"How The World Sees Russia"

Issue #37: 12/08/2018

From the Publisher:

This week’s Rossiya Scan covers some of the most important topics affecting Russia from an international standpoint. We begin first by looking at the latest U.S show of force against Russia, in both the Ukraine and the Pacific.

Moscow’s latest conflict with Kiev in the Black Sea plus its growing presence in the Pacific has led the U.S to make a military statement by both the sea and air. We analyze the meaning of these moves by the U.S along with their efficacy, as far as their probability of achieving their intended geopolitical goals.

We then move on to the latest developments regarding the INF (Intermediate-range Nuclear Forces) treaty. Russia has stated that it will respond in kind to the U.S withdrawal, if it were to take place. There is more than Russia vs. the U.S in this squabble though. China is again another actor that we believe is pushing Russia and the U.S reconsider the treaty.

The Arctic Circle is an area where a lot of countries have considerable geopolitical interests. Russia is a country that has its eyes on the north, and that has a large presence in it. We delve deeper into this growing flashpoint, and breakdown its importance.

Finally, we again look at the deteriorating state of the Organization of the Petroleum Exporting Countries (OPEC). Russia and Saudi Arabia are acting in unison to better control the price. This commercial alliance has provided both countries with a lot of power. For now, this alliance is one of convenience, but if fortified over time this partnership could very well become what OPEC was for most of its existence. 

-Rossiya Scan

The U.S Military is Vexing Russia…

This week, Washington D.C responded to Moscow’s latest incursions into the Ukraine with a show of force. Using both an American ship and plane to tell Russia that it does not approve of their incursions into the Ukraine, or its growing role in the Pacific.

Last Thursday, a U.S Air Force OC-135 observation aircraft flew an "extraordinary flight" under the Open Skies Treaty  to showcase Washington D.C’s commitment to Kiev. This flight came one day after the U.S Navy sailed the guided missile destroyer USS McCampbell in waters claimed by Russia near the Sea of Japan. These moves by the U.S military are designed to annoy Russia, and at best keep Moscow at bay in regards to further military incursions.

"Russia's unprovoked attack on Ukrainian naval vessels in the Black Sea near the Kerch Strait is a dangerous escalation in a pattern of increasingly provocative and threatening activity,"  said Eric Pahon, a Pentagon spokesperson in an interview with CNN. "The United States seeks a better relationship with Russia, but this cannot happen while its unlawful and destabilizing actions continue in Ukraine and elsewhere."

Such shows of support are important to the Ukraine. A country that is heavily outgunned by Russia, and that desperately needs proper allies in its (for the most part) lonely fight against Moscow. The country is currently contemplating sending more naval ships to the Kerch strait. A move that could inflame the situation, but that Kiev feels it must follow through with based on the simple concept national sovereignty.

The move in the Sea of Japan is also preemptive. Russia has been working towards strengthening its position in the Pacific over the past few years.

"It should be clear by now that when (Russian President Vladimir) Putin is not confronted, he will continue to act aggressively against the interests of the U.S and our allies," said Boris Zilberman, a Russia expert at the Foundation for Defense of Democracies, a Washington D.C-based think.tank. "Russia must know that the U.S will not allow them to militarize international waterways in key areas such as the Black Sea, the Sea of Japan or Okhotsk, or elsewhere.”

Although the U.S has certainly made its presence felt through the sales of weapons, and with the dispatching of military advisors to the Ukraine. In the Pacific, the U.S presence as far as countering Russian moves has been less prevalent. China has in fact been the biggest concern in this part of the world. 

The USS McCampbell was actually the first freedom of navigation operation in the disputed water of the Sea of Japan since 1987. In other words, since the Cold War.

Russia is unlikely to engage in combat with the U.S military. The same is the case for the U.S in regards to the Russian military. Both know that a conventional conflict would result in a bloodbath. A nuclear one would simply annihilate the world. 

