"How The World Sees Russia"

Issue #32: 11/03/2018

From the Publisher:

This week’s Rossiya Scan begins with a look at the Russian Navy.

Russia has modernized its military substantially over the past decade. However, its navy has yet to have the type of overhaul that other branches have been showered with. Poor maintenance of vessels, old dry docks, and corrupt shipyards have made it increasingly difficult for Russia to have a strong navy. In this issue, we look at the state of the Russian Navy, and provide you with some of the main reasons as to why it is struggling. 

We then move on to NATO.

The military alliance launched the “Trident Juncture 2018” war games in Norway. The exercises include all members of the coalition plus Sweden and Finland. The purpose of this event is to show a strong  sign of cohesive force from the longstanding alliance. Tensions are heightening on both sides, and we break down what these games mean from a geopolitical standpoint.

In many prior issues we have analyzed the reasons why Russia has such a strong playbook in the Middle East. We look at how Russia is using its realpolitik playbook to gain favor with Saudi Arabia in the aftermath of the gruesome murder of journalist Jamal Khashoggi. The West has correctly condemned the murder, while Russia is ignoring it, and using the chaos to further strengthen its position in the region.

Finally, we revisit the latest news on sanctions against Russia. Unlike before, Russia is preparing for them. All in an effort to better cushion its economy, and not be hit as severely by them. How effective will these financial defenses be? It’s tough to say, but it can be said that Russia is getting ready, and using some straightforward, and strong economic mechanisms to do so.

-Rossiya Scan

NOTE: Because of transatlantic travel, issue #33 will be sent at a later time on Saturday than usual. We apologize for the inconvenience, and thank you for your ongoing support. 

The Russian Navy: "Moscow...We Have a Problem" 

The Russian Navy has a problem.

It is composed of an aged fleet that is prone to accidents and breakdowns due to years of poor maintenance.  A reality that has led to a series of high-profile incidents that have been both tragic, and an embarrassment for Russia.

For example, in 2000, an explosion in the Kursk submarine led to the death of all 118 crew-members. In 2009, Russia’s only aircraft carrier, the Admiral Kuznetsov, lost a crew-member due to a short-circuit fire. In 2016, the same aircraft-carrier was seen belching a thick cloud of black smoke as it passed the English channel on its journey to the Mediterranean.

“After 20 to 25 years, all you have is what's left on the shelf," said Bryan Clark, senior fellow for the Center of Strategic and Budgetary Studies, according to Business Insider. "You can't live on older ships.”

What’s perhaps even more of an evident sign that Russia’s Navy is aging beyond any possibility of refurbishment is their reliance on tugs. The latter have become a standard accompaniment for most of their surface vessels. The tugs are basically an indication that the ship might break down, and be in need of it. In other words, a vessel with a tug is a ship with problems. A clear sign that Russia’s navy is aging, and insufficient.

“The ‘dreaded’ Russian Navy never goes out without a tug in case a ship goes down,” said Michael Kofman, a research scientist for the Center of Naval Analyses in an interview with The National Interest. “That tells you a lot.”

As stated in prior issues Rossiya Scan, Russia has modernized its military over the past decade. However, its focus has been mostly on ground and air units.  Some of these have seen substantial upgrades, and can stand on par, or at times even surpass, their Western counterparts competing products.

There has been talk in Moscow of re-building the navy. This is likely to take time though, as it is also seeing a constant stream of  accidents in its ports and shipbuilding facilities. Numerous fires were reported throughout the 2000s.  This past week, the PD-50 dry dock in Murmansk, the largest of its kind in Russia, sank while the Admiral Kuznetsov carrier was receiving an overhaul.

The PD-50 services all vessels of Russia's most powerful fleet.  If this dry dock finds itself out of commission for years, or is completely lost in this accident, it would be a serious hit for Russia’s overall naval readiness. 

Corruption in the shipyards has also been a constant problem for the Russian Navy. It has contributed to Russia’s demise in terms of properly establishing an effective industry that can build quality ships in a steady production line fashion.

