Rossiya Scan: Ukraine, Belarus and Sanctions

"How The World Sees Russia" Issue #30: 10/20/2018 From the Publisher: This week we start with the latest from the Ukraine. The war in the Donbas region is unlikely to end soon. The Ukrainian Air Force recently held exercises with their U.S counterpart. A show of solidarity that is likely to bolster Ukraine's image from a defense standpoint, as it does what it can to move further into the West's embrace. Also, the Organization for Security and Co-operation in Europe accused Russia of arming the rebels in the separatist region, and the Ukrainian Orthodox Church decision to move towards independence, has heightened tensions even more between these two neighbors. We break down the situation as it stands, and try forecast what will happen from now until next year's Ukrainian presidential elections. Belarus is the anti-thesis of the Ukraine. It is the former Soviet-state that has the best relations with Russia. This unique alliance is worth analyzing, as the location of the landlocked country has helped Russia have an effect in Europe through energy trade. We dig deeper into the relationship, and provide you with our take on it. Sanctions continue to affect Russia. However, as we have stated in many issues before, they are not having the intended severe impact that the West would like. The rise in the price of oil, the unintended negative effects on European businesses plus U.S energy firms seems to be playing in Russia’s favor. All is still not well for Russia, but it is finding strength, and making strong strides amid the chaos. -Rossiya Scan Tensions Rise with Ukraine There is no end in sight to the war in Ukraine. The shadow conflicts, like the uncovering of alleged Russian spies in the Netherlands, or the Sergei Skripal poisoning in Salisbury, might catch most of the recent headlines of this new cold war. However, the hot proxy-war taking place in the eastern Donbas region of Ukraine is heating up, and has the potential of serious escalation if left unchecked. The number of casualties from the conflict between Kiev and the allegedly Moscow-backed separatists in the Donbas are already estimated to have surpassed 10,000 people. Last week, joint Ukraine and U.S military exercises were carried out by both air forces. The “Clear Sky” exercise included F-15C Eagle fighters, MQ-9 Reaper drones and KC-135 aerial refueling tankers. "The purpose of the exercises is to increase the level of interoperability of our combat aircraft with the air forces of the United States and other member states of the alliance," said Ukrainian President Petro Poroshenko, according to a statement of the Ukrainian Ministry of Defense. "Five years ago, our planes rusted on the ground and military pilots forgot about the sky. But today, each of you has an opportunity to see the professional skills of our pilots — soldiers, who carry out difficult tasks on an equal footing with their foreign counterparts." At around the same time last week, the U.S stepped up its rhetoric against Russia in the conflict, via its embassy in Kiev. A drone from the Organization for Security and Co-operation in Europe's special monitoring mission to Ukraine, a civilian outfit, recorded several vehicles entering and exiting Ukrainian territory. The images allegedly captured by the drone included an armored personnel carrier being carried by a truck. "Russia must stop providing deadly weapons under cover during the night to its proxies in eastern Ukraine," said the U.S embassy in Kiev through Twitter. "These weapons, including those @OSCE_SMM spotted by UAV, kill soldiers & civilians alike. Only Russia can bring an end to the bloodshed in Ukraine." From a cultural and identity standpoint, things have also worsened between both nations. Last Monday, the Russian Orthodox Church severed ties with the Ecumenical Patriach of Constantinople. After the latter showed support for the establishment of an independent Ukrainian Orthodox Church. “I believe it is absolutely necessary to cut off all the tentacles with which the aggressor country operates inside the body of our state,” said Poroshenko, in reference to the Russian Orthodox church, according to Politico. Statements that show that this schism could potentially lead to more than just a high-brow theological debate. The church is highly political in both countries, and has a high degree of influence in their societies. “If the current situation leans into the realm of illegal actions, then, of course, just like Russia protects the interests of Russian speakers, then likewise -- and Putin has said this many times -- Russia will protect the interests of Orthodox Christians," said Dmitry Peskov, Press-Secretary to the President of Russia, according to a CNN article These words can understandably cause concern in Ukraine. After all, Russian President Vladimir Putin said that Russia's Crimea intervention was necessary to defend the rights of ethnic Russians in the area. This past week, Putin is said to have presided over a meeting of his security council on the potential schism. Showing just how much this topic is of importance to the Russian state. These tensions are unlikely to be softened in the short term. No diplomatic amends have been forecasted by either side. They both seem to think that the results of the Ukrainian presidential elections in March are necessary to make progress. "I think that Russia has essentially decided to wait out the Ukrainian election, see what happens. Maybe it will be a new opportunity that arises to get a more favorable position for Russia. So I think they intend to play it out," said Kurt Volker, U.S Special Envoy to the Ukraine at the Atlantic Council, a D.C.