Hence, these moves by the U.S are likely to deter Russia from further incursions while they are being carried out.  The truth is that Russia has the upper hand though. They have been able to annex and help establish separatist regions (e.g. Ukraine & Georgia) without much of fight from the U.S, the EU or NATO.  Russia is unlikely to attack if U.S troops are present or carrying out such missions. However, in the case of the Ukraine, U.S troops are not there permanently, and it is not a part of NATO.  Unlike Japan which does have a bilateral defense alliance with the U.S along with a permanent U.S military presence. Russia knows this and will push forward in the Ukraine if it feels it must for whatever security or geopolitical concern. As long as Russia’s fight is not with U.S, NATO or a treaty backed U.S ally, it will act more aggressively and with less concerns.  

Read more: 

"U.S Military Flexes Muscles in Message to Russia," by  Zachary Cohen and Ryan Browne for CNN. 

"In Warning to Russia, U.S Flies Open Sky Aircraft Over Ukrainian Territory," by Aaron Mehta for Defense News. 

"U.S Destroyer Sails Near Russia Claimed Waters in Sea of Japan," by Rebecca Kheel for The Hill. 

"Kyiv Says Russia Blocking Kerch Strait, Plans to Send Ukrainian Navy Ships," by  staff at Radio Free Europe/Radio Liberty. 

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Are We Entering a Post-INF World?

Previously in Rossiya Scan we have already discussed the dangers of a potential break-up of the INF (Intermediate-range Nuclear Forces) treaty. Things are getting very heated between NATO, the U.S and Russia, and all are pointing fingers at each other. Both sides are claiming that the treaty is not being respected by one another.

"Allies have concluded that Russia has developed and fielded a missile system, the 9M729, which violates the INF Treaty and poses significant risks to Euro-Atlantic security," the NATO foreign ministers' statement read. Russia, claims that these accusations are an excuse for the U.S to abandon the treaty.

Russian President Vladimir Putin warned on Wednesday that Russia will respond in kind if the U.S decides to develop new intermediate-range nuclear missiles. This threat is not only addressed to the U.S for future development of new missiles, but also to the European countries. Specially those which station U.S Intermediate range missiles. Namely Poland (which has a long history of animosity with Russia) and Romania. The greatest loser if the treaty is terminated, would definitely be Europe.​ However, as we have previously pointed out there is another critical underlying factor which is not being given the attention it should.

China is not bound by this treaty,  and for the past decade has been stocking up with intermediate missiles. Moreover, these missiles have been strategically positioned in the artificial reefs in the South China sea to counter potential enemy offensives.

Again, Rossiya Scan believes that the South China sea will be a major point of conflict in the future between regional and global powers. China has had a considerable advantage over Russia and the U.S in the past decades, not having to adhere to this treaty, giving it an opportunity to catch up and build strong defenses.

Nonetheless, in order for Russia to preserve its mutually beneficial relationship with China, they need to project on the surface discrepancies with the U.S, which is going hard after China with Trump’s “America First” policy. On the other hand, we still believe in the existence of a “back channel” of communication between Russia and the U.S.

China has been doing whatever they pleased for decades, now finally a nation (the U.S) which for now happens to be the most powerful country in the world, is standing up to them. This is a chess game, and it is hard to know the real intentions, and what is going on behind the scenes. But it's important to dive deeper into a perceived open problem, and look at the collateral effects that can derive from the INF treaty being crippled. At a first glance, Europe suffers the greatest loss. Peel another layer of the onion, probably China is the one that will be most unsatisfied with this on the long run. Maybe this is what the U.S and Russia want in the end, aligning their interest to corner China.

Read more:

“Putin Vows to ‘React Accordingly’ if U.S. Withdraws From Nuclear Treaty,” by Neil MacFarquhar for the New York Times.

“Russia Will Build Missiles if U.S leaves Treaty, Putin Warns,” by BBC staff.  

