Capital Outflow

The Russian Regime appears to be very concerned with the potential impact that a further weakening of the ruble would have and have been warning about it. There have been several articles (some of which I have highlighted here already) mostly pointing to the fact that Rosneft’s lack of ready cash could cause major problems for the Russian currency come December.

According to Russia’s Central Bank Russian companies have $21.6 billion in external debt due by the end of the year, and another $15.2 billion due by the end of the first quarter of 2017. This does not include banks or other financial institutions.

As for the banks, Raiffeisenbank analysts predict a further outflow of capital.

“Since the beginning of the year, foreign currency in corporate accounts decreased by $20.5 billion or 14%.”

That is, every 7th dollar has left.

“Foreign exchange reserves of the banking system, the reserves on the accounts in foreign banks – remained at its lowest level in 5 years and reached $20.4 billion, down by 20% from the beginning of the year.”

The columnist Sergei Shelin wrote earlier this week that a drop in the price of oil could hurt the ruble too. But, he says, the main thing is that people panic. There are three things that could happen with the ruble:

“A more or less marked weakening of the ruble in the coming months is quite possible, although not guaranteed.”

The rising price of oil may prevent this, however. But Shelin writes, “I do not believe this is very likely.”

Second, if the ruble is again weakened, he says, “it is unlikely to be on the same scale as two years ago or even one year ago.”

And third, Shelin does not rule out “a powerful devaluation” but for this to happen, there would have to be external shocks, “such as the collapse of the global energy market, or some major adventures on the domestic and external fronts.”

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Standoff

The Russian Regime is ratcheting up on both its rhetoric and actions in the last few weeks leading up to the US presidential election. The Moscow Times reports:

Russian state television has lashed out at the United States in a blistering campaign against Washington policy in Syria and eastern Europe.

Foreign Minister Sergei Lavrov began the anti-American tirade on “Sunday Time” (Voskresnoe Vremya) on Channel One, accusing the United States of threatening Russia’s national security.

Flagship news program Vesti Nedeli continued the theme, announcing that “relations between Russia and the United States have taken a long-expected turn for the worse.”

Meanwhile, Mikhail Gorbachev came out today to entreat both sides to start talking again about nuclear disarmament.

There has been a collapse of mutual trust [between Russia and the United States.] I believe that we need to resume talks across the agenda, and on the nuclear issue above all,” he said.

Essentially, Gorbachev is playing “good cop” to the Kremlin’s “bad cop”.

Gorbachev’s plea brought to mind Ivan Preobrazhansky’s appeal last week to stabilize the situation.

The statements of Russian diplomats are increasingly similar to analogous statements of their Iranian colleagues. Recall, only recently, before most of the US sanctions against Iran were cancelled, the US was regularly called “the empire of Satan”.

There are, however, abstract conciliatory statements. They are clearly not addressed to the current US administration in the White House, but can be actualized after the new president comes to power. Moscow will not be difficult if you want to give it a gift.

Whoever comes to power – Donald Trump or Hillary Clinton, either of them will be quite easy against the backdrop of the current almost complete cessation of cooperation with Moscow to demonstrate excellent diplomatic skills, achieving normalization of relations. Moreover completely without concessions by the US.

He concludes:

However, the freezing of relations between Russia and the West is increasing at an acculturated pace. And then, in order to “warm up” literally the last few days of curtailed contacts and to restore confidence, it will take more than one year, or even a decade – as we saw with the historical experience of the USSR.

Let’s work together, guys, or else… Or else we will get World War Three, apparently.

Remembering Politkovskaya

The photo below has been making the rounds on Russian social media today, the 10th anniversary of the murder of Russian journalist, Anya Politkovskaya.

It appears to have originated on Memorial’s Alexander Cherkasov’s Facebook page:

We remember our murdered friends.

