De-Confliction Line Established Between US and Russia for Ukraine; No-Fly Zone Ruled Out

It has been reported that a de-confliction line has been established between the US and Russia with respect to Ukraine in order to avoid unnecessary escalation or misunderstanding.  According to The Hill:

The U.S. military has set up a channel to communicate directly with the Russian military to prevent “miscalculations” or “escalation” over the Kremlin’s invasion of Ukraine, a defense spokesperson confirmed to The Hill Thursday.

“The Department of the Defense recently established a de-confliction line with the Russian Ministry of Defense on March 1 for the purposes of preventing miscalculation, military incidents, and escalation,” the spokesperson said.

They noted that the U.S. “retains a number of channels to discuss critical security issues with the Russians during a contingency or emergency.”

Meanwhile, despite repeated requests by the Kiev government, Defense Secretary Lloyd Austin has ruled out a no-fly zone in Ukraine.  Austin told NBC News yesterday:

“President Biden’s been clear that US troops won’t fight Russia in Ukraine, and if you establish a no-fly zone, certainly in order to enforce that no-fly zone, you’ll have to engage Russian aircraft. And again, that would put us at war with Russia,” Austin said.

Results of Round 2 of Talks

French president Emmanuel Macron had a 90-minute “not-so-friendly” phone conversation with Putin this morning in which Putin reportedly told Macron the Russian military operation in Ukraine was “going according to plan.”

The negotiations between Russia and Ukraine in Belarus resulted in an agreement for humanitarian corridors and the delivery of aid with a temporary ceasefire to facilitate them.  However, there were cryptic statements from a member of the Russian delegation, head of State Duma Foreign Affairs Committee Leonid Slutsky, about terms from today’s talks needing to be approved by parliaments:

“Clearly, it will require a third, no less important round of talks, which is due in coming days, to implement these agreements, which I won’t voice today,” he said.

“It will require parliamentary efforts, as some agreements will have to be endorsed and then undergo national ratification procedures,” Slutsky said.

He also said all agreements reached would be fast-tracked on the Russian side.  Ivan Katchanovksi, the Ukrainian academic who undertook an in-depth forensic investigation into the violence of the protests on the Maidan in 2014, has speculated that there could be other terms reached that have not been publicized, such as Ukrainian neutrality.  We’ll see.  More talks are scheduled for early next week.

Meanwhile, one million refugees are now reported to have fled Ukraine to countries on its western border, according to the UN.  2000 civilians have died according to Ukraine’s emergency services department.

Beginning of Counter-Sanctions

Russia has announced it will halt shipment of rocket engines to the US.  According to a Reuters report, the head of Roscosmos, Dmitry Rogozin said:

“In a situation like this we can’t supply the US with our world’s best rocket engines. Let them fly on something else, their broomsticks, I don’t know what.”

A preview of additional actions to counter the west’s sanctions can be found in proposed parliamentary legislation.  Interfax News has reported the following on a bill proposed in the Duma:

The bill cancels inspections at small, medium and IT companies until the end of this year, liberalizes public procurement terms and procedure, and restricts drug exports. The bill allows the government to additionally raise non-contributory pensions, pension points, and the fixed payment pension during 2022.

The bill clarifies the application of business legislation, including the rules for calculation of net assets’ value in 2022 and legislation on loans and borrowings, gives the government the right to derogate from a number of rules on licensing and accreditation and certain provisions of laws in the field of shared construction and intellectual property. There will be a special procedure for the establishment of the subsistence minimum and the minimal wage.

The sentence clause I have bolded could relate to what Pepe Escobar recently suggested about Russia no longer recognizing intellectual property and patents from the west.

Censorship

RT America has shut down operations, which had offices in New York, Washington DC, Los Angeles and Miami.  All of the staff have been permanently laid off.  It’s my understanding that some staff had received threats of violence.  The EU has begun banning RT and Sputnik as I already mentioned earlier this week.  Attempts to access RT on both Google and DuckDuckGo browsers have been difficult. YouTube and various apps have been kicking the Russian state broadcasters off.  RT will now be available through Rumble and Odysee.  One can also download the apps for RT and Sputnik at the Huawei AppGallery store. These will purportedly work on an Android phone.

