Why is the EU struggling to ban Russian oil imports?

Since the beginning of the conflict in Ukraine, Brussels has been putting pressure on Moscow by introducing sanctions to damage its economy. The aim is clear: to deprive Russia of its main sources of hard currency income. But the European Union is having trouble agreeing on its sixth sanction package. Initially, the EU had planned to ban the import and transport of crude oil from Russia. Due to a lack of consensus among Member States, this plan could now be watered down.

Oil is essential for all economies to create wealth. When the price of oil rises sharply, countries without oil pay the equivalent of a tax or levy to countries that produce it. A massive change in the price of oil leads to a massive transfer of wealth in a global economy.

This is the difficult situation that President of the European Commission, Ursula von der Leyen, is currently facing. By seeking to stop importing oil from the world’s largest producer, the European Union risks above all paying more for its much-needed energy. 

Will this policy inflict more pain on Russia than on the old continent? Nothing is less certain. What is certain is that this measure is not unanimously supported by the EU Member States.

Hungary, which has until now largely supported EU sanctions against Russia, is the main opponent of the suspension of Russian oil imports. Prime Minister Viktor Orban has said that stopping Russian oil purchases would be an “atomic bomb” for the Hungarian economy. “Fuel prices in Hungary will rise by 55-60%. Their growth will be followed by a surge in prices for all goods”, said the Hungarian Minister of Foreign Affairs. 

Given their dependence on Russian crude oil, Slovakia and the Czech Republic would also want to benefit from special conditions if an agreement can be reached on new energy sanctions.

According to Bloomberg, the EU is considering banning the transport of Russian oil to third countries by EU-owned ships. This time, it is Greece that is lobbying to drop this provision in the next round of sanctions. Its economy is heavily dependent on maritime transport. 

Greeks own more than a quarter of the world’s oil tankers by capacity. The share of Greek tankers shipping oil from Russian ports has risen from 37% before the war to 55% since. 

EU member states could, however, agree to sanction Russian oil exports through European insurers. To transport oil using tankers, oil companies collectively insure their ships against risks, including oil spills.

Targeting marine insurance is a powerful tool as the largest specialist insurers in this sector operate mainly in Western countries. This option still needs the UK to be persuaded to adhere to EU sanctions as it plays a crucial role in the insurance market.

“I can assure you that Europe will move out from Russian oil and Europe will move out from Russian gas. The only thing is it cannot be done overnight,” said Alexander Schallenberg, the Austrian Minister of Foreign Affairs

The paradox is that by promising to phase out Russian oil imports, the EU is helping to create uncertainty about future supplies. This in turn drives up the price of oil today and helps to increase Russian state revenues.

Research & Insights #21

Oil & Gas. Tensions between Russia and the West over energy have escalated in recent days. For the first time, Moscow has cut off gas supplies to Poland and Bulgaria since Vladimir Putin threatened “unfriendly countries” with having to pay for natural gas in rubles. This demand is intended to stabilize the Russian economy in the face of Western sanctions. On Wednesday, the European Union’s executive proposed the toughest package of sanctions yet against Moscow. The measures should mainly target Russian oil as well as all shipping, brokerage, insurance and financing services offered by EU companies enabling its transportation. The Commission’s proposal must still be unanimously approved by the 27 EU countries. It plans to phase out deliveries of Russian crude oil in six months, and of refined products by the end of 2022. Several countries worried about the impact of cutting off Russia oil imports stand in the way of agreement. The Ukrainian conflict calls into question more than half a century of partnership in the energy field between Europe and the USSR, then Russia.

Central Bank. On 29 April 2022, the Bank of Russia decided to reduce the policy rate by 300 basis points to 14% per annum. Recent data indicate a slowdown in current price growth rates due to a strengthening ruble and weakening consumer activity. Indeed, the ruble has recently reached its highest level in over two years against the dollar and the euro, supported by capital controls. There are currently no concrete signs that the Central Bank will reduce capital controls in the near future. For its part, the finance ministry said it had managed to make payments on two dollar-denominated bonds, potentially averting a default on the country’s external debt. Russia made the payments from bank accounts that were not subject to direct sanctions, according to people familiar with the matter. Moscow has ample resources to service its debt from oil and gas revenues. But Western sanctions have complicated the country’s efforts to make sovereign bond payments. In early April, the US prevented Russia from using US banks to repay its foreign debt.

