With the referendum on Crimean independence and possible reunification with Russia now taking place, the US and its European allies have threatened actions to battle Moscow. Measures that include denial of visas, freezing of assets, even commencing economic sanctions against Russia and Russian interests. Escalation of tensions would undoubtedly have negative, potentially disastrous, effects on the European and global economy, not to mention the all-important political and diplomatic ties between West and East.
On Saturday March 15th, the day before this historic referendum in Crimea, the Washington Post, famously regarded as a principal mouthpiece of the US political establishment, published a strongly worded Op-Ed piece collectively written by the Editorial Board entitled US, EU must stay the course on Russian sanctions over Ukraine. A number of punitive actions that the West should, according to the authors, use to punish Russia, including targeted sanctions against prominent Russians in Putin’s inner circle.
“The Obama administration and the European Union are poised to adopt sanctions as early as Monday against Russians involved in the invasion, denying them visas and freezing their assets. But it’s not clear that those measures will be aimed where they must be: at the relatively small circle of oligarchs and power brokers who surround Mr. Putin. These include Igor Sechin, chairman of the oil company Rosneft; Vladimir Yakunin, president of Russian Railways; and Alexei Miller, chairman of Gazprom. Russia is ruled by a mafia. If the dons are left untouched, Western sanctions will have little effect.
Western strategy must also fulfill the warning issued by German Chancellor Angela Merkel, who said the invasion would “cause massive damage to Russia, economically and politically.” That means, at a minimum, excluding Moscow from the Group of Eight and the Organization for Economic Cooperation and Development, which it is seeking to join. It also requires expanding sanctions from individuals to sectors — starting with the Russian banking system, which should be cut off from U.S. and European markets. Russia will respond with sanctions of its own, including against Western companies in Russia. Governments must be prepared to discount that damage, knowing that the economic cost to Russia — including from its own sanctions — will be far greater.
The most important piece of the Western response will be staying power. The policy probably won’t bring quick results”
Specifically, the authors suggest the denial of visas and freezing of assets of such key Russian figures as Igor Sechin (Chairman of Rosneft), Vladimir Yakunin (President of Russian Railways), and Alexei Miller (Chairman of Gazprom). Such measures must, according to the authors, be combined with “punishment” of Russia diplomatically including exclusion from the G8 and Organization for Economic Cooperation and Development (OECD). Were the US and EU to follow through with these and other sanctions, they would undoubtedly open the door for an effective Russian response – a response that would have dire consequences for the already fragile economic situation in Europe and the US.
Sanctions and Russia’s Counter-Moves
How Moscow might respond to such provocative measures, as sanctions would undoubtedly be seen as a very serious escalation. Moreover, it is essential to consider how the Russian response would impact the entire world.
- Russia holds the key to Europe’s energy future. With Russia providing more than one-third of Europe’s gas imports, any sanctions could immediately lead Russia to scale back, or even more drastically, cut off the gas to Europe. This would create innumerable problems for Europe, particularly for the export-dependent economy of Germany, which is unquestionably the economic powerhouse on the continent. With German technology, luxury cars, and the like no longer being produced in the required numbers, the economy would, almost overnight, come to a screeching halt. Moreover, future German energy security would be threatened, as the primary lifeline for the country is the Russian Nord Stream pipeline, which brings Russian gas across the Baltic and into northern Germany.
- Tremendous amount of political discord within the EU as countries traditionally friendly with Russia, such as Italy, also heavily reliant on Russian energy, become ever more disenchanted with the belligerent policies of Brussels vis-à-vis Russia and Ukraine. With turmoil already in high gear in Italy, Spain, Portugal, Greece and many other economically devastated countries in Southern Europe, it is unlikely that the political will to go along with a suicidal sanctions regime will remain.
- Russia also has a tremendous financial weapon that could be unleashed against the US and EU: their dollar holdings. With the Russian government, not to mention private Russian holdings, retaining a tremendous amount of US dollars, they could easily choose to transfer or dump their dollars and create a veritable panic on Wall St and in Washington. In fact, this scenario may have already taken place on a small-scale.
- The Russian Central Bank may have quietly transferred a portion of its dollar holdings offshore. More than $106 billion of US securities held by foreign central banks were suddenly transferred away from the US Federal Reserve, with the majority of the securities being US Treasury bonds. It remains unclear exactly which central bank made the transfer, though there is a good deal of speculation that it was Russia. Though the move was not enough to severely rattle markets, it has been interpreted as a warning to Washington and Wall St. from Moscow that the Russians are willing to retaliate in the case of economic war being waged against them. As CNBC reported last week.
Foreign central banks’ holdings of U.S. marketable securities fell in the week that ended Wednesday by a record $106.1 billion, and that was mostly Treasurys. The holdings of U.S. securities held by the Fed for other central banks fell to $3.21 billion, the lowest level since December 2012.