I’ve noted that the OSCE Media Freedom representative has been silent on these actions from the west but has voiced condemnation of Russia’s suppression of non-establishment media outlets. 

A 65 year-old substitute teacher in Arlington, Virginia has been suspended from his job for reportedly providing a balanced perspective on the war – which included the Russian perspective – and admonishing his students to seek out different perspectives before making up their minds about important issues.  Here is a Fox5 report on the story:

A 65-year-old substitute teacher and journalist has been suspended from teaching in Arlington, Virginia for giving his students a balanced perspective on the Russia-Ukraine conflict. Mainstream media says he "spread Russian propaganda." So much for freedom of speech. pic.twitter.com/qSix0FBdvl

— Alex Rubinstein (@RealAlexRubi) March 3, 2022

I will reiterate here what I posted on Twitter about this:

If you disagree with what someone is saying, you provide a counter-argument, you don’t censor. Only people who are very insecure in their positions demand censorship.  Those who cheer for censoring their perceived political opponents will see the boomerang come back to them.

I wonder if Russia, in retaliation, will ban RFE/RL and VOA from their country.  My understanding is that American sponsored media in Russia is significantly more influential than RT/Sputnik is in the west.  Something about a nose and a face comes to mind.

By MK Bhadrakumar, Indian Punchline, 3/2/22

MK Bhadrakumar is a retired Indian diplomat.

A veteran Indian journalist and world class war correspondent, recently wrote with a touch of humour that when BBC’s Lyse Doucet landed in Kiev a week ago, he was reminded of the howling cry of monkeys in the Corbett Park alerting the jungle that a tiger was on the prowl. “As soon as I saw Doucet I knew that “action” would begin (in Ukraine),” he wrote. 

However, BBC erred this time around. The MI6 probably anticipated a devastating Russian attack on Kiev — something like the horrific British-American firebombing of the Dresden on February 13-15, 1945, when heavy bombers numbering 1300 planes dropped more than 3,900 tons of high-explosive bombs on the city and killed an estimated 22,700 to 25,000  people. 

Indeed,  a full week has passed and the Russian bombers are nowhere to be seen. But this doesn’t mean that Kiev is not a prime target. Russia seems to be counting on an eventual “implosion” in the city as a climactic moment of the war, triggering the eclipse of the western-backed regime installed in Kiev February 2014 following the CIA-sponsored coup.

Arming Ukrainian civilians was a horribly cynical propaganda stunt by the regime, acting on the advice of western mentors. But the blowback has begun. Armed gangs are roaming the streets of Kiev adding to the mayhem. If it continues, an army takeover cannot be ruled out at some point.

The Russian forces would much rather avoid fighting the Ukrainian army as the “enemy” — with the exception, of course, of Neo-Nazi formations (as in Kharkiv and Mariupol, or elsewhere in the southeastern Donbass region.) 

Evidently, Russians do not want to destroy Ukraine. The objective is revive Ukraine’s sovereignty under a Ukrainian leadership and help in its build-up as a strong enduring buffer against any future western invasions. 

Germany’s rearmament must be ringing alarm bells when French, German and British military budgets already exceed three times that of Russia’s. The deep involvement of France and Germany in post-2014 Ukraine is not in the public domain. They kept their heads below the parapet but were digging in for the long haul. That explains the scale of their wrath toward Moscow. 

Unless this complex matrix is understood, the dynamics of the current Russian campaign cannot be grasped. From available indications, the Russian operation appears to have three objectives:

• subject Kiev and other major cities to siege warfare (attrition); 
• cut off the escape route for the Ukrainian forces deployed in the east to retreat to Kiev; and, 
• consolidate in Donbass and a contiguous coastal belt along the northern Black Sea coastline .  

The above map below shows the state of play as of Monday, 28th February. The Russian operation is going on in the Donbass region in southeastern Ukraine and along the Northern coastline of Black Sea but this is escaping attention. The propagandistic western media is concentrating on sensational stories, although the regional balance in south and southeastern Ukraine is hugely consequential.  