Anya Politkovskaya, Stanislav Markelov, Natalia Estemirova. Grozny [Chechnya], at the courthouse. Spring 2005, at the verdict in the Lapin (Cadet) case.

asn-2005

Sergei Lapin was convicted for the torture and disappearance of a Chechen student during the 2nd Chechen War. Anya Politkovskaya brought attention to the crime in an article written in 2001.

Roman Vorontsov commented:

There is the feeling now that there are so few political murders in Russia now only for the reason that there are so few decent and courageous people.

 

 

Sotnik Leaves Russia

I have been posting translations and summaries of pieces by Sasha Sotnik here for awhile now. As time has gone on, his comments on the situation in Russia have become more and more bleak. Even so it came as a bit of a surprise to read today that he is joining the ranks of those who are leaving Russia.

Rosbalt reports:

The famous Russian writer, publicist, and political scientist Alexander Sotnik is leaving Russia for Georgia because of continued threats.

According to the writer, he has not emigrated, and is not running away from the country, but hopes to return to Russia soon. The journalist in an interview released on YouTube said he did not intend to ask for political asylum.

According to Sotnik, soon the situation in Russia will change, because “Russia is a country of surprises”.

RFE/RL wrote:

Aleksandr Sotnik said he had received threats in a telephone call.

“We are going to tolerate you until October and after that we will transfer you to a vegetable department,” Sotnik quoted the unknown caller as telling him.

Russia Is Not Going to Rio

Russia’s track and field team was barred from participating in the up-coming Olympic Games in Rio due to its collective use of banned performance enhancing drugs last week.

Russian track and field athletes have been suspended from international competition since last fall, after publication of a WADA report accusing the nation of an elaborate government-run doping program.

The International Olympic Committee is meeting today to decide on whether Russia will be banned from attending the events entirely.

Meanwhile, the Russian government has portrayed its athletes as the victims of some kind of massive conspiracy:

And the Kremlin’s Dmitry Peskov reiterated the same sentiments:

Russian MP Vladimir Zhirinovsky suggested that Russia boycott the games all together and hold a separate event in Russia.

By now we’ve all heard about the health and safety warnings surrounding Rio. The World Health Organization is under fire for its failure to take the risks seriously. In the same article from late last month:

The International Olympic Committee (IOC) has said it sees no reason to delay or move the Games because of the mosquito-borne disease.

Athletes from all over the world are dropping out of the Games. Others are freezing their sperm in case they acquire Zika while in Rio.

So I can’t help but wonder if the Russian athletes and Sports Minister Mutko aren’t a bit secretly relieved by the recent events.

NATO’s Future

I wrote this back in July 2015, and it was originally published by The Center for Intelligence Studies on their website. However, I have had difficulty linking back to the article, so I’ve decided to put it up on my blog.

The Implications of Russia’s Aggression Against Ukraine for NATO

Since Russia’s annexation of Crimea early last year, and its subsequent invasion of Ukraine proper, discussions about the country’s ambitions and goals have become common in European capitals. Even more so as Russian adventurism has not been limited to Ukraine. Flybys with transponders turned off, and dangerous maneuvers mid-air in international airspace are now a regular occurrence. The search for a Russian submarine in Swedish waters last year brought back memories of the Cold War era.

The rhetoric from Moscow about nuclear capability and intent is escalating at the same time. In March, Russia’s military claimed that it was sending its Iskander missiles to Kaliningrad, a Russian province on Poland’s border. It additionally stated that it was planning to “deploy long-range, nuclear-capable Tu-22M3 bombers to Crimea”. Conventional weapons and troops are also being moved into Kaliningrad, a recent article in RFERL confirmed. The sabre-rattling is concerning.

Questions about NATO’s future and capabilities are increasing in conjunction with rising Russian adventurism. There is a growing belief that NATO is fractured and does not have the political will to act in the face of the threats it faces from a resurgent Russia. There are questions about the alliance’s cohesiveness, and commitment to one another. Is the alliance able to respond adequately to the current threats it faces from Russia?

