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No more sectoral sanctions against Russia: US gives up targeting Russia’s sovereign debt

Alexander Mercouris

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In a recent article for RussiaFeed I discussed the possible additional sectoral sanctions against Russia which were being discussed in the US, and I said that none of them would do significant long term harm to Russia, but all of them risked doing real harm to the US.

As a self-sufficient continental economy sanctions on Russia almost by definition can have only a limited impact, and one which over time must diminish anyway.

As it happens the most effective sanctions the West could have imposed on Russia, both in terms of their impact on the Russian economy and their limited impact on the economies of the West, were the sectoral sanctions which were imposed in 2014.

Those sanctions did stop for a time the flow of capital from the West into Russia at a time when Russia was facing heavy debt repayments and when the price of its main export products – oil and gas – was collapsing.  The result was to deepen the recession caused by the collapse of oil and gas prices whilst further lowering the value of the rouble in a way which intensified the inflation spike.

With oil prices now rising, most short term Russian foreign debt repaid, and with the rouble floating, none of the sanctions discussed in this article look like they can have anything like the impact on Russia that the sanctions imposed in 2014 did.

The fact that the Russian economy successfully – in fact almost effortlessly – adjusted to those sanctions despite the difficult conditions ought to serve as a warning that further sanctions against Russia will not work, and if they are of the sort discussed in this article are counter-productive.

I also discussed at length in the same article the one set of sanctions the US seemed to be most actively considering, which was a prohibition on US investors buying Russian sovereign debt.

I said why this would be counterproductive and would not work and why it would only harm US investors if it was not backed by a freeze on Russian gold and foreign currency reserves held abroad and specifically in the US

The US cannot prevent Russia from floating bonds in the international money markets – in Asia if not in Europe – and the Democratic Senators’ assumption that prohibiting US investors from buying such bonds will dissuade other international investors from doing so is also almost certainly wrong (the cited authority for the claim are not ‘economists’ but two articles in Bloomberg Markets).

The problem anyway is that with Russia now expected to run a budget surplus next year, and with Russia’s trading position also in healthy surplus, and with Russia’s gold and foreign currency reserves now standing at more than $430 billion and growing, it is not obvious that Russia needs to borrow at all.

Unless this measure is combined with a freezing of Russian gold and foreign currency reserves, it is difficult to see how this could be more than a pinprick, just as the Democratic Senators report Russian Central Bank Chair Nabiullina having said.

However if the US were to freeze Russian gold and foreign currency reserves this step would not be necessary anyway, since US investors would not want to buy Russian foreign debt in those circumstances if the Russian reserves were frozen.

At that point of course the US would be facing all the consequences outlined in (2).

Needless to say, if US investors were prohibited from buying Russian debt but no action was taken against Russia’s reserves, then the US would simply be forcing its own investors to forego an opportunity to make money by buying into a strong financial asset which was being bought by other international investors elsewhere.  Again it is not obvious how this would benefit the US.

As to the suggestion that the US freeze Russian gold and foreign currency reserves held abroad and specifically on US territory – which would be the indispensable step if a prohibition on US investors buying Russian sovereign debt were to have any effect – I said why that would be totally counterproductive first and foremost for the US itself

Russia does keep some of its foreign currency reserves in the US with the IMF, but it is not clear how great the amount is and claims that it is much as a third of the reserves is probably an overstatement.

There is no doubt that such a step would have a serious impact, causing the value of the rouble to fall, at least for a short time.

However Russia runs a trade surplus and has paid off most of its foreign debt and the Central Bank since 2014 has been letting the rouble float.

The economy would swiftly adjust as it did to the crisis of 2014, with the Russian trade surplus growing still further as Russia’s trade position benefitted from the rouble’s fall and from the surge in oil prices which would be likely follow such a measure.

Doubtless inflation in Russia would be higher, though it would be unlikely to go as high as it did during the inflation spike of 2015.  However the political impact of the increase in inflation within Russia would be mitigated with the Russian government in a position to blame the US for causing it.  Besides as happened following the inflation spike of 2015, once the economy adjusted inflation would fall back again.