Interestingly, Moscow has recognised the two separatist regions in eastern Ukraine Lugansk and Donetsk as independent states as per their boundary claims. President Putin said in his remarks on the issue that Moscow has recognised all these two regions’ “fundamental documents.” 

What does this imply? Clearly, Russia’s recognition of the borders claimed by the two separatist republics’ as per their respective constitutions means boundaries containing all the areas they had controlled on the day of their “founding” in 2014 from where they have since been systematically pushed back by the Ukrainian (Neo-Nazi) forces through organised violence against the Russian population during the past 8-year period. It stands to reason that Russian operations will aim at restoring the lost territories  to Lugansk and Donetsk. 

Meanwhile, Moscow also has a score to settle with the neo-Nazi militia deployed in Donbass and the Black Sea region who committed terrible atrocities against the hapless Russian communities, which is an emotive issue within Russia. Putin calls it “genocide”. A dossier on the atrocities has been sent to the US. 

The “denazification” campaign aims to ruthlessly suppress the neo-Nazi groups. The Russian intelligence has prepared a “hit list” of the notorious ring leaders to be brought to justice.

As of Tuesday, the Russian advancing column in the south reached Kherson oblast, which also has an important port on the Black Sea as well as on the Dnieper River and is the home of a major ship-building industry. Further to the east, the strategically important port of Mariupol, the steel centre on Black Sea coast, has also been secured.

Equally, Russian troops have destroyed a concrete dam built in Ukraine’s Kherson Region in 2014 to cut off water to Crimea in reprisal for its annexation by Russia. This solves the problem of acute water shortage in Crimea, which is a major political issue.

Kherson is just about 145 kms east of the great port city of Odessa (founded by Catherine the Great) with a concentration of Russian population despite the “Ukrainisation” in the demography in recent years. It remains to be seen whether the Russian operations will now move toward Odessa and further along the Black Sea coastline leading all the way to the breakaway region of Transnistria (Moldova) where Russians comprise around one-third of the population.

Sandwiched as a thin stretch of land on the Moldova-Ukraine border, Transnistria remains the de facto forward operating base for Russia’s interests in the broader region.

Moscow considers the US military base in neighbouring Romania a significant threat; therefore, it likely considers the military presence in Transnistria to be more important than ever. A land route from Rostov-on-Don (Russia) all the way to Transnistria (Moldova) along the Black Sea coastline can be a strategic asset. 

In all of the above, a sub-text cannot be overlooked — namely, that Donbass is both Ukraine’s rust bet and granary. It is a heavily industrialised region that has a great future in economic development with the string of Black Sea ports providing easy access to the world market.

The above map of regional economic development of Ukraine displays the strong industrial base of Donbass. To be sure, the Russian objective will be to rapidly build up Lugansk and Donbass as economically viable regions that will not be a financial drain on Moscow.

Evidently, a great deal of thinking has gone into the planning of the Russian operation, starting with the historic decision to recognise Lugansk and Donetsk as independent states. The fury with which Berlin and Paris are reacting is self-evident.

With the ‘big picture’ in mind of rebuilding Ukraine to its past glory as the most prosperous ex-Soviet state, Putin thoughtfully picked one of his trusted aides, Vladimir Medinsky, to lead the delegation for the talks with the Ukrainian officials. Medinsky was born in Ukraine.

Apart from being an accomplished political scientist and historian and a senior figure in the ruling United Russia party, he bears a famous name. His father, Rostislav Medinsky, while serving as colonel in the Soviet Army, became a national hero, having taken part in the disaster management at the Chernobyl nuclear power plant in 1986.

Reports of massive Russian air strikes tonight on Kiev are starting to come out. This follows blasts reported from last night, including on the city’s main rail station and near the Ministry of Defense. I will keep readers posted as I learn more.

More Sanctions Fallout

A report from Antiwar.com details that the world’s two largest shipping lines are halting transport to and from Russia.  Exemptions are in place for food, medicine, and humanitarian goods. FedEx and UPS will halt also deliveries;

The Danish container shipping giant Maersk announced that it was temporarily suspending shipments to all Russian ports, although it is allowing exemptions for foodstuffs, medical, and humanitarian goods.

