As New Cold War Heats Up, Russia Preparing to Go It Alone?

There is nothing new under the sun. It has all been done before. – Sherlock Holmes (A Study in Scarlet)

Brief History Lesson

Leading up to the United States’ entry into World War II, Japan was reliant on trade with the U.S. and its European allies for about 75 percent of its foreign trade. Items like oil, gasoline, steel, iron, copper, and nickel constituted a disproportionately high amount of this figure. Thus, when the U.S. began imposing ever-increasing sanctions on Japan in response to its aggression in South Asia and alliance with Germany and Italy, the economic costs were devastating. Without an end to the sanctions or securing new sources of these materials, Japan would simply run out of the ‘stuff’ it needed to run its economy and military. Japan’s leaders ultimately decided to gain access to new sources through military conquest and the rest, as they say, is history.

Russia’s Economy Today – a National Security Perspective

Unlike Japan, Russia is blessed with many natural resources including oil and gas. A ban on oil exports to Russia would be like refusing to sell string to a spider. Russia also has a capable national defense industry, which adequately supplies the Russian military’s needs as well as those of other countries through international arms sales, where Russia is second only to the U.S.

But, despite its prowess in the ‘hard’ industries that were greatly prized during the 20th Century, Russia lacks a national capability in the ‘innovative’ industries – e.g., high-tech, pharmaceuticals – that have become the prizes of the 21st Century.

Indeed, Russia currently imports about 80 percent of all medicines consumed in the country, and the 20 percent that are produced locally rely on imported components. Strikingly, Russia imports 93 percent of its pharmaceuticals from countries that have imposed sanctions on Russia (although the sanctions have not covered pharmaceuticals). Here’s a chart illustrating Russia’s dependence on imports by industry and sanctioning country source:


Russia Goes it Alone – Pharma Case Study

There are signs that Russia is responding to its reliance on imports of high-value-added products, and thus exposure to potential sanctions affecting those products. The best example is in the pharmaceutical industry, one of the areas where Russia is most reliant on imports from countries that have imposed sanctions in the past.

To be sure, the Russian government has sought to promote the development of a domestic pharmaceutical market. In 2011, the government launched a major investment program to support local industry, with nearly $4 billion in funding behind it. The purpose of the program was to ensure that 90 percent of Russia’s ‘vital medicines’ be domestically produced by 2020. Safe to say, Russia is not likely to meet these goals in four years. In 2013, the Russian government sought to boost this initiative by excluding foreign manufacturers of drugs from selling to government purchasers (around 99% of all purchases in Russia).

Many international pharma companies at the time did consider local production, typically  in the form of joint ventures with their distributors that already had some degree of local manufacturing capability. Most of these plans were scuttled, with some token exceptions like Abbott’s acquisition of Veropharm.

Foreign pharma companies’ disregard of Putin’s will did not generate much of a reaction, until now. In August, Pres. Putin ordered the government to conduct a review on prices of medicines on the domestic market. The consequent review, conducted by the Federal Antimonopoly Service (“FAS”), identified “criminal elements” as a source of excessively high prices of imported drugs. For those not already aware, FAS is kind of like Russia’s regulatory lifeline to the West. They are by far the most sophisticated, ‘Westernized’ agency in Russia, but nonetheless implement the orders of the government. FAS’s audit of drug prices thus far has no clear outcome. But the message to Western drug companies is quite clear – build up local production or go home.

PM Medvedev is also on the case. In a totally not staged visit to a pharmacy in Lipetsk, Medvedev made an ‘impromptu’ visit to a local pharmacy on his way to visit pensioners at a ‘rehabilitation center’, Medvedev asked consumers their thoughts on the drugs available. Medvedev was dutifully informed by consumers and pharmacists alike that Russian drugs are increasingly available and trusted by local consumers (the whole thing had a supremely Soviet feel to it). Recently, Medvedev has promised to shut down pharmacies that engage in violations of Russian law with respect to the pricing of medicines.

These aggressive steps in relation to imported medicines come against a backdrop of increased support for local producers. In September, the government announced a 100 percent increase in subsidies for local pharma manufacturers. Collectively, the purpose of these moves seems to be ensuring a transition from reliance on imports to reliance on locally-produced generics by 2020 (which seems ambitious). Within this goal towards local reliance, of prime importance is ensuring control over state purchases of medicine (the top purchaser of medical goods in the country by magnitudes).

What Does it All Mean?

For Russia observers, it is difficult to take these announced measures seriously. We’ve seen them all before (just like the wars against corruption, deofshorizatsiya, etc.). But it is important to consider the context in which these measures arise. Although there is definitely a local political need to show pensioners that the government is responsive to their concerns about drug prices, I would argue that the economic pressures on the Russian government’s budget and the threat assessment of a new Cold War has made this issue a real priority for Putin and the rest of the government.

A full trade embargo – like the U.S. kind of still has with Cuba – would be devastating to Russia, particularly if it could encompass European drug producers (most of whom are listed on U.S. stock exchanges or otherwise have substantial U.S. connections). With no vaccines, cancer and diabetes treatments, and other essential drugs, the Russian population would face a degree of hardship not known since WW2. Naturally, Russia is planning for the worst case scenario, and seeking to avoid this eventuality.




