Sanctions Talk, Money Walks

Vladimir Putin at press conference

Image courtesy of Reuters

Sanctions Talk, Money Walks
| published July 31, 2014 |

By R. Alan Clanton
Thursday Review editor

Many member states of the European Union have been reluctant to sign on wholeheartedly to U.S. sanctions against Russia over Moscow’s interference in the Ukraine. After all, several European countries have faced tough times as a result of recession and austerity programs. And to make matters more challenging, some of these same countries engage in a lot of business with Russia—and European dependence on Russian oil and gas places energy at the top of the list of concerns when U.S. President Barack Obama talks of ratcheting-up the heat on Vladimir Putin.

Germany alone did roughly $88 billion is trade with Russia in 2013, and a fourth of that is oil and gas. Norway has one of the world’s largest investment funds, at nearly $900 billion, and a significant share of that investment portfolio is in Russia. Poland, France, Italy and Spain all engage in billions of dollars’ worth of trade with Russian banks and businesses, and even the Netherlands—for whom almost half of the passengers of MH-17 called home—has significant business relationships with Russia. All told, trade between Russia and its two dozen European neighbors to the west totals, by some estimates, more than $2 trillion a year. Disrupting those markets in times of tepid recovery and in a period of debt crisis can be economically painful.

So discussion of harsher sanctions has, up to a few days ago, been the exclusive narrative of Obama and his spokespersons, and leaders like Germany’s Angela Merkel have remained circumspect, to say the least.

But the downing of a Malaysian jetliner carrying 298 passengers has changed all of that.

When that Boeing 737 was shot out of the skies over war-torn eastern Ukraine, downed apparently by a missile system built in Russia and operated by pro-Russian militants on the ground, many European leaders realized that they could no longer take the middle path while leaving the toughest of tough talk to the Americans.

Since the Ukrainian crisis began seven months ago, tensions between Russia and the U.S. have been strained—a tension so chilly that many have compared the situation to the frosty, grey days of the Cold War. What began in winter as a mostly peaceful protest against Kiev’s pro-Russian leader Viktor Yanukovych—a guy who won an election which many say was rigged, Soviet-style—turned violent at the very moment that Putin was basking in the glow of playing host to the Winter Olympics. Yanukovych was ousted, along with his steamer trunks of cash and his bags of gold. But things quickly became worse, much worse. Russian-inspired insurrection followed, with heavily-armed separatists taking over dozens of towns east of the Dnieper River, and Russia annexing the Crimea region after a snap referendum.

What was at first a slow-moving counter-revolution escalated into what is now all-out war, with the militants gaining access to increasingly heavy, high-tech weaponry—including the very BuK-11 rocket system which is alleged to have been used to shoot down the Malaysian airliner.

Along the way, as the fighting has increased on a steady basis, Obama and his closest allies (read: the United Kingdom) have sought to put pressure on Putin. This pressure has come in varying forms, including Putin’s expulsion from the G8, and a steady diet of unpleasant economic sanctions. Putin, the calculating, icy KGB field officer, has sought to brush aside the sanctions, even retorting with a few of his own. But in the EU, talk of a campaign of outright economic isolation against Moscow has for months sent shudders along spines—or, at the very least, spurred guarded language from European leaders reticent to put their already-precarious economies back into recession mode. Russia has used oil and gas as leverage before, including as recently as 2009, when it cut off the Ukraine in retaliation for political and market moves Putin deemed too western.

But the downing of that commercial jetliner on July 17 may have changed attitudes in dozens of countries, and given some European leaders a new reality to consider. The use of a battlefield rocket to kill innocent civilians was a horror, but for many Europeans, the specter of watching armed militants bar emergency services personnel and crash investigators from the site of the wreckage was too much, and the unseemly handling of the crash victims’ bodies (even now, many have not been located or recovered) turned a tragedy into a nightmare. Putin’s stone-faced, stolid response to the incident sent a chill through many in Europe.

Putin is a power player. But Putin answers to his closest friends and his tight circle of oligarchs as well. And that means that business analysts and financial wonks working for the U.S. Department of State and the U.S. Treasury Department have been closely tracking the wealth of Putin’s richest cronies.

Two of the most powerful billionaires in Russia are Arkady Rotenberg, the leading figure in SMP Bank and InvestCapitalBank OAO, and Yury Kovalchuk, the majority stockholder in Bank Rossiya and owner of the National Media Group, a mega-media conglomerate which includes among its assets TV networks, news programs, TV stations, and a dozen print publications. Already squeezed by sanctions imposed by the United States months ago, Rotenberg and Kovalchuk are now among eight billionaires targeted for tough blacklisting by the European Union. Among other actions, the EU members voted to freeze all the European assets of the eight oligarchs. In the U.S., foreign policy analysts consider Europe’s stringent new battery of sanctions to be a crucial turning point, as U.S. sanctions alone may not have had an immediate impact on Putin’s attitude.

The EU also included Nikolay Shamalov, a close friend of both Putin and Kovalchuk, and a major stockholder in both banks and media operations. Shamalov is also a high-ranking policy-maker charged with media relations and press policy for the Kremlin. He is also the owner and publisher of dozens of major news and information websites with notably Putin-friendly editorial positions. Kovalchuk is widely considered the “Rupert Murdoch of Russia.”

The EU’s actions against Russia, and against Putin’s wealthy cronies, were followed closely by additional sanctions by the United States, most of which were aimed at several large Russian banks and financial institutions, but also included tweaking existing sanctions against some of the oligarchs most closely linked to Putin.

The 28-member EU also targeted Russia’s significant technology sector, agreeing to block certain forms of computer, military and communications technology from being sold to Russia. These measures may ultimately hurt tech firms in Germany, Italy and France, but the ripple effect may spill into most European economies as well. Among the items now limited or banned for sale to Russia: new hardware and software for oil and gas drilling and delivery, communication and cell phone technology, and many technologies and electronic devices which may have additional applications for military use.

In the meantime, the violence in eastern Ukraine continues to rise. In late June, the Ukrainian army began to make a concerted push into those areas controlled by the separatists. Kiev sent in heavier, more advanced weaponry, and began using air support and fighter jets in its operations against the militants. As a result, the Ukrainian forces began to regain ground and send the separatists into retreat in several key areas. The Ukrainians have suspected (and some U.S. intelligence seems to confirm) that Russia is intervening directly, but that Moscow is stopping short of an all-out invasion. Still, the militants have come into possession of newer, more powerful hardware and weaponry, including the BuK-11 surface-to-air system apparently used to shoot down MH-17.

Russia has moved tens of thousands of its troops to areas close to the border with eastern Ukraine. Putin has consistently said that these troop movements are routine exercises. Satellite imagery shows that along with the troop movements, scores of helicopters, hundreds and tanks, and scores of MiG fighter aircraft have been positioned along the frontier. Some U.S. and British intelligence photos also show what appear to be batteries of Russian long-range artillery lined up within firing range of eastern Ukraine.

Fighting has intensified in the areas around Donetsk, a city controlled by the militants but currently under siege by Ukrainian forces loyal to Kiev. Shelling and gunfire in the vicinity of the airliner crash site has made it difficult for investigators to get to the scene of the wreckage, which is spread out over a five-mile area of rural Ukraine about 18 miles from the border with Russia.

Related Thursday Review articles:

Information is War; Truth is its Casualty; R. Alan Clanton; Thursday Review; July 23, 2014.

No Conflict is Local, No War is Regional; R. Alan Clanton; Thursday Review; July 19, 2014.