“As the stability and safety of our operations is already being directly and indirectly impacted by sanctions, new Maersk bookings to and from Russia will be temporarily suspended, with exception of foodstuffs, medical and humanitarian supplies,” Maersk said in a statement.

The Swiss-based Mediterranean Shipping Company (MSC) also announced Tuesday that it was stopping cargo booking for inbound and outbound shipments for Russia. MSC said the ban applies to “all access areas including Baltics, Black Sea, and Far East Russia.” MSC will also allow exemptions for food, medical, and humanitarian goods.

The suspensions mean Russia is now cut off from a significant chunk of the world’s shipping capacity. Maersk alone owns and charters over 700 ships and accounts for 17 percent of the globe’s merchant container fleet.

US mail carriers UPS and FedEx have also announced that they are suspending deliveries to Russia.

Boeing has announced it is suspending maintenance of its jets in Russia.

Gazprom, meanwhile, is paving the way for its biggest gas deal yet with China. And, in one of its measures to counter the effect of western sanctions, the Central Bank of Russia has ordered the Russian stock market to remain closed for a fourth straight day.

UN General Assembly resolution condemning Russia’s invasion of Ukraine

 A UN General Assembly vote on a nonbinding resolution to condemn Russia for its invasion of Ukraine and to reverse its recognition of the DPR and LPR saw 141 vote in favor, 5 against, and 35 abstentions.

Russia, Belarus, Syria, North Korea and Eritrea opposed the resolution; China, India, Iran, Iraq, Vietnam, Mongolia, Venezuela, Cuba, Nicaragua, South Africa, and Kazakhstan were among those abstaining.

Russia Releases First Casualty Figures

Earlier today, the Russian Ministry of Defense released for the first time since the military intervention began on 2/24, casualty figures.  On the Russian side: 498 dead and 1597 wounded.  On the Ukrainian side: 2870 dead, 3700 injured, and 572 taken prisoner.  Again, all of these figures are from the Russian Defense Ministry.

Ukrainian Refugees; Evacuation of OSCE Monitors

Democracy Now! is reporting that, according to UN figures, over 800,000 refugees have fled Ukraine to the west over the past week:

The U.N. says some 836,000 people have fled Ukraine in the week since the invasion started, in what “looks set to become Europe’s largest refugee crisis this century.” Poland says more than 450,000 people have crossed its border.

Meanwhile, Russia’s National Defense Control Center has announced that it has evacuated over 140,000 from Ukraine, including 40,000 children – these are most likely from the Donbas region. 

As of yesterday, most OSCE SMM monitors had evacuated the Donbas area through Russia with those in Kherson (northwest of Crimea) – which is now reported to have been captured by Russian forces – were sheltering in place.  Today the OSCE reported the death of one of its SMM members from shelling in Kharkiv yesterday.

Western Punishment of Russian Athletes and Culture

The International Olympic Committee is recommending that athletes from Russia and Belarus be banned from competing in all international sports.

The Guardian has reported on various cancelations and suspensions of Russian art and culture throughout the west, including ballet and symphony.  The Glasgow Film Festival in Scotland announced Russian films would be withdrawn.  Dostoevsky has even been purportedly banned in Italian venues. Russian cats are not free of the Russophobic frenzy and have actually been banned from cat show competitions.

Pentagon Agrees to Not Push WWIII

On a positive note, the Pentagon is showing some signs of sanity by canceling a previously scheduled test launch of its Minuteman III ICBM missile so as not to risk an escalation with Russia based on misunderstanding. According to ABC News:

“In an effort to demonstrate we have no intention in engaging in any actions that can be misunderstood, or misconstrued, the Secretary of Defense has directed that our Minuteman-III intercontinental ballistic missile test launch scheduled for this week to be postponed,” said [Pentagon spokesman John] Kirby.

Also, further talks are supposed to occur on Thursday between Russia and Ukraine but there is wrangling over the venue.  I will provide an update on what happens if they actually take place.

By Ben Aris, Intellinews, 3/01/22

Two years ago I wrote a piece entitled “A history of Russian crises”. Time to update it.

