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March 4, 2022

Smith's Research & Gradings

Russia Goes to War

Russia Goes to War

         — Katya Moore and Terence Smith

"Patriotism is the last refuge of the scoundrel" — Samuel Johnson

Whenever you hear politicians speaking about noble causes and the rights of governments to determine their own destiny, remember the words of Samuel Johnson. Ukraine had every opportunity to negotiate a peaceful settlement with Russia and/or prepare its people for war. Instead, the President of Ukraine, a former comedian, applied for membership to NATO and he has retreated to a basement and refused to acknowledge the possibility that Russia is going to win the war in the Ukraine.

Yes, Russia may very well win. That is not a political statement. It's a fact. In contrast, political statements call upon the world to reject the "Mad Man in Moscow" and "Vlad the Invader." The United Nations will condemn Russia. None of it matters.

The fact remains, Russia winning is the end result of every war game played at the Rand Corporation and War Colleges by the best U.S. generals, armed with the most advanced weapons and AI driven cyberattacks.

In Ukraine, the probability of Russia winning is not only because of Putin's famous strong hand. When the Ukrainian war campaign started in 2014, Russia annexed Crimea and supported Russian separatists in Ukraine's Donbas region.

The Ukraine-Russian situation is nothing new. A great American thinker, former Secretary of State from 1973 to 1977, Henry Kissinger, wrote: "Far too often the Ukrainian issue is posed as a showdown: whether Ukraine joins the East or the West. But if Ukraine is to survive and thrive, it must not be either side's outpost against the other — it should function as a bridge between them…The West must understand that, to Russia, Ukraine can never be just a foreign country… The European Union must recognize that its bureaucratic dilatoriness and subordination of the strategic element to domestic politics in negotiating Ukraine's relationship to Europe contributed to turning a negotiation into a crisis." He added, "Foreign policy is the art of establishing priorities."

Furthermore, General David Patraeus reminded members of a briefing last week that, "They have an excellent road system in Ukraine so the weather does not matter. What matters are the enablers that surround President Putin."

The plan of attack is much larger than almost any of the Western leaders expected. Initially, the widely held belief was Russia would nibble at the Donbas on the Eastern Border (where 70% of Ukraine's army was amassed). It became clear the entire country was being overrun within hours of launching the attack. Russia took critical infrastructure assets, such as airports, bridges, and power/water utilities. Russia and Ukraine (especially in its Eastern area) have a common language; Russia easily navigates the terrain, knows about the military infrastructure built in the USSR, and has many agents underground. Before this operation and the first casualties, many Ukrainians supported the so-called "Russian world ." Many of those supporters now are gone, of course. They saw the terrible face of war. However, in the beginning, their support helped to prepare this operation.

Brandon Webb, combat decorated Navy Seal and former instructor of the Seal's Sniper School, said Ukraine can win Putin's war, until he wants to start it again. He participated in a Special Forces team room discussion on Monday morning. He explained, "Ukraine will come out of this still mostly intact, but the unfortunate consequence is those good Ukrainian people, and Russian conscripts in the thousands will pay in blood for Putin's staged saber-rattling, many with their lives, until Putin decides the time is right to take another bite out of the apple."

Biden Responds

The United States response to Russia's aggression has been to launch economic sanctions. Not exactly the type of stuff that Hollywood movies feature — no flak, no bombs, no kinetic strikes. By the way, Hollywood movies are not available in Russia anymore. Disney, Sony, and Warner Bros., the three significant players, have paused film releases in Russia.

In his State of the Union on Tuesday, President Joe Biden said that sanctions were "prepared extensively and carefully." It was done via "a coalition of other freedom-loving nations from Europe and the Americas to Asia and Africa to confront Putin." The American government "spent countless hours unifying our European allies."

Thanks to this work, along with twenty-seven members of the European Union, including even neutral Switzerland. President Biden touted the U.S.-led coalition inflicted "pain on Russia" that is "now isolated from the world more than ever."

On the other hand, the voting on Wednesday's Resolution against the war in Ukraine approved in the UN, had 35 nations, including China and India, all abstaining from the UN resolution. Those countries who abstained, represent economies and populations which are some of the largest in the world. In this regard, total isolation of the Russian economy is simply impossible.