Russia-China relationship. China’s leading provider of information and services to the coal and coke industries, Fenwei Energy Information Service Co, has revealed that several Chinese companies purchased Russian coal in Chinese currency in March 2022. The first shipment would be made in April.  It is also the first shipment of Russian commodities paid for in yuan to arrive in China after Russia was sanctioned by Western countries. Chinese buyers have also used yuan to purchase Russian crude oil. China’s total imports from Russia have recently increased significantly. According to the latest mid-April report from the General Administration of Customs, in the first quarter of 2022, total Chinese imports from Russia reached US$21.73 billion, a 31% year-on-year jump, second only to Indonesia (31.4%). Since the outbreak of war in Ukraine, China has refused to condemn Russia’s actions and has criticised the radical Western sanctions imposed against Moscow.

Commodity Shock. According to the World Bank, global energy prices are projected to rise dramatically, culminating in the biggest price jump in commodities in nearly half a century. In its April commodity market outlook report, the institution expects global energy prices to rise by 50.5% in 2022. Sanctions on Russia are the main reason for the disruption of the global trade supply chain, which is causing dramatic energy price increases. Food costs are expected to rise by 22.9% this year, the largest increase since 2008, with wheat prices peaking at 40%. Ukraine was expected to produce 10% of the world’s wheat in 2022, but between 25% and 50% of that production has been affected by the conflict. Meanwhile, metal prices are expected to rise by 16% before declining next year, but they will remain at high levels. According to the report, soaring commodity prices have contributed to inflation levels not seen for more than 40 years in the US, and a record 7.5% jump in consumer prices in Europe.

The Decline of a Reserve Currency

Since the freezing of the Russian central bank’s assets by the Americans and the rise of inflation, many are wondering about the future of the US dollar as a reserve currency. In this article we will take a step back and outline, on the basis of Ray Dalio’s latest book, “The Changing World Order“, the dynamics that occur when a currency ceases to be a reserve currency.

“The times ahead will be radically different from those we’ve experienced in our lifetimes, though similar to many times in history”. With these words begins the latest book by the founder of the $140 billion US hedge fund, Bridgewater Associates.

Ray Dalio is convinced that no empire or currency lasts forever, yet almost everyone is surprised and ruined when they fail. The man who predicted the economic crisis of 2008 describes the current economic and political environment by delving into centuries of economic ups and downs. 

Through the study of four empires: the Dutch, the British, the American and the Chinese, Ray Dalio developed a framework for assessing the level of wealth and power of the archetypal empire, using eight parameters: 1) education, 2) competitiveness, 3) innovation and technology, 4) economic output, 5) share of world trade, 6) military power, 7) power of the financial center, and 8) reserve currency status.

His analysis of the emergence and decline of the Dutch guilder, the pound sterling and the US dollar as reserve currencies is of particular interest in understanding the world of tomorrow. In this informative video, Dalio explains that empires rise and fall in a predictable pattern known as the “big cycle”. He believes that a new world order is imminent.

The power of a reserve currency

If a currency has to fulfill two functions, namely a medium of exchange and a store of value, not all money printed by governments is of equal value. A reserve currency has the particularity of being accepted throughout the world for transactions and savings. 

Having a reserve currency is among the greatest powers because it allows a country to borrow more than it could otherwise afford. People around the world want to save in it, which enables the country to borrow more at a lower rate. This is what the French Minister of the Economy called in 1960 when referring to the power of the dollar: the exorbitant privilege.

An empire that borrows and spends a lot seems very strong at first glance. In reality, its finances are actually weakened because borrowing supports the country’s power beyond its fundamentals. By living beyond its means, the empire finances domestic over-consumption and engages in numerous international military conflicts to increase its power.

Inevitably, the country begins to borrow excessively, which contributes to the accumulation of large debts to foreign lenders. In the long run, a country always ends up servicing its debt by creating a lot of money and credit, which depreciates the value of its currency.

When investors start to sell government bonds aggressively

According to Dalio, a country that ceases to have a reserve currency always comes to a traumatic end. In concrete terms, this means large devaluations caused by debt crises.