“Russia has crises regularly. They happen for a variety of reasons: poor regulations, the lack of institutional checks and balances, rank corruption, heavy debt, no money in reserve, shallow capital markets, weak banking sectors and external shocks. And they cause havoc when they happen,” the article opened.

Now we can add “invasion of other countries” to that list of causes. The attack on Ukraine on February 24 has caused the biggest crisis since the August 17, 1998 meltdown of the Russian financial sector. However, this crisis will do less damage than that one.

The ruble has lost a third of its value in just the last few days and the market capitalisation of the Russian stock market has been halved, with the RTS index falling from its peak of 1,900 in October just before the military posturing around Ukraine started to 935 now. In 1998 the ruble lost 75% of its value and the RTS index fell from circa 600 at its peak in October 1997 to a mere 38 a year later.

The Russian economy is much stronger today than then. Its gross international reserves (GIR) are an order of magnitude bigger. Russia is running a triple surplus of trade, current account and federal budget. Its bank sector has been cleaned up and is profitable and well capitalised. Unemployment is at post-Soviet lows and inflation, and while higher than comfortable, it is still in single digits (for now). Russia is in a much better state to weather this storm than at the end of the 1990s, when that crisis wiped out the entire top tier of the Russian banking system and plunged the country back into economic chaos. No wonder the Russians hate the 1990s so much.

However, the real pain on the Russian economy this time is the nature of the sanctions that have just been imposed. While the macroeconomic, banking sector and stock market indicators are not as bad as in 1998, the big difference is these sanctions are designed to permanently hobble Russia’s economic development.

Thanks to the fiscal fortress that Russian President Vladimir Putin has built in an attempt to sanction-proof the economy (the success of which is now in question after the EU unexpectedly imposed sanctions on the Central Bank of Russia’s gross international reserves (GIR) on February 27), Russia has been running an austerity budget that has kept its growth potential to only 2% when it should be more than double this amount.

Russia was condemned to underperform the global economic growth before the sanctions, but now it will fall even further behind as its growth potential has been even further reduced. Putin has doomed Russia to slowly end up as at best “a raw materials appendage to China,” for as long as this sanctions regime remains.

1998 crash and recovery

The 1998 crash was a disaster, especially for the normal people that once again saw their life savings evaporate overnight. But it also reset the economy and laid the groundwork for a rapid recovery.

Putin took over in 2000 and pushed through a radical set of reforms such as rewriting the labour code, setting realistic flat income tax rates that are still in place today (with a few tweaks such as those to VAT) and he began to raise public wages by 10% a year over the next decade.

Most importantly, what academics Barry Ickes and Clifford Gaddy had dubbed “the virtual economy” was destroyed – a system where business was done almost entirely on barter. The collapse in the value of the ruble forced a re-monetarisation of the economy that allowed the bank sector to work again, and tax revenues began to pour into the federal coffers.

As ruble-denominated labour wages were slashed by three quarters, oil companies that earned dollars on the international markets became cash cows overnight and primed the pump. The oil companies invested more in just 1999 than they had collectively over the previous decade. And their business only got better after the oil prices began their inexorable climb to a peak of $150 per barrel over the next five years.

Having cleared out the oligarch banks – the so-called “Financial Industrial Groups” – the banks that were left were mostly more commercially minded and flourished as they rushed to tap the international capital markets where they could “borrow long and cheap overseas, but lend short and expensive at home.” Banks like Russky Standart, a POS retail specialist that pioneered the unsecured lending business, boomed.

None of these conditions exist this time round, with the exception of more profitable oil companies. The collapse of the ruble this week will lead to high inflation. The CBR imposed an emergency 20% rate hike on February 28 that will take years to unwind and will stifle growth. The SWIFT sanctions and the US ban on US investors buying any new Russian Ministry of Finance ruble-denominated OFZ treasury bills will cut Russia off from the international capital markets.