NATO faces dual threats from Russia. The threat of a conventional war with Russia is being debated, with both experts and dilettantes trying to anticipate which alliance member Russia will invade first. Alongside this, the phrase ‘hybrid war’ is being bandied about, though its meaning and what it entails is not agreed upon. In essence the group is facing the threat of war by unconventional means. Tactics include propaganda aimed at minority populations in order to destabilize domestic politics in NATO countries, and cyber warfare, among others. These are threats that the alliance was not designed to counter.

It seems unlikely that Russia could win a conventional war on the battlefield with NATO. As a result, Russia is resorting to asymmetrical attacks, and intimidation tactics. Attacks that NATO was not designed to counteract. While the alliance has only recently stated that a cyber attack would be considered a reason for action on Article 5, the parameters are unclear. Poland, for example, has experienced seven reported cyber attacks in the last year alone. Although it is unclear if the source of the attacks is the same, as it has not been publicized.

At the same time, an internal fracturing appears to be taking place. NATO has always been something of a loose confederation of nations who could be relied upon to act if a member was attacked. It has become even looser in the last couple of decades. The common enemy it was initially designed to counter no longer existed, as the Warsaw Pact collapsed, and Russia was transformed from a threat into a partner. New threats emerged to fill the vacuum left by the USSR, but rather than acting as a unifying force, they sometimes led to discord. The alliance struggled to define their purpose and common interests in the face of these changes and challenges.

Pew Research Center recently released a poll about attitudes to the alliance and the conflict in Ukraine with Russia. The polling agency dramatically declared that more than half of Germans thought their country should not abide by Article V in coming to the aid of an alliance member if they got into conflict with Russia.

The Pew poll was criticized, however, for misrepresenting their findings. In fact, the poll question did not specify the instigator of the hypothetical conflict. Something that would almost surely make a difference in the way someone answered the question, and certainly would change how NATO reacted.

Even so, it appears that NATO lacks the political will to act as a whole. Articles 4 and 5 may not be the guarantee they were once believed to be. Politics still play a role in the alliance’s decision-making process. This principle was laid out as early as 1956, when the Secretary General of NATO, Lord Ismay, stated: “NATO is a political as well as a military alliance”.

Immediately following Russia’s annexation of Crimea, Poland and Lithuania called for “extraordinary consultations” based on Article 4 of the Washington Treaty, on the premise that Russia’s actions were ‘a threat to NATO’. Consultations based on Article 4 have only been called four times since 1949.

Article 4 of the NATO treaty reads:

“The Parties will consult together whenever, in the opinion of any of them, the territorial integrity, political independence or security of any of the Parties is threatened.”

Article 5 of the treaty has only been invoked once, by the United States after it was attacked on September 11. Article 5 requires all members to agree to act, and does not mention technological advances. There has been some question of what happens in the case of a cyber attack. But NATO Chief Stoltenberg reassured allies earlier this year, saying, “NATO has made clear that cyber attacks can potentially trigger an Article 5 response.”

Another question that has been on the coalition’s backburner for years is the budget. According to numbers just released by NATO, only five countries (Estonia, Greece, Poland, the United Kingdom, and the United States) are spending the suggested two percent of GDP (gross domestic product). This percentage is not mandatory, but the fact that it is not has caused some resentment among the various members. In addition, there are 18 countries who plan to increase their contribution, Stoltenberg stated on Monday. Nevertheless, he continued, the budget is expected to fall “by 1.5%” this year.

These budgetary disputes demonstrate a lack of commitment to other alliance members, and have led to some resentment about countries who do not contribute, but still expect to benefit.

Some NATO members were also hesitant to allow former Warsaw Pact countries to join the alliance after the end of the Cold War. And accession has been frozen since 2009, when Albania and Croatia joined. Both Ukraine and Georgia have been denied entry despite statements of intent. However, in the face of increasing Russian sabre-rattling, there has also been interest expressed by non-NATO countries in expanding their partnership, or even joining the alliance. Polls conducted in Sweden, for example, show that popular support for NATO ascension is the highest it has been in years — 31% according to a recent poll.