While traders say they suspect it was Russia, they don’t know for sure, and it has not shown up on Russia’s balance sheet.
The timing of Sunday’s Crimean referendum and the potential for Western sanctions. Rather than selling the Treasurys, Russia simply transferred them out of the U.S.
“Everything (Russian President Vladimir) Putin is doing is being extra cautious about retaliation, like bringing troops right to the Ukraine border,” said Chandler. “The other reason I say it’s most likely Russia is you look at the countries that have the largest reserves. It doesn’t feel like it’s China because China has enough on its plate.”
Half of Russia’s foreign currency reserves are held in dollar-denominated instruments, and this would be about 80 percent of those dollar holdings. At the end of 2013, Russia had $138 billion in Treasury securities.
Naturally, the danger to the US is not simply Russian holdings of dollar assets that could be dumped, but the flight out of the dollar that such dumping could trigger. With China and other powerful economies heavily leveraged in dollars themselves, their central banks could become concerned for their own investments and might cautiously begin to move out of the dollar themselves, triggering a chain reaction that would prove devastating for the US currency and economy more generally.
Aside from purely economic counter-measures, Russia has a number of political and strategic moves it could make to retaliate against possible sanctions. Principally, Moscow could begin to act with more impunity in theaters of conflict. In Syria, Russia could move from being a backroom supporter of the Assad government, to being a principal supplier and backer. Russia could finally deliver the weapons systems that they have, to this point, been reluctant to hand over to Damascus, including more modern anti-missile systems, fighter jets, and other critical military supplies. In Iran, Russia could cease its obstinacy with regard to delivering advanced weapons systems, choosing instead to buttress Iranian military power as a check to US pressure.
Although there are, undoubtedly, costs for Russia associated with the possibility of sanctions, it is equally possible to view such measures as beneficial for Russian power in the long-term as they might motivate Russia to settle outstanding disputes and move toward expanding its global influence. In this way, sanctions might very well be that external force that promotes Russia’s geopolitical, economic and strategic development.
For instance, the possibility of European sanctions on Russian energy could be the push necessary for Russia to finally resolve its pricing disputes with China and officially make progress on Sino-Russian energy trade. As the Financial Times reported back in January, Russian energy giant Gazprom is very close to finally sealing an agreement with China regarding gas pricing. Once the agreement is official, Gazprom would then begin the major investment required to develop the critical pipelines and other aspects of the energy delivery infrastructure required to finally achieve the long sought dream of a viable Sino-Russian energy relationship. Were the EU sanctions actually implemented, Russia would be all the more motivated to overcome whatever obstacles remain and thereby transform their economic and geopolitical calculus immeasurably.
Not only would this provide Moscow with still more motivation to work closely with Beijing, it would transform Russia’s relations with the former Soviet Republics of Central Asia, specifically Turkmenistan, which currently provides an enormous amount of energy to China. Relations between the countries, which have become contentious at times in recent years, could then be stabilized against the backdrop of cooperation on energy pricing and cooperation with the Chinese manufacturing giant.
Furthermore, the sanctions would likely strengthen the ties within the Collective Security Treaty Organization (CSTO), which would, out of necessity, need to come together in order to protect its own interests, and act as a counterweight to NATO expansion. Additionally, this would provide added leverage to Russia in its relations with the other former Soviet Republics, especially Kazakhstan, who are certainly candidates for Western-sponsored destabilization.
Finally, Russia’s military cooperation around the world would undoubtedly improve. Recently, the Russian military made public its desire to build naval and other military facilities in Venezuela, Nicaragua, Vietnam, Cuba, the Seychelles, Singapore, and other countries. With the imposition of sanctions, Moscow would only feel more urgency to follow through with these plans, and to make the necessary concessions to the relevant countries in order to achieve this. Unquestionably, such moves would tremendously alter Russia’s geopolitical and strategic position in the world.
If the US and EU follow through on their threats of sanctions and other punitive measures, it will at the very least have tremendous negative effects on the global economy. However, should the West, blinded by its hubris, think such sanctions will bring Russia to its knees, they have grossly miscalculated. Rather than punishing Russia, these actions will push Moscow even further down the road to true strategic independence from the West. Perhaps this could also lead to the creation of a true multi-polar world. Were that to happen, those interested in peace and stability would rightly rejoice.
Russia’s dominant position in the European energy market solidifies Moscow as an integral part of the West’s future, forcing Washington and its allies to engage with their eastern rival. Moreover, it is this precisely this necessary engagement that grows Russia’s influence both in Europe and around the world – influence which necessitates the continued Russophobic propaganda in Western media and popular culture.
Since the early years of the post-Soviet period, Russia has steadily grown its energy exports, rising to its current position as the single most significant provider of oil and gas to Europe. With roughly one third of European oil and gas imports coming from Russia, the economic relationship between the two has become of primary importance for both sides. Europe is heavily dependent on Russia to fuel its manufacturing and consumer base, while Russia relies on oil and gas revenue from Europe to finance its continued economic development and diversification.