Posted in Business, Business and Economy, Cold War, economics, FAS, Foreign direct investment, foreign investment, goskorporatsii, Government, Government of Russia, pharma, procurement, Russian economy | Leave a comment

Ukraine Takes NYT for a Ride

On August 15, the New York Times published a lengthy, detailed article on Trump Campaign Chairman Paul Manafort’s potential involvement in corrupt dealings in Ukraine. Two of the journalists published an overview of Manafort’s Ukraine activities last month. Unlike their campaign trail colleagues, the authors are excellent journalists who have been covering Russia/FSU or involved in investigative reporting for some time. Unfortunately, the Manafort article – or at least the implications it contains – is not their best work.Shooter Manafort

One commendable feature of the article is the volume of facts it conveys to the reader. The authors did not get overly hung up on Eastern Bloc vignettes describing what Ukraine looks like or rumors about Yanukovych’s weakness for luxury goods. Instead, the authors do their best to describe and weave a common thread through the following main assertions:

  • Secret Ledger: the lead item of the story is that Manafort’s name – or the name of his form Davis Manafort – is listed 22 times over a five-year period in a so-called ‘black ledger’ detailing cash disbursements from the Party of Regions to various individuals and entities. According to these entries, Manafort or his firm was paid approximately $12.7 million. The source of this allegation were investigators from the National Anti-Corruption Bureau (NABU, by its Ukrainian acronym), which was formed in October  2015.
  • Offshore Shell Companies: the second main issue described in the article relates to the use of offshore shell companies to facilitate the sale of Black Sea Cable (BSC), a Ukrainian telecom company. The short story is that Manafort’s firm set up an investment fund – Pericles Emerging Market Partners – that was intended to purchase BSC assets. One of the Pericles ‘partners’ was Russian oligarch Oleg Deripaska. The NYT article cites two sources concerning suspect shell companies: a Ukrainian anticorruption prosecutor – who “pointed to an open file on his desk” – and Cayman Islands litigation records.

Evidentiary Gaps

The otherwise interesting article falls short when it comes to the evidence supporting the two principal claims.

Secret Ledger

Regarding the secret ledger, the authors are careful not to state that they viewed the ledger entries – or even one example – showing Manafort’s name. They published an example of the ledger released by NABU, but noted in the caption that it does not contain Manafort’s name. But the source of the sample page – NABU – is the same source for the statements that Manafort’s name appears in other pages. Why wouldn’t they just release the page showing Manafort’s name? And wouldn’t this be a red flag to an investigative journalist?

Strangely, while the authors rely entirely on the statements of NABU investigators to support the claim that Manafort’s name appears in the black ledger, they fail to discuss the absence of such evidence from an extract of the ledger that is freely available online. Specifically, there are 22 pages of ledger – which the article does refer to – that were provided to Viktor Trepak, a former deputy director of the SBU and later released on Ukrainskaya Pravda. The 22 pages released by UP appear to cover the period from June-December 2012. The journalists helpfully transcribed the handwritten list into a searchable list as well. Manafort’s name never appears.

The absence of Manafort’s name on the list released by UP is interesting, as the NABU investigators told the NYT journalists that the payments to Manafort show up in the handwritten ledger “from 2007 to 2012.” Moreover, one of the tasks that Manafort assisted on – the drafting of a report concerning the prosecution of former PM Yulia Tymoshenko – was delivered in December 2012. Thus, you would expect to see payments to Manafort in the second half of 2012.

None of this means that Manafort’s name does not show up in the pages that have not been released to the public. But the article is weakened by its reliance on NABU investigators’ statements versus primary source documents, and the failure of the authors to address (i) why they were not shown the ledger entries with Manafort’s name and (ii) the absence of Manafort’s name on an extract of the ledger publicly available.

Offshore Shells

The gaps in the offshore companies issue are more nuanced, but perhaps more glaring. The Ukrainian prosecutor who referred to the ‘open file’ on his desk during his meeting with the reporters mentioned a specific shell company – Milltown Corporate Services. Indeed, this is an infamous company that is widely known to anticorruption lawyers active in the former Soviet Union. The company has indeed been implicated in numerous cases of corruption, fraud, and other illegal activities. The best example was in a 2010 report prepared by investigators working on behalf of the Yushchenko administration, which identified corruption in public procurement under the previous (i.e., Party of Regions) government.

Milltown operates in an ecosystem of offshore shell companies that I collectively refer to as the corporate machinery of evil in the world. Without these companies and the secrecy jurisdictions that support them, the volume of corruption, illegal arms sales, and other nefarious conduct in the world would be minimized. Milltown’s specific role in this ecosystem of evil is more administrative – it sets up companies that administrate ‘off the shelf’ shell companies used for a few corrupt transactions, and then are discarded. The best analogy is to an illegal firearm sale for use in a murder: Milltown is the seller, the single-use shell company is the firearm, and the corrupt official is the murderer. So while Milltown is a bad guy, it’s not the bad guy.

The NYT authors failed either to understand or to educate their readers of this distinction in roles. Indeed, the reference to Milltown by the Ukrainian prosecutor breezily transitions into a discussion of the BSC transaction involving Manafort and Deripaska. The authors note that the BSC assets were controlled by offshore shells that “led back to the Yanukovych network, including, at various times, Milltown.” Let me be clear: Milltown is not part of any Yanukovych network. It is an offshore services provider that Yanukovych and his cronies have used in the past.

More importantly, Milltown has nothing to do with the BSC transaction the article proceeds to describe. Milltown was dissolved in July 2005, according to its registry page in Ireland. But according to the litigation records cited by the article, Pericles was not formed until March 2007 and thus has nothing to do with Milltown. But the guilt-by-association sticks with the reader, based on Milltown’s past control of BSC assets. Again, an analogy: the logic is similar to alleging that you are guilty for buying a used computer that, under its previous ownership, was used to engage in criminal activity. More importantly, the BSC deal fell through – the article hints at this but never plainly states it – and Deripaska is now suing Manafort’s company. So are Manafort and Deripaska friends or enemies…I’m confused. I would also object to the article’s characterization of Deripaska as a Putin “ally,” but that is too meaty a subject to address here.