Russia’s ambassador to Sweden has recently responded with threats, saying: “The country that joins Nato needs to be aware of the risks it is exposing itself to.”

On a recent visit to Finland, former Russian Finance Minister, Alexei Kudrin, also asked for guarantees that the alliance “would not continue to expand”. A promise Russia has claimed they were given at the end of the Cold War.

It is difficult not to be sceptical of the capability of a fractured NATO to respond to Russian aggression. NATO has demonstrated clearly that it is technically and technologically capable in the face of a conventional invasion.

As Stoltenberg recently stated: “NATO is here. And NATO is ready.”

He continued by laying out the coalition’s future plans, including deployments, and new “logistics headquarters”.

Nevertheless, it seems frozen when confronted with unconventional attacks. Additionally, it appears to be politically incapable of reaching a consensus on so-called existential threats, and even identifying its common enemy.

Russia’s current hostile behavior presents NATO with the opportunity to address questions concerning its purpose and function. There is a small window of opportunity for the alliance to come to an agreement on these issues and develop a new strategy, but unfortunately this looks increasingly unlikely. NATO failed to adapt to new realities following the end of the Cold War, leaving itself unprepared for the current threats it faces. Any attempts to rectify the situation now would be reactionary and may not be successful.

Putin vs. Lenin?

Last week, AP reported that President Putin had “denounced Lenin and his Bolshevik government for their brutal repressions and accused him of having placed a “time bomb” under the state.”

On Twitter an analyst asked if this meant that Putin saw the Communist Party as a threat in the coming parliamentary elections in September, and speculated about “internal polls”.

In the highly contested 2011 Duma election, the Communist Party came in 2nd place to the ruling United Russia. Granted, they took 19.19% of the vote compared to United Russia’s nearly 50%, but this was a marked increase from their 2007 results of 11.57%.

When looking at the seat distribution, the Communist Party gained 35 seats in Parliament while United Russia lost 77 (the remainder were distributed to the 3rd and 4th place parties with 16 & 26 seats respectively).

The Communists have also been actively fighting for no budget cuts on benefits and have also been supporting some of the protest movements against the Kremlin.

So, yes, the Communist Party is something of a threat to United Russia in the coming elections in September. But is that why Vladimir Putin said what he did about Lenin?

When Putin makes ideological statements like the one he did about Lenin, he is sending a message to his core constituency. And I don’t mean voters. I mean the elite who support him. Particularly those who support his adventurism on foreign soil.

This was not the first time that the President has made a statement criticizing Lenin & the Bolsheviks either. At the annual summer Nashi youth camp in 2014, Putin

“spoke of the Bolsheviks’ ”betrayal of the Russian national interests.” It was the Bolsheviks, after all, who “wished to see their fatherland defeated while Russian heroic soldiers and officers shed blood on the fronts of the First World War.””

Lenin’s name was never mentioned, but the implication should have been clear to anybody who heard it.

Even though he did use Lenin’s name this time, Putin would not make the final step to call for the closure of the Masoleum in Moscow’s Red Square, saying that it would “divide society”.

 

 

Downshifting

Sberbank chief German Gref caused a scandal at the Gaidar Forum last week by calling Russia a “downshifting” economy, and saying that Russia had been “defeated in the global competition”.

A long piece in Novaya Gazeta highlighted some of Gref’s comments:

“According to him [Gref], the technology gap between the leading economies and lagging countries may be greater today than in the era of the industrial revolution of the 19th century. And the only chance to fight for the future is to change the entire state system and all social institutions ranging from the education system, which today is not only ineffective, but works exclusively to export talent [brain drain]. Gref also described Russia as a “downshifter country” — the… term usually refers to a person who gave up a career and competition for a “life for themselves”.

