"How The World Sees Russia"

Issue #24: 09/08/2018

From the Publisher:

In this week's issue of Rossiya Scan, we take a step back.

Why?

In order to understand the conflicts between the West and Russia, it is necessary to look at the past. Why does Russia act the way it does? Why is NATO still perceived as threat by Russia? With these questions, we begin our issue. 

We begin by taking a look at history to explain Russia’s actions. By visiting their military attacks on Georgia and the Ukraine, while trying to decipher what Russia is trying to tell the world. The West needs to understand this in order to effectively deal with Russia, and have a more constructive relationship.

NATO is will forever be an ongoing thorn on Russia’s relations with the Europe and the U.S. The Cold War is simply part of its DNA and the Kremlin is still the enemy. Russia is so threatened by this alliance that it  has even take up conventional and asymmetric arms to prove its point and stop its expansion. Could NATO cease to exist in the near future with the creation of an EU standing army or alliance? We also look at how likely this is the case, and what are the implications of such a move.

In prior issues of Rossiya Scan we have discussed the Kremlin’s strategy of looking eastward to offset its troubled commercial relationship with the West. In this issue, we briefly touch upon the latest of Russia’s ongoing work towards fortifying its commercial relationships with this part of the world, specifically China. Lastly, we take a look at the UK’s ongoing troubles with Russia as far as the Skripals poisoning incident. This unfortunate event is strictly a problem between the UK and Russia. We again make our case as to why the EU ought not to be caught in this mess, as it likely to jeopardize its own interests.

-Rossiya Scan

The Key to Understanding Russia? The Past... 

As Russia President Vladimir Putin once put it, “Chess makes man wiser and clear-sighted”. Russia plays chess, when others play checkers. In Rossiya Scan we have always highlighted how Russia is consistently one step ahead of its adversaries, positioning itself yesterday, where it wants to be today from a strategic standpoint.

Historically, Russia has always been threatened by its environment. Everyone wants to take down the biggest guy in the room, which in Europe happens to be Russia. Napoleon Bonaparte and Adolf Hitler failed adamantly; leading to their downfall, but at a hefty cost to the Russians. Indirectly, Russia also happened to save Europe from these tyrants; ironically allowing European democracy to flourish, challenging Russia’s economic and political hegemony.

History has caused an inherent sense of fear and distrust by the Russians towards Western democracies. This led to the famous “Russian Buffer Zone”, which Ivan the Terrible began and Russia reclaimed after World War 2 as a no-go zone for the allies. Alleviating two of Russia’s greatest concerns, vulnerability on land and its lack of access to warm-water ports.

Fast-forward to the 21th century, and Russia is acting to maintain the same old strategic goals it has deemed important for its safety.

Let’s look at Russia’s war with Georgia in 2008. At the time, NATO courted Georgia (which was open to it) for potential membership. The NATO alliance has always been considered a threat by Russian leaders, as it was created to counter their predecessor. In addition, Mikheil Saakashvili, Georgia’s then president, was hostile to Russia, which with other factors (such as an attack on a pro-Russian separatist Georgian province where Russia housed peacekeeping soldiers) culminated in Russia’s military intervention (in total defiance of the West).

Being backed by the West (but not part of it), Georgia was an appealing target to engage in a proxy war. Especially following an extensive military upgrade of the Georgian armed forces, which was facilitated by the U.S government.

By intervening directly, before Georgia took any further steps to join NATO, Russia was able to show that it was not afraid to attack a country it deemed as part of its sphere of influence. It also allowed them the opportunity to stretch their military muscle conventionally. Although Russia won the now called Russo-Georgian War, they became aware in the process of the state of their old weaponry. It was inferior to the Georgian’s newly minted U.S. made defense tools. This brief war led Russia to pour money into its military technology, which can now stand toe-to-toe with the West’s.