Signs that such a situation is approaching are when: 1) a country’s debt level is very high, 2) the central bank already has its interest rates at 0%, 3) it is already printing money to buy its bonds, and 4) it faces a financial crisis.

In this situation, the traditional approach is for governments to increase the supply of money and credit to stimulate the economy. The problem is that interest can no longer be lowered and money printing only stimulates the financial market without impacting the real economy.

By creating a lot of money, the government reduces the value of money and credit, which is good for debtors but very bad for holders of money and credit.

People then start selling their government bonds en masse and turn to inflation-hedging assets and other currencies. In other words, holders of debt whose real return keeps falling want to sell that asset for other reserves of wealth.

Once it is widely perceived that money and debt assets are no longer a store of value, the status of a reserve currency is at risk. As Ray Dalio explained in his recent conversation with Larry Summers, the central bank is then faced with a Cornelian choice: raise interest rates to make bonds more attractive, at the risk of contracting a highly indebted economy, or print massively to buy debt that no one wants, thereby depreciating the value of money.

History has shown that central bankers generally prefer the second option and that there are very high risks in holding interest-bearing cash as a store of wealth, especially at the end of debt cycles. 

As Dalio points out: “One of the most important questions investors need to regularly ask themselves is whether the amount of interest that is being paid more than makes up for the devaluation risk they face.”

Research & Insights #20

Oil & Gas. According to the New York Times, the European Union is preparing a phased ban on imports of Russian oil products. The measures should not be introduced until after the second round of French elections, to be held on April 24, to avoid the impact on pump prices harming President Emmanuel Macron’s re-election chances.This approach is intended to give Europe, and Germany in particular, time to find alternative suppliers. In 2020, Russia provided a quarter of the European Union’s oil supplies and a third for Germany. The EU has imposed several rounds of sanctions on Russia, but so far Russian oil and gas have been excluded because of the high level of dependence of some EU member states on energy supplies. Germany’s Vice Chancellor, Robert Habeck, recently spoke out against an immediate gas embargo on the grounds that it would threaten social peace in the country. Despite the war, Gazprom continues to supply Russian gas for transit to Europe through the territory of Ukraine.

Defence. Russia has successfully carried out a first test launch of a Sarmat intercontinental ballistic missile (ICBM) from the Arkhangelsk region, the Russian Defence Ministry announced Wednesday. Vladimir Putin congratulated the military, stressing that this unique weapon will force all those who try to threaten Russia to think twice. According to the Russian president, the new system has the highest tactical and technical characteristics and is capable of evading any modern missile defence system. It is the largest nuclear missile ever designed. The Pentagon commented on the event through its spokesman, John Kirby, who said it was a “routine” test that posed “no threat” to the United States or its allies. The Sarmat has been under development for years, so its test launch is not a surprise to the West. However, it comes at a time of extreme geopolitical tension due to the war in Ukraine.

Central Bank. Russia announced a likely further cut in interest rates and increased budget spending to help the economy adjust to Western sanctions. As a reminder, the Bank of Russia marginally lowered its key interest rate on April 8 to 17%. The country recorded 16.7% inflation in March and the World Bank expects the Russian economy to contract by more than 11% for the year 2022. The current rise in inflation is due to low supply, not high demand, according to Elvira Nabiullina. She repeated in the lower house of parliament that the goal is to bring inflation down to 4% by 2024, while the economy adjusts to Western sanctions. The latter mainly affect the financial market but should now “start to affect more and more the economy.” The main issues are the massive changes required in logistics and technology supply chains. Over time, logistics networks will be reconfigured and shortages of some consumer goods should disappear. Problems along technology supply chains will be more difficult to resolve.

Russia-China Relationship. Trade between Russia and China has surged since Moscow was cut off from Western imports. In 2022, January-March trade turnover between the two countries reached US$38.17 billion, up 28.7% from the same period last year, according to state news agency RIA Novosti. Russian imports from China rose 25.9% to US$16.44 billion, while its exports to China jumped 31% to US$21.73 billion in the first quarter of the year. In March alone, Russia exported US$7.84 billion worth of goods to the Chinese market. The bulk of Chinese imports from Russia are energy, mineral and agricultural products. China has been Russia’s largest trading partner for more than 10 years. Beijing has called on the West to lift the unprecedented sanctions imposed on Russia. Just days before the war in Ukraine, Vladimir Putin and Xi Jinping announced a “no-limits” partnership with plans to increase bilateral trade to US$250 billion by 2024.

