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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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Russia Lures International Arms Buyers With Half-Priced, More Effective Missile System

The Russian S-400 mobile long-range surface-to-air missile system costs around $500 million, vs. the $1 billion price tag for a US-made Raytheon Patriot Pac-2 battery.

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Via Zerohedge


Russia has been pitching a rival missile platform that costs half of those made by US companies, reports CNBC, which has resulted in several countries dealing with the Kremlin “despite the potential for blowback.”

Sefa Karacan | Anadolu Agency | Getty Images

The Russian S-400 mobile long-range surface-to-air missile system costs around $500 million, vs. the $1 billion price tag for a US-made Raytheon Patriot Pac-2 battery, while a THAAD battery made by Lockheed Martin costs just about $3 billion, according to people with first-hand knowledge of a US intelligence assessment.

Nearly 13 countries have expressed interest in buying Russia’s S-400, a move that could trigger potential U.S. sanctions under the Countering America’s Adversaries Through Sanctions Act, which President Donald Trump signed in August 2017. In September, the U.S. slapped sanctions on China  for buying fighter jets and missiles from Russia. However, the U.S. could grant sanction waivers. –CNBC

Turkey, meanwhile, may be hit with US sanctions over their decision to purchase the S-400 defense system, which the United States says poses a risk to its F-35 fifth generation stealth fighter platform.

Meanwhile, India called the United States’ bluff over sanctions in late Ocotber, standing its ground in its decision to buy the S-400.

One of the reasons Russian systems are generally considered less expensive than their American counterparts is because they don’t include pricey ongoing maintenance.

“When foreign militaries buy American, above and beyond the purchase, they are buying a partnership with the U.S. military,” Andrew Hunter, director of the Defense-Industrial Initiatives Group at the Center for Strategic and International Studies, told CNBC. “And that plus the maintenance and technical assistance is a big part of the cost difference.

The S-400 system made its debut in 2007, succeeding the S-200 and S-300 missile systems. According to CNBC, “the Russian-made S-400 is capable of engaging a wider array of targets, at longer ranges and against multiple threats simultaneously,” vs. US-made systems.

In terms of capability, one source noted that while there is no perfect weapon, the S-400 eclipses even THAAD, America’s missile defense crown jewel.

When asked why nations seek to buy the S-400 instead of America’s Patriot or THAAD systems, one of the people with knowledge of the intelligence report explained that foreign militaries aren’t willing to stick with the cumbersome process of buying weapons from the U.S. government. –CNBC

“Many of these countries do not want to wait for U.S. regulatory hurdles,” said a CNBC source with first hand knowledge of the assessment. “The S-400 has less export restrictions and the Kremlin is willing to expedite sales by skipping over any regulatory hurdles.

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Britain’s Enemy Is Not Russia But It’s Own Ruling Class, UN Report Confirms

In austerity Britain, who the enemy is has never been more clear.

The Duran

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Authored by John Wright. op-ed via RT.com:


As the UK political establishment rips itself to pieces over Brexit, a far greater crisis continues to afflict millions of victims of Tory austerity…

A devastating UN report into poverty in the UK provides incontrovertible evidence that the enemy of the British people is the very ruling class that has gone out of its way these past few years to convince them it is Russia.

Professor Philip Alston, in his capacity as the United Nations Special Rapporteur on extreme poverty and human rights, spent two weeks touring the United Kingdom. He did so investigating the impact of eight years of one of the most extreme austerity programs among advanced G20 economies in response to the 2008 financial crash and subsequent global recession.

What he found was evidence of a systematic, wilful, concerted and brutal economic war unleashed by the country’s right-wing Tory establishment against the poorest and most vulnerable section of British society– upending the lives of millions of people who were not responsible for the aforementioned financial crash and recession but who have been forced to pay the price.

From the report’s introduction:

“It…seems patently unjust and contrary to British values that so many people are living in poverty. This is obvious to anyone who opens their eyes to see the immense growth in foodbanks and the queues waiting outside them, the people sleeping rough in the streets, the growth of homelessness, the sense of deep despair that leads even the Government to appoint a Minister for Suicide Prevention and civil society to report in depth on unheard of levels of loneliness and isolation.”

Though as a citizen of the UK I respectfully beg to differ with the professor’s claim that such social and economic carnage seems “contrary to British values,” (on the contrary it is entirely in keeping with the values of the country’s Tory establishment, an establishment for whom the dehumanization of the poor and working class is central to its ideology), the point he makes about it being “obvious to anyone who opens their eyes,” is well made.

