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By Christopher McCallion, The National Interest, 3/13/23

The Russian invasion of Ukraine initially seemed to galvanize the United States’ NATO allies and encourage them to take a more energetic role in Europe’s defense. But some analysts have recently noted that the war actually seems to have had the contrary effect of increasing Europe’s dependence on Washington. This should not be a surprise to anyone, since Europe’s dependence will inevitably increase in proportion to the United States’ own commitment to the continent’s security.

While French president Emmanuel Macron has championed strategic autonomy in recent years, and German chancellor Olaf Scholz announced a historic “Zeitenwende” in defense policy in response to the Russian invasion, both countries have proceeded cautiously over the course of the war. Germany only grudgingly sent Leopard 2 tanks to Ukraine following parallel moves by the United States and the UK, while Macron has insisted that a post-war resolution must include a recognition of Russian security concerns.

This has increasingly frustrated Eastern European allies like Poland and the Baltic States, whose hard line on Russia has put them at odds with what they perceive as their Western counterparts’ ambivalence, making them all the more eager to maintain the U.S. presence in Europe.

But the more restrained attitude of France and Germany towards Russia is not based on spinelessness or frugality. Instead, due to geography, relative power, and history, Western and Eastern Europeans have profoundly different threat perceptions of Russia.

This would normally suggest that the two halves of Europe do not in fact make natural treaty allies. Historically, Eastern Europe suffered the misfortune of being a buffer zone between Western Europe and Russia—a role to which Eastern Europeans, all too understandably, do not want to return.

This fundamental asymmetry was introduced into the alliance by enlarging NATO to include Eastern European states from the 1990s onwards—a faultline papered over by the continuing leadership of the United States, but which reduces any incentive for Western Europeans to “step up” the way Washington (officially) wants them to.

The reflexive argument among many Western commentators is to blame France and Germany for not backing Ukraine more aggressively, reducing their credibility in the eyes of Eastern Europe, and compelling the latter to lean even more heavily on Washington to allay their security fears. According to these arguments, Western Europe should instead put itself on a serious war footing and help lead the charge against Russia.

But there are a couple of reasons to view such assertions skeptically. In the first place, the Russian military’s performance makes France and Germany’s response seem relatively proportionate. Russia has been struggling for months to conquer the small regional city of Bakhmut; it is not marching on Warsaw anytime soon. Moreover, while Eastern Europeans would probably like nothing more than for Russian fields to be sowed with salt, France and Germany recognize that Russia will likely always be a power in the region, and that peaceful coexistence requires some sort of reasonable mutual accommodation.

Secondly, the United States shouldn’t expect the over-the-top measures it relies on to prop up the credibility of extended deterrence to be mimicked by Europe should the latter transition towards strategic autonomy and deterring Russia directly. Nor should the Eastern Europeans.

Finally, and more to the point, one would think when listening to American officials and analysts who lament Europe’s security dependence that these folks want the United States out of Europe as quickly as possible. And yet the opposite is the case; most of these same voices are deeply dedicated to America remaining permanently committed to NATO.

According to conventional arguments for greater “burden-sharing” among the allies, the best way for the United States to encourage its capable allies to do more for their own defense is to redouble our own efforts on their behalf and fall over ourselves to insist upon our commitments to them. The causal logic here has never been explained, but it seems self-evidently contradictory: if we do more, we incentivize our allies to do less.

The alternative view is that the best way to encourage the rich and capable countries of Western Europe to assume greater responsibility in a European alliance is to slowly, but steadily and openly, reduce our own contribution to the continent’s security. This would not be greater “burden-sharing,” but rather “burden-shifting.”

If European security is truly the goal, we should expect capable states like France and Germany to act like any other state without a guarantor: to develop the independent capabilities they deem necessary for their own threat environment, and to manage their own alliances. Poland and the Baltic states prefer an American guarantee, but they’ll likely still be able to sleep well at night with a guarantee from their more powerful and nuclear-armed Western neighbors.