Weaponization of the US dollar threatens its domination

American sanctions on Russia’s currency reserves could gradually prompt many countries to bypass the US currency.

On February 28, the United States and its European allies froze the assets of the Russian Central Bank following the Russian military intervention in Ukraine. Half of the Central Bank’s assets held in the form of foreign exchange reserves and gold (US $300 billion) have been blocked by the West. 

By weaponizing the dollar to preserve its global economic and geopolitical position, the United States risks jeopardizing its greatest power: its control over the world’s reserve currency and capital market system. Zhang Yanling, former executive vice-president of Bank of China, said the sanctions would “cause the US to lose its credibility and undermine the dollar’s hegemony in the long run”. 

The Russian response was not long in coming. A few weeks later, Vladimir Putin signed a decree stipulating that “unfriendly countries” will have to pay for Russian gas in rubles from April 1. This announcement caused the price of natural gas to rise and the ruble to strengthen against the dollar.

The inertia of the dollar as the reserve currency should not be underestimated.

Ray Dalio, founder of the US $140bn US hedge fund Bridgewater Associates, believes that the conflict between Russia and the West is the first battle in the long war for control of the world order. According to him: “When this first round comes to an end, most people will probably misconstrue it as the end of the fight, but it will only be the beginning.”

The end of the US dollar has been predicted countless times and the inertia of a reserve currency that dominates international transactions should not be underestimated. So why should this time be any different?

In theory, a currency can be held in the form of debt or money and must fulfill two essential functions: a store of value and a medium of exchange. 

In practice, the US dollar has ceased to be a store of value since its purchasing power began declining faster than its bond yield. And for countries that are not geopolitically aligned with Washington, the weaponization of the greenback prevents it from being a reliable medium of exchange.

Vyacheslav Volodin, speaker of the Russian Duma lower house of parliament, recently said: “Anyone who keeps money in dollars today can no longer be sure that the US will not steal their money.” Countries such as China, Russia, India and Saudi Arabia, are already reducing the share of dollars used in trade, financial transactions or central bank reserves. 

Published in a recent note, Zoltan Pozsar, Former Federal Reserve and U.S. Treasury Department official stated “We are witnessing the birth of Bretton Woods III – a new world (monetary) order, centered around commodity-based currencies in the East, that will likely weaken the Eurodollar system and also contribute to inflationary forces in the West.” 

“Demand for commodity reserves will be higher, which will naturally replace demand for FX reserves,” Mr Pozsar said. “Demand for dollars will be lower too, as more trade will be done in other currencies.”

This analysis is consistent with the new monetary paradigm presented last month by IMF’s first Deputy Managing Director, Gita Gopinath, according to which we could see the emergence in the coming years of small currency blocs based on trade between separate groups of countries.

Research & Insights #19

Foreign debt. Russia is getting closer to a potential default on its foreign currency debt. The Ministry of Finance recently stated that it was forced to make payments in rubles to holders of dollar-denominated bonds. For the first time, the attempt to settle the US$649.2 million payment was rejected by a US financial institution on orders from Washington. Russia has a total of 15 international bonds outstanding, with a face value of about US$40 billion. Moscow managed to secure several foreign currency coupon payments on its Eurobonds before Washington stopped the transactions. According to international rating agencies, Russia has a 30-day grace period to make the dollar payment. The Kremlin has rejected the idea of a default by the country, saying that Russia has the necessary funds and is ready to pay its debt. Indeed, Moscow has described the blocking of payments as a failure of the West to meet its financial obligations to Russia. According to the Kremlin spokesman, the freezing of foreign exchange reserves in February was an attempt to push it into an “artificial default”.