If freezing the Russian state’s foreign currency reserves in the US would only have a short term impact on the Russian economy, it would nonetheless constitute a colossal shock across the world financial system.

It would show that the US is prepared to abuse its position at the core of the world finance system and as the host of institutions such as the IMF to target not just the financial reserves of the smaller economies such as Libya, Venezuela or Iran but also the reserves of big G20 economies such as Russia.

The Chinese especially – who have been on the receiving end of similar threats against their reserves for some time – would be horrified.

It would be difficult to imagine any step the US might take that would galvanise more countries like China and Russia to set up their own alternatives to the world financial system and its institutions which have historically been under the control of the US.  Such moves are already underway and following the freezing (ie. seizure) of whatever proportion of Russia’s reserves are on US territory that process would be bound to accelerate.

It is impossible to see how that would benefit the US.

On 1st February 2018 Russian Central Bank Chair Nabiullina made the same points about the limited effect of the sanctions being discussed on the Russian economy.  Here is how Interfax reports her comments

We saw this risk previously, we see it now. We evaluated it, evaluated the effect of two possible scenarios: a scenario when there is a ban on purchase of new [obligations] and a ban on ownership [of existing obligations]. Of course, both of these decisions might trigger some volatility on the sovereign debt market, but in our view, even if there is initial short-term volatility, the markets will arrive at equilibrium.  We do not see any great effects either for the economy, financial stability or the financial sector.

(bold italics added)

A short while earlier – on 16th January 2018 – Russian Finance Minister Siluanov made the same point.  Here is how Interfax reports his comments

If these sanctions are introduced, those primarily suffering would be foreign investors, who are happy to invest in Russian obligations and receive a steady, reliable, guaranteed high return.  [Russian sovereign bonds would in that case be placed] among our Russian investors, using Russian infrastructure, which is very important.  We will also be engaged in not increasing budget imbalances, in order to carry out this borrowing in minimal volumes.

The US Treasury Department has now released a report which concedes all these points and which says that sanctions against Russia’s sovereign debt would be counterproductive, would have only a limited impact on Russia, and would harm the US.

The report concedes the Russian government’s very limited dependence on foreign borrowing and its invulnerability to sanctions on Russia’s sovereign debt

According to public information from the Russian Finance Ministry, Russia plans to issue roughly $17 billion annually in net new domestic bonds [NB: this refers to rouble bonds which the Russian government issues internally in Russia’s own domestic money markets, and which are invulnerable to sanctions – AM] to finance its fiscal deficits over 2018-2019, but to taper issuance beyond 2019 as the Russian budget comes into balance.  On the external side, Russia’s persistent current account surplus, supported by energy exports, its ample foreign exchange reserves, and its manageable schedule of dollar-denominated bond redemptions limit the need for Eurobond issuance in upcoming years.  However, Russia plans to continue to maintain a presence in this market to support a benchmark yield curve and to reach new investors.  Future external debt issuances will continue to be primarily denominated in US dollars.

In other words Russia does not need to borrow externally at all since it has very limited foreign debt, very large foreign currency reserves (which actually exceed the amount of its foreign debt), and a budget which is almost balanced and which will be in surplus from next year.

To the extent that Russia needs to borrow at all in order to cover its budget deficit, it can do so without difficulty on its own internal rouble denominated money markets.

The only reason Russia continues to float dollar denominated Eurobonds in the international money markets is not because it needs to do so in order to raise money to cover its budget or trade deficits or to pay its foreign debt.

It is in order to impress on foreign investors the strength and credit worthiness of the Russian economy as confirmed by the low interest Russia pays on its Eurobonds.

The US Treasury report does say that despite this invulnerability sanctions on Russia’s sovereign debt would nonetheless have a negative impact on Russia’s economy

Expanding Directive 1 to include dealings in new Russian sovereign debt and the full range of related derivatives would likely raise borrowing costs for Russia; prompt Russian authorities to alter their fiscal and monetary strategies; put downward pressure on Russian economic growth; destabilize financial markets, including Russia’s repurchase market, which is critical for overnight bank funding; increase strain on Russia’s banking sector; and lead to Russian retaliation against US interests.

