Tag Archives: sanctions against Russia

White Gloves War: Sanctions against Russia

Laser weapons system use glass.  Glass could be considered dual-equipment.  Pictured here  the Laser Weapon System (LaWS) aboard USS Ponce. Image from wikipedia

Since Russia annexed Crimea last year, it has become almost impossible for scientists in Russia to buy anything in the United States or Japan that has a dual purpose, said physicist Alexander Shilov, who works in the Institute of Laser Physics in Russia’s scientific hub of Akademgorodok, or Academy Town — part of Russia’s third-largest city of Novosibirsk…The U.S. and EU sanctions were designed to halt exports to the Russian defense sector. When announcing a new round of sanctions in July 2014, the European Union noted specifically that they “should not affect the exports of dual-use goods and technology” to Russia for “non-military use.” In reality, many Western companies were so spooked by the sanctions and the penalties they could face for violating them that the door was shut completely, the scientists say….

What’s more, foreign-made equipment is now less affordable for Russian scientists because of the depreciation in the Russian ruble, which lost nearly half of its value since the Crimean annexation.

The scientists’ plight has been compounded by the Kremlin’s own crackdown on Russian private funding of science, stemming from suspicions of Western influence. The government this year labeled the Dynasty foundation, Russia’s largest source of private funding for science, a “foreign agent” — which makes the group vulnerable to an array of surprise checks and audits. It is a Cold War term that carries connotations of spying. The foundation fell afoul of the officialdom because its Russian founder funds the organization from money transferred from his foreign bank accounts.  “If Dynasty was named a foreign agent, then everyone who had contracts with Dynasty is an accomplice of a foreign agent,” said Shilov. “We are all spies now.”

The government has become increasingly suspicious of foreign-funded non-governmental organizations, seeing them as potential agents of a hostile West. Russia has brushed off the sanctions imposed by the United States and European Union, saying that Russia has plenty of resources to replace banned imports with its own production.

Excerpts from  NATALIYA VASILYEVA5, Russian scientists squeezed by sanctions, Kremlin policies, Associated Press, July 20, 2015

A Golden Opportunity: Russia and China Collaboration

china-russia-map (1)

Relations between China and Russia have been growing closer since the end of the cold war. Both, for different reasons, resent America’s “hegemony” and share a desire for a more multipolar world order. Russia, a declining great power, is looking for ways to recover at least some of its lost status; whereas China, a rising power, bridles at what it sees as American attempts to constrain it…..

But there have been occasional tensions. Russia played a key role during the 1990s in helping China to modernise its military forces. Russia was able to preserve a defence-industrial base that would otherwise have withered from lack of domestic orders. But since the middle of the last decade, irked by China’s theft of its military technology and its consequent emergence as a rival in the arms market, Russia’s weapons sales to its neighbour have slowed.

Russia is also wary of becoming little more than a supplier of natural resources to China’s industrial machine—a humiliating position for a country that until recently saw China as backward. As long as Russia could sell to Europe all the gas required to keep the Russian economy growing, it could put deals with China on hold. These included plans for two gas pipelines from Siberia into China that were announced in 2006 and then quietly dropped as the two sides bickered over prices.

All that has changed. The Ukrainian crisis is, as Russian media put it, forcing Russia to “pivot” its economy towards Asia in an effort to lessen the impact of Western sanctions by finding alternative markets and sources of capital. For China it is a golden opportunity to gain greater access to Russia’s natural resources, at favourable prices, as well as to secure access to big infrastructure contracts that might have gone to Western competitors and to provide financing for projects that will benefit Chinese firms.

But China abstained from voting on the UN Security Council resolutions condemning Russia, while Chinese media have given Russia strong support. China has quietly welcomed a new cold war in Europe that might distract America from its declared “rebalancing” towards Asia.

Striking evidence of the new closeness between China and Russia was a $400 billion gas deal signed in May 2014 under which Russia will supply China with 38 billion cubic metres (bcm) of gas annually from 2018 for 30 years. At China’s insistence, the gas will come from new fields in eastern Siberia and will pass through an as yet unbuilt pipeline—the better for ensuring that it will not be diverted elsewhere. Other deals have followed. The biggest was a preliminary agreement signed in November 2014  for Russia to sell an additional 30 bcm a year through a proposed pipeline from western Siberia. In every instance it is probable that China was able to drive a hard bargain on price.

Russia’s weakness was also clear in its recent decision to resume high-tech arms exports to China. In April it agreed to sell China an air-defence system, the S-400, for about $3 billion. This will help give China dominance of the air over Taiwan and the Senkaku islands (Diaoyu to the Chinese, who dispute Japan’s claim to them). In November 2014 Russia said it was prepared to sell China its latest Sukhoi-35S combat aircraft. Initially it had refused to sell any fewer than 48, in order to make up for losses it calculated it would suffer as a result of China’s inevitable pilfering of the designs. Now it has meekly agreed to sell only 24.

But problems ahead are discernible. One is that both countries are competing for influence in Central Asia, once Russia’s backyard (Mr Xi was due to head there before proceeding to Moscow). Mr Putin wants to establish his Eurasian Economic Union partly to counter growing Chinese economic power in Central Asia, through which China wants to develop what it calls a Silk Road Economic Belt. China is using the Shanghai Co-operation Organisation (SCO), of which Russia and Central Asian nations are also members, to boost its security ties in the region as well: it often holds counter-terrorism exercises with its SCO partners.

Russia and China: An Uneasy Friendship, Economist, May 9, 2015, at 37.