Resiliency of Russia

Despite President Biden's claim during the SOTU that the U.S. coalition has paralyzed Putin's $630 bln."war fund" with catastrophic sanctions, somehow the Russian ruble lost only 30% of its value. On a more technical note, the "war fund" is actually the national reserve of the Russian people, which serves as a "nest egg" and a source of stability for its currency.

It is not the scale of sanctions on Russia that changes things, but their nature. Freezing Russia's foreign exchange reserves, by limiting its access to the SWIFT bank messaging system, is an unprecedented assault on the principle of national sovereignty. Even Switzerland, which remained open for business to the Nazis during WW2, has dropped its neutrality.

President Biden, during the State of the Union address, promised to cut Russia from the energy market by providing 30 million barrels of oil from the US national reserves and another 30 million from the US allies, for a total of 60 million barrels. However, many experts are saying it is naïve to think that Europe can live without Russian energy, at least over the short-term.

Clearly, President Biden and the EU are baiting the bear. They are attempting to push Russia into blockading the EU. "Current inventories are about 47% of full capacity," Bernd Weidensteiner, senior economist at Commerzbank in Frankfurt, said in interview with Deutsche Welle (DW), Germany's international broadcaster. "Normal for this time of the year is about 60%...so, we are significantly lower." But other energy producers like the US are at their capacity.

Sanctions Guru

Who is responsible for this new approach? Well, that's a closely guarded secret. However, the Deputy Director of Operations for the Central Intelligence Agency (CIA) is David S. Cohen.

According to Center for a New American Security (CNAS), Mr. Cohen is a Treasury veteran and a sanctions guru. Many Americans praise his professionalism. Before the Treasury, he also practiced law in Washington, was a partner at WilmerHale, where he focused on civil and criminal litigation, the defense of regulatory investigations, and anti-money laundering and sanctions compliance advice.

The cement is still too wet to lift any fingerprints, so right now the U.S. sanctions against Russia look like a homemade Armageddon, not a professional defensive measure.

US Sanctions

The United States government released its list of sanctions against Russia:

     *Severing the connection to the U.S. financial system for Russia's largest financial institution, Sberbank, including 25 subsidiaries, by imposing correspondent and      payable-through account sanctions. Full blocking sanctions on Russia's second largest financial institution, VTB Bank (VTB), including 20 subsidiaries. This action will      freeze any of VTB's assets touching the U.S financial system and prohibit U.S. persons from dealing with them.

     *Full blocking sanctions on three other major Russian financial institutions: Bank Otkritie, Sovcombank OJSC, and Novikombank- and 34 subsidiaries. These sanctions      freeze any of these institutions' assets touching the U.S financial system and prohibit U.S. persons from dealing with them.

     *New debt and equity restrictions on thirteen of the most critical major Russian enterprises and entities. This includes restrictions on all transactions in, provision of      financing for, and other dealings in new debt of greater than 14 days maturity and new equity issued by thirteen Russian state-owned enterprises and entities.

     *Additional full blocking sanctions on Russian elites and their family members.

     *Costs on Belarus for supporting a further invasion of Ukraine by sanctioning 24 Belarusian individuals and entities.

     *Sweeping restrictions on Russia's military to strike a blow to Putin's military and strategic ambitions. This includes measures against military end users, including the      Russian Ministry of Defense.

     *Russia-wide restrictions to choke off Russia's import of technological goods critical to a diversified economy and Putin's ability to project power. This includes       Russia-wide denial of exports of sensitive technology, primarily targeting the Russian defense, aviation, and maritime sectors to cut off Russia's access to cutting-       edge technology.

     *Historical multilateral cooperation that serves as a force multiplier in restricting more than $50 billion in key inputs to Russia- impacting far more than that in Russia's      production.

Additional sanctions by U.S. partners and corporate America:

     *EU has banned the supply of Euros in Russia.

     *Apple, Google, Ford, and the others have halted products, sales, and services in Russia.

     *About 40 nations closed their airspace to Russian aircraft. Canada and Greenland closed their airspace the same day that the State Department called all the      Americans back from Russia using all available airlines. A Russian Aeroflot plane was turned away while in flight en route to New York. Many American citizens are      likely stranded in Russia.