Instead of booming during a bounce-back, Russia’s economy under this sanctions regime is doomed to sub-par growth for years to come. Putin’s fiscal fortress is probably strong enough to prevent a crisis in the short term, but the sanctions will stymie Russia’s long-term growth prospects and could condemn the country to a Latin America in the 1970s-style stagnation over the long term…

…In this crash the ruble has lost 30% of its value in just the last few days, putting this crisis on a par with earlier crises but not quite as bad as in 2014. That is due to the huge reserves the central bank has built up and also the much greater confidence in the regulator; in 2014 CBR Governor Elvira Nabiullina was seen as green and untested, but today she is seen as a titan amongst central bankers and the “most conservative governor in the world.”

The impact on unemployment is likely to be very small. Joblessness spiked in 2020 due to the lockdown as people literally couldn’t go to work, but it rapidly recovered as the coronavirus (COVID-19) restrictions came off in the autumn of that year. Currently unemployment is back at its post-Soviet lows of 4.3% as of December 2021. How far it rises from here will depend on the severity of the recession that will almost certainly begin now.

Inflation will also rise. Inflation is currently 8.7% as of January this year and was rising all last year, despite an aggressive string of rate hikes: March (25bp), April (50bp), June (50bp), July (100bp), September (25bp), October (75bp), December (100bp), January (100bp) and February (1,500bp).

The CBR’s emergency doubling of overnight rates on February 28 will curb the further rise but the 30% devaluation will feed through into more inflation over the next six-nine months. However, in the previous crisis the CBR said it was pleasantly surprised as the devaluation-driving inflationary effects were surprisingly mild and fed through more quickly than expected. However, in those crises the economic bounce-back was also better than anticipated. Again just how bad the inflation problem gets will depend on the depth and duration of the coming recession.

The banking sector has been largely undamaged, although not unaffected, in each crisis since the disaster in 1998, which wiped out the entire top tier, but there is moderate danger of a banking crisis this time round. As bne IntelliNews reported, there is a dangerous mismatch between the state-owned banks dollar liabilities and their dollar assets: in short, the big state-owned banks don’t have enough dollars on hand to meet demand if withdrawals soar – and demand is soaring after the US effectively cut both Sber and VTB Bank off from using dollars. On balance it seems the CBR has enough dollars to cover the shortfall if needed, but the story highlights how painful the SWIFT sanctions are proving to be.

From the macro-economic point of view this crisis is actually milder than the previous ones, or at least on a par, even slightly better than that of 2014. But there is one big difference: Putin’s decision condemns Russia to sub-par growth in the long term, as he has destroyed what little confidence domestic business has in the future of Russia.

The noughties boom was driven, and was gathering momentum, because Russian business was returning its flight capital to the Motherland, confident in the future. Russia’s development does not depend on foreign direct investment (FDI) or access to the capital markets. It depends on persuading its own businessmen to build and invest into the economy.

Those businessmen were nervous before. Now they will simply not invest in Russia any more, as it has no future. Russia cannot grow strongly unless its domestic businessmen participate, and following this crisis they will not. 

The previous crises of 1998, 2008 and 2014 were not Russia’s fault. They were due respectively to a currency crisis in Asia, the US failure to manage its mortgage markets and OPEC’s decision to flood the markets with crude. This crisis is entirely and exclusively of Putin’s own making. The biggest long-term consequence of this crisis is Putin will have destroyed what little confidence his own businessmen have in his leadership. Indeed, a few of Russia’s business elite have already come out and publicly criticised the invasion of Ukraine, including Rusal owner Oleg Deripaska, Alfa group founder Mikhail Fridman and Kremlin insider Anatoly Chubais.

Prominent businesses have told bne IntelliNews in the past that they built up big businesses that have made them rich, but they have stopped there. “Why risk borrowing when that could mean I could lose control of my business? I am already rich. I don’t see the point of risking what I already have,” one medium-sized successful businessman told bne IntelliNews.

The Kremlin has tried to force domestic businesses to invest into Russia with laws that penalise companies who don’t repatriate the ownership of their companies. It is also in the process of passing a law that will penalise unsanctioned companies from doing business with sanctioned ones that will end up infecting the whole economy. But the only way to get businessmen to invest into Russia is to create a conducive investment climate. But as long as Putin emphasises security over capitalism that will never happen. Inflows of the domestic capital belonging to “minigarch” and other successful businessmen from offshore havens to Russia remain miniscule.