Sanctions against Sanctions: Sovereign Financial Systems, Russia

Visa

International payment operators Visa and MasterCard have started processing domestic payments inside Russia’s new national processing system, launched in response to U.S. sanctions against Moscow that saw cards from several Russian banks blocked in 2014. Observers see the creation of the National Card Payment System as the first step towards an autonomous financial system in Russia.

“The national system has already been introduced, quickly and at a little cost, and it has fully resolved the problem of payments inside the country,” says Sergei Khestanov, professor of finance and banking at the Russian Presidential Academy of National Economy and Public Administration.  If Visa and Mastercard do not fulfill the requirements of the Central Bank, they will have to pay a security deposit, whose size will be linked directly to the turnover of the credit card systems. Morgan Stanley estimated the figure at $950 million for Visa and $500 million for MasterCard.

According to Khestanov, processing Visa transactions through the national system should be viewed as a compromise: The Russian government’s control of the transactions will strengthen, but the international systems will continue to operate in Russia.  “The potential of the development of the Russian cashless payment market is still enormous,” explains Anton Soroko, an analyst at Finam Investment Holding.,,,For the time being, experts are avoiding any clear-cut predictions of success, and say that Visa’s protocols are more complex than MasterCard’s. “We will see if this will be successful only after the infrastructure assumes the full burden,” says chief analyst at UFS IS Ilya Balakirev.

The next stage should be the Russian national payment system’s issuance of plastic cards, which is slated for December 2015.The picture is further complicated by the emergence of Asian operators as an alternative to western payment systems. Immediately after the introduction of sanctions against Russia by the U.S., the Chinese bank card system UnionPay entered the Russian market in April 2014, followed in March 2015 by Japan Credit Bureau (JCB). By 2017 Russia is planning to issue about two million UnionPay cards and three million JCB cards.

Excerpts from Alexei Lossan, Visa and MasterCard join Russia’s National Card Payment System, Russia Beyond the Headlines, Apr.  2, 2015

Financial Sanctions Against Russia and Iran: the use of SWIFT

Swift

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) provides a network that enables financial institutions worldwide to send and receive information about financial transactions in a secure, standardized and reliable environment.  SWIFT is not an international organization.  It is instead a cooperative society under Belgian law and it is owned by its member financial institutions…

But the network’s very usefulness means it is increasingly being cast in a new role, as a tool of international sanctions. In 2012 it was obliged, under European law, to cut off access for Iranian banks that had been subjected to sanctions by the European Union. Now there are calls for Russian banks to be banned from SWIFT in response to Russia’s invasion of Ukraine.

A group of American senators is arguing for the measure, which could be inserted into a broader bill on sanctions against Russia that has a good chance of being passed in the next session of Congress. The European Parliament passed a resolution in September calling on the EU to consider mandating a cut-off…European governments are divided, with Britain and Poland among the keenest.

The earlier SWIFT ban is widely seen as having helped persuade Iran’s government to negotiate over its nuclear programme. The ban was one of the first sanctions Tehran asked to be lifted, points out Mark Dubowitz of the Foundation for Defence of Democracies, a Washington-based think-tank. Though some of the banks blocked from SWIFT managed to keep moving money by leasing telephone and fax lines from peers in Dubai, Turkey and China, or (according to a Turkish prosecutor’s report) by using non-expelled Iranian banks as conduits, such workarounds are a slow and expensive pain. And the sanctions prompted Western banks to stop conducting other business with the targeted banks.

The impact of a reprise on Russia’s already fragile economy would be huge. Its banks are more connected to international trade and capital markets than Iran’s were. They are heavy users not only of SWIFT itself but also of other payment systems to which it connects them, such as America’s Fedwire and the European Central Bank’s Target2. Kommersant, a Russian newspaper, has reported that more than 90% of transactions involving Russian banks cross borders.

Foreign firms that do business in Russia would suffer, too. Countries that trade heavily with Russia, such as Germany and Italy, are therefore none too keen…

SWIFT’s own rules allow it to cut off banks involved in illegal activity, and it has occasionally done so. But if it ends up being used frequently for sanctions, it could come to be seen as an instrument of foreign policy…Already there are calls for it to be used in other conflicts: pro-Palestinian groups have recently sought for Israel’s banks to be shut out, for instance. And as China’s economic clout grows, might it want Taiwanese banks excluded?

Another risk is that using SWIFT in this way could lead to the creation of a rival. Russia’s central bank is pre-emptively working to develop an alternative network; China has also shown interest in shifting the world’s financial centre of gravity eastward. Earlier this year it co-founded a BRICS development bank with Russia, India, China and South Africa, and its UnionPay service, set up in 2002, has loosened the stranglehold of MasterCard and Visa on card payments. If China and other countries that feared being subjected to future Western sanctions joined the Russian venture, it might become an alternative to SWIFT—and one less concerned with preventing money laundering and the financing of terrorism…

America’s current crop of senior Treasury officials are similarly cautious, despite being vocal proponents of sanctions in general. SWIFT is a “global utility”, says one, and using it for sanctions should be “an extraordinary step, to be used in only the most extraordinary situations”. Blocking access to SWIFT, he frets, could mean that traffic shifts to networks that are less secure and easier to disrupt—and thus make life easier for criminals and cyberterrorists, including those in rogue governments. Against those who threaten global security, a SWIFT ban is a powerful and proven weapon. But it is also a risky one.

Financial Sanctions: The Pros and Cons of a SWIFT Response, Economist,  Nov. 22, 2014