Some of this is no doubt true, though it undoubtedly underestimates the extent to which the Russian economy – as Nabiullina and Siluanov have said – would rapidly adjust to these sanctions.

It also seriously underestimates the action the Russian authorities would themselves take to mitigate the effect of the sanctions.  By way of example, the assumption that Russia’s repurchase market would be destabilised by sanctions on Russia’s sovereign debt almost certainly underestimates the steps Russia’s Finance Ministry and Central Bank would immediately take to support it.

It is a certainty that more than four years after sanctions began to be imposed Russia’s Finance Ministry and Central Bank have game-planned for all conceivable scenarios, and are prepared to counter them.  Given Russia’s exceptionally strong financial position they have all the available means to do so, and that already makes any plans for new sanctions look unviable.

However the key point is that even the US Treasury report now admits that additional sanctions on Russia’s sovereign debt such as those which are being proposed would have extremely negative consequences for the US and world economies irrespective of whatever effect they might have on Russia

However, because the Russian economy has extensive real and financial sector linkages to global businesses and investors, the effect of the sanctions would not be limited to Russian authorities and businesses.  In particular, expanding sanctions could hinder the competitiveness of large US asset managers and potentially have negative spillover effects on global financial markets and businesses, although competitive distortions could be partially mitigated if the EU implemented similar sanctions.  Expanding US sanctions to include dealings in new Russian sovereign debt without corresponding measures by the EU and other US partners could undermine efforts to maintain unity on Russia sanctions.  Given the size of Russia’s economy, its interconnectedness and prevalence in global asset markets, and the likely over-compliance by global firms to US sanctions, the magnitude and scope of consequences from expanding sanctions to sovereign debt and derivatives is uncertain and the effects could be borne by both the Russian Federation and US investors and businesses.

In plain English, if the sanctions are limited to prohibiting US investors from buying Russian sovereign debt they will fail, and US investors will be the losers; whereas if the US were to succeed in strong arming its allies (ie. Japan and the EU) into supporting the sanctions then because of the Russian economy’s great size and sophistication the damage done to the world financial system and to the world economy would be extensive, and might call into question the US’s management of the world financial system and the reserve currency status of the US dollar.

The last words in the preceding paragraph of course do not appear anywhere in the US Treasury report.  US officials invariably avoid discussing the US’s role in managing the world financial system or the reserve currency status of the US dollar in discussions of this sort, since for completely understandable reasons they do not want to give the slightest hint that they might ever be questioned.  However concern for them is implicit in the whole paragraph from the US Treasury report which I have just quoted.

I return to my original point in my article discussing the proposed additional sectoral sanctions which I wrote when reports first circulated that these sanctions were being considered.

The sectoral sanctions which were imposed in Russia in July 2014 were calibrated to do the greatest possible harm to Russia and the least possible harm to the US and its allies.  Indeed I can remember no less a person than Barack Obama saying precisely that about them at the time.

The fact that those sanctions have failed is not a reason to double-down on still more sanctions.

No sanctions the West can now impose on Russia can harm Russia more than did the sanctions which the West imposed on Russia in July 2014.

On the contrary any further sectoral sanctions the West now imposes on Russia look more likely to harm the West than to harm Russia, especially over the medium and long term.

Rather the fact that the sectoral sanctions imposed on Russia in July 2014 failed should be a reason not for doubling down on still more sanctions, but rather for drawing back and reconsidering whether imposing sanctions on Russia is a good idea in the first place.

That in the present fraught atmosphere is something Western leaders seem unable to do.

However it does for the moment seem that the folly of imposing more sectoral sanctions is simply too obvious, and has for the moment been abandoned.

Following publication of the US Treasury report US Treasury Secretary Steven Mnuchin has now admitted as much, and in testimony to the House Financial Services Committee on 6th February 2018 has said that the only further sanctions the US Treasury is now considering are sanctions against individual Russian persons (“oligarchs”) and businesses

We’re targeting specific sanctions to bad individuals and companies as opposed to sanctions on debt.

As I have said previously, such sanctions on individual Russian persons and businesses are wrong and unfair.

However they cannot affect the Russian economy or the political situation in Russia, and in political and economic terms they are pinpricks.

