Tim Ash responds to new U.S. sanctions on Russia

2016/9/2 13:36:34

“I think…it is meant to signal to Moscow that the US will negotiate hard, and that Moscow should not view sanctions moderation (erosion) as inevitable - the willingness of the US to maintain sanctions is strong is in effect the message.”


 

 

 

 

 

LONDON, Sep 2, 2016 (UBO) – Responding to a U.S. Treasury announcement of sanctions on 17 individuals and 20 Russian and Crimean entities, Nomura International economist Timothy Ash offered the following comments at 11:36 today:

 

 

The timing of the US Treasury OFAC office's decision yesterday to announce the sanctioning of another 17 individuals and 20 corporate Russian and Crimean entities related to the conflict in Ukraine was interesting given that it came on the same day as the various sides to the conflict agreed another ceasefire to commence on the very same day, September 1, 2016.

 

It is worth reading through the OFAC justification for the move:

 

"To maintain the effectiveness of existing sanctions, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) today designated 37 individuals and entities under three Executive Orders (E.O.s) related to Russia and Ukraine.  Today’s action is part of OFAC’s ongoing efforts to counter attempts to circumvent sanctions on Russia, to assist the private sector with sanctions compliance, and to foster a diplomatic resolution to the conflict in Ukraine.  The action demonstrates Treasury’s steadfast commitment to maintain sanctions until Russia fully implements its commitments under the Minsk agreements, including a comprehensive cease fire, the withdrawal of all weapons and military personnel, and the restoration of Ukraine’s control over its side of the internationally recognized border.  It also underscores the U.S. government’s opposition to Russia’s occupation of Crimea and our firm refusal to recognize its attempted annexation of the peninsula.  These sanctions follow the recent extension of European Union sectoral sanctions, and together these steps demonstrate continued international unity in opposing Russia’s actions in Ukraine".

 

Some might argue that the move was somewhat aggressive at a time when there seems to be a move towards moderation on the ground as reflected in the new ceasefires attempt. That said we have seen on several occasions in the past sanctions iterations from the West on Russian/Crimean entities at times where tensions on the ground appear to be easing. In part this reflects the natural administrative process of maintaining the sanctions regime, with the US and its allies continually seeking to adjust the regime to ensure compliance and the effectiveness of the regime as attempts are naturally made to sidestep and get around that regime. This process tends to have its own timescale and dynamic, somewhat separate from the political decisions made over the sanctions regime and the political process relating to the conflict. Politicians set the scale/severity of the sanctions regime and OFAC and its other Western counterparts are tasked with maintaining the regime at the determined level of intensity/severity.

 

That said, I do think that there is some politicking going on here, and indeed from both sides, in what seems to be the run up to potential negotiations over Ukraine at the G20 summit in China this weekend.

 

From the Russian side, a month back we saw allegations made by Moscow of provocations by Ukraine in Crimea - the alleged (denied by Ukraine) discovery of a plot to attack strategic assets in the peninsula. Russia responded by threatening that these provocations would not go unanswered, and there was then a significant Russian military buildup in Crimea and along the border with Ukraine. This included a controversial move by Russia to site S400 air defence systems in Crimea. But the promised and largely expected large scale and direct military response on the ground failed to come - albeit for the past couple of months leading up to this there had been a re-escalation of the conflict on the ground with over 40 Ukrainian troops killed in the month of July alone. Instead we got a new round of negotiations over a ceasefire, and announcements that President Putin is likely to have direct talks with Chancellor Merkel and President Hollande, likely over Ukraine, at the G20 summit in China this coming weekend. Moscow also indicated that Presidents Putin and Obama would also likely meet at the G20 - unconfirmed as yet by the Obama administration. What all this suggested is that Moscow ramped up the rhetoric over the past month, including over Crimea, with the focus perhaps of improving its negotiating position in any talks over the future of Ukraine likely now to be held at the G20 in China this weekend. In many respects this does follow a pattern by Moscow of escalating rhetoric or actions on the ground over Ukraine, in the run up to expected negotiations with Western leaders.

 

I also tend to think that from the US perspective, the OFAC decision is also aimed at positioning ahead of any potential discussions over Ukraine at the G20. Reading the OFAC statement above the point is clearly made that sanctions remain in place until Russia respects a ceasefire in Eastern Ukraine - as yet many ceasefires have been called but few have held over the past 2 years or more - implements its part of the Minsk agreements, plus withdraws troops and hands over border control to Ukraine. The point the US administration is making is that agreeing to a ceasefire is not in itself enough, and the US is still willing to maintain a rigorous sanctions regime until Moscow shows greater willingness to comply with all aspects as above. I think also it perhaps is meant to signal to Moscow that the US will negotiate hard, and that Moscow should not view sanctions moderation (erosion) as inevitable - the willingness of the US to maintain sanctions is strong is in effect the message.

 

So if Moscow has tried to talk tough pre any talks over Ukraine at G20, then the Obama administration is signalling equal intent therein.

 

The above said, I think what is apparent is that both sides, the Putin and Obama administrations, would like some deal done over Ukraine sooner now rather than later.

 

For Putin, I think he is mindful that military options on the ground in Ukraine are now constrained by Ukraine's greater ability to defend itself, suggestive that the costs to Moscow of escalation are now much more significant. Economic levers for Moscow over Ukraine are also now much diminished with the erosion of trade, energy, transit and banking ties and relations between the two countries. Even the debt card used via the USD3bn in Ukraine December 2015 Eurobonds looks set to be stuck in the courts for years perhaps. And the longer that Russia waits, the more Ukraine is likely to drift away from Russian influence. He is also wary of a new Clinton presidency, expected to be more hawkish over Russia relations, and the shear unpredictability of a potential Trump presidency which actually might be difficult to pin down/deal with. So there seems to be a sense in Moscow that it might just be able to get the best deal possible now with a more dovish Obama presidency looking for some "easy" foreign policy wins just before it departs office. I think there is also a sense in Moscow that there is some Ukraine fatigue in Washington and European capitals and a desire there to move on from the crisis in Ukraine to other now more pressing issues such as fighting global terrorism. Moscow is perhaps looking to exploit these factors by perhaps offering Obama, and perhaps Merkel/Hollande, some new dimensions towards a solution over Ukraine.

 

I think it is fair to say that the Obama administration would also likely appreciate potential solutions over Ukraine, albeit I don't think it is willing to agree a settlement at any price and not a deal which bargains away or erodes Ukrainian sovereignty. And therein is likely the problem, as this side of a US presidential election I doubt the Obama administration would want to be seen as going that soft on Putin's Russia and potentially giving a campaign gift to Trump. The other difficulty is any deal which Washington might want to agree has still to be sold to Kyiv, which could be difficult in practice if it is perceived to undermine Ukraine's sovereignty and to force Ukraine to accept the annexation of Crimea. For any Ukrainian politician this would still likely be political suicide.

 

So essentially Russia and the US seem likely to both want to talk Ukraine at G20 and be eager to find solutions, but it remains difficult to see how any deal can be done when set against the constraints of the different agendas in terms of setting/defending the limits of Ukrainian sovereignty, and also the politics of the US election campaign. Given this, it is difficult to see any deal being done in the very near term, and hence this might ultimately result in disappointment this weekend.

 

I would add that the EU is set to decide by September 15 a further six-month rollover on sanctions on 146 individuals and 37 companies. I guess OFAC was trying to pre-empt this with this decision - harder now for any EU member states to go against the US position and break rank.

 

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