Initial Impact of Sanctions

As a result of the U.S. severing connections with Sberbank, the European subsidiary of Russia's largest institution entered into bankruptcy, according to The Moscow Times. Under international banking laws the parent organization in Russia cannot support its subsidiary in Europe to solve the problem, which will have a knock-on effect to the budgets of EU countries, businesses, and ordinary people who do banking with Sberbank.

There are, of course, exceptions. Seven Russian banks were excluded from using the SWIFT system, but an exception was made so that they could, say, transfer energy payments from Germany and other European countries to Russia.

European aircraft leasing companies are facing a problem in how to recover from the potential loss of $5bn of assets, FT reports. The article added EU sanctions are meant to bring back 515 planes. But it's not clear how to make that happen, since the sky is closed, and how to sell those planes is a big question. In an interview for Bloomberg, IBA President Phil Seymour noted that there is "a real risk of default as soon as the coming week." He sees the main risk for AerCap Holdings NV with 152 flights across the Ukraine and Russia. Problems will follow for US companies. And Boeing said it would not provide technical support to Russian airline companies.

Russia Responds with Counter-Sanctions and Measures

As President Putin warned, "if you hurt Russia, then we will hurt you," so it came as no surprise that Russia responded with counter-sanctions and measures against the U.S.-led coalition.

     *Banned Russian residents from transferring hard currency abroad - only applies to new loans, not existing debt.

     *Temporarily bans foreigners from selling assets

     *Reciprocal flight bans to 36 nations. Wednesday, the US joined those countries.

Noteworthy, is the Russian airspace is a key part of a corridor for the lion's share of long-haul flights to Asia, including air cargo. American companies will stop flying through the Russian airspace on Friday. "US administration has been concerned about disruptions to a supply chain already frayed by the Covid-19 pandemic, according to people familiar with the discussions," WSJ reports.

Russia still cooperates in space with the US. However, last week President Biden did not exclude the possibility that the sanctions against Russia may "degrade" its space program. Russia warns that it may have a significant impact on the US.

"If you block cooperation with us, who will save the International Space Station (ISS) from an uncontrolled deorbit and fall into the United States or...Europe?" the head of Roscosmos Dmitry Rogozin said. "There is also the possibility of a 500-ton structure falling on India and China. Do you want to threaten them with such a prospect? The ISS does not fly over Russia; therefore, all the risks are yours. Are you ready for them?" (quoted by CNN). Furthermore, the Russian engine RD-180 powers the first stage of each Atlas 5 rocket. Recently UK Prime Minister Boris Johnson, regarding its space program said that "in the current circumstances, it's hard to see how even those can continue as normal."

Global Impacts

     *Within the last 24 hours Russia presented its initial phased-approach counter-sanctions 

     *Energy supplies - The EU gas terminals were 85 % empty last month (according to Gas Infrastructure Europe). The gas transportation system in Ukraine is also in      danger. 

     *The EU is heavily dependent on Russian oil. If the supply is stopped it will hit the EU economy. There is a spot market of course. But the oil prices are very high and      Russia is in constant competition with Saudi Arabia and the US as the largest supplier in the World. Note: The top producers will not be able to make up the difference      if Russia is out of the market.

     *Even before the invasion, according to CNN estimates, the basic inflation scenario in the US is going to hit the 10% threshold. 

     *Gasoline prices in the US are at record highs. The situation is going to further impact the gasoline market. 

Russian Foreign Minister Sergei Lavrov said on Wednesday that if a third World War were to take place, it would involve nuclear weapons and be destructive.

Clearly, Russia is feeling the pressure from the U.S. and its allies. The game is global thermal nuclear war. President Biden has to ask himself a question: "Shall we play the game?"

Katya Moore is Senior Fellow/Sovereign Wealth Management, Marketing Director at New York Center for Foreign Policy Affairs.

Her expertise includes global governance, economics, and foreign relations. She contributes as Senior Policy Fellow at New York Center For Foreign Policy Affairs, covering Eastern Europe and the countries of the Former Soviet Union. Her opinion on Energy was published by the Carnegie Center in Moscow.

Ms. Moore graduated from George Washington University, the School of Political Science, with a Master’s Degree in Strategic Public Relations. She also completed intensive business courses at Harvard’s Business School (CORe certificate) and Harvard’s Kennedy School credentials program for Public Leadership. Adding to that knowledge, Ms. Moore is an alumnus of RECS-2020 sponsored by the US Department of Energy and focuses on business sustainability practices.

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