More recently, Ukraine suffered the same fate as Georgia when it contemplated NATO and EU membership. Ukraine has always been on the edge, suffering the ramification of being in-between Europe and Russia. To make matters worse, in Crimea rests the only all year warm-water ports that Russia has access to. Once the Pro-Russian government of Viktor Yanukovych was brought down in 2014, Russia felt it had to act and secure its interests, as Russia has a lease on Sevastopol ($98MM/year). The latter could be easily revoked by a pro-Western government with membership in NATO or the EU. Russia prevailed through the use of separatists, conventional forces, asymmetric warfare and complete annexation of Crimea.

You do not need to read in between lines, to foresee how Russia will react when it comes to a less powerful neighboring country joining NATO, or the possibility of losing an important naval base. You simply need to look back at history, and see how Russia has repeatedly reacted under these circumstances, which has always been with force.

Read more:

“A Scripted War,” by The Economist.

“The importance of Sevastopol for Russia,” by Viktor Litovkin for Russia Beyond.

“Russia’s Clash With the West Is About Geography, Not Ideology,” by Benn Steil for Foreign Policy.

“Russia and The Course of Geography,” by Tim Marshall for the Atlantic.

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NATO: The Eternal Threat?

The story of NATO (North Atlantic Treaty Organization) and Russia is never ending, a story of fear, misconception, “deceit” and constant paranoia, feeding of the perpetual distrust existing between the forces which won World War 2; which till today, divides our world.

In 1949, when the broken pieces of Europe were still being glued together, the “threat” of communist expansion induced the United States of America and 11 other nations (today 28), to pool Western European defense efforts and create NATO. Ever since, communism is no longer a threat (at least under the Russian banner), the Soviet bloc collapsed and Europe has “united” giving birth to the European Union.

However, the European Union has grown to embrace NATO as the pillar for European security (even though the alliance has ventured into other parts of the world). Following the collapse of the USSR, many nations (previously under the Soviet Block) have, or are attempting to join the European Union and NATO. With the objective of reaping the economic benefits of the EU, as as well as a sense of protection under NATO.

On the other hand, the USSR created the Warsaw pact in 1955 to challenge NATO uniting all the territories under its umbrella. The USSR is a distant memory, but the feeling of what once was part of the Soviet bloc, the Kremlin still feels is entitled too.

We believe that beyond the conflicts which have already made Russia react militarily (e.g. Georgia and Ukraine), other events, however, unlikely could trigger a direct or indirect intervention by Russia.

With the perception of escalating “Russian aggression”, the U.S under NATO has sent troops to Poland, as well to the Baltic states. There has even been discussion of Poland hosting a permanent U.S military base within their territory. Furthermore, the U.S has a plan to install the THAAD anti-missile defense system in Poland by 2020, to deter nuclear attacks. This is an open provocation to Russia, which understandably fuel its paranoia.

The question is…would Russia dare attack a NATO member?

Unlikely, the human cost would be too vast for both sides to consider. However, they have successfully sent a message to NATO with their Georgia and Ukraine interventions. The message is, that from here on out, any country that was in their former sphere of influence, and wishes to join NATO or the EU, will be attacked asymmetrically, and if need be even conventionally. This of course is a scary concept for any country bordering Russia that finds itself in the middle (e.g. Ukraine). What are they supposed to do? Do they not have the sovereign right to pick the side that they choose to be on?

Every nation should have the right to make the choice they deem best for their own safety and prosperity. The world is not a fair place though, the power struggles between the NATO and Russia, the defacto synonymizing of the EU and NATO, plus an overall lack of communication, have led to a less than ideal situation for these bordering states. That being said, it must be understood that NATO's chess pieces seem to always land around Russia, and this behavior is not conducive to a productive foreign policy. 

That being said, Russia  might not have a NATO to worry about anymore in the future. Instead, it might have to deal with a different alliance, which will not include the behemoth of the New World or its "European island".  There has been talk in Brussels, and elsewhere, about the benefits of creating a standing EU army or alliance. This, however, has actually become more than just talk though, albeit very slowly. There have been a series of moves that could signal the beginning of an eventual schism between the members of the EU, and NATO.

