It is a tradition amongst Russian watchers to remind ourselves that August is the month when unusual and trend changing events take place more often than in any other month of the year. Despite it being a supposedly quiet holiday month, rarely does Russia actually get away without some crisis to deal with. This year is already shaping up to be one of those that confirms the sequence, as a group of senior US senators are determined to push new and dangerous sanctions legislation against Russia.
In an op-ed ahead of the July 16 Helsinki Summit we noted that Moscow was deliberately taking a huge risk with the meeting because the more positive the summit looked to the Washington audience then the greater the risk US senators would hit back with new sanctions initiatives, to hit both Russian President Vladimir Putin and the US’ Donald Trump. The calculated risk that the Kremlin may have considered was that a) the anger would diffuse during the annual August recess on Capitol Hill and b) Trump may take a more pragmatic position and refuse to sign any new legislation. We now know that the Senate is not taking a break this August because there is such a backlog of presidential nominations to be confirmed. Some senators are taking advantage of the unusual August session to submit new legislation that would force the White House to impose tougher sanctions against the Russian state and more oligarchs. Whether Trump would actually sign off of any new initiatives remains to be seen.
In recent years, sanctions have been imposed in August and it may again happen this year. In August 2014 the US, EU and several other nations imposed sectoral sanctions against the Russian banking and energy sectors as a result of the deterioration of the situation in Eastern Ukraine. To a large extent the Russian economy adapted to these sanctions relatively effectively and, it can be credibly argued that these sanctions actually helped Russia take some tough decisions that have benefited the economy. Devaluing the ruble and the Budget Rule, which aims to balance the budget at $44 Urals in 2021, are certainly in that category.
But the benign sanctions backdrop changed in August last year when President Trump signed the Countering America’s Adversaries Through Sanctions Act (CAATSA). That was a game-changer and continues to deliver consequences that are still hurting the Russian economy. The senators sponsoring the latest sanctions threat are promising to force even more damaging enforcement of that legislation this August.
Perhaps this year Russia may get a very rate positive event in August? For those with an inclination towards optimism, the always active rumour mill in Moscow suggests that there may be some announcement with regard to Ukraine in the coming weeks. Normally one dismisses most rumours in Moscow unless persistent and broadly sourced, as these are. The suggestion is that the Kremlin, keen to build on the positive sentiment generated towards Russia, in Europe in particular, from the World Cup may offer a concession in East Ukraine so as to break the impasse and move the Normandy talks forward. Such a move would also help Ukraine’s President Petro Poroshenko start to address his dreadful opinion poll position, and would undoubtedly be welcomed in the major EU capitals. A sort of Countering Russia’s Adversaries Through Positive Action. It would indeed make for a nice change at this time of the year.
As stated, historically, major political events, both domestic and geopolitical, have not been uncommon in August. The Molotov-Ribbentrop Pact was signed in August 1939, and construction of the Berlin Wall started in August 1961. Soviet troops entered Prague in August 1968, and in August 1991 there was an attempted coup against Mikhail Gorbachev by those looking to prevent the break-up of the Soviet Union. August 1999 was when Boris Yeltsin promoted a still relatively unknown Vladimir Putin to the post of prime minister. The Russia-Georgia war provided the backdrop to August 2008. History is certainly on the side of the Doomsayers.
As this July draws to a close the economy is in relatively good shape in that it is showing modest growth across almost all sectors and the national balance sheet is in very good shape, especially as the current oil price average will deliver a $25bn budget surplus for the year. But a quiet economy has not always been the case in August, with arguably the two biggest macro events in the history of the state initiated in August 1998 and in August 2014. The former was the default on domestic debt and the collapse of both the ruble and a big portion of the banking system. In 2014 the sectoral sanctions were met with a retaliation that banned the import of food from most Western nations. August 2014 also saw the start of the collapse of the oil price, which directly pushed the economy into recession and, in combination with sanctions, led to 25% food inflation and some shortages the following winter. On a more positive note, Russia ended almost 19 years of stop-start negotiations and was finally admitted into the World Trade Organisation in August 2012.
Nature has also been very unkind to Russia in August. In August 2002 widespread fires raged in the peatlands around Moscow and blanketed the city in a toxic haze. August 2013 brought very destructive flooding to much of Russia’s Far East, which led to both expensive economic disruption and loss of life. The worst weather-related disruption came in August 2010 when large swathes of the country were hit with high temperatures and forest fires. That combination contributed to drought conditions across much of the farming belt and led to a big drop in the year’s harvest. In fact, it was this combination that persuaded Putin the country’s reliance on imported food (55% of consumption that year) and medicines was not only bad economics but a national security issue. The origin of what we now refer to as the ‘localisation’ policy was in August 2010.
August can be an accident-prone month, such as in August 2000 when there were a number of serious accidents including the sinking of the Kursk submarine and a fatal fire in Moscow’s landmark Ostankino TV tower. In August 2006, 170 people died in an aeroplane crash on a flight from the Black Sea resort of Anapa to St Petersburg. In August 2005 the first case of avian flu was reported and while thankfully that did not develop as had been feared, it did lead to a sense of heightened concern for the month. In August 2009 one of the country’s largest hydropower stations suffered a catastrophic explosion in which 75 people died.
August is also associated with various acts of terrorism. In August 2004 the country was rocked by a series of terrorist actions including a car bombing in Moscow and the destruction of two passenger aircraft. A thoroughly miserable and fear-filled month was rounded off with one of the biggest tragedies to hit post-war Russia when terrorists took over a school in Beslan in southern Russia with tragic consequences.
Even in relatively quiet Augusts, of which there have been very few over the past 15 years, there is always something noteworthy or just odd. In August 2001 the then North Korean leader, Kim Jong-il, visited Moscow. But because of his fear of flying he rode his private train across Russia and caused havoc to passenger services. Such was the frustration of the inconvenienced people that when the train arrived at a Moscow station there were multiple bullet holes clearly visible on its side. In August 2007 a group of nationalist politicians paid for a mini-sub to take them to the floor of the Arctic Ocean where they planted a Russian flag in support of the country’s claim to sovereignty over the Lomonosov Ridge.
August 2018 will not be uneventful. That is already clear. The only question is whether it will take its place in history as yet another dreadful month when the economy or national optimism took another hit, or maybe a month when the recent positive sequence of events was added to. History favours the former unfortunately.
Chris Weafer is a founding partner of Macro-Advisory, which helps investors cut though the noise & focus on underlying trends, real political risks, & opportunities in Russia/CIS, Eurasia Union, & Mongolia. Follow him on @ChrisWeafer.