-based think tank. This sentiment was also echoed by Putin in Sochi. "We need to wait until the internal political cycles are finished, and I really expect that we will be able to build at least some kind of relations and reach some kind of agreement with a new leadership of the country. We're ready for that, we want that," said Putin at an event organized by the Valdia Club, a Moscow-based think-tank. From Russia’s standpoint, it makes sense to wait. Currently, Moscow is unlikely to achieve what it wants under the current conditions of the conflict. From a Ukraine standpoint, it is also smart of them to carryout these joint exercises with the U.S, and make moves towards a schism of their Orthodox church now. The conditions for doing these are better than they were before, or could be in the future. Read more: "Ukraine and Russia Step Up Confrontation, and the U.S is not a bystander," by Nathan Hodge for CNN. "Ukraine's Orthodox Church Moves Closer to Autonomy," by The Economist. "Russian Orthodox Church 'National Security Threat' to Ukraine, Says President," by Kate Bolongaro for Politico. "U.S Envoy: No Progress Made in Ending Ukraine War As Putin Waits for Kyiv Elections," by RadioFreeEurope/Radio Liberty. Russia & Belarus: A “Necessary Evil”… or Strategic Friendship? The foundation of Russian and Belarusian diplomatic ties, are the result of Slavic and Orthodox links which have been anchored in both nations for generations, especially during the Soviet era; furthermore, Bela/rus(sia) says it all… Notwithstanding, the relationship between these two nations is very unusual and has sent mixed messages to the world over the course of the years, as American journalist and satirist P.J. O’Rourke once said, “Politics is a necessary evil, or a necessary annoyance, a necessary conundrum”. Setting aside the crucial strategic location Belarus has, considered the last stronghold in the eventuality of a Western attack on Russia. In issue #10 of Rossiya Scan, we mentioned how Russia was considering responding to the possibility of a U.S military base in Poland. Warsaw expressed fears of Russian aggression and invited the U.S to establish a base within its borders. What was the Russia response? To float the idea of a military base in Belarus. “We are not going to deploy right now new military bases,” said Belarus Foreign Minister Vladimir Makei in Brussels last June. “But looking into the future, we should take into account the future steps which will be taken by our neighbors.” Russia already has a radar and communications station within Belarus. So the base would likely be a full fledged one, if it were to be carried out. We all know defacto Russia’s reaction when a buffer nation is compromised such as Georgia, Ukraine most recently, imagine Belarus… Hold that thought. Belarus is the oldest dictatorship in Europe with President Aleksander Lukashenko running the show since 1994. Of all the ex-Soviet states Belarus has remained the closest to Russia ( together with Serbia ) and is strategically positioned next to Russia, which has several implications, beyond the military standpoint. Belarus, unfortunately has not been blessed as a resource rich country (like its neighbor Russia). However, it’s the corridor that Russia uses to supply gas to its apprehensive neighbors; a crucial revenue stream for Russia, and at times a weapon to unsettle the European Union due to the strategic importance of energy in resource poor Europe. The evolution of Belarus-Russia relations as mentioned before has been unusual. In the early days of Lukashenko’s rise, the Pro-Soviet feeling was still latent in Belarusians hearts (today, between 2014 – 2016 roughly 40%-50% still favor a union with Russia). There have even been official plans to unify both nations, but this is unlikely to happen as Lukashenko knows that Belarus will never be seen as an equal in this unification. It’s worth noting that Belarus is heavily dependent economically on Russia (energy subsidies + trade), union or not Lukashenko shouldn’t spit on the hand that feeds him. Showing signs of rapprochement to the EU, as he has most recently did when energy prices had to be renegotiated with Russia. The rise of Russian President Vladimir Putin