If we’re being frank, however, the contradiction at the heart of calls for more “burden-sharing” is probably recognized by those devoted to the permanence of the transatlantic alliance, and this incoherence is precisely its utility. Virtually no one in the American foreign policy establishment actually wants to give up the United States’ seat at the head of the table in NATO, which places Europe within America’s sphere of influence. And for some time, therefore, NATO’s existence, to quote the historian Richard Sakwa, will continue to be “justified by the need to manage the security threats provoked by its [own] enlargement.

Euronews, 3/26/23

Russian President Vladimir Putin announced plans on Saturday to station tactical nuclear weapons in neighbouring Belarus, sending a warning to the West as it steps up military support for Ukraine.

Putin said the move was triggered by Britain’s decision last week to provide Ukraine with armour-piercing rounds containing depleted uranium.

Tactical nuclear weapons are intended for use on the battlefield. They have a short range and a low yield compared with much more powerful nuclear warheads fitted to long-range missiles. 

On Sunday, Ukraine called for an urgent meeting of the UN Security Council, with Ukrainian Security Council Secretary Oleksiy Danilov saying the Kremlin had taken Belarus “nuclear hostage”. 

It is a “step towards the internal destabilisation of the country,” he added.

Putin said Russia planned to maintain control over the nukes it sends to Belarus, with the construction of storage facilities to be completed by 1 July.

He didn’t say how many nuclear weapons Russia would keep in Belarus, which shares a long border with Ukraine and NATO members Poland, Lithuania and Latvia. 

The US government believes Russia has about 2,000 tactical nuclear weapons, including bombs that can be carried by tactical aircraft, warheads for short-range missiles and artillery rounds.

Washington said it did not believe Russia was preparing to use them.  

Putin argued that by deploying its tactical nuclear weapons in Belarus, Russia was following the lead of the United States, noting the country has nukes in Belgium, Germany, Italy, the Netherlands and Turkey.

“We are doing what they have been doing for decades, stationing them in certain allied countries, preparing the launch platforms and training their crews,” Putin said, speaking in an interview on state television that aired Saturday night. 

“We are going to do the same thing.”

The Russian leader claimed the move would not violate existing nuclear-non-proliferation agreements. 

Russia currently stores tactical nuclear weapons at dedicated depots on its territory. 

Moving part of the arsenal to a storage facility in Belarus would up the ante in the Ukrainian conflict by placing them closer to the combat zone and NATO states.

This will be the first time Moscow has based nuclear weapons outside of its borders. 

Before the collapse of the Soviet Union in 1991, it stationed nukes in Ukraine, Belarus and Kazakhstan. However, they were transferred back to Russian territories in 1996. 

The US said it would “monitor the implications” of Putin’s announcement.

“We have not seen any reason to adjust our own strategic nuclear posture,” the US Defense Department said in a statement.

“We remain committed to the collective defence of the Nato alliance.”

By Nicolai Petro, ACURA, 2/24/23

The new Cold War, like its predecessor, can be traced back to the misinterpretation of Russian intentions. In case of old Cold War, as we now know from diplomatic archives, the West grossly misunderstood the intentions behind the 1948 Berlin Blockade.

Western leaders feared it was the beginning of an attack on the West, while Stalin saw it as a means to gain leverage over an increasingly intransigent Truman Administration, and induce it to abide by the Potsdam Agreements. Later, the Korean War would also be seen as a feint to distract American attention from Europe, resulting in what historian Odd Arne Westad calls, “an entirely avoidable war, created by the intensity of ideological conflict among Koreans and a Cold War framework that enabled superpower interventions.”

The origins of the new Cold War can also be traced back many years, as the late Stephen F. Cohen argued in his last book, War With Russia?, reaching a fever pitch only after NATO cavalierly dismissed Russia’s last minute efforts in late 2021 to negotiate a comprehensive pan-European security agreement that would prevent the expansion of NATO into Ukraine.