“Russia’s shipbuilding industry is the worst of all its defense industries,” said Kofman to the National Interest. Corruption, delays, maintenance problems are apparently the rule and not the exception. “A couple of the shipyards got racked with terrible corruption, the owners basically stole billions and ran off with them, which really hurt Russia’s shipbuilding plans.”

What is obvious from all the above is that Russia has not focused its efforts on its navy. This will have consequences if it wishes to be seen a complete global player in terms of military prowess.  However, the Russian Navy and its industrial complex have some serious wounds.  Lesions that have grown worse with with time, and that will now require some serious corrective surgery.

Read more:

"The Russian Navy is Powerful (But Suffers from 2 big Fatal Flaws)," by Dave Majumdar for The National Interest. 

"Tug Sailing with Russian Ships Reveals Their Fleets Biggest Problem" by Caitlin Foster for Business Insider. 

"Russia's Drydock Accident Could Have Far Larger Repercussions Than a Damaged Carrier," by Tyler Rogoway for the The Drive. 

"Russian Navy Suffers Another Blow, As Aircraft Carrier is Damaged While Undergoing Repairs," by Pavel Felgenhaeur for the Jamestown Foundation. 

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NATO War Games:  Who Has The Longest Sword? 

On the 25th of October, NATO launched the “Trident Juncture 2018” war games in Norway, the largest war games performed by NATO since the 1980’s. Recently we discussed the strategic implications/intentions of the war games carried out by Russia in the Eastern border with China, which were significantly greater (300.000 troops, compared to the 50.000 troops deployed in “Trident Juncture 2018”).

In previous issues, we have also highlighted Russia’s sense of paranoia when there is military activity close to its borders. More specifically, its apprehension for NATO as a united force; created by Western countries to contain/threaten Russia (depending on which angle you see it from).

Once again history comes in play, and misinterpretations can be very dangerous at this stage, given the current global political tensions.

These war games are a rehearsal should Norway be invaded, by a “fictitious aggressor” in the North Eastern Flank (e.g. Russia), broadcasting a strong message to Russia. NATO needs to coordinate 29 countries as a united front to counter Russian hostility, its also worth noting that Sweden and Finland have also chosen to participate in these war games. In issue #28, we highlighted Sweden’s concerns with Russia, and their defense preparations, which are tied directly to their perceived view of an increasingly aggressive Russia.

Following the annexation of Crimea, NATO created a “Joint Task Force” to act swiftly in response to an attack on an allied member of NATO within days. War has evolved in recent decades; NATO is also going over different war tactics as well as remodeling its readiness for cyber attacks, for which Russia is notorious.

Even though Russia and Germany currently have good diplomatic ties, there was once a time where they were bitter enemies. On June 22, 1941, the world saw the largest invasion force in the history of warfare (Operation Barbarossa). The Germans used their infamous Blitzkrieg offensive, to rapidly reach the outskirts of Moscow, practically neutralizing the USSR. We are pointing this out, because the second largest contingent in these war games was Germany (arising ghosts from the past). Furthermore, Germany will lead the rapid response force of NATO, and is driving the idea of a European army.  

As Gordon B. Hinckley, a renowned Mormon clergy men once put forth, “Conflict grows out of ignorance and suspicion”.

In Rossiya scan, we understand that recent events have cooled communication between Russia and the West, leading to an escalation of events following the Russian war games “Vostok 2018”. Notwithstanding, amidst the annexation of Crimea and hostile signals towards Sweden, these war games were held in the eastern, not western border of Russia.

Russia is a one-man show, maneuverable, with a reputation to react to signs of aggression. NATO is a 29-member coalition, with interests that rarely align, or able to make fast decisions. These exercises will have consequences, and further nurture Russia’s suspicion of the West. Adding to the weariness Russia already has towards its Sino neighbors, feeling cornered between the West and the East, Russia could be reckless.

Read more:

“NATO Is in the Middle of an Expensive and Dangerous Military Exercise. Here’s Why Those War Games Are Worth It,” by James Stavridis for the Time

“NATO launches biggest war games since end of Cold War,” by DW staff DW.