Wikipedia defines “downshifting” as:

“a social behavior or trend in which individuals live simpler lives to escape from the rat race of obsessive materialism and to reduce the “stress, overtime, and psychological expense that may accompany it”.”

So what is the economic prognosis for 2016? Novaya’s journalist talked to Russian economists to find out.

  • Capital outflow: $50 billion
  • Sanctions will continue
  • No growth
  • Recession will last 4-5 years
  • GDP decline: 2-4% in 2016
  • Budget Deficit: not more than 5%?

Other predictions and factors:

  • This year will see a confrontation between the Finance Ministry, who want to adhere to an austerity policy, and other agencies, desperately clinging to their dwindling budgets. “…the 10% [budget cut] is clearly not enough”, says economist Sergei Hestanov.

Another possible source of revenue for the federal budget is partial privatisation. But the low price of Russian assets and the unwillingness [of the state] to give up control of “Gazprom” and “Rosneft” will encourage the government to ensure that the reserves are spend first, according to Mironov. In addition, the crisis situation in the economy reduces the demand for domestic assets, so the state does not have a real opportunity to bring in a lot of money through this tool, experts agree.

  • Printing money still seems like a radical idea… But if budget problems continue to grow uncontrollably, after 2018 [the presidential election], anything is possible.

“A deficit is a situation where the state cannot fulfill its obligations. This is most clearly expressed in the form of delayed pensions, and public sector wages [already a problem in certain regions]. A deficit of 3% is a critical value: in this range the budget remains stable and manageable, but as soon as that mark is passed, the risks are greatly increased,” says Sergei Hestanov.

  • The authorities will try to take all possible measures to keep the deficit within acceptable limits, but if oil prices hold out for a long time below $30 a barrel, it will rise above 5%.
  • If Iran does aggressively dump oil, prices could halve again to $14.5 per barrel. For the state this is a catastrophic scenario, at such prices oil companies are exempt from the tax burden, and the budget is deprived of a significant part of its revenues.

The key factors will be the indexation of pensions significantly lower than actual inflation, as well as a tougher business policy – the protracted nature of the crisis will force employers to cut costs more decisively.

In terms of the population, the main risk is still inflation, says Doctor of Economics Yevgeny Gontmakher. The rise in prices is felt by people much more than the official statistics tell us. The second point is what happens with the social benefits of the population, especially at the local level.

“In 2016, social factors override macroeconomics. If you approach the issue purely from accounting, the budget can be halved — cut costs — and that’s it. but this year will be a year of great social tensions. It won’t turn into an organised movement, but constant local outbursts, as we have seen in Krasnodar, where pensioners took to the streets, or the truck driver protests last year, will be significantly strengthened,” predicts Gontmakher.

So things are bad, and only going to get worse. And it’s too late to turn back the clock.

Russian Society’s Limits

A little over two months ago, Alfred Kokh asked the following question on his Facebook page:

“…it seems that Russia has a huge margin, before the coming danger of the disintegration of all social institutions.

“But the fact is that our understanding about the stability of a society and its ability to face the challenges of the outside world is very superficial and unconvincing. Sometimes it seems that the the edge is much closer than it actually is.”

And we still poorly know how society works, in order to be able to accurately predict the limits of its tolerance.

I was reminded of this post when I saw Andrei Kolesnikov’s recent interview in Ekho Moskvy:

The people need to be scared, to be kept off-balance, by the regime, Kolesnikov says. The current situation with the falling GDP, 15% inflation, and the unstable ruble makes this necessary “in the abstract sense”. Mass repression is not needed. Russia is “not yet a totalitarian regime”.

“The authoritarian regime demonstrates just what it is capable of…”, emphasizing its cruelty, and targeting various peoples and groups, emphasizing its arbitrariness.

Of course, this signal is understood by the public in such a way that it is better continue to behave calmly, it is better not to twitch, not to offend the Lord, to be quiet. Do not join any protests. To adapt to the life as it is.”