Seductive Narrative

To me it seems that the authors – or perhaps more likely their editors – were seduced by the prospect of being the first ones to publish an investigative story that conveniently segued into the Trump-Putin narrative that arose shortly after the RNC convention. Indeed, the article was probably one of the most-reported-on political stories of the day.

It would be interesting to know whether the reporters sought out the story, or if it came to them. Frankly, I would not be surprised if the NABU investigators sold the story. There are certainly Ukrainian motivations at play: to hurt a candidate perceived as less supportive of Ukraine; to gain clout – and perhaps more funding and legal authority – as a young agency.

Unfortunately, the reporting on this story will inhibit a real understanding of what type of political animal Manafort really is: a bottom-feeder who will sell his services to anyone who pays on time. To be sure, Manafort’s willingness to board the S.S. Trump on its all-but-certain disastrous voyage reveals what a rank opportunist he is. Moreover, the primacy of financial gain over democratic values is not a story about Manafort, but rather of the political consulting industry in general.

But instead of an exploration of this industry – which, let’s face it, subverted the 1996 Russian presidential election – we get Putin-Trump conspiracies packaged as investigative journalism. As Trump would say at the end of a Tweet, “SAD!”


Posted in russia, Trump, ukraine

The Whole Putin-Trump Thing

I have been trying to write this post for two weeks now, but the issue seems to morph and expand on a daily basis. I did not want to write a ‘hot take’ that characterizes the majority of campaign coverage in the United States. Most of these pieces come to firm conclusions as to whether or not Trump is a covert Russian agent based on his muddled and contradictory utterances. Probably the best piece on the issue was by Russian journalist Mikhail Zygar. But if you want one Trump statement that encapsulates the precise nature of his relationship with Putin, it comes from this tweet three years ago:

You see, as someone likely suffering from narcissistic personality disorder, Trump wildly overestimates his own skills and importance and yet constantly  craves the admiration and approval of others. And Putin – wittingly or unwittingly – fueled this need in December 2015 when he called Trump “very bright and talented.” The statement was made offhand in response to, it seems, an American journalist’s question:

Putin’s status as number 1 bogey man in the United States meant the comment was picked up in all major media outlets and, over time, ‘very bright’ became ‘brilliant’ and ‘a genius’. Regardless of what version he heard, Putin’s comments tickled Trump in his favorite spot, and his views on Russia very likely stem from those comments alone…kind of. He did still advocate shooting down Russian fighters that ‘buzz’ NATO warships and has flirted with a policy of using nuclear weapons in Europe.

But Trump’s whole appeal to Putin – if it does exist – reminds me of an appearance Mark Ames made on the Dylan Ratigan Show in 2009, during Obama’s first trip to Russia as President. Asked what, in Putin’s view, would be the ‘perfect relationship’ with the United States, Ames replied, “Basically, that we would be stupid and weak.” Although true at the time, I am not convinced that the same analysis applies today. Nevertheless, if it did Trump would represent the ideal U.S. candidate of stupidity and weakness for Russia. Stupid because Trump is uninformed and too inattentive to handle the intensity U.S.-Russian relations; and weak because (i) if Trump won, a near-majority of the country would hate him, and (ii) simple appeals to Trump’s vanity – e.g., quoting The Art of the Deal in the middle of a nuclear forces reduction negotiation – would trump the Donald’s understanding of the national interest. So, yes, in a way Trump is a Putin candidate. And there are also the personal, stylistic similarities between the two that Zygar described. But, to quote Trump, “There’s something going on.”

Recent Development in U.S.-Russian Relations

You can pinpoint the exact date of the nadir of post-Soviet U.S.-Russian relations: July 17, 2014, when MH-17 was shot down over eastern Ukraine (likely by Russian-backed separatists, but who really knows). The tragic downing of the airliner followed Russia’s annexation of Crimea, and U.S. sanctions on Russia in response. The second round of sanctions – announced the week of March 17, 2014 – were hastily thrown together by the State Department using Google the weekend before. The resulting need of U.S. companies to evaluate whether they were doing business with Gennady Timchenko or the Brothers Rotenburg was like a full-employment act for all Russian-speaking attorneys in the U.S.

But in the two plus years that have followed, the pieces have fallen back into place and the Obama Administration’s policy has reflected as much. A few examples:

  • Iran Nuclear Agreement – the Obama Administration relied on Putin to cajole Iran into coming to the bargaining table for what has become one of the signature foreign policy achievements of Obama’s second term.
  • Syria Conflict – after some initial bitching about Russia’s support of Assad, the Obama Administration has started cooperating with the Russians in the effort to take out ISIS, and abandoned the dangerous and unworkable ‘no-fly zone’.
  • Ukraine Conflict – although the official U.S. position has not changed, the Obama Administration has not pushed for Ukraine membership in NATO, nor has it supported sending lethal military aid to the Ukrainian government (notably, it is this policy position in the GOP platform that led the mainstream media to conclude Trump is a Putin agent).
  • NATO Generally – in my previous post I outline some of NATO’s recent moves in the Baltics and Eastern Europe in response to Russian ‘aggression’. But the limited nature of the forces deployed there imply a signal to Russia that the forces are a symbolic effort useful to both sides: the U.S. can show how it’s ‘countering’ Russian aggression, and Russia, though building up retaliatory deployments on the border, can argue that any game playing in the Baltics would be risking WWIII.