Last year, Germany began to quietly take the lead towards building a European army. They did so by integrating a handful of Czech, Rumanian and Dutch army brigades into the Bundeswehr. This took place outside of the existing, although small Eurocorps, and could be seen as another step towards the development of a separate European defense entity outside of NATO.

Of course, the actual creation of such a pluralistic military powerhouse would inevitably face hurdles from within, as well as outside. The EU would have to drastically increase their defense spending, and convince all EU members of the benefits of such an entity. With the UK (e.g. the U.S's European Island) out of the EU, such a consensus is more likely. However, Baltic states, and other Eastern European countries would need to be re-assured that such an armed force could offer the protection that the U.S. military can provide.

The U.S would also certainly do its best to deter such an action by the EU. On the other hand, Russia would likely be in favor of this, of course for reasons that are not EU centric. That being said, the seeds have been laid for such a concept, and it is one that in the long term would yield benefits to the EU as a powerful political entity. The quiet German approach is necessary to achieve this. Creating such treaties, and such incorporations without pomp eliminates drastically the efficacy of opposing actors. If it carried out correctly, plus expansively, such incorporations would in turn lead to the defacto creation of such a force. By default, this would lead to a more independent EU that could then drop the antiquated NATO without concern.

However, such a force would require France, the EU’s most powerful military actor, to take a lead jointly with, or even from, its German counterpart to ensure success. The wounds of Word War 2 are still too fresh for some people, who are still troubled by the idea of Germany leading the pack towards a standing EU military. That being said, Germany has changed more than any European country since World War 2, and its also the EU's economic powerhouse. It deserves the right to lead, and has acted with coolness and in a very pro-EU fashion since its inception.  

Read more:

“Germany Is Quietly Building a European Army Under Its Command,” by Elisabeth Braw for Foreign Policy.

“Germany to boost army to 200,000 troops amid growing concern over Donald Trump's commitment to NATO,” by Justin Huggler for The Telegraph.

“US troops deployed to Poland in response to 'Russian aggression,” by Tom Batchelor for The Independ ent.

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Sanctions Continue to Push Russia Towards Asia…

We have stated a few issues ago that due to sanctions, Russia has begun to turn towards Asia. It is embracing the similarities and common history it has with its Asian neighbors, in an attempt to fortify these relationships. Russia’s relations with the West have over the last 4 years gone from bad to worse to terrible. The more sanctions against Russia from the West, the harder it is for relations to improve. Hence, Russia’s turn towards more friendly waters in Asia is understandable.

The sanctions have stifled Russian businesses, and have created an unproductive climate from both a political, and business standpoint for all countries involved. Progress is slow and fights keep breaking out despite signs of a rapprochement.

As of this week, the Chief Executive of VTB (MCX:VTBR), Andrei Kostin issued a formal apology for calling British politician Boris Johnson a “freak” when holding a talk at the Russian institute for International Relations (MGIMO).

This animosity is most likely based on the fact that the bank is under sanctions, and that this week it announced a management buy-out. The latter will be led by VTB’s New York management. VTB capital has been sold off to its managers in order to offset the sanctions, the new company will be named Xtellus Capital Partners, and will retain the same clients and obligations as before.

Is this a true sale of the U.S based activity to managers? Or is this simply a shift in ownership via “straw men” in order to retain the business and avoid sanctions? We will find out in due time.

The ongoing emerging market currency crisis is also not fostering a climate for better relations. This year the Ruble is down by 17% against the U.S. Dollar. A key culprit for the ongoing weakening of the Ruble are the new U.S and EU imposed sanctions. This has led Russia to explore ways for it can mitigate these economic attacks.

For example, the Russian government has stated that it might consider repurchasing all of their debt. An increase in national debt ownership by third parties has a negative/positive correlation on the national currency. For Russia, which has only a 17% debt to GDP ratio, this could be a worthwhile strategy to stabilize its currency. By taking this extreme action Russia could deal a preemptive strike in case of the U.S sanctions. This would freeze Russian borrowing, and avoid a major sell off that would cripple the Ruble.