On the contrary, all such sanctions do is give added force to the campaign the Russian authorities have been waging for some time to persuade Russian businessmen to repatriate to Russia the money they have been squirrelling away abroad, and it is almost certainly not a coincidence that for the first time that campaign looks to be meeting with a measure of success.

Inevitably there have been suggestions that the US Treasury Department’s decision to give up on further sectoral sanctions against Russia was somehow inspired by the well-known wish of US President Trump for better relations with Russians.

I think that is very unlikely to be true, with the true reasons for the decision being set out in this and my previous article and in the US Treasury Department’s own report.  As I have said many times, there is no reason to look for a secret conspiratorial reason for a decision, when the straightforward and openly expressed reason is fully sufficient and satisfactory.

On 27th May 2016, shortly after The Duran was started, I wrote a long article for The Duran in which I pointed out that Western attempts to stop the Russian government raising funds by borrowing both internally on Russia’s own money markets and internationally were guaranteed to fail, and that the attempt being made to stop the Russian government doing this was merely making Russia stronger.

The US’s decision not to proceed with sectoral sanctions targeting Russia’s sovereign debt confirm this.

With further sectoral sanctions against Russia now conclusively off the agenda, this episode merely highlights how much stronger in financial terms Russia has become.

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Don’t Laugh : It’s Giving Putin What He Wants

The fact of the matter is that humorous lampooning of western establishment Russia narratives writes itself.

Caitlin Johnstone

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Authored by Caitlin Johnstone:


The BBC has published an article titled “How Putin’s Russia turned humour into a weapon” about the Kremlin’s latest addition to its horrifying deadly hybrid warfare arsenal: comedy.

The article is authored by Olga Robinson, whom the BBC, unhindered by any trace of self-awareness, has titled “Senior Journalist (Disinformation)”. Robinson demonstrates the qualifications and acumen which earned her that title by warning the BBC’s audience that the Kremlin has been using humor to dismiss and ridicule accusations that have been leveled against it by western governments, a “form of trolling” that she reports is designed to “deliberately lower the level of discussion”.

“Russia’s move towards using humour to influence its campaigns is a relatively recent phenomenon,” Robinson explains, without speculating as to why Russians might have suddenly begun laughing at their western accusers. She gives no consideration to the possibility that the tightly knit alliance of western nations who suddenly began hysterically shrieking about Russia two years ago have simply gotten much more ridiculous and easier to make fun of during that time.

Couldn’t possibly have anything to do with the emergence of a demented media environment wherein everything around the world from French protests to American culture wars to British discontent with the European Union gets blamed on Russia without any facts or evidence. Wherein BBC reporters now correct guests and caution them against voicing skepticism of anti-Russia narratives because the UK is in “an information war” with that nation. Wherein the same cable news Russiagate pundit can claim that both Rex Tillerson’s hiring and his later firing were the result of a Russian conspiracy to benefit the Kremlin. Wherein mainstream outlets can circulate blatantly false information about Julian Assange and unnamed “Russians” and then blame the falseness of that reporting on Russian disinformation. Wherein Pokemon Go, cutesy Facebook memes and $4,700 in Google ads are sincerely cited as methods by which Hillary Clinton’s $1.2 billion presidential campaign was outdone. Wherein conspiracy theories that Putin has infiltrated the highest levels of the US government have been blaring on mainstream headline news for two years with absolutely nothing to show for it to this day.

Nope, the only possibility is that the Kremlin suddenly figured out that humor is a thing.

The fact of the matter is that humorous lampooning of western establishment Russia narratives writes itself. The hypocrisy is so cartoonish, the emotions are so breathlessly over-the-top, the stories so riddled with plot holes and the agendas underlying them so glaringly obvious that they translate very easily into laughs. I myself recently authored a satire piece that a lot of people loved and which got picked up by numerous alternative media outlets, and all I did was write down all the various escalations this administration has made against Russia as though they were commands being given to Trump by Putin. It was extremely easy to write, and it was pretty damn funny if I do say so myself. And it didn’t take any Kremlin rubles or dezinformatsiya from St Petersburg to figure out how to write it.