All told, I think Obama has made the best of a bad situation and rescued U.S.-Russian relations from the brink…and we all know what is over that brink.

Likely Developments in U.S.-Russian Relations under Clinton

That brings us to the reason why Russia, and NATO for that matter, has now been mentioned more times in the 2016 election, than any previous presidential election since the fall of the Soviet Union. The reason is a well-established fact: Hillary Clinton is much more of a ‘hawk’ – arguably a neoconservative – than Obama. (Full disclosure: I supported Sen. Sanders in the primary, but am supporting Sec’y Clinton in the general election.)

Hillary’s hawkishness has led to barely-concealed mouth-frothing and transition planning by some of the more unhinged members of the U.S. foreign policy establishment. These groups – I’ll focus on the Russia-related ones – all have clear goals, which Clinton may or may not support. But the intersection of Trump and Putin, both in terms of policy goals and political expediency, has made the Clinton camp increasingly susceptible to the more anti-Russian members of the neoconservative claque in D.C. Moreover, the mainstream media – which spent the preceding year building Trump’s poll numbers through non-stop coverage – has now decided he must be defeated at any cost. And that cost appears to be Red Scare 2.0, with open and unfounded accusations of Trump as Putin agent, and a Russia policy  that is reactionary in the extreme.

Some of these D.C. ghouls just want a job, like former Acting Director of the CIA, Michael Morell, who recently penned an op-ed in the New York Times endorsing Clinton and naming Trump as a Putin agent. Morell resigned from the CIA in 2013, joining Beacon Global Strategies, a D.C.-based ‘consulting’ firm co-founded by Philippe Reines, a longtime Clinton confidante. In the initial launch of Beacon, Reines openly admitted to reporters that Beacon would serve as an incubator for intelligence officials waiting to reenter government service in a Clinton administration. For his part, Morell has stated his belief that Putin is trying to “recreate the Russian empire,” one of the more laughably absurd Russia tropes commonly believed in D.C. foreign policy circles.

The more dangerous neocon types are those who really want to “take on” Russia in places like Ukraine and Georgia, and think the concomitant risk of WWIII is worth the benefit of gaining a foothold in…those countries. One of these figures – Under Secretary of State Victoria Nuland – is most-well-known in Russia for her involvement in the aftermath of the overthrow of the Yanukovych government. Nuland is rumored to be Clinton’s Secretary of State and, if so, would be the most overtly anti-Russian SoS since the end of the Cold War. Another is Former NATO Supreme Commander Philip Breedlove, whose emails were hacked and released in June. The emails revealed that Gen. Breedlove was advocating for a more confrontational posture vis-a-vis Russia in Ukraine. Similar to Nuland, there are rumors in D.C. that Breedlove is a would-be candidate for Clinton’s Secretary of Defense.

The 2016 Campaign and U.S.-Russian Relations

Modern U.S.politics, particularly during presidential campaigns, are shaped by extreme polarization and hence political competition, non-stop media coverage that elevates decisive messaging over nuance, and a cynical manipulation of events and the competition’s behaviors in order to achieve short-term political gain. The degradation of our electoral politics and consequent failure of traditional political elites to solve the problems faced by working and lower class Americans are the proximate causes of Trump’s success. But that’s a topic for another blog.

The coming storm for U.S.-Russia relations arises out of the confluence of several developments: (i) the dubious yet politically viable allegation that Trump is a Putin agent based on the DNC hack, connections between Trump’s campaign adviser and Yanukovych, etc.; (ii) an organized cadre of foreign policy ‘elites’ supporting Clinton, which advocates a much more belligerent line against Russia; and (iii) the collective decision of the mainstream media to defeat Trump at any cost, after propping up his primary campaign with free coverage for the past year. The political gain of attacking Trump as a Putin agent enables the anti-Russian foreign policy elites to push their agenda to the Clinton campaign. Once the Clinton campaign was willing to pursue this line of attack, the now anti-Trump media was more than willing to push it as established fact because defeating Trump is the great moral prerogative of our generation.

The problem is that there is a real, influential constituency behind the anti-Russian rhetoric, which means Red Scare hysteria of the campaign is more likely to be translated into actual policy, backed by Americans who have been whipped up by said hysteria. That is why Obama, although denouncing Putin’s purported ‘meddling’ in the election, is frantically trying to reach an agreement with Russia on cooperation in Syria. Aside from recognizing the reality that Russia can undermine U.S. efforts to undermine Assad, Obama knows that a Clinton Administration will take a much harder line (e.g., suspend cooperation with Russia, impose a no-fly zone) that will in turn raise the risk of U.S.-Russia confrontation.

Anti-Russian elements currently in government service are hard at work to undermine Obama’s efforts. First, the draft of SoS Kerry’s Syria plan was leaked to the Washington Post in advance of his last trip to Moscow. Notably, the reporter to whom it was leaked – Josh Rogin – is one of the more reliably anti-Russian journalists on the foreign policy beat. The dramatic act of leaking the plan prior to any agreement can be interpreted as an attempt by anti-Russian elements in the U.S. government to undermine any likelihood of the plan’s success. Further attempts to undermine the agreement can be seen in a WSJ report days after Kerry’s Moscow trip, which described a Russian air attack on a rebel outpost used by American and British special forces. The bombing took place on June 16 – no American or British forces were present at the time – but was not reported until July 22. The timing of the leak to the WSJ suggests it was intended to influence the ongoing talks with the Russians.