Lastly, another slower but more long-term way of mitigating the efficacy of sanctions is by making the Russian economy less dependent on their Western commercial relationships . By essentially substituting them with Asian partners, such as China.

This week Alibaba announced that it was in advance stages of a joint-venture with Russian firm Mail.ru. This is part of a greater Chinese plan to develop a digital silk road. The joint venture would concern, Alibaba, Mail.ru and the Russian Direct Investment Fund. The latter shows an implicit commitment and green light from the Russian government for such a transaction. The more Russia and other Asian countries join together, and develop mutually beneficial partnerships, the more dependent they become on each other. Meaning, the more the West becomes isolated from these areas of immense growth potential.

Read more: 

"Sanctioned Kremlin Banker Apologizes for Calling Johnson a 'Freak'," by Anthony Halpin for Bloomberg. 

"Alibaba Goes to Russia," by Fiona Symon for the Financial Times. 

"Aliababa Close to Signing a Joint Venture with Russian Partners," by James Kynge for the Financial Times. 

"Russia’s VTB Bank sells US unit to Management Amid Sanctions Fears," by Henry Foy for the Financial Times.

"'No Political Strings Attached' to New Silk Road Funding," by Gordon Watts for the Asia Times.  

"In the Emerging Market Storm, Look to Russia" by Marcus Ashworth for Bloomberg. 

"Why Russia Should Buyback its Debt," by Leonid Bershidsky for Bloomberg. 

"Russia Ready to Buy Own Debt If Sanctions Spark Market Crash," by Olga Tanas , Anna Andrianova , and Jake Rudnitsky for Bloomberg. 

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Skripal: A UK and Russia Conflict…

It has been a while since we have discussed the latest from the alleged Russian orchestrated poisoning of Sergei Skripal, the former GRU agent, and his daughter in the UK. However, this week, new developments occurred, which ought to be discussed. The UK announced earlier this week that they had identified two men suspected to be the perpetrators of the attack. 

Now, at Rossiya Scan we believe coincidences exist. However, they are a rarity, and do not occur as often as politicians’ claim.

We have already stated our concern about how the UK has been using this unfortunate event to stall Brexit negotiations. Yet, as we said two issues ago, the EU is increasingly divided and reticent on placing more sanctions against Russia because of the potential hurt that its economies could face.  Especially for a country whose membership is expiring soon. 

The GRU, which is Russia’s foreign intelligence service, has been accused of several plots. Including in leading the operation against the Skripal’s. According to Mark Galeotti, a senior fellow at the Institute of international Affairs Prague, the UK’s decision to call the attack a failure, in the event where Russia did orchestrate it, showed a misunderstanding (whether purposely or not) of the goal.

“Don’t let the reporting on the suspected Skripal attackers fool you,” was the sub-headline of article by Galeotti for Foreign Policy. “Moscow got what it wanted.”

As this would have been a way to send a message to London and not the EU.

Again, it seems opportunistic for the UK to release information pertaining to the attack during a period where it’s government is in turmoil. The UK’s Brexit negotiations are a quagmire, and it is unlikely that they will get a good deal.  Hence, they have grabbed on to something completely unrelated in an attempt to further stall the deal. The UK does not have, and never really has had the interests of the EU at heart.

Currently, there is a trend of Russia bashing across many countries in the West. Granted, Russia can be a difficult actor, that can be extremely aggressive. However, it has also shown be a master diplomat that can sit down and have a conversation with opposing parties. Each country or political bloc needs to act accordingly, and not confuse the interests of a different party for theirs. The EU must not make the mistake of seeing the UK as an ally.  It is not a friend of the EU, and has been a constant thorn since its inception. 

Read more: 

"Britain Charges Two Russians for State-Backed Plot to Kill Skripals," by Michael Holden and Guy Faulconbridge for Reuters. 

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