“Trump says U.S will Withdraw from Nuclear Arms Treaty with Russia,” by Julian Borger and Martin Pengelly for the Guardian.

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The Arctic Circle: A Growing Flashpoint …

Since the beginning of time resources, money and power have always been a major source of conflict. The Arctic Circle happens to have all these ingredients, potentially being an explosive cocktail in the near future, leading to rivalry between nations.

Let’s begin with the nations claiming territorial legitimacy in this untapped resource rich part of the world. So far it has been established that there are 8 Arctic coastal states: Canada, Norway, Russia, Denmark (via Greenland), Iceland, Sweden, Finland and the U.S.

However, apart from the untapped resources in the Arctic Circle, we have a brand new commercial route emerging because of the melting of the polar ice caps, as well as military interests.

Currently, the region produces about one tenth of the world's oil and a quarter of its natural gas. The Russian Arctic is the source for about 80 percent of this oil, and virtually all of its natural gas exports. Recent appraisals suggest that a considerable fraction of the world's undiscovered petroleum reserves lie within the Arctic. This fact, highlights the importance of the Arctic Circle for Russia, and strengthens our view that Russia will do what is required to preserve its interests in this region.

Commercial routes are crucial, as whoever controls or has influence in these trade routes, will have more global muscle when dictating terms. That being said, most trade goes through the Panama and Suez Canals, which are currently controlled predominantly by Western Powers. The Arctic is potentially a faster, more direct route between Asia and ports in Europe, as well as eastern North America. If Russia positions itself strategically, we could see a shift of power in controlling global trade; which will lead to economic gains on top of political power.

From a defense perspective, Russia has increased military drills in the Arctic, placed or reopened military bases, built icebreakers, and positioned advanced radar stations to enhance its control of the region. Such actions have led some journalists to proclaim that Russian President Vladimir Putin has opened an Arctic front in a New Cold War. This region also has proximity to the U.S, and Scandinavian nations such as Sweden, Finland who are fearful of a potential Russian invasion, as we highlighted in a previous issue.

It’s hard to touch all the aforementioned points (e.g. trade, military and resources) and not think of China. Even though China is not an Arctic coastal state, they have proclaimed themselves a “near-Arctic” state to claim their slice of the pie. In the midst of sanctions being imposed, Russia has had trouble sourcing Western finance for projects in the Arctic Circle. China has seized this window of opportunity, and is participating in several projects in conjunction with Russia to gain more exposure to the Arctic Circle.

The Arctic Circle is very likely to be at the top of the list of most nations with a strong global strategic agenda, as the ice melts we believe that friction will escalate. Those with claims will likely to drill or extract resources and make claims. Be that as it may, Russia was the first nation to put a flag below the Arctic Circle with a submarine claiming sovereignty. Moscow has a game plan for the Arctic, and we foresee that it will likely walk away with substantial claim over its seas, and resources.

Read more:

“As Arctic Ice Vanishes, New Shipping Routes Open,” by Jugal K. Patel and Henry Fountain for the New York Times.

“Russia’s Arctic Strategy: Military and Security (Part II),” by Pavel Devyatkin for the Artic Institute. 

“A Melting Arctic Could Spark a New Cold War,” by Paul Watson for the Time

“China Pledges $10bn to Silk Road, Arctic Projects in Russia,” by Janne Suokas for the GBtimes.

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Is OPEC Still Relevant?

Once heralded as the single greatest market maker/breaker of the oil industry, the Organization of the Petroleum Exporting Countries (OPEC) as a whole seems to be losing its luster. The de-facto leader of OPEC, Saudi Arabia, is more or less imposing its wishes on the cartel. In fact, if we look more closely, as stated in a prior issue, control of the oil market is now vested within the hands of three players, Saudi Crown Prince Mohammed bin Salman (MBS), U.S President Donald Trump and Russian President Vladimir Putin.