Once again, many Western leaders labelled the subsequent invasion of Ukraine as a precursor to an attack on NATO, and began making statements about how it must be used to remold the world for future generations. Once this view becomes the conventional wisdom, it is not hard to see how it will be used to ensure domestic support for foreign military adventures for decades to come.

All this hints at the existence of a long term U.S. foreign policy strategy that outside observers can only guess at. I would not be at all surprised if, thirty years from now, future historians learned of the existence of a new NSC-68—America’s 1950 blueprint for conducting the Cold War—cooked up within the Biden administration in anticipation of just such a confrontation. After all, the contents of NSC-68 itself, although rumored about for years, were only revealed in 1975.

In sum, just as Russia is to blame for the initiation of hostilities in February 2022, so the West is to blame for prolonging them. In this conflict each side is pursuing its own ends, usually at the expense of the Ukrainian people.

As for what the immediate future holds, I would divide this question into two parts: One is “what does the future hold for Ukraine?” The other is “what the future hold for Russia and the West?”

For Ukraine the foreseeable future is catastrophic. Its population, which was estimated at 42 million before the war, has now probably fallen to below 30 million, and with reconstruction costs upward of 350 billion USD, there will be little to attract those who have fled to come back. Ukraine’s long term demographic picture therefore looks exceedingly bleak.

Realistically, one must add to this enormous burden, the conundrum that has plagued Ukraine since its independence in 1991—how to create a single national identity in a pluricultural society. The current war has led many Ukrainians to “rally round the flag” against Russian aggression, but as President Zelensky admitted at the 2023 Munich Security Conference, “To be honest, many have fled our state. Many have remained with the invaders of their own accord. And there is plenty of information of this kind.”

The terrible cost to Ukrainian democracy of trying to impose monoethnic nationalism on a country with substantial Russian, Polish, Hungarian, and Romanian minorities is today a taboo subject. Perhaps even understandably so, given the ongoing war. But, as Alexey Arestovych, President Zelensky’s press spokesman until January 2023, recently noted, it will have to be addressed sooner or later:

“At every turn we shout about being the freest country, but we don’t even have elementary freedom of speech. In our society, it is considered reprehensible to discuss various scenarios. . . [but] then what kind of social contract can there be? A social contract is a broad discussion, examining a wide variety of scenarios, even unpleasant ones.

This is something we are absolutely unprepared for. Take the simplest example. Ukraine actually has only two options: a monoethnic state or a united states of Ukraine. . . [but] the monoethnic project is de facto unfeasible. We won’t be able to achieve it. And if we do achieve it, it will lead to a rapid reduction and aging of the country’s population. We will wind up just like all monoethnic countries.”

This savage combination of economic, industrial, and demographic devastation; cultural, religious, and political rivalry (which the inclusion of Donbass and Crimea would only make more acute); alongside the West’s determination to make Ukraine an instrument for containing Russia, will make it extremely difficult to resist efforts by the Far Right, and the increasingly politically influential military, to transform post-war Ukraine into an ethnic authoritarian enclave. To appease Western sensibilities, the trappings of electoral democracy will likely be preserved, but within a system designed to ensure that no candidate from the East or South of Ukraine can ever again emerge to offer the country a culturally pluralistic political alternative.

The fact that such a Ukraine will continue to be an Apple of Discord between Russia and the West long after the current conflict ends, sadly, seems not to trouble political leaders in the slightest. In fact, if there is one thing that Russian, American and European leaders all seem to agree on, it is that they would rather see Ukraine utterly ruined than allow it to fall into the hands of The Enemy.

The only way that I can see to prevent this from coming about is for Ukraine and Russia to negotiate a ceasefire between themselves, regardless of the West’s objections. It is time to recognize the brutal truth of political realism: that only Russia can guarantee Ukraine’s survival, or extinguish it. The question that anyone serious about ending this conflict should be asking, therefore, is this: what does Russia need to end its violence against Ukraine?