Domestic Politics. Some 83% of Russians approve of Vladimir Putin’s actions, gaining twelve points compared to February, according to a survey published on 31 March by the independent Russian institute Levada. This is the first poll since the beginning of the offensive in Ukraine that has not been carried out by pro-government institutes. Only 15% of Russians say they do not approve of the president’s actions (-12% in one month) and 2% have no opinion. Among respondents who support the actions of the Russian Armed Forces in Ukraine, the dominant opinions are that Russia launched a “special operation” to: protect the Russian-speaking population and civilians in Donbass (43%); prevent an attack on Russia (25%); get rid of nationalists and bring order (21%). Vladimir Putin justified Russia’s military offensive against its Ukrainian neighbour by accusing it of having orchestrated a genocide of Russian speakers, and of serving as a springboard for NATO, an existential threat to Russia. Since the beginning of the conflict, Russia has banned some of the largest social networks (Facebook, Twitter, Instagram, TikTok) accused of having a Russophobic line.

Dedollarization. One of the main counter-sanctions taken by Russia against the West was to order, on March 23, that Russian gas exports be paid for in rubles. In fact, the system now allows buyers to pay in the contract currency which is then changed into rubles by Gazprombank. “It is obvious that – even if this is currently a distant prospect – we will come to some new system – different from the Bretton Woods system,” Peskov said.The West’s sanctions on Russia, he said, had “accelerated the erosion of confidence in the dollar and euro.”The Kremlin wants a new system to replace the contours of the Bretton Woods financial architecture established by Western powers in 1944. The government spokesman said the West’s decision to freeze US$300 billion in central bank reserves was a “robbery” that had already accelerated the move away from using the US dollar and the euro as global reserve currencies. The decision to impose payment in rubles has boosted the Russian currency, which fell to record lows after the February 24 invasion, but has since recovered.

Russia-India relationship. Since Russia’s military intervention in Ukraine and subsequent Western sanctions, India has purchased at least 13 million barrels of Russian crude oil, benefiting from deep discounts. By comparison, India had imported in 2021 about 16 million barrels for the whole of last year, according to data compiled by Reuters. Russia is India’s largest supplier of defence equipment, despite increased purchases from the United States over the past decade. Defence analysts say Russian supplies are more cost-competitive and vital to India, which faces a superior Chinese military. As a result of the sanctions, Russia has offered a US$35 per barrel cut from price levels prior to the start of the war in Ukraine to the world’s third largest oil importer and consumer. Indian Oil Corp, the country’s largest crude refiner, has the option to buy up to 2 million tons, or about 15 million barrels, of Urals-grade crude oil from Russia’s Rosneft this year. India and Russia are also trying to work out a rupee and ruble payment mechanism to maintain their trade.

Research & Insights #18

Central Bank. On February 28, the United States and its European allies froze the assets of the Russian Central Bank following the Russian military intervention in Ukraine. Half of the Central Bank’s assets held in the form of foreign exchange reserves and gold (US$300 billion) are now unusable, according to the Russian finance minister.The West has removed one of the means Moscow had to support its currency. In a few days, it lost about 40% of its value against the US dollar. In response, the Russian authorities have taken a number of measures designed to encourage the government, businesses and households to buy or hold rubles and to discourage them from buying or holding foreign currency.The Central Bank of Russia has more than doubled interest rates to 20% and capped the amount of funds that can be converted into foreign currency for individuals (US$10,000).Commodity exporters are now required to convert 80% of their revenues into rubles. The main Russian stock market (MOEX) has been closed since February 25. Russia’s finance minister said the country would meet its debt obligations, but would issue ruble payments until Western countries released its foreign currency reserves.

SWIFT.  Since March 12, seven Russian banks have been disconnected from SWIFT. The communication system, launched in 1973, serves as a neutral platform for banks to communicate financial transfers, transactions and exchanges. The sanctioned banks are VTB, Rossiya, Otkritie, Novikombank, Promsvyazbank, Sovcombank and the state development bank VEB. From now on, they will be severely restricted in their ability to do business outside Russia. However, it is unlikely that this sanction will lead to the collapse of the Russian economy. These banks operate primarily in Russia, where they receive most of their profits and where most of their customers are located.In addition, Sberbank and Gazprombank are not on the list. These two banks play a key role in European energy supplies, as they handle most of the payments for oil and gas exports. In general, Russians distrust the banking system and over 90% of the Russian population keeps at least part of their savings in cash (often in foreign currency). It is estimated that 40% of commercial transactions in the country are still conducted in cash.