"How The World Sees Russia"

Issue #30: 10/20/2018

From the Publisher:

This week we start with the latest from the Ukraine.

The war in the Donbas region is unlikely to end soon. The Ukrainian Air Force recently held exercises with their U.S counterpart. A show of solidarity that is likely to bolster Ukraine's image from a defense standpoint, as it does what it can to move further into the West's embrace. Also, the Organization for Security and Co-operation in Europe accused Russia of arming the rebels in the separatist region, and the Ukrainian Orthodox Church decision to move towards independence, has heightened tensions even more between these two neighbors. We break down the situation as it stands, and try forecast what will happen from now until next year's Ukrainian presidential elections.

Belarus is the anti-thesis of the Ukraine. It is the former Soviet-state that has the best relations with Russia. This unique alliance is worth analyzing, as the location of the landlocked country has helped Russia have an effect in Europe through energy trade. We dig deeper into the relationship, and provide you with our take on it.

Sanctions continue to affect Russia. However, as we have stated in many issues before, they are not having the intended severe impact that the West would like.

The rise in the price of oil, the unintended negative effects on European businesses plus U.S energy firms seems to be playing in Russia’s favor. All is still not well for Russia, but it is finding strength, and making strong strides amid the chaos.

-Rossiya Scan

Tensions Rise with Ukraine

There is no end in sight to the war in Ukraine.

The shadow conflicts, like the uncovering of alleged Russian spies in the Netherlands, or the Sergei Skripal poisoning in Salisbury, might catch most of the recent headlines of this new cold war. However, the hot proxy-war taking place in the eastern Donbas region of Ukraine is heating up, and has the potential of serious escalation if left unchecked. The number of casualties from the conflict between Kiev and the allegedly Moscow-backed separatists in the Donbas are already estimated to have surpassed 10,000 people.

Last week, joint Ukraine and U.S military exercises were carried out by both air forces. The “Clear Sky” exercise included F-15C Eagle fighters, MQ-9 Reaper drones and KC-135 aerial refueling tankers.

"The purpose of the exercises is to increase the level of interoperability of our combat aircraft with the air forces of the United States and other member states of the alliance," said Ukrainian President Petro Poroshenko, according to a statement of the Ukrainian Ministry of Defense. "Five years ago, our planes rusted on the ground and military pilots forgot about the sky. But today, each of you has an opportunity to see the professional skills of our pilots — soldiers, who carry out difficult tasks on an equal footing with their foreign counterparts."

At around the same time last week, the U.S stepped up its rhetoric against Russia in the conflict, via its embassy in Kiev. A drone from the Organization for Security and Co-operation in Europe's special monitoring mission to Ukraine, a civilian outfit, recorded several vehicles entering and exiting Ukrainian territory. The images allegedly captured by the drone included an armored personnel carrier being carried by a truck.

"Russia must stop providing deadly weapons under cover during the night to its proxies in eastern Ukraine," said the U.S embassy in Kiev through Twitter. "These weapons, including those @OSCE_SMM spotted by UAV, kill soldiers & civilians alike. Only Russia can bring an end to the bloodshed in Ukraine."

From a cultural and identity standpoint, things have also worsened between both nations. Last Monday, the Russian Orthodox Church severed ties with the Ecumenical Patriach of Constantinople. After the latter showed support for the establishment of an independent Ukrainian Orthodox Church.