“Nato holds biggest exercises since Cold War to counter Russia's growing presence around the Arctic” by Alec Luhn for the Telegraph.

“German forces land in Norway for major NATO exercises” by Gwladys Fouche and Terje Solsvik for Reuters.

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Russia is Getting Ready for More Sanctions...

"Sanctions are a sign of irritation; they are not the instrument of serious politics" - Sergey Lavrov, Russian Foreign Minister

It seems like the U.S have found a new love: the love of sanctions.

Over the past year, they have imposed sanctions on various adversaries ( e.g. Russia, China, Iran), but also friends (e.g.Turkey). However, their desired effect has yet to be felt in most cases. In the words of Omar Bongo, who served as President of Gabon for 42 years, and a man well accustomed to sanctions: ‘Economic Sanctions rarely work'.

The U.S. Congress is currently debating whether to impose sanctions on Russian Sovereign debt. The latter would be relatively painless for now, seeing as Russia does not need to borrow.  A substantial part of their debt is also held by countries with friendlier relations.

Moody’s announced this week that it is considering upgrading the level of Russia’s debt to an ‘investment’ grade. This would be a positive for Russia, considering Moody’s is the only rating agency that has not done so yet.

As we have stated last week, despite sanctions, the Russian economy is growing. Not as fast as it could be, but nevertheless growing. Would growth be greater without them? Undoubtedly, yet still, it is growing. Preparing for sanctions, Russia has also been siphoning more and more funds from its exports into its National Wealth fund, and preparing a security buffer to offset them. As an additional note, last month Russia preferred not to issue debt, considering that the rates were too high. This month Russia has also stated that they would not increase interest rates. The Russian government said that they would prefer to first analyze the impact of future sanctions in order to have more flexibility. Russia’s policy is very conservative, focuses more on saving than on spending, and in a way is echoing what the Chinese are currently doing.

Russia’s largest state-owned bank, Sberbank (MCX: SBER), posted higher 3rd Quarter profits and beat forecasts. This has been seen as a sort of defiance to U.S sanctions. Again, the sanctions do not seem to have the crippling effect intended. Simultaneously, with the current potential risk for a global oil supply glut, the U.S may wish to scale back on the sanctions so as not to precipitate a next crisis.

Another interesting shift in global markets, is the fact that Russia and several other states, including Turkey and Kazakhstan, have begun buying up larger quantities of gold for their respective reserves. Gold is known for having an adverse correlation with the U.S dollar. In other words, when one goes down the other usually rallies. If we go back 40 years, the U.S partially destroyed the USSR by outspending it, and by forcing it to sell its gold reserves. In the early 90’s, Russia had essentially no gold left.

Today, however, when most established nations have stopped purchasing gold, emerging markets are steadily increasing their reserves in order to diversify from the U.S dollar, as well as to have a buffer against it. The volatility currently being experienced in equity markets is likely to have also made several countries worried.

Thus gold, is yet another way that they might start preparing for a possible correction.The latter is predicted by many to arrive sooner, rather than later.  Governments no longer have the financial firepower to save their economies if trouble arises. A sanction infested global economy that involves actors that hold influence on key global economic sectors could simply further complicate things for all. 

Read more: 

"U.S Love of Sanctions Won’t stop Moody’s Upgrading Russia," by Ana Andrianova and Aine Quinn for Bloomberg.

"Russia, wary of U.S sanctions , Puts savings Before Growth," by Darya Korsunskaya for Reuters.

"Russia to Take Time to Assess Risks of Sanctions, Inflation," by Andrey Ostroukh for Reuters.

"Russia’s Central Bank Leaves Key Interest Rate Unchanged," by Max Seddon for the Financial Times. 

"Russia’s Sberbank Beats Forecast with Q3 Net Profit of $3.47 bln," by Andrey Ostroukh for Reuters

"Russia’s Sberbank Profits Rise Defying Fears of U.S Sanctions," by Max Seddon for the Financial Times.