Oil & Gas. The United States announced a total ban on imports of Russian oil, gas and coal. The news sent the global price of oil soaring, with Brent crude reaching US$127.98 a barrel, up more than 50 percent from the beginning of the year. The UK says it will phase out Russian oil by the end of the year. From Russia’s perspective, these two countries account for 8% and 2% of its oil exports respectively. As far as Europe is concerned, it will be much more difficult to do without Russian raw materials. Russian oil represents 25% of European imports and gas 40%. Despite this, EU leaders agreed to “end our dependence on Russian gas, oil and coal imports as soon as possible” by increasing LNG imports from other markets, developing a European hydrogen market, improving energy efficiency and accelerating investment in renewable energy. In concrete terms, this means that Europeans will have to pay more for their energy and that they will have to reopen coal-fired power plants. In France, the taboo of “energy sobriety” is beginning to be promoted more and more to encourage consumers to reduce their energy demand.

Visa & Mastercard. Both American companies have suspended their operations in Russia since March 10. All cards using these payment systems previously issued by Russian banks will continue to operate in Russia as before, but it will not be possible to use them abroad. In addition, cross-border transactions will not be available, including payments for purchases in foreign online stores. This measure is expected to accelerate the adoption by Russian banks of Mir cards. This Russian payment solution is accepted in a handful of countries, including Turkey, Vietnam, Armenia, Belarus, Kazakhstan and Kyrgyzstan. Mir said it has already seen a sharp increase in demand for its cards after sanctions were imposed on Russian banks. According to Central Bank of Russia, more than half of Russians already had a Mir card by September 2021, accounting for 32 percent of all transactions. The Chinese company, UnionPay, is also emerging as an alternative payment solution for Russian citizens in this new environment. Western sanctions are helping to consolidate Russia’s move away from their transaction systems to Chinese providers seeking to expand their presence around the world.

Research & Insights #17 – Special Ukraine

Ukraine Crisis. Russia has recognized the independence of the Lugansk and Donetsk People’s Republics (DPR and LPR) and concluded with them agreements on friendship, cooperation and assistance. While the Western media warned that Russia’s invasion of Ukraine “could happen at any time,” Putin’s announcement surprised many as it represents an intermediate stage to a full-blown war that no one wants. The Russian president demanded that Ukraine immediately halt all hostilities in Donbass, stressing that otherwise “the Ukrainian ruling regime will be wholly and entirely responsible for the possible continuation of the bloodshed,”. Russia announced that it would send “peacekeeping forces” to the regions to ensure stability and security. This is the first time Russia has officially admitted to sending regular army troops to the separatist regions. In the coming days, it will become clear exactly what territory the two republics claim, and military action could intensify if their claims are extended.

Economic sanctions. Sanctions are very likely to be imposed on Russia by the West. US Secretary of State Antony Blinken said the US would respond to Putin’s decision with a “firm response.” What is not clear is the extent of these future sanctions. Russia’s place in the supply of raw materials is so important that strong Western sanctions could send energy prices soaring. Many Western players are engaged with the country and would be affected by such a policy. These include BP, Shell and ExxonMobil, as well as commodity traders such as Glencore, Vitol and Trafigura. Recall that in 2018, US sanctions against Deripaska and its aluminium companies, Rusal and En+, sent metal markets soaring and significantly disrupted supply chains. Covering 40% of Europe’s gas needs, Russia could retaliate by reducing its supply. A sudden rise in energy prices could quickly lead to higher inflation and higher interest rates in Western economies.

Domestic Politics. recent poll conducted by the independent Levada Center reveals three interesting facts about Russians’ opinions on the rising tensions in Ukraine. The first is that most Russians do not want a war with their Ukrainian neighbour. Currently the fear of a world war is abnormally high. The second point is that the majority of Russians think that the US and NATO are responsible for the tensions in the Donbass region. Only 4% think that Russia is to blame. They see the clashes in Ukraine as a proxy war with US-backed forces. Finally, the third point that is paradoxical, is that 80% of Russians consider America as a “friend”, and only 3% as an “enemy”. The Russians view the round of peace negotiations since the meeting between Putin and Biden in Geneva in June 2021 in a very positive light. The discussions between the leaders themselves and between their delegations have improved the attitude of Russians towards Europeans and the United States.