“I believe it is absolutely necessary to cut off all the tentacles with which the aggressor country operates inside the body of our state,” said Poroshenko, in reference to the Russian Orthodox church, according to Politico.

Statements that show that this schism could potentially lead to more than just a high-brow theological debate. The church is highly political in both countries, and has a high degree of influence in their societies.

“If the current situation leans into the realm of illegal actions, then, of course, just like Russia protects the interests of Russian speakers, then likewise -- and Putin has said this many times -- Russia will protect the interests of Orthodox Christians," said Dmitry Peskov, Press-Secretary to the President of Russia, according to a CNN article

These words can understandably cause concern in Ukraine.

After all, Russian President Vladimir Putin said that Russia's Crimea intervention was necessary to defend the rights of ethnic Russians in the area. This past week, Putin is said to have presided over a meeting of his security council on the potential schism. Showing just how much this topic is of importance to the Russian state.

These tensions are unlikely to be softened in the short term. No diplomatic amends have been forecasted by either side. They both seem to think that the results of the Ukrainian presidential elections in March are necessary to make progress.

"I think that Russia has essentially decided to wait out the Ukrainian election, see what happens. Maybe it will be a new opportunity that arises to get a more favorable position for Russia. So I think they intend to play it out," said Kurt Volker, U.S Special Envoy to the Ukraine at the Atlantic Council, a D.C.-based think tank.

This sentiment was also echoed by Putin in Sochi.

"We need to wait until the internal political cycles are finished, and I really expect that we will be able to build at least some kind of relations and reach some kind of agreement with a new leadership of the country. We're ready for that, we want that," said Putin at an event organized by the Valdia Club, a Moscow-based think-tank.

From Russia’s standpoint, it makes sense to wait.

Currently, Moscow is unlikely to achieve what it wants under the current conditions of the conflict.

From a Ukraine standpoint, it is also smart of them to carryout these joint exercises with the U.S, and make moves towards a schism of their Orthodox church now.

The conditions for doing these are better than they were before, or could be in the future.

"Ukraine's Orthodox Church Moves Closer to Autonomy," by The Economist.

"Russian Orthodox Church 'National Security Threat' to Ukraine, Says President," by Kate Bolongaro for Politico.

"U.S Envoy: No Progress Made in Ending Ukraine War As Putin Waits for Kyiv Elections," by RadioFreeEurope/Radio Liberty.

Russia & Belarus: A “Necessary Evil”… or Strategic Friendship?

The foundation of Russian and Belarusian diplomatic ties, are the result of Slavic and Orthodox links which have been anchored in both nations for generations, especially during the Soviet era; furthermore, Bela/rus(sia) says it all…

Notwithstanding, the relationship between these two nations is very unusual and has sent mixed messages to the world over the course of the years, as American journalist and satirist P.J. O’Rourke once said, “Politics is a necessary evil, or a necessary annoyance, a necessary conundrum”. Setting aside the crucial strategic location Belarus has, considered the last stronghold in the eventuality of a Western attack on Russia.

In issue #10 of Rossiya Scan, we mentioned how Russia was considering responding to the possibility of a U.S military base in Poland. Warsaw expressed fears of Russian aggression and invited the U.S to establish a base within its borders. What was the Russia response? To float the idea of a military base in Belarus.

“We are not going to deploy right now new military bases,” said Belarus Foreign Minister Vladimir Makei in Brussels last June. “But looking into the future, we should take into account the future steps which will be taken by our neighbors.”

Russia already has a radar and communications station within Belarus. So the base would likely be a full fledged one, if it were to be carried out.

We all know defacto Russia’s reaction when a buffer nation is compromised such as Georgia, Ukraine most recently, imagine Belarus… Hold that thought.

Belarus is the oldest dictatorship in Europe with President Aleksander Lukashenko running the show since 1994. Of all the ex-Soviet states Belarus has remained the closest to Russia (together with Serbia) and is strategically positioned next to Russia, which has several implications, beyond the military standpoint.

