Thursday, October 16, 2014

Stand Firm on Russian Sanctions

In the few days, the discussion of Russia has acquired a new dimension. The announced withdrawal of Russian forces placed close to the Ukrainian border and a slight but significant easing on the previously blood-curdling rhetoric coming from Moscow has made some people think that the crisis, fomented and largely organised by the Kremlin, may now be beginning to ease.

Certainly the imposition of sanctions although it has had relatively little direct effect, has indirectly caused the government of Vladimir Putin some real problems. Western companies involved in the Russian market have radically reconsidered the risks of doing business in Russia and almost all have curtailed their investment plans. Some such as Blackstone and Adobe have announced plans to leave the Russian market altogether. The market capitalisation of the Moscow stock exchange has plunged. Inflation, at 8%, is already climbing further. Russia has faced investment shortfalls for some time, but is now facing huge capital flight- estimated at over £120 billion this year alone. Emergency interest rate rises have failed to defend the Rouble, which has fallen over 20% since the crisis began.
The core of the Russian economy remains energy. The World Bank estimates that 16% of Russian GDP, 52% of its government revenues and 70% of its export revenues come from oil and gas. The weakness of the global oil price (Brent is trading at $85/bbl. as I write) is probably the major cause for concern in the Kremlin right now, and as the markets price in a possible global slowdown and both Saudi Arabia and the United States pumping at high levels, together with the return of Libya and Iraqi oil to the global market, there is little that seems able to support a sustained recovery in the oil price in the coming months. Thus we are seeing open debate within the Putin administration as to how to cut expenditure to fit these reduced circumstances.

Nevertheless, we should remain deeply concerned over the potential use by Russia of its control of European gas supplies to threaten the stability of the entire European gas market in order to support its continuing attacks against Ukraine and to weaken support inside the European Union for the democratic course that the Ukrainian people have chosen.
Since the bloodshed on the Maidan began in January, Russia has illegally seized Crimea- although President Vladimir Putin assured the world he would not- and been directly implicated in military operations in Eastern Ukraine. The unconvincing denials and outright falsehoods put out by Mr Putin and echoed by Kremlin funded propaganda outlets have undermined any trust that we might have placed in the word of the Russian government. Shockingly Russian military forces also appear to be ultimately responsible for the deaths caused by the downing of Malaysian flight MH17. To add insult to injury, we should note the callous disregard that has been shown for the victims and their families, with the despicable theft of victim’s valuables and their appearance for sale on Russian websites.

Nor is it simply insult and rhetoric that Russia continues to direct at Britain and its NATO allies.

Beyond the continuing Russian intervention in Eastern Ukraine, Russian military activity continues at a high level. Large scale “exercises” and regular incursions by Russian military aircraft into or close to the airspace of Finland and Sweden as well as NATO states seems designed to test NATO readiness, and maintain a high level of tension. The kidnapping of an Estonian security officer on September 5th and the seizure of a Lithuanian fishing boat in international waters on September 18th reminds us of the continued pressure our Baltic allies have had to endure. Other activity in cyberspace also suggests no let-up in the pattern of hostility towards NATO and the EU.

Under these circumstances it is pretty hard for us to take Russian assurances about their being a reliable partner in the European gas market at face value. The Russian government has been prepared to use their control over gas as a political weapon in the past, and there is a real chance that they may do so in the coming winter.

Yet the strategic position of Russia is weakening. Greater energy efficiency and new sources of power, such as renewables and shale gas is already causing a structural shift in the global energy market. European demand for Russian gas is also set to fall, as customers seek to diversify their sources of supply- not least because Russia is now perceived as a threat, instead of a partner. Mr Putin, not for the first time, has chosen a path of confrontation that will ultimately cause major damage to Russia. Indeed, the country may already be facing a period of considerable instability, and Mr Putin’s popularity- currently said to be stratospheric- may prove to be very shallow, as his problems mount.

Nevertheless, unless and until Russia gives up its reckless adventure in Ukraine and respects international law, it is critical that we keep up the pressure on the Putin regime. A further frozen conflict- as in Georgia and Moldova- is unacceptable.

Russia has chosen a dishonest, dishonourable and dangerous path, and Britain and its NATO and EU partners must maintain the current regime of sanctions- and even add to them if necessary. There can be no return to business as usual while Russia remains a real threat to European peace.

It is a threat that must be answered with a clear-eyed and disciplined assessment of the long term costs of dealing with a rogue regime in Moscow versus any possible short term benefits of a relaxation of the sanctions regime. 

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