“Ben Nimmo, an Atlantic Council researcher on Russian disinformation, told the BBC that attempts to create funny memes were part of the strategy as ‘disinformation for the information age’,” the article warns. Nimmo, ironically, is himself intimately involved with the British domestic disinformation firm Integrity Initiative, whose shady government-sponsored psyops against the Labour Party have sparked a national scandal that is likely far from reaching peak intensity.

“Most comedy programmes on Russian state television these days are anodyne affairs which either do not touch on political topics, or direct humour at the Kremlin’s perceived enemies abroad,” Robinson writes, which I found funny since I’d just recently read an excellent essay by Michael Tracey titled “Why has late night swapped laughs for lusting after Mueller?”

“If the late night ‘comedy’ of the Trump era has something resembling a ‘message,’ it’s that large segments of the nation’s liberal TV viewership are nervously tracking every Russia development with a passion that cannot be conducive to mental health – or for that matter, political efficacy,” Tracey writes, documenting numerous examples of the ways late night comedy now has audiences cheering for a US intelligence insider and Bush appointee instead of challenging power-serving media orthodoxies as programs like The Daily Show once did.

If you wanted the opposite of “anodyne affairs”, it would be comedians ridiculing the way all the establishment talking heads are manipulating their audiences into supporting the US intelligence community and FBI insiders. It would be excoriating the media environment in which unfathomably powerful world-dominating government agencies are subject to less scrutiny and criticism than a man trapped in an embassy who published inconvenient facts about those agencies. It certainly wouldn’t be the cast of Saturday Night Live singing “All I Want for Christmas Is You” to a framed portrait if Robert Mueller wearing a Santa hat. It doesn’t get much more anodyne than that.

Russia makes fun of western establishment narratives about it because those narratives are so incredibly easy to make fun of that they are essentially asking for it, and the nerdy way empire loyalists are suddenly crying victim about it is itself more comedy. When Guardian writer Carole Cadwalladr began insinuating that RT covering standard newsworthy people like Julian Assange and Nigel Farage was a conspiracy to “boost” those people for the advancement of Russian agendas instead of a news outlet doing the thing that news reporting is, RT rightly made fun of her for it. Cadwalladr reacted to RT’s mockery with a claim that she was a victim of “attacks”, instead of the recipient of perfectly justified ridicule for circulating an intensely moronic conspiracy theory.

Ah well. People are nuts and we’re hurtling toward a direct confrontation with a nuclear superpower. Sometimes there’s nothing else to do but laugh. As Wavy Gravy said, “Keep your sense of humor, my friend; if you don’t have a sense of humor it just isn’t funny anymore.”

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EU’s ‘toothless’ response to creation of Kosovo army risks worsening the crisis – Moscow

Russia’s ambassador to the UN said that the EU could have and should have done more to stop the breakaway region from creating its own army.

RT

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The creation of Kosovo’s own 5,000-strong army is a threat to peace and security in a turbulent region and may lead to a new escalation, Russia’s UN envoy has warned, calling the EU’s lackluster response irresponsible.

Speaking at the UN Security Council emergency meeting on Kosovo, Russia’s ambassador to the UN Vassily Nebenzya said that the EU could have and should have done more to stop the breakaway region from creating its own army to replace its lightly armed emergency response force.

“The EU reaction to the decision by Pristina cannot be described as other than toothless. This irresponsible policy has crossed the line,” Nebenzya said, after the UNSC meeting on Monday.

The diplomat said the lack of decisive action on the part of the 28-member bloc was a “great disappointment,” adding that the EU seems to “have turned a blind eye on the illegal creation of Kosovo’s ‘army.’”

The law, approved by Kosovo lawmakers on Friday, paves the way for doubling the size of the current Kosovo Security Force and for turning it into a de facto army, with 5,000 soldiers and 3,000 reservists.

The move did not go down well even with Kosovo’s usual backers, with both NATO and the EU voicing their indignation. NATO’s General Secretary Jens Stoltenberg called the decision “ill-timed” and lamented that Kosovo’s authorities had ignored “the concerns expressed by NATO.”