It seems increasingly unlikely that President Obama will be able to fundamentally alter the U.S.-Russian relationship with respect to Syria before he leaves office. If that is the case, we will be in very dangerous territory indeed. On January 20, 2017, we will most likely have a more hawkish, anti-Russian President, backed by the most anti-Russian elements of the U.S. foreign policy establishment, voted into office during a campaign in which her competitor was widely accused of being a Russian ‘Manchurian Candidate’. These factors will enable and encourage Clinton’s worst instincts when it comes to her Russia policy and, I believe, will push us further down the path to direct confrontation outlined in my previous post.


Posted in Clinton, Cold War, democracy, elections, foreign policy, nato, neoconservatism, nuclear holocaust, Obama, President Obama, Putin, russia, u.s.-russia relations, War

USA Quietly Inches Closer to War with Russia

Over the past few years, the Obama administration has intentionally pursued a dramatic expansion of policies that the Russian government and military consider threatening to Russia’s national security. Curiously, the Obama administration launched some of the most concerning elements of this expansion very recently. The policies fall into two overlapping categories: NATO and missile defense.

NATO – Enlargement and Posture

Russia is not a fan of NATO for a few reasons that arose out of the last days and immediate aftermath of the collapse of the Soviet Union. First, Russia was under the impression that – claims it was promised – that NATO would not expand its membership, particularly to countries on Russia’s border. Second, and less important, Russia thought that it would be invited to join NATO at some point, which clearly is not happening anytime soon. Although there are various reasons for Russia’s exclusion from NATO, there is only one logical strategic explanation that has made sense from NATO’s inception to the present: the military alliance is aimed at Russia! Two foreign policy heavyweights admitted as much in a 2014 NPR interview, essentially arguing that Russia would “obstruct NATO’s continuing viability” and undermine NATO’s “cohesion” by introducing a second ‘great power’ to the group. When you consider that we are talking about a collective defense organization, it is difficult not to read these statements other than: “NATO is USA’s platform for deterring and defeating potential great power rivals.”

When you look at recent enlargement efforts, the reason for Russia’s exclusion is pretty obvious. In December 2015, NATO sent Montenegro an invitation to the Russia-bashing party. I am confident most Americans could not point out Montenegro on a map and know literally nothing about it (except perhaps a vague memory of it belonging to Serbia at some point). Montenegro is very small, with a population of 677K people (166/233 countries) and total land area of around 14K square kilometers (156 out of 195 countries). It has just under 2K active duty members in its military. Ask yourself: are Americans ready to go to war for Montenegro?

On a side note, it is interesting that the expansion of NATO has continued with virtually zero public debate or discussion in the United States. Indeed, if you try to search for debates on NATO enlargement, you mostly find references from 1997, in the lead-up to Poland, Hungary, and the Czech Republic joining the alliance. The 2016 presidential election, however, has been a notable exception. Credit for elevating the issue unfortunately goes to Donald Trump, who has advocated reducing (“getting better deals”) our spending on Europe’s defense via NATO. On the Democratic side, Bernie Sanders appeared to agree with Trump on this issue, whereas Hillary Clinton has cited the Russia “being more aggressive” as a reason for continued support of NATO.

Of course, Montenegro is not what really bothers the Russian government – Ukraine and Georgia membership, which we’ll get to – but extending membership to countries like Montenegro in principle makes the case easier for countries like Georgia and Ukraine. Indeed, in April 2008 NATO issued a statement that read, “These countries will become members of NATO.” The Bush administration had supported initiating the membership process immediately, but the Germans and French were opposed. A few months later, Russia invaded Georgia after fighting broke out in South Ossetia. Less than six years later, Russia invaded Ukraine in response to what it called an illegal ‘coup’ against the pro-Russian Yanukovych government; Russia annexed the Crimean Peninsula after the region held a referendum in support of joining Russia. I won’t get into the debate about these two conflicts – who’s to blame, what actually happened, etc. But my interpretation is this: Russia appears committed to ensuring that neither country joins NATO, by diplomatic means or otherwise.

Another area of concern relates to NATO’s posture in Europe, in terms of deployments, military exercises, etc. The changes in posture over the past year have been far more significant than the addition of Montenegro. Indeed, the moves have been so controversial within NATO, that the German Foreign Minister recently warned NATO against “warmongering.” The German FM’s comment was in response to a 10-day exercise simulating a Russian attack on Poland. The exercise follows on a number of other exercises in recent years throughout Russia’s western flank including, yes, Ukraine and Georgia. NATO has also increased troop commitments in Eastern Europe, with an additional 1,000 troops added at the NATO summit this month. Another expansion in NATO’s capabilities – missile defense – brings us to the next topic.

Missile Defense

Shortly after Obama was elected in 2008, I addressed the missile defense issue and the reactions proponents of the system had to Obama’s election. In the post, I noted that proponents of missile defense were concerned Obama would kill the program. And indeed, Obama did kill the program as designed by the Bush Administration. But rather than scrap the idea of missile defense in Europe entirely, Obama instead proposed an alternative system, which would host missile systems on ships instead of on land in Poland and the Czech Republic.

But Obama’s more conciliatory missile defense program was slowly walked back to the Bush-era approach. By 2010, the Obama Administration was signing an agreement with Poland for hosting missile defense installations on their territory. And the formerly-ship-based program added a radar in Turkey, and an interceptor (missile installation) in Romania. The latter system, which came online this summer, will be under NATO ‘control’, as announced at the most recent summit in Warsaw. In reality, the Poland-based interceptor will be folded into the the currently operational missile defense shield.