Meanwhile, small demonstrations are taking place, as Paul Goble notes:

“Novyye izvestiya” reports today that Russians took to the streets in Volzhsky, Kalach-na-Donu, Blagoveshchensk, Chita and Birobidzhan not to protest this or that action but rather the decline in living standards as a result of central government policies (newizv.ru/politics/2015-08-31/226365-banalno-net-deneg.html).

Goble continues:

Valery Borshchev, a former Duma deputy and rights activist, says that “the higher leadership of the country receives information about all protest actions and about [this] change in their character. But it is necessary to point out at the present time the Center really doesn’t have a genuine chance to provide help to the regions. For the banal reason that there is no money.”

Oboronservis

The Oboronservis fraud case seems to finally be wrapping up. To recap, in the autumn of 2012 the Russian Minister of Defense was sacked after a scandal broke regarding corruption in an agency [Oboronservis] dedicated to outsourcing services for the Ministry of Defence. Oboronservis was accused of defrauding the state through various schemes.

The main suspect, Yevgenia Vasilyeva, also happened to be having an affair with the Minister of Defense, Anatoly Serdyukov, at the time.

Vasilyeva was sentenced to a 5 year prison sentence this past May. She had already spent 2.5 years under “house arrest”, but had been spotted shopping in high-end Moscow stores during that time. Her lawyers had vowed to appeal.

On 20 August, it was reported that Vasilyeva’s father paid the state a fine of 216,287,223 roubles for all the defendants in the Oboronservis case.

UDO is the Russian parole agency.
UDO is the Russian parole agency. Alla Naumchova posted this to Facebook with the comment: “Условно Досрочное обогащение” [Conditional Early Enrichment].
Olga Romanova wrote on her Facebook page:

“It is reported that Yevgenia Vasilyeva has fully repaid the damages caused – 216 million roubles – and will be released tomorrow.”

Romanova also noted that Vasilyeva had “earned on the market: 216 million roubles was worth $7 million two years ago, and today, in order to achieve the desired amount of 216 million roubles you just need to sell $3 million.”

Komsomolskaya Pravda reported:

“Everyone who investigated the “Oboronservis” case is outraged in the extreme”, one of the participants in the investigation told RIA Novosti.

The Prosecutor had asked that Vasilyeva be sentenced to 8 years probation, to take her State Order of Merit, to fine her a million roubles, and to return to the victims 800 million roubles.

Yesterday, Oleg Kozyrev commented:

“The court did not oppose the parole of Vasilyeva. But did oppose the parole of Vitishko [an environmental activist arrested during the Sochi 2014 olympics]. And this is all you need to know about the parole system and the courts.”

Rustem Adagamov tweeted:

“Vasilyeva has been released from prison, where apparently she had never been. In Russia anything is possible.”

Ilya Shumanov of Transparency International wrote on Facebook:

“One of the most important principles of any anti-corruption campaign is the inevitability of real punishment for corruption. Lack of impunity. (No impunity).

You can speak countless words about the fight against corruption and send signals about its harm, but it is enough to release the corrupt and thus cancel out all that had been done previously, and [everything that had been] achieved.
Another anti-corruption campaign in the country has ended. Once again it has come to nothing.”

Konstantin Jankauskas noted:

“The “release” of Vasilyeva is a terrible shame for the country. A shameless and cynical public demonstration of the absolute impunity of public thieves before the law.

“Plunder and steal, the law does not apply to us.” This was the simple message that we received today.

Vladimir Osechkin publicized the name of the judge who made the decision to parole Vasilyeva:

“[Vasilyeva spent] 34 days in prison, and more than 90% of her time… just 5 minutes from the Kremlin.”

Osechkin noted the judge’s youth and said it was clear that the order had been sent down from above.

“I believe that in a year or two he will be promoted to a judge of the regional court. Unless, of course, he is not employed with a law firm with Vasilyeva.”