The Nord Stream, seen by many as a necessary move by Russia to diversify its energy delivery infrastructure away from total reliance on Ukraine, has increased Russia’s leverage when it comes to relations with Europe. Moreover, it establishes a reliable revenue stream for Moscow, which has, since 2000, vowed to use energy export revenue to diversify the Russian economy away from a purely “petro-economy.”South Streampipelinewill make Russia a dominant player in terms of exports to the Mediterranean and Central Europe. The South Stream is expected to carry 63 billion cubic meters of gas per year, making it one of the largest pipelines in the world in terms of volume.
Of course, these two pipelines are not the only critical European energy infrastructure controlled by Russia. Currently, Russia still provides a great deal of gas to the continent through its restive partner Ukraine, whose network of pipelines dates back to the Soviet era. The spider-web of Ukrainian pipelines, coupled with Russia’s ownership of the Belarusian pipeline operator Beltransgaz, means that Moscow has cemented a dominant position for itself vis-à-vis the European market over land and under the sea.
Naturally the West, the United States in particular, views this mutually beneficial relationship between the EU and Russia as threatening Washington’s geopolitical hegemony in Europe. For this reason, a number of steps have been taken by Western governments and corporations to undercut Russia’s energy dominance.
Every geopolitical conflict between Russia and the West has an energy dimension to it. The current conflict in Ukraine can be understood, at least in part, as a struggle for control of the critical gas delivery infrastructure.
At its height last decade, Ukrainian pipelines accounted for nearly 80% of all gas deliveries from Russia to Europe. The Russia-Ukraine gas dispute of 2009 brought into stark relief just how significant gas is to the bilateral relations between the two countries and, perhaps even more significantly, how critical Ukraine was to Russia’s overall export revenue. This conflict, and others that preceded it, was one of the principal motivators for Russia’s construction of the Nord Stream and South Stream.
The current political crisis in Ukraine should be recognized as partially based on economic competition between Europe and Russia over Ukraine. The EU partnership agreement that Ukrainian President Yanukovich rejected was specifically designed to be an “exclusive” deal that would force Ukraine to choose either to side with Russia or with Europe, forcing the government into an untenable position. The unfolding crisis in that country is a direct result of such provocative economic measures.
The war in Syria, and the subsequent diplomatic standoff between Russia and the West, is also partially the result of energy-related issues. The early days of the conflict in Syria coincided precisely with the signing to the so-called “Islamic Pipeline”, a gas pipeline that would have delivered Iranian and Iraqi gas to the Mediterranean, and subsequently to Europe, via Syria. Naturally, such a development would have been a direct assault on the gas hegemony of Qatar, and the gulf monarchies more generally.
Referendum, another step toward annexing Crimea
Crimean voters overwhelmingly approved a referendum to secede from Ukraine and join Russia. Mr. Putin is scheduled to speak Tuesday to the Russian parliament, and was widely expected to announce Moscow would formally absorb Crimea.
Undeterred by the mounting pressure, the Kremlin said late Monday that Mr. Putin had signed a decree recognizing Crimea as an independent state—a necessary step before Russia can proceed with annexation, in what would be the most significant land seizure in Europe in decades.
The developments left Russia on the brink of absorbing a portion of another country while the West grasped for leverage to contain Mr. Putin and prevent further Russian incursions into Ukraine or elsewhere.
The U.S. sanctioned the seven Russian and four Ukrainian officials for allegedly destabilizing Ukraine and supporting Russia’s annexation of Crimea. Most notable, said U.S. officials, were the presidential aides: Mr. Surkov and Sergey Glazyev.
Obama’s executive order also allows the White House to sanction any individual or company believed to be providing financial support to the Russian government. This could allow the White House to target broad sectors of Russia’s economy, including energy and mineral companies, arms suppliers and banks, if the conflict intensifies.
Citizens of America & Europe are still more afraid of their own oppressive governments rather than worrying about Russia’s oppressive government. Our governments who overthrow leaders worldwide, assassinate journalist, attack protesters, spy on everyone and meddle in countless countries while we can’t afford to uphold some worldwide empire for the benefit of the 1%.
See Also: Russia Ukraine Conflict Part 1
Sources: http://journal-neo.org/2014/02/25/russia-europe-and-the-geopolitics-of-energy/ , http://www.washingtonpost.com/opinions/us-eu-must-stay-the-course-on-russian-sanctions-over-ukraine/2014/03/15/ceb4b94a-aba1-11e3-98f6-8e3c562f9996_story.html , http://www.cnbc.com/id/101495837 , http://online.wsj.com/news/articles/SB10001424052702304747404579445081937946854?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052702304747404579445081937946854.html