Parallel to these efforts – although far less reported in the media – was the creation of a missile defense shield in Asia. This shield is purportedly aimed at deterring North Korea’s nascent and as-yet-ineffective ballistic missile program. Talks between the United States and South Korea began in February 2016, with an agreement-in-principle concluded in June 2016.

China, which has actual ballistic missiles with nuclear warheads that actually work, believes the missile defense shield is in fact aimed at them and not North Korea. Indeed, it is easy to see the hastily-concluded missile defense talks between the U.S. and South Korea as a reaction to increasing tensions over China’s territorial claims in the region, specifically the South China Sea. In October 2015, the Obama Administration released a statement supporting the ‘right of navigation’ around the Spratly archipelago in the South China sea, thereby rejecting China’s territorial claims to the same. Obama backed up his words with action by sending a U.S. Navy warship – the USS Lassen – through the very waters that China claims to itself.

China has claimed – accurately, I think – that these moves have collectively disrupted the ‘strategic balance’ in the region. What China and the Russians mean by this is that, essentially, the U.S. is full of shit and they know that the missile defense systems are aimed at them. Thus, they will need to respond accordingly in terms of military planning, mobilization, and deployment.

Deploying missile defense in Europe and Asia simultaneous has strengthened the Russo-Chinese alliance, still in its infancy. For a number of reasons to lengthy to cover here, Russia and China are not natural allies. Indeed, ‘great’ powers that share borders rarely make for durable partnerships unless motivated by some clear, common enemy. Putin has pursued better relations with China for years now, particularly following the sanctions related to its annexation of Crimea. But China has always seemed more willing to talk than to act. Perhaps China believed that U.S. antipathy towards Russia was of a different species than its feelings towards China. After all, the U.S. has made less political hay out of China’s human rights abuses, lack of democracy/rule of law, etc. Maybe China thought it was special because of its economic relationship with the U.S.

If this is the case, the nearly simultaneous announcement of missile defense shields in Europe and Asia has been a gift to factions in the Russian and Chinese governments pushing for closer relations between the two countries. We may already be seeing evidence of growing ties between China and Russia: two days ago, China’s military announced that it will conduct joint Russian-Chinese military exercises in the South China Sea in the near future.

WWIII, Here We Come?

The developments in Europe and Asia raise the scary question of whether we are slowly inching towards World War III. Certainly our military actions in those regions suggests as much. And for those who say we are merely moving towards a Cold War 2.0, I would reply that a hot war is much more likely, for several reasons:

  • In a bipolar world, each side was far better prepared to anticipate, learn about, and respond appropriately to the adversary’s actions. In a multipolar world, we cannot be sure that the Russia-Chinese alliance is for real, which distorts our threat perception.
  • In the Cold War, we had exceedingly pliant allies in Europe and Asia, all of which still had the memory of WWII fresh in their minds. Now, you cannot say that NATO members are united in treating Russia as a critical threat. Germany and France do not agree with this assessment. And if Brexit is a trend, we can expect more nationalism in Europe and less willingness to carry U.S. water (or those who are, more extreme and willing to engage in off-script antics that ratchet up tensions). In Asia, there is not a broad consensus in South Korea for the missile shield. In Japan, our presence has grown less welcome due to incidents of U.S. soldiers breaking local laws.
  • Conflicts in Europe and Asia are more fluid than at any time in the second half of the Cold War (the era during which all senior decision makers in Russia/U.S./Asia matured).

In an upcoming series of posts, I will expand on U.S.-Russian relations in the context of the current U.S. presidential elections.


Posted in russia

Russia’s New Old Anticorruption Campaign – “We’re serious this time!”

There’s an article on Bloomberg that caught my eye (h/t @agoodtreaty). The article claims that Pres. Putin approved the launch of a ‘new’ anticorruption campaign following a meeting at the Presidential residence in October. According to the article, this was ‘shocking’ news and represents a ‘win’ for the civiliki in their battle vs. the siloviki. Putin will apparently announce the anticorruption campaign during his Address to the Federal Assembly in December.

First, I am wondering whether the whole liberals vs. security types is a useful framework for understanding post-Medvedev Russia. My guess is not. And especially not after Ukraine and the sanctions. Indeed, even the most ‘liberal’ members of the Russian government and society have dug in and are ready for anything – 50 years of hard times, Cold War, even WWIII.

Second, since when is an anticorruption campaign in Russia a ‘new’ idea? The stated purpose of the campaign is to raise economic growth. The article quotes a number of breathless Russian elites who point out that reducing bribes will have an immediate effect and is like cutting taxes without straining the budget (but not if the ruble is worthless!). OK, accepting those arguments are valid in a vacuum, why didn’t they just do this earlier? Oh yeah, they did:

  • 2012 Address to Federal Assembly“We will certainly continue to combat corruption, which is a threat to national development prospects. I would like to stress that businesses must never enjoy any privileges based on their proximity to the executive, legislative or judicial government bodies at any level.”
  • 2013 Address to Federal Assembly“[P]ublic councils should … be active participants in anti-corruption efforts.” ; “there is a lot of corruption in … [the permitting procedures]. This is where the root of the problem lies.”