For it is now the case that in every town and city centre in Britain, it is impossible to walk in any direction for more than a minute before coming across homeless people begging in the street. And the fact that some 13,000 of them are former soldiers, casualties of the country’s various military adventures in recent years, undertaken in service to Washington, exposes the pious platitudes peddled by politicians and the government as reverence for the troops and their ‘sacrifice,’ as insincere garbage.

Overall, 14 million people in the UK are now living in poverty, a figure which translates into an entire fifth of the population. Four million of them are children, while, according to Professor Alston, 1.5 million people are destitute – that is, unable to afford the basic necessities of life.

And this is what the ruling class of the fifth largest economy in the world, a country that parades itself on the world stage as a pillar of democracy and human rights, considers progress.

The values responsible for creating such a grim social landscape are compatible with the 18th not 21st century. They are proof positive that the network of elite private schools – Eton, Harrow, Fettes College et al. – where those responsible for this human carnage are inculcated with the sense of entitlement and born to rule ethos that defines them, are Britain’s hotbeds of extremism.

Professor Alston:

“British compassion for those who are suffering has been replaced by a punitive, mean-spirited, and often callous approach apparently designed to instill discipline where it is least useful, to impose a rigid order on the lives of those least capable of coping with today’s world, and elevating the goal of enforcing blind compliance over a genuine concern to improve the well-being of those at the lowest levels of British society.”

Here, set out above in bold relief, is the barbarism that walks hand in hand with free market capitalism. It is the same barbarism that was responsible for pushing post-Soviet Russia into a decade-long economic and social abyss in the 1990s, and the values that have pushed 14 million people in the UK into the same economic and social abyss in our time.

Austerity, it bears emphasizing, is not and never has been a viable economic response to recession in a given economy.

Instead, it is an ideological club, wielded on behalf of the rich and big business to ensure that the price paid for said economic recession is borne exclusively by those least able to bear it – namely, the poor and working people. It is class war by any other name, packaged and presented as legitimate government policy.

However, in Britain’s case in 2018, this is a war like no other because, as Professor Philip Alston’s report lays bare, only one side in this war has been throwing all the punches and only one side has been taking them.

With Christmas season upon us, the scale of human suffering across the UK ensures that the elaborate ad campaigns inviting us to shop and indulge to our heart’s content – ads depicting the middle class dream of affluence and material comfort – take on the character of a provocation. In fact, they call to mind the truism that wars take place when the government tells you who the enemy is, while revolutions take place when you work it out for yourself.

In austerity Britain, who the enemy is has never been more clear.

 

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‘Iron’ Mike Pence Stares-Down Putin In APEC Showdown

Vice President Mike Pence and National Security Advisor John Bolton were seen shaking hands and chatting with Russian President Vladimir Putin on the sidelines of the ASEAN Summit in Singapore.

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Via Zerohedge


Forget the All-Blacks ‘Haka’, ignore Foreman-Frasier, Drago-Balboa, and Ortiz-Liddell, the honor of the greatest (or perhaps most awkward) staredown in history now goes to US Vice President Mike Pence…

Having been blamed for everything from Trump’s election victory to USA soccer team’s loss to England last week, Russia faced accusations all weekend and was reportedly confronted by the US contingent over “meddling.”

As The Sun reports, Pence and Putin “discussed the upcoming G20 Summit and touched on the issues that will be discussed when President Trump and President Putin are both in Argentina for the summit,” according to the vice president’s press secretary, Alyssa Farah.

An NBC reporter tweeted: “New per the @VP’s Office—> The VP’s office says Vice President Pence directly addressed Russian meddling in the 2016 election in a conversation with Vladimir Putin on Thursday in Singapore.

“The conversation took place following the plenary session this afternoon at ASEAN.”

But, it was the following clash of the titans that caught most people’s attention.

As the Russian president joined the that Pence shook Putin’s ‘deadly’ hand, met his ‘steely KGB-trained’ gaze, and desperately tried not to smile or blink for 20 seconds as Putin appeared to chat amicably with the US VP…

While Putin has (if his accusers are to be believed) grappled his opponents to death with his bare hands (remember he is a sinister KGB agent and jiu-jitsu expert); we suspect the only thing VP Pence has gripped tightly in his hands is his bible.

Sadly, John Bolton then blew the tough guy act (or is he Mike Pence’s ‘good cop’) as he does his best impression of a teenage girl meeting their popstar idol for the first time…

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