According to former Israeli Prime Minister Naftali Bennett, who served as the intermediary in talks in March 2022, at that time Russia was willing to give up both de-nazification (taking out Zelensky), and the disarmament of Ukraine. What its conditions might be today is anyone’s guess, but the sooner the effort is made to find out, the better the prospects for Ukraine’s survival and recovery.

Ukraine would of course be asked to sacrifice much in any direct negotiations with Russia, but it would survive as a state. And this, as Ukraine’s own historical experience has shown time and again—from the Versailles Treaty of 1919, to the Budapest Memorandum of 1994—is not something that the West has ever been willing to guarantee.

The Bell, 3/10/23

Cautious optimism for Russia’s short-term economic prospects

Russia’s economic indicators are starting to improve and the budget deficit that shocked observers in January has shrunk. Both economic experts and households are increasingly showing cautious optimism. In the absence of further external shocks, such as a sharp fall in Russian energy prices or a new round of sanctions, there is every possibility that the IMF’s  prediction (0.3% GDP growth in 2023) will be achieved. The key driver of growth and optimism is internal demand, primarily fuelled by generous budget spending, according to Central Bank analysts. However, if the spending stops, so will the growth.

Government spending growth

Expenditure in January and February was 5.75 trillion rubles, up 51% on the equivalent period last year. At the same time, revenues fell by almost a quarter, to 3.16 trillion rubles. The budget deficit was 2.5 trillion rubles, almost 88% of the planned figure.

At the same time, February’s figures look a bit better than January’s. The monthly budget deficit for January was 1.8 trillion rubles but in February it fell to 0.8 trillion rubles. But an increase in spending is also slowing: throughout February expenditure was 2.63 trillion rubles, compared with 3.12 trillion in January. This is already fairly close to historical norms (in February, the government spent 8.9% of its entire planned expenditure for the year, compared with a historical norm of 7%), the Solid Figures Telegram channel noted. More detailed data on budget spending shows that, in the second half of February, there was a slowdown in expenditure. The Finance Ministry continues to explain the high level of spending at the start of the year on advance payments for government contracts. 

It’s quite possible that the Finance Ministry is correct. But there is an important side-effect to increased budget expenditure at the start of 2023 — it goes a long way to offsetting the generally unfavorable economic background.

• In the manufacturing sector, high expenditures contributed to increased production, Central Bank analysts pointed out. In January (February’s figures will not appear until late March), the biggest growth was in sectors related to the military-industrial complex: vehicle manufacture (including aviation technology and shipbuilding) was up 27.4%; computers, electronics and optical products was up 5.5%; clothing was up 5.5%; metal components (not including machinery and equipment) was up 3.6%.
• In the raw materials sector over the same period production of coal (-3.5%), oil and gas (-3.2%) and metal ores (-3.1%) all fell. However, there was growth (+14.2%) in the production of other raw materials, including stone, gravel and sand (this suggests growth in the construction industry likely fueled by the advance payments mentioned by the Finance Ministry). In early March, the government allowed companies working in public procurement to receive up to 50% of the value of their contracts in advance. Companies engaged in capital expenditures (for example, road building) in annexed Ukrainian territory can receive up to 90% in advance. Construction contracts in these areas go to firms linked with the Russian military, security forces and officials.

Consumer-driven growth

The second important factor in economic stabilization has been growing consumer optimism — and related consumer spending. Studies commissioned by the Central Bank show that consumer confidence, which collapsed following Russia’s mobilization in the fall, has almost entirely rebounded. Propaganda plays a role in this — most independent media is blocked in Russia and state media try their very best to spew out positive headlines.

Economic indicators also point to improving consumer sentiment. Spending has stabilized. This is helped by a labor shortage that is driving up incomes (companies increased salaries for employees who did not flee abroad as a result of the war and mobilization). The flipside of increased consumer confidence, of course, is greater inflation risks.

Business sentiment is also improving: in February the PMI index reached a record 53.6 points, its highest level since 2017. Business confidence is growing on the back of an increase in new orders, according to analysts from credit rating agency S&P. Although most of this comes from domestic clients — exports “are falling even further.” At the same time, the real situation in the manufacturing sector is close to stagnation, according to Vladimir Salnikov of economic think tank CMASF.