Belarus, unfortunately has not been blessed as a resource rich country (like its neighbor Russia). However, it’s the corridor that Russia uses to supply gas to its apprehensive neighbors; a crucial revenue stream for Russia, and at times a weapon to unsettle the European Union due to the strategic importance of energy in resource poor Europe.

The evolution of Belarus-Russia relations as mentioned before has been unusual. In the early days of Lukashenko’s rise, the Pro-Soviet feeling was still latent in Belarusians hearts (today, between 2014 – 2016 roughly 40%-50% still favor a union with Russia). There have even been official plans to unify both nations, but this is unlikely to happen as Lukashenko knows that Belarus will never be seen as an equal in this unification.

It’s worth noting that Belarus is heavily dependent economically on Russia (energy subsidies + trade), union or not Lukashenko shouldn’t spit on the hand that feeds him. Showing signs of rapprochement to the EU, as he has most recently did when energy prices had to be renegotiated with Russia.

The rise of Russian President Vladimir Putin marked a before and after in the relationship between these two countries, Putin doesn’t give concessions as easily as Boris Yeltsin used to. In the early stages of Lukashenko’s dictatorship everything was done to become a simile of Russia, to the point of making Russian an official language. However, with time this feeling of belonging to Russia has diverged to re-instate the national identity of Belarus, as relations are not as amicable.

Even though Russia carried major war games in Belarus in 2017 (Zapad 2017) to give a message to the West, it was also said that Moscow was rehearsing for a potential invasion of Belarus, if it were necessary in the future. Being an authoritarian regime Belarus could never join the EU nor NATO, reassuring Russia’s greatest concern of perceiving Belarus as an enemy rather than friend.

But in Rossiya scan we always highlight perceptions relative to action. For example, an unexpected event such as the sudden death of Lukashenko, a coup d’état or dramatic perception of Belarus shift to the West, could lead to a robust action from Russia. Lets hope, for the benefit of all, that such an event does not bring about chaos, and bloodshed. The ingredients for a nasty situation are certainly there.

“Russia and Belarus Launch War Games Aimed at Holding the Line Against the West,” by David Filipov for the Washington Post.

“Belarus rejects Putin's call for unification with Russia” by Markian Ostaptschuk and Viacheslav Yurin / Ji for DW.

“After decades of Russian dominance, Belarus begins to reclaim its language,” by Katerina Barushka for The Guardian.

Could Sanctions be Strengthening Russia?

‘Business is a war of money’ - Jean-Baptiste Colbert, Minister of Finance to King Louis XIV

It seems that the sanctions imposed by the U.S Treasury in the wake of the Skripal poisoning on Russian businessmen, and businesses, are being counterproductive. Of course, the average 'Joe' is suffering from a strong devaluation of the ruble, but this is not the case for Russia’s super rich, who are currently topping the world tables in terms of fortune growth this year.

Additionally, as tensions mount with U.S sanctions, their exiting of the Iran deal and with the current crisis surrounding Saudi Arabia, the price for crude oil has been going north.

Russia, as a major exporter, benefits immensely from an increase in oil prices. This naturally helps its economy. Simultaneously, however, the ruble has been taking a beating and is in free fall.

What happens when your commodity grows more expensive, and your currency depreciates against the currency in which said commodity is traded?

You get more local currency for your barrel thus improving your economy. As a result, despite sanctions the MOEX Russia Index has outperformed the S&P 500. Additionally, this situation has also an unintended effect of pushing Russian companies away from U.S dollar denominated debt, so as to avoid sanctions plus increased costs.

Could it be possible that, the sanctions are having the contrarian effect to that which they were supposed to have?

On a different note, as the U.S prepares to vote on new sanctions Russia has begun experimenting with non-U.S dollar deals. These have for the moment been done in Chinese Yuan, with both China and India. This is something Russian President Vladimir Putin has been pushing towards to lessen the dependence on the U.S dollar. This is also an explanation as to why Russia has been consistently dropping its holdings in U.S bonds.