But as the Russians always say, “Где посадки?” (where are the convictions?). 2012 is an interesting year to check, because Putin’s speech followed a number of high-profile corruption scandals. I summarized these scandals here. It almost seemed like some high-level officials would go to jail, which would be a major development for Russia. So let’s check in with how the implicated officials from each scandal are doing:

  • Anatoly Serdyukov (former Minister of Defense) – pardoned in March of this year
  • Alexander Provotorov (former CEO of Rostelecom) – no charges, and a commercial court even approved his ‘golden parachute’ recently
  • Elena Skrynnik (former Minister of Agriculture) – no charges, and her deputy has still not faced a court
  • Yury Urlichich (former head of GLONASS) – no charges, and subsequently got a job as CEO of Sitronics, a subsidiary of the Sistema Group.
  • Roman Panov (former Deputy Head of Ministry of Regional Development) – a ray of sunshine: his trial is finally looking like it maaayyybeee will start. When the prosecutor read the charges last month, Panov replied, “I cannot really understand what I’m being accused of.” So he plead not guilty.

So two years and no convictions. And we all know, if Russia really wanted convictions, they would get them. Keep in mind the officials listed above stole around USD 1.75 billion.

Most likely, the upcoming anticorruption ‘push’ will result in firings and jail time for a bunch of low-level officials demanding small payments for routine stuff like a permit. Don’t get me wrong, these guys terrorize ordinary people every day and it is not a bad thing that they are punished.

But, treating corruption the same as air in a bike tire reveals the truly rotten character of the Russian state. They accept that corruption exists at all levels and even should exist. Putin has reportedly endorsed this view. It is just another tool to pursue certain ends, like eliminate adversaries or, in this case, promote ‘economic growth’. Really, the goal is to ease the pain of the sanctions, prop up Putin’s popularity, and thereby maintain Putin’s system. But Putin’s system relies on two pillars: popular support and bureaucratic support. Popular support comes from unflagging economic growth. Bureaucratic support comes from permitting officials to use their positions for ‘entrepreneurship’. Faced with low oil prices and the sanctions, how long before one of these pillars collapses?

Posted in bribes, bureaucracy, clans, corruption, criminal law

Russia Declares Open Season on American Brands

For Russians hoping to enjoy a Big Mac, America’s Favorite Fries, and wash down their meal with a Jack Daniels, the news is not good. In a thinly-veiled effort to retaliate against the United States for its Ukraine-related sanctions, Russian regulators are now targeting iconic American brands. This goes beyond the transparent, retaliatory sanctions Russia already adopted against imports of certain agricultural products. Instead, the most recent measures fall into the ‘asymmetrical’ variety, of which Russia is so fond.


Here’s what has been done so far:

  • McDonald’s – Rospotrebnadzor closed 4 Moscow restaurants of McDonald’s, including its legendary Pushkin Square location (the first McDonald’s ever in Russia). Today, the Russian authorities announced that they were widening the probe into McDonald’s, with new inspections scheduled in the Sverdlovsk region. This follows an earlier investigation by Rosselkhoznadzor into the level of antibiotics found in meat used by McDonald’s. It all started in April when, after McDonald’s closed its locations in Crimea, professional clown and Russian Duma Deputy Vladimir Zhirinovsky (LDPR) demanded retaliatory actions against the fast food chain (although apparently Crimeans were about to dump McDonald’s first anyway).
  • Bourbon – Russian authorities have also targeted U.S. manufacturers of bourbon, including Kentucky Gentleman, Jack Daniels, and Jim Beam (never mind that the Jim Beam brand is owned by Japan-based Suntory Holdings).  Kentucky Gentleman imports were banned earlier this month due to alleged pthalate contents in its bourbon; Jim Beam was ordered removed from shelves after Rospotrebnadzor found that its bottles supposedly did not meet the required labeling standards; and Jack Daniels was targeted by Rospotrebnadzor after the regulator found “chemical substances not common to whiskey” in its Tennessee Honey Liqueur (honey, perhaps?).

Western companies should expect such ‘asymmetric’ efforts by the Russian authorities to increase. Indeed, you can expect a number of ‘copycat’ inspections after the Moscow branches of regulators like Rospotrebnadzor take action, such as in the McDonald’s case. Obviously, the targeting strategy is aimed at iconic American brands for which Russia represents an important market. Russia has long been a growing source of revenue for McDonald’s, and it has escalated its expansion into that country, most recently with the first master franchise agreement with Rosinter. Similarly, Beam has been making inroads into Russia, where whiskey consumption has been growing exponentially among traditional vodka drinkers.

The whole idea behind this approach to hurting U.S. companies is not only to retaliate for the sanctions, but also to promote ideas that U.S. products are tainted or defective in the public mind.

So who will be next on Russia’s list? Here are some guesses:

  • Coca-Cola – Coke – perhaps the most iconic American consumer brand – has been pushing deeper into the Russian market in recent years, adapting to Russian preferences for juice and kvass over soda (Pepsico has a greater share of the juice market). In 2010, Coca-Cola acquired Nidan, a Russian juice-maker. But this year, they shuttered two Russian factories due to declining demand. Thus, targeting Coca-Cola is appealing from a symbolic and economic nationalism point of view (i.e., ‘bring our jobs back’).
  • Automakers – nothing is more American than cars, and both GM and Ford have established manufacturing presences in Russia over the past decade. Specifically, the plants in Russia conduct final assembly tasks of parts shipped from all over the world. Unlike consumer products that are sold within Russia, however, the authorities cannot ban sales of cars meant for export to Europe. Thus, the measures taken against automakers would probably involve slowing down customs clearance times of parts coming into the factory, which could devastate their ability to fill orders from dealers in the EU. My only hesitation here is whether Russia would be willing to target its own non-oil exports just to hurt U.S. companies – thus, it will be a test of how committed they are to this path.
  • Tech Companies – Putin already announced that Russia was going to eliminate its use of IBM and Microsoft in government offices. And they could take the same ‘slowdown’ approach to imports as they do with car makers. But I’m thinking more about Google (YouTube), Facebook, and Twitter. Not only are these companies the face of modern American business, they’ve also been used as platforms for anti-regime messages. Personally, I think Russia would rather siphon off all the data these companies generate within its borders than ban them completely. But that doesn’t mean they won’t harass them generally with dawn raids and the like. More likely, I could see the Russian authorities using the vague terms of its new extremism law to selectively target U.S. tech companies for content hosted on their sites.
  • Airlines – Russia has threatened to withdraw overflight rights to airlines based in countries that have adopted sanctions, but this seems a bit extreme for Russia. Again, Russia will most likely pursue a more passive-aggressive strategy that will be unofficial and thus unattributable to any one decision maker. One example I recall: United Airlines used to have a direct flight from DC to Domodedovo, but eliminated the route once Domodedovo started price gauging United on the cost of fuel. I could see Russian airports initiating the same tactic, and also causing delays through ‘safety’ inspections and withholding takeoff clearance.
  • American Films – non-Russophiles may not know it, but Russia actually has its own little film industry, carved from the remnants of the epic era of Soviet cinema. Caps on foreign films have been floated in the past.  But again I could see the extremism law being used to target American movies on a case-by-case basis, particularly in the case of blockbusters competing with local work.
Posted in coca-cola, Cold War, duma, economics, extremism, film, Foreign direct investment, foreign investment, Government of Russia, internet, ldpr, nidan, Putin, sanctions, u.s.-russia relations

Putin’s Bad Month – How the Sanctions Are[n’t] Working

Will the history books view the shooting down of MH17 as a similarly crystallizing event like the assassination of Franz Ferdinand nearly 100 years before? Maybe (probably depends on whose books you will read). In any case, it is difficult to overestimate the significance of that apparently accidental event, which arguably convinced the EU (read: Germany) to adopt stricter sanctions against Russia.   [Sidebar: many have compared the downing of MH17 to that of Iran Air Flight 655 in 1988. I agree, it seems similar. The difference is that where Putin has tried to pin the blame on the Ukrainians for ‘creating the conditions’ that led to the tragedy, Pres. Reagan immediately repudiated Pentagon claims that the US Navy did not shoot the Iranian airliner down].

The key to the new sanctions: freezing major Russian companies out of the global, dollar-based financial system (the ‘matrix‘ I wrote about earlier). Strangely, statements from Russian officials have vacillated from claiming that the sanctions have no impact to admitting their devastating consequences. The news yesterday, however, seemed to corroborate the latter group: Rosneft is requesting $42 billion in emergency funding from the Russian government to offset the effects of the sanctions. To put this figure in perspective, here are some fun statistics about what $42 billion represents:

  •  2% of Russia’s GDP
  • 24% of the Reserve Fund+National Wealth Fund
  • 41% of Rosneft’s revenues
  • 472% of Rosneft’s net income

At the same time, oil prices have remained low despite the conflicts in Ukraine, Gaza, and Iraq, thereby limiting the financial levers available to Moscow.

oil price


And this is only a few weeks after the new sanctions went into effect – it will get worse (perhaps far worse) before it gets better. Indeed, it will arguably get worse for both Russia and the West.

But the sanctions are working, right? Not really, if the aim is to influence Russian policy. Indeed, an internal Sberbank note on the sanctions comes to the following conclusions:

1.       We can be fairly certain that sanctions will not succeed in compelling Russia to reverse course as Russia is a textbook case of a country that will not respond to sanctions. It has a strong leadership with popular support, already poor relations with the West, an alternative supporter in China, and a high perceived cost to amend its policies.  

2.       We should expect sanctions to go on until the situation in Ukraine is resolved through victory or negotiation.

3.       It may be that sanctions are just for domestic consumption in the West, and this is clearly what the market hoped at the start.  However, there is a danger that sanctions are ratcheted up until they really do cause economic damage in a (probably futile) attempt to make the costs outweigh the benefits. 

4.       The West can’t afford to stop importing Russian energy, and Russia can import most goods from Asia, so the key sanctions levers that the West has are high tech exports and financial markets.  As we have noted many times, Russia is highly unusual to have such large and integrated financial markets and yet to defy its providers of capital.

5.       We reiterate our longstanding view that the option value of Russian shares lies at around 1,000 on the RTS, that the oil sector is the safest place to be within the market, and that the banks are the area most exposed to sanctions. 

6.       The main hope for the next market bounce centres on a new attempt to negotiate a comprehensive solution.

Thus, the sanctions are unlikely to influence the behavior of either side. But missing from this analysis is the broader, long-term consequences of Russia’s decoupling from the international system. At some point, it will not be so easy to just ‘flip the switch’ and go back to how things were circa February 2014. If the sanctions have the effect of freezing Russia out from access to international finance and investment – or at least dramatically increases the costs of accessing such finance/investment – then this will turn out to have been a bad month for Putin indeed. The only way for Putin to avoid such a scenario is to blink first or, given his perfected media manipulation machine, declare victory and leave Ukraine alone (a more likely scenario in the event oil prices suffer further declines). In other words, Russia could go back to Feb. 2014 or on the road to N. Korea, and it’s all up to one highly unpredictable man. Sounds like a paradise for foreign investment.

Posted in Economic development, economics, Foreign direct investment, foreign investment, foreign policy, moscow, Novatek, oil, Putin, Rosneft, Russian economy