A decline in exports significantly limits the potential for business growth. Meanwhile, logistical problems make it harder to cash in on the revival of the Chinese economy following the end of Beijing’s Covid restrictions. Russia’s reduction in oil production will be a blow to manufacturing and transport that will be reflected in GDP figures for the second quarter.

The big challenges

The two major challenges facing Russia in 2023 are revenue shortfalls and inflation. Although changing oil taxation and a one-off payment from businesses can give the state’s finances a temporary boost, they cannot fundamentally change the situation.

The Finance Ministry is unlikely to remain within its declared budget deficit target of 2.9 trillion rubles or 2% of GDP. The government can, of course, still plug that deficit using the National Welfare Fund and by taking on debt. But that, in turn, forces the Central Bank to maintain a tight monetary policy for longer.

Why the world should care

The latest economic figures give Kremlin propaganda another chance to shout from the rooftops that all is well. But that’s not the whole story:

• As domestic demand is being driven by the state via the defense sector and construction, it means growth will fall when expenditure falls.
• Demand is falling in sectors not linked to state spending and the defense industry. And the government’s current approach makes inflation more likely. In addition, it’s not a long-term solution. Sooner or later state-driven will no longer be possible — it’s unlikely the defense industry will successfully switch to producing high-quality consumer goods. Even the IMF, which has an optimistic prognosis for Russia’s economy in 2023 believes that the mid-term prospects are not good.

Western sanctions split the Russian opposition

Western sanctions against billionaire Russian businessmen have not yet brought about a split among the Russian elite — but they have led to significant disputes within the Russian opposition (all of which is now based outside of the country). One of top opposition politician Alexei Navalny’s leading supporters, Leonid Volkov, was forced to leave his job as head of the Anti-Corruption Foundation (FBK) this week amid accusations he lobbied the European Commission to lift sanctions on Alfa Group shareholders Petr Aven, Mikhail Fridman, Alexei Kuzmichev and German Khan. Volkov’s letter in support of Fridman and Aven emerged at the start of March — it was initially released by the former editor in chief of Ekho Moskvy Alexei Venediktov, who FBK accuses of taking money from Moscow City Hall.

In addition to Volkov, other opposition figures also signed an appeal to lift sanctions against the owners of Alfa Group. Signatories included co-founders of Dozhd TV Natalia Sindeeva and Vera Krichevskaya, former deputy prime minister Alfred Kokh, politician Leonid Gozman, journalists Sergei Parkhomenko and Leonid Parfyonov, businessman Yevgeny Chichvarkin and economist Vladislav Inozemtsev.

The signatories claim that Alfa Group was never close to Vladimir Putin and, on the contrary, displayed a “lack of political engagement.” Fridman, the main shareholder, was described as “a friend of the late [opposition politician] Boris Nemtsov”, who “always strongly distanced himself from contact with Vladimir Putin (they never met in private).”

Detail: The Financial Times discovered Friday that Fridman and Aven are ready to divest their 45% stake in Alfa Bank, Russia’s largest private bank, in order to have sanctions against them lifted. Their long-term partner, the least prominent of Alfa Group’s founders Andrei Kosogov, is willing to buy a stake worth 178 billion rubles ($2.3 billion) held by Cyprus-based ABH Holdings. He currently holds 41% of ABH Holdings after buying out the shares of German Khan and Alexei Kuzmichev, both of whom remain under sanctions.

Since war broke out, Aven and Fridman have distanced themselves from Russia as far as possible (although Khan returned to Russia). However, it would be a big exaggeration to say they are distant from the Russian authorities. In 2019, Fridman took part in Putin’s traditional pre-New Year meeting with top businessmen. And in 2013, Alfa Group and their partners received $27.7 billion from state-owned Rosneft for a stake in a joint venture with BP. The deal went ahead with Putin’s personal approval.