"Why Central Bank Buying has the Gold Market Guessing," by Rupert Rowling for Bloomberg.

"Central Bank Gold Buying Hits Highest level Since 2015," by Henry Saderson for the Financial Times.


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Vladimir of Arabia...

"The U.S. is no longer the indispensable nation in the Middle East — it's Russia. [Russian President Vladimir] Putin has more control in this powder keg than American experts like to admit" - Sean McFate, senior fellow at the Atlantic Council and the Changing Character of War Centre, Oxford University.

The crisis that resulted in the aftermath of the gruesome murder of Saudi-journalist Jamal Khashoggi showcased how divisive and isolated, Crown Prince Mohammed bin Salman (MBS) actually is. Russia, was one of the very few nations that did not utter any direct accusation against MBS.

After the U.S, and other nations, stalled their arms sales to Saudi Arabia, plus began criticizing its role in the war in Yemen, Russia has seen its  relationship and fortunes improve slightly with Saudi Arabia. This understanding (which seemed unlikely, bearing in mind Russia’s interest in Iran and Syria) began two years ago when both petrostates started to in effect regulate the oil market. Now after the murder in Istanbul, the relation seems to be getting stronger,  with Saudi Arabia  investing in a Russian arctic gas project, and with discussions going towards potential arms sales. The fact is, Russia and Saudi Arabia (the de facto leader of the OPEC) want to maintain a higher oil price in order to balance their budget (Russia needs oil at $40 a barrel to stabilize and Saudi $70).

The other concern both have is not to raise oil prices too high. Shale oil in the U.S still doesn’t yield positive cash flows, and needs a far higher price to break even. This industry is also built like a house of cards. It relies on cheap debt to finance itself and the longer the oil prices remain high,  but not high enough for them to break even, the greater are the chances that the Russo-Saudi alliance can ‘break’ the industry.

This alliance enables both parties to also play an even greater geopolitical role beyond oil. There have been calls, more or less openly by leaders to have MBS leave.  This a tricky situation, as MBS currently operates as the defacto leader of Saudi Arabia and has been working towards consolidating his power.  MBS is also young, and likely to rule for some time if he inherits the crown. 

This reality has prompted other members of the royal family to return to the country (with assurances from the West that they would not be harmed) in order to counterbalance his power. Much like Louis XIV, MBS awaits for them all in his gilded palace, with the ability to strip away most of their power, and riches. For this though MBS needs a strong ally, and in this case Russia could be the obvious choice. First of all, as stated in several prior issues, Russia is the only party in the world that has a positive working relation with EVERY single player in the Middle East. Russia is also a country whose ruler does not have the same considerations as the West, and is unlikely to push MBS towards any reform.

The fact is, this recent conflict plus the U.S exit from the Iran deal has played into Russia’s interests. Russia has become the sole power broker of the Middle East, and it is the go-to party for business or politics in the region. By getting Saudi Arabia on board, in a way they are becoming that which the UK was in the past. Combining business with mutual interests in terms of stability is not a friendship, but could be a good basis for cooperation and the fomenting of a proper alliance.

By getting most of the Middle East on its good graces, Russia could potentially be able to use its natural resources and geopolitical power with more force. The U.S needs oil prices to increase in order to bolster their own shale oil production and attain further energy independence. This is also the way for the U.S to sweep away the preeminence of both Saudi Arabia and Russia. The latter two know this, and are likely to continue to work in unison to keep shale from becoming profitable.

Read more: 

"Russia-Saudi Rapprochement Reshapes More than the Oil Market," by Henry Foy for the Financial Times. 

"Rosneft’s Iraqi Kurdistan Oil and Gas Play Angers Baghdad," by Henry Foy for the Financial Times.  

"Oil Dips as Russia Signals Oil Output will Stay High," by Stephanie Kelly for Reuters.

"Iran sanctions Kick in With Biggest Oil Disruption in Years,"  by Grant Smith for Bloomberg.

"Forget Iran. Russia is the Real Threat to the U.S in the Middle East," by Sean Mcfate for CNBC.

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