The current attitude towards Saudi Arabia after the gruesome murder of Saudi journalist Jamal Khashoggi, and the Iran deal debacle, could inadvertently play into Putin’s handbook. Making other nations consider an alternative to the U.S dollar.

As such we at Rossiya Scan believe that the ingredients are right for the development of serious currency alternatives to the U.S dollar. The change will not come quick, but momentum is growing, and is likely to get stronger.

"U.S. Sanctions Give Russian Economy an Unexpected Boost," by Avantika Chilkoti for the Wall Street Journal.

"Russian Firms Test Non-Dollar Deals to Sidestep any US Sanction," by Polina Devitt and Katya Golubkova for Reuters.

"US Business warns on ‘Scorched Earth’ Russia Sanctions" by Henry Meyer and Andrey Biryukov for Bloomberg.

"Vekselberg to Appeals Against Sanctions" by Max Seddon for the Financial Times.

"Russia’s Treasury Holdings Continue to Drop," Brian Chappatta for Bloomberg.

"Vladimir Putin Uses Speech to Herald the End of U.S Hegemony," by Henry Foy for the Financial Times.

Sanctions, or No Sanctions…Businesses Are Moving Forward...

In several past issues, we have been repeatedly drawing a parallel between the UK’s push for sanctions, and their stalling/failing Brexit negotiations. Now they are focusing on sanctions for the Skripal affair, use of chemical weapons and cyber hacking. Even though the UK asserts that these sanctions are not solely aimed at Russia, but potentially also at China and Syria. That being said, what is going to be done about Saudi Arabia as a result the murder of journalist Jamal Khashoggi? Are the UK or the EU going to be as tough, or will they be lenient because of economic, and geopolitical concerns? Only time will tell as to how they will act in response to this tragic incident. Even as the EU seems divided over further sanctions, with Kremlin sympathizers arriving in governments in Austria and Italy, the fate of these sanctions seems to be unpredictable.

Contrary to what happened with Iran, after the U.S withdrew from the deal, French energy giant Total (Euronext: FP) has confirmed that they intend to pursue doing business in Russia. At the end of the day, let us not forget, these companies are looking to do good business. Another major player seems to be vying the same opportunities, ExxonMobil (NYSE:XOM)had removed itself from most of its Russian projects earlier this year amid sanction fears. However, they seem to be back in the playing field. This is putting them in a dire situation, since the U.S is bound to seek new sanctions against Russia.

The U.S could find an exception, as it is doubtful that they would like these projects to go to either Total or some Chinese firm. These developments show that on a certain level businesses are getting tired, and do not want to get involved in politics. As they get in the way of their main pursuit, which is to make money.

Yet in Russia, the energy business and politics are intrinsically linked, with most natural resources being under the scope of one or another government 'faction’, hence the conundrum.

Additionally this week both Italian Deputy Prime Minister Matteo Salvini and Prime Minister Giuseppe Conte have spoken outright against the sanctions. Voicing what is happening already in Germany, as we have discussed in several prior issues. Basically, businesses are coming forward and stating that the sanctions are hurting them. Thus, that they would like a curving of the sanctions in order to carryout business.

However, it seems logical for Salvini to say this since his electoral base are the export driven industrial, small-mid-sized companies. This again shows a division, and a riff within the EU that could further grow if unattended.

"EU Paves Way for Chemical Weapons Sanctions," by Michael Peel for the Financial Times.

Total Underlines Russia Commitment Despite Sanctions Fear ," by Henry Foy for the Financial Times.

"Russia Offers Exxon New projects as U.S Sanctions Loom," by Elena Mazneva for Bloomberg.

"Sanctions against Russian An ‘Absurdity’, Italian PM " by Lisa di Giuseppe, Giulia Segretti for Reuters.

"Salvini Visits Moscow Pledging to Fight EU Russia Sanctions," by Gregory Viscusi for Bloomberg.

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