At present, there is no mechanism to lift personal sanctions against individual Russians, so those affected are currently seeking legal solutions (for more about the mood among the Russian elite and their sanction-busting strategies, see here). Their lawyers often recommend collecting testimonials from Russian opposition figures respected in the West.

Why the world should care

Questions about who deserves to face sanctions are somewhat philosophical. So far, though, they have caused more splits in the opposition than among the Russian elite. Moreover, faced with a choice between the unknown prospect of escaping sanctions and the familiar demands of Putin and his security forces, most are choosing the devil they know. Reviewing personal sanctions, or creating a mechanism to remove them, would likely turn oligarchs away from Putin. In the meantime, they are fighting back: recently a European court lifted sanctions against the mother of tycoon and mercenary leader Yevgeny Pigozhin.

Figures of the week

• Inflation slowed almost twice in February, according to Rosstat: to 0.46% after 0.84% in January. Annual inflation also slowed to 11% from 11.4%. During the week of February 28 to March 6, prices stabilized around zero. The biggest contribution to the growth of prices was made by: food +9.3% m/m; services +13% m/m.
• On March 1, Russia’s National Welfare Fund (NWF) was worth 11.1 trillion rubles (up 299 billion rubles for the month, 672 billion rubles since the start of the year). Its liquid assets are worth 6.5 trillion rubles (up 112 billion for the month, 314 billion rubles since the start of the year). The NWF increased due to the redemption of Yamal-LPG bonds, an increase in Sberbank shares and the weakening ruble. In February, 7.4 billion Chinese yuan (a little more than $1 billion) and 12 tons of gold (about $700 million) were withdrawn. The Finance Ministry sold these assets to the Central Bank for 131.7 billion rubles to replace lost oil-and-gas revenues. The Central Bank mirrored these trades on the market by selling a similar amount of yuan (the Central Bank cannot sell gold).
• There was a 12-fold fall in profits in the Russian banking sector in 2022, the Central Bank reported. Almost half of the banking sector’s reserves (1.1 trillion rubles) are now connected with various frozen assets (Eurobonds, subsidiaries, loans to non-residents etc). The banks’ forex assets fell from $331 billion to $290 billion (part of which is frozen), forex liabilities fell from $353 billion to $259 billion. The yuan began to appear on banks’ balance sheets.
• Russian firms make half of their foreign trade settlements in yuan. At the end of 2022, the share of dollar and euro payments for Russian exports fell to 48%, the Central Bank said. Almost all the rest were settled in rubles and yuan (34% and 16%), with currencies from other “friendly” nations amounting to 2%. At the start of last year, 87% of trades were made in dollars and euros, 12% in rubles and 0.5% in yuan.
• When paying for imports, the dollar and euro share fell from 65% to 46%, but they were not replaced by the ruble — but by the yuan. The Chinese currency’s share increased from 4% to 23% while the ruble’s share fell slightly from 29% to 27%.

What to look out for

• Russian Union of Industrialists and Entrepreneurs Congress — March 16
• Central Bank board meeting to set interest rates— March 17

Further reading

• Lies, damn lies and statistics — how many prisoners has Wagner really recruited? Judith Pallot points out why any inmate recruitment estimates based off Russian federal prison data is shoddy journalism and should be treated with caution
• Chasing Russia’s shadow reserves  Martin Sandbu uncovers how the how the financial infrastructure works, and what the new reality of reserves might look like

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The author of this newsletter is one of Russia’s leading writers on this topic: independent economic analyst Alexandra Prokopenko. Alexandra worked as an advisor at Russia’s Central Bank and Moscow’s Higher School of Economics from 2017 to 2022 — and before that she was an economic journalist for Vedomosti, then Russia’s leading business newspaper. Today, Alexandra is a columnist at the Carnegie Endowment for International Peace, and a visiting Fellow at the Center for Order and Governance in Eastern Europe, Russia, and Central Asia at the German Council on Foreign Relations. She holds an MA in Sociology from the University of Manchester.

Wrtten by Alexandra Prokopenko

Translated by Andy Potts