

The US is outraged that Moscow would dare to try and interfere in a US election, but this has also been Putin’s objection to Washington. US advisors played an important role in getting Boris Yeltsin re-elected in 1996, the year that Putin came to Moscow to work for the former president. And Putin believed that US funded pro-democracy NGOs were actually fifth columns, so he banned them. The US does routinely interfere in elections: the Washington Post reported that the US meddled in over 70 elections over 30 years during the Cold War, but this is the first time another power has attempted to meddle in its own elections.

As both sides see the clash as a question of protecting their sovereignty neither side is likely to back down. As part of the DASKAA sanctions Washington is demanding not only that Russia closes down its chemical weapons facilities but that it agrees in the next 30 days to open them up to international inspection — conditions very similar to those imposed on Iran’s nuclear programme.

It is highly unlikely that the Kremlin will agree to what it clearly thinks is American bullying, although it would perhaps agree to a deal that comes under the auspices of an international body such as the Organisation for the Prohibition of Chemical Weapons.

The difference is that Putin concedes that Russia’s relations with the US will never be as good as he had initially hoped but he is willing to work together with the US if they can set up a multipolar international system of cooperation. The Kremlin has made it clear that its preferred forum is the UN, where it also has the special privilege of a veto, while at the same time the Trump administration has been actively downgrading what relevance the UN had for Washington with its withdrawal from the UN Human Rights Committee being the most recent example.

All this can do is drive the wedge between Russia and the US deeper. Russia has already turned to China as an ally against US unilateralism and Beijing is as keen as Moscow for a multipolar world for most of the same reasons. Washington should be worried about this budding relationship that now includes joint military exercises — perhaps a signal that if the US were to attack Russia and Beijing was forced to choose sides it would come down on Russia’s side: Washington represents a long-term threat to China’s global interests as it becomes more powerful; Moscow doesn't.

Russia cannot accept US chemical weapons inspectors on its soil as it is question of sovereignty. Russia has been preparing for war since 2012, as bne said in the cover story “Rekindling a new Cold War as Russia rearms.”  

But Russia doesn't have to win a war with the US. It only has to convince the rest of Europe that it has the capacity to last long enough to wreak damage on the continent. Post-war democratic society will be unwilling to fight, to give up their pleasant prosperity and see their homelands destroyed in a war against Russia that is dictated by a fight started in Washington. The popular protests in Europe would be so strong they would be likely to bring down any government that attempts to ignore them. In this sense Putin’s investment into the World Cup was a clever piece of insurance as it is more difficult to demonise a country if you have recently been there and enjoyed it and its people to the extent that millions of visitors so clearly did enjoy themselves.

 

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