First, news came that 18 Russian diplomats are being expelled from the Czech Republic amid reports that two GRU [Russian military intelligence] agents were behind the 2014 explosions at a Czech armaments dump which saw 50 tons of munitions blow up and saw the death of two Czechs.
The two agents seemingly behind the attack were the same two men behind the 2018 Novichok poisoning in Salisbury, United Kingdom. Both agents were caught on CCTV as suspects in smearing Novichok nerve agent on the door handle of the house of former GRU officer Sergei Skirpal, who became ill along with his daughter, Yulia. A British woman, Dawn Sturgess, was killed months later by Novichok from a discarded perfume bottle.
Amid all the jokes about cathedral spires, we should remember that two Czechs died in the attacks in 2014 and a Brit in the Salisbury attack. This might invoke NATO’s Article 6 and require all NATO members to respond with similar expulsions.
The background for the attacks is interesting given that the munitions were reportedly heading for Ukraine as it battled with Russia in Donbas at the time.
That this has come up now is interesting – seven years later – likely this reflects a new US policy of opening up on Russian malign action: “We know you did it,” and revealing to allies the full extent of the Russian threat if they did not know it already. The context here is that the Czech President, Milos Zemen, is a former communist and has a soft spot for Putin and Russia. Presumably, it aims to expose Zeman and rally the Czech political class to the cause of allying with the alliance of democracy against Russia.
I think more revelations will be forthcoming now across other NATO countries – again calling out Russian malign action and revealing and undermining Russian allies and proxies in Europe.
Second, an interesting piece was posted in the Financial Times with comments by US officials trying to clarify thinking in the White House around sanctions after the Biden administration’s decision to ban US institutions from buying ruble-denominated Russian bonds in the primary market.
This came after some criticism that last week’s actions were too soft. The messaging from the White House is that economic sanctions are the primary sanctions tool and that Biden is committed herein. The message is that what we saw last week is just the start and if Moscow continues with malign actions it can expect more.
Sanctions on sovereign debt are likely to go through the gears.
The next stop will be sanctioning secondary trading in new issues, ruble and/or dollar, then eventually secondary on prior issuance.
Perhaps this could come as early as June – 90 days after the original certification that Moscow used biological weapons in the Sergei Skyrpal and Alexei Navalny attacks. Obviously banning primary and secondary trading in new issues has the advantage of not locking in existing US investors in trades. But the message will be clear from the US government that it does not want US institutions funding Russian malign actions against the US and its allies. And they should reduce exposure to Russia – or don’t come complaining later when they get impacted by future sanctions iterations.
Third, well soon after the sanctions were rolled out, Russia responded by cutting off shipping through the Kerch Straits until October. The objective is clear – to tighten the economic noose around Ukraine as this will cripple Ukrainian ports in the Sea of Azov, including Mariupol.
This presents an immediate challenge to the Biden administration as it suggests new malign action which might trigger new US sanctions in response.
Note here that the US had been meant to send two warships into the Black Sea last week but pulled the deployment at the last minute which was seen as a gesture of moderation to Putin – attempt to ramp off. Given Putin responded by escalating leaves the US administration with a dilemma – do they ramp back up with deployment? Meanwhile, the U.K. seems to be stepping into the void by announcing two of its destroyers will deploy to the Black Sea in May, with HMS Queen Elizabeth providing air cover for US planes from the Mediterranean Sea.
Fourth, Moscow threw out a Ukrainian consul from Washington on allegations of spying.
Fifth, Moscow announced it had made arrests in what it says was a planned coup attempt against President Lukashenko in Belarus. Lukashenko is now promising extraordinary legal measures in the coming days – not sure what this could be but it might well include commitments to greater integration with Moscow – and what Russia specifically wants which is the ability to deploy more troops in Belarus to open a second front against Belarus.
Six, reports suggest Navalny is close to death. His actual death could well spark another diplomatic spat between the West and Russia and likely further sanctions – I would expect those aimed against kleptocracy, so oligarch designations.
Points three to six are likely to engender Moscow’s pushback/retaliation against the US and its allies, in addition to the sanctions Moscow unveiled on April 16, including the expulsion of diplomats and sanctions on individuals.
In summary, I think it is fair to say we are seeing an extraordinary series of events that underscore that US-Russia relations are in the worst place at any point since the end of the Cold War, likely even worse than 2014 after the Kremlin’s annexation of Crimea as escalation is coming on multiple fronts.
Hopes had been that the announcement of the Biden-Putin summit would calm tensions but I think we are likely to see tensions increase in the run-up to that summit if it actually occurs. Both sides will be eager to jostle for position and secure leverage into those negotiations, and showing the other that it is strong and won’t be pushed around. We have seen Moscow escalate before summits in the Normandy and Minsk format.
More “stuff” is going to happen here, and more sanctions actions likely.
But irrespective of what sanctions are rolled out, I think with the direction of travel as is I think investors will be slow to step up investment in Russia, despite perceived attractive valuations. Rather I think compliance departments and environmental, social, governance considerations will push investors to continue, at the margin, to reduce exposure to Russia – in anticipation of worse to come.