History. Fifteen years ago, Vladimir Putin gave his famous speech on his vision of international relations at the Munich Security Conference (read the text). He denounced American unilateralism and the importance of taking into account the growing economic and political influence of China and India. He said: “I consider that the unipolar model is not only unacceptable but also impossible in today’s world. The model itself is flawed because at its basis there is and can be no moral foundations for modern civilization. There is no reason to doubt that the economic potential of the new centers of global economic growth will inevitably be converted into political influence and will strengthen multipolarity”. Today, there are no more G8 or regular Russia-EU summits. Between Russia and the West, there are no longer any illusions or mutual trust but only sanctions that are accumulating. What has not changed, however, is Russia’s desire to maintain its independence in foreign policy, much to the frustration of the Americans.

Why the Ukraine Crisis Is the West’s Fault

On September 2014, political scientist John Mearsheimer published an article in Foreign Affairs entitled: “Why the Ukraine Crisis Is the West’s Fault”. As tensions between Russians and NATO once again hit the headlines, it is striking in retrospect how accurate John Mearsheimer’s analysis was. If you want to get the big picture on this conflict without getting lost in the detail, then you should read his article or watch his lecture. Professor at the University of Chicago since 1982, John Mearsheimer analyzes international relations through the lens of the realism school of thought. He was one of the strongest opponents of the 2003 Iraq War before it happened.

Research & Insights #16

Covid. A study called the National Anxiety Index for the year 2021 was recently published. It measures and classifies the phobias of Russians based on media and social network analysis. In 2020, the main source of anxiety that kept people awake was the fear of catching Covid. In 2021, it is now the measures taken to fight the spread of the virus that is a source of concern. In other words, Russians are now more worried about the widespread use of the QR code system and mandatory vaccination than about catching the virus. Moscow has made Covid-19 vaccination mandatory for employees in a wide range of public-facing positions, including food service and transportation. Workers who refuse run the risk of being fired from their jobs without pay. Despite the recommendations of the authorities, only a little more than half of the country’s population has received a vaccination. It is interesting to note that the same level of scepticism towards government measures can be observed in many countries of the former Soviet Union such as Belarus, Ukraine, Kazakhstan, Serbia and Georgia.

Kazakhstan. On January 2, demonstrations broke out in several Kazakh cities. A few days later, they degenerated into mass riots and government buildings were ransacked in several cities. The ensuing violence left many people injured and deaths were also reported. Officially, 164 people were killed and nearly 6,000 were arrested. At the request of the Kazakh president, Russia deployed peacekeepers as part of the Collective Security Treaty Organization (CSTO). According to Kazakh authorities, law and order was restored in all regions of the country on January 7. Independent for over 30 years, the country has maintained close relations with Russia (they are part of the Eurasian Economic Union) and developed friendly relations with a wide range of countries in the West, the Middle East and Asia. The Russian president warned that Moscow would not tolerate “color revolutions” in the former USSR. This refers to the revolts orchestrated, according to the Kremlin, by the West in former Soviet republics since the 2000s.

Digitalization. Russia continues to digitize its economy with the State development of a digital platform called “Unified Biometric System” (UBS). The idea is to digitize all information concerning Russian residents. This digital registry will make it possible to identify a person remotely by his or her biometric data (facial or voice recognition). Initially, the unified biometric system will serve banks and financial organizations, and then it will be used in healthcare (telemedicine), distance learning, e-commerce, retail, public and municipal services, etc. The large-scale implementation of the biometric system will provide an essential infrastructure for the development of the country’s digital economy. UBS was launched at the initiative of the Ministry of Digital Sciences, the Bank of Russia and Rostelecom, as part of the national program of digital economy.

Russia-USA relationship. The situation in Ukraine is still not resolved. Talks between Russia and NATO took place “again” on January 12 in Brussels. They discussed Ukraine and the expansion of NATO to the east. The Russians do not want to concede anything about the integration of Ukraine into the military organization. They are keeping up the pressure by conducting military exercises in the regions of Voronezh, Belgorod, Bryansk and Smolensk, near the Ukrainian border. Around 3,000 soldiers took part in these exercises. The West and Kiev have recently spread allegations about a potential Russian invasion of Ukraine. Kremlin spokesman Dmitry Peskov called the allegations “empty and unfounded” and a ploy to raise tensions, stressing that Russia poses no threat to anyone. Russia won’t be intimidated by ‘crippling’ sanctions, the Russian Ambassador to the US said.