Even though Trump has been vocal (via his usual medium of Twitter) of his desire to outlaw the world’s only ‘legal’ cartel, OPEC countries have been playing ball and refrained from cutting back their oil output. The fact of the matter is most OPEC countries cannot sustain their budgets with the current oil price. Russia has the lowest breakeven price per barrel level of the major producing countries at $53, yet even they are currently beginning to agree that $60 per barrel would be a more agreeable price point. The fact is, even if Trump wants oil prices low, in order to cater to a majority of his electorate, he seems to omit the shale oil/gas producers who’s breakeven price is much higher, and who’s economics are quite different.

Now here is an interesting matter, with renewed interest by some U.S lawmakers of pushing legislation that would outlaw OPEC, Saudi Arabia (especially since the Jamal Khashoggi murder) has been (at least in appearance) growing closer to Russia. OPEC members are growing concerned that these two producers are making backdoor deals, and that Saudi Arabia is giving Russia too much leverage. This is actually a truer position of the market since Saudi and Russia together account for more oil output than the other OPEC states combined.

Saudi Arabia is becoming a pariah since the murder of Khashoggi, and Russia has been an ever growing pariah since 2014, hence its easy for both to unite in order to have some control. From a geopolitical standpoint, it makes sense for Russia and Saudi Arabia to work together, because on the one hand they need oil to be high enough to cover their budget, but not be too high so as not to enable additional shale operations in the US. The problem with OPEC right now is that the breakeven prices for countries vary greatly, with some countries needing a price twice as high as others in order to break even.

Now, what could Moscow do?

On the one hand they want to continue pumping full on, in order to get more hard cash before future U.S sanctions sink in. At the same time, they want to maintain the alliance with Riyadh, hence they will either operate a small reduction in output  (around 300,000 barrel per day according to some outlets) or they will freeze their production output. Once again here we see Russia doing something, no one would have expected. The only party talking to every actor in the Middle East, and now poised to become the de-facto Co-Prince of Oil.

Just like in Europe with the U.S’s interference in the Nord Stream 2 project, in an attempt to push them towards purchasing more expensive U.S GPL, Arab countries are understanding that they have to look out for themselves, and their interests. Yes, they are not pleased to work with Russia on this, fearing the wrath of the U.S, yet, for now their interests align. In addition, where most of the Gulf countries are scared of the potential ire of the U.S, Russia in this situation is neutral. It is already under sanctions and already has chilly (to put it mildly) relations with the U.S. Therefore, it can easily pursue its own interests, and act with less consideration to what the U.S desires.

It is hard to federalize various states with different objectives and sizes. It is much easier for two countries, Russia and Saudi Arabia, to cooperate together in regards to the oil market. This reality is also likely to allow Russia to further get a stronger grip on the Middle East. The U.S is currently leaving quite the vacuum. A chasm that is likely to be picked up by the only other outside player with global ambition, a military presence in the region, and advanced knowledge of energy markets.

In other words...Russia.

Read more:

"OPEC Open to Risking Trump’s Ire, Prompted by Budget and Shale" by Summer Said and Benoit Faucon for the Wall Street Journal.

"Saudi-Russia Ties Raise Concerns Among OPEC Members," by Summer Said and Benoit Faucon for the Wall Street Journal.

"Oil Prices Tumble as OPEC Meets Over Production Cuts," by Christopher Alessi, Benoit Faucon and Summer Said for the Wall Street Journal. 

"Qatar Plans to Pull out of OPEC as Relations with Neighbors Sour," by Anjli Raval and Simeon Kerr for the Financial Times. 

"Saudis Back Modest OPEC Cut, Don’t Want to Shock Market," by Grant Smith, Nayla Razzouk and Golnat Motevalli for Bloomberg.

"OPEC Waits for Putin’s Decision As it Searches for Oil Cut Deal" by Grant Smith, Annmarie Hordern and Javier Blas for Bloomberg.

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