The EU’s top diplomat, Federica Mogherini, has echoed those concerns, saying in a statement that the mandate of Kosovo’s forces “should only be changed through an inclusive and gradual process” in accordance with the state’s constitution.

The only nation to openly applaud the controversial move was the US, with its ambassador to Kosovo, Phillip Kosnett, saying that Washington “reaffirms its support” for the upgrade as it is “only natural for Kosovo as a sovereign, independent country” to have a full-fledged army.

The Kosovo MPs’ decision has drawn anger in the Serbian capital Belgrade and provoked a strong response from Moscow, which calledon the UN mission in Kosovo to demilitarize the area in accordance with UNSC resolution 1244, and to disband any armed units.

Nebenzya pointed out that the UN resolution does not allow any Kosovo Albanian military units to be present in the region’s territory. He accused Western countries, including members of the NATO-led international peacekeeping force (KFOR), of “condoning and supporting” the violation by Pristina of the resolution.

It is feared that the army, though a relatively small force, might inflame tensions in the region and impede attempts at reconciliation between Pristina and Belgrade. Serbia has warned that it might consider an armed intervention if the army becomes a threat to the 120,000-strong Serb minority in Kosovo.

“The advance of Kosovo’s army presents a threat to the peace and security in the region, which may lead to the recurrence of the armed conflict,” Nebenzya stated.

In addition to creating its own army, Kosovo in November hit Serbia with a 100 percent import tariff on goods, defying calls by the US and the EU to roll the measure back.

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Ukraine’s President Says “High” Threat Of Russian Invasion, Urges NATO Entry In Next 5 Years

Poroshenko is trying desperately to hold on to power, even if it means provoking Russia.

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Via Zerohedge


Perhaps still seeking to justify imposing martial law over broad swathes of his country, and attempting to keep international pressure and media focus on a narrative of “Russian aggression,” Ukrainian President Petro Poroshenko denounced what he called the high “threat of Russian invasion” during a press conference on Sunday, according to Bloomberg.

Though what some analysts expected would be a rapid flair up of tit-for-tat incidents following the late November Kerch Strait seizure of three Ukrainian vessels and their crew by the Russian Navy has gone somewhat quiet, with no further major incident to follow, Poroshenko has continued to signal to the West that Russia could invade at any moment.

“The lion’s share of Russian troops remain” along the Russian border with Ukraine, Poroshenko told journalists at a press conference in the capital, Kiev. “Unfortunately, less than 10 percent were withdrawn,” he said, and added: “As of now, the threat of Russian troops invading remains. We have to be ready for this, we won’t allow a repeat of 2014.”

Poroshenko, who declared martial law on Nov. 26, citing at the time possible imminent “full-scale war with Russia” and Russian tank and troop build-up, on Sunday noted that he will end martial law on Dec. 26 and the temporarily suspended presidential campaign will kick off should there be no Russian invasion. He also previously banned all Russian males ages 16-60 from entering Ukraine as part of implementation of 30 days of martial law over ten provinces, though it’s unclear if this policy will be rescinded.

During his remarks, the Ukrainian president said his country should push to join NATO and the EU within the next five years, per Bloomberg:

While declining to announce whether he will seek a second term in the office, Poroshenko said that Ukraine should achieve peace, overcome the consequences of its economic crisis and to meet criteria to join the EU and the North Atlantic Treaty Organization during next five years.

But concerning both his retaining power and his ongoing “threat exaggeration” — there’s even widespread domestic acknowledgement that the two are clearly linked.

According to The Globe and Mail:

While Mr. Poroshenko’s domestic rivals accuse him of exaggerating the threat in order to boost his own flagging political fortunes — polls suggest Mr. Poroshenko is on track to lose his job in a March election — military experts say there are reasons to take the Ukrainian president’s warning seriously.

As we observed previously, while European officials have urged both sides to exercise restraint, the incident shows just how easily Russia and the West could be drawn into a military conflict over Ukraine.

Certainly Poroshenko’s words appear designed to telegraph just such an outcome, which would keep him in power as a war-time president, hasten more and massive western military support and aid, and quicken his country’s entry into NATO — the latter which is already treating Ukraine as a de facto strategic outpost.

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