Issue 10

THE BRETON/GEROL NEWSLETTER

CHANGING TRADE WINDS

Trade statistics made available by the Eurasian Economic Union (EAEU: Armenia, Belarus, Kazakhstan,Kyrgyzstan, Russia) would tend to suggest that, for the first six months of 2017, Canada’s overall trade with the EAEU has increased by 59.2%. in comparison for the same period in 2016. Within that 2017 to 2016 comparison, Canada-Russia overall trade has started growing again with an overall increase of 52.4%, but Canada-Kazakhstan trade has more than doubled.

A few cautionary notes apply. Six months is a short period. Statistics can be affected by the fluctuation in the price of certain commodities. Statistics coming for some of our trade partners do not always reflect exactly our own statistics.

This being said, these most recent numbers begin to vindicate the idea of pursuing a diversification of Canada’s trade with EAEU countries. They also confirm the relative vitality of Canada-Russia trade in a context where there is neither active trade promotion on the part of the Canadian government nor Export Development Canada assistance for Canadian exporters on the Russian market.

It is possible to establish very clearly the impact of certain measures on bilateral trade, for instance the Russian embargo on meat imports from Canada. For other measures, the impact can be far more difficult to evaluate depending on the extent to which the sanctions influence the behaviour of actual and potential exporters in any given country. The best example would be Russian trade with France and Germany, two EU countries subject to the same set of sanctions and counter-sanctions. Using the EAEU statistics one can see that France’s overall trade with Russia increased by 14% in 2016 over 2015. During the same period, Germany's trade with Russia decreased by 11%. In the years following the imposition of sanctions by the EU on Russia, observers had generally noted how enthusiastic French business people were about doing business with Russia and how more guarded their German counterparts were. For 2017 so far both countries are increasing their trade with Russia by over 20%, as is the EU, a possible reflection of the changing mood in Europe. The letter of the sanctions is important. The spirit in which the sanctions are implemented is equally relevant.

In the context of sanctions, the diversification of trade also can lead to the use of third countries as intermediaries, not to bypass the sanctions, but, for instance, to mitigate their negative impact on certification processes. A company may, for instance use its existing business in a country close to Russia to move its products into Russia rather than going through the lengthy process of establishing  its own presence in Russia.

The embargo on certain goods can also lead to diversification within a particular sector. Russia no longer importing meat from certain countries, Russian meat producers may be very keen to purchase the technology and genetic material that can allow them to increase their production. As a result, there can be significant increase in the export of such items.

With time, one can see that these “adjustments” can dilute the overall impact of sanctions.

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COLD WAR II

It is time to cast away today’s typical statements from numerous media outlets that we are nearing a new Cold War, that Cold War is imminent and so on. The reality of the situation is such that the new Cold War, which is in many ways much more dangerous and unpredictable than the previous one, is already here and with every news cycle becoming more intense.  

During Cold War-I the world was split into roughly two superpower blocks which were if not equal in economic sense (the West held substantial edge in wealth), but surely in a military sense there was parity. The game played between the two superpowers was conducted along the more or less predictable lines of geopolitical rules with respect to each other’s zones of influence and constant diplomatic communications. It is also worth noting that both sides employed highly educated, capable and experienced diplomats and were governed by careful and insightful leaders.

 In the 25 years since the Soviet bloc has collapsed the West gained the upper hand in every aspect (militarily, geographically and politically). The West acted as a winner. However, as history teaches us through many examples going as far as Roman military campaigns, the most dangerous conflicts are between strong, but unequal sides and that is where we are right now. This Cold War puts a lesser emphasis on the arms race as such, but may easily last as long as the last one and would have enough triggers to turn into a real and devastating war. What makes the current situation very precarious is that the West is no longer a united front and that its most powerful entity is led by an uneducated, inexperienced, unpredictable and consequently dangerous president. What complicates the situation is that Russia’s apparent political stability will sooner or later have to go through the challenge of a democratic transition that will respond to the aspirations of the younger generations. A slow-growing economy could well compound that challenge.

In conclusion; it is time to drop all pretense: we are living the reality of Cold War and if we are to survive it we will need to see the emergence of new, sophisticated, strong-willed leaders and diplomats. 

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RUSSIA'S CHOICE: TO OVERHAUL THE ECONOMY OR TO CHANGE THE LEADERSHIP

Everyone in Russia, including Putin himself, realizes that the country is in dire need of radical economic and political reforms. As Alexey Kudrin, former finance minister and now head of a strategic research center remarked recently: "We should finally set our priorities straight; what is more important for the development of our country-military expenditures or economic growth-we can't have both." Kudrin has advocated the same position for a long time.  Only now does he find supporters in the upper echelons of power including in the government and the presidential administration.

Agreeing with Kudrin's position is relatively easy. The hard part will be changing government policies in such places as Syria, Ukraine and other localities which form a cornerstone of Russia's costly military investments. For that reason the changes have to come at the very top of the Russian political pyramid.

President Putin attending the July 30th naval parade, St. Petersburg
Ⓒ President of Russia website

From the point of view of Russian political observers the only way for Vladimir Putin to remain in power is to gradually replace his inner circle with a new generation of managers and politicians: less ideological and nationalistic and therefore more rational and more economically minded.

To some modest extent, these changes are already there. New ministers of energy, communications and economic development are people in their late 30's, early 40's with some years of Western education. Many observers even believe that Kudrin could replace Dmitry Medvedev as prime minister after Putin's re-election.

In some way the pressure of Western sanctions that has become a permanent feature helped Russian economy to rely less on oil and gas and diversify their industrial and agricultural production.

Certain aspects of sanctions (such as lack of serious credits and steady supply of Western exclusive technologies) have grave consequences for a more rapid growth of the Russian economy. In the final analysis Russia urgently needs to find a compromise with the West on Ukraine, the thorniest and most significant dispute in their relationship.

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WHOSE MISSILE?

On August 14th, the New York Times published a story about the possible transfer of Ukrainian missile engines to North Korea. This, the story alleges, is the reason behind the recent successes of North Korean missile launches. The story is based on a report by Michael Elleman, a missile defense expert with the reputable International Institute for Strategic Studies (IISS) in London.

At the outset, Ukrainian rebuttal of the alleged link between the Ukrainian missile plant (Yuzhmash in the city of Dnipro) and North Korea was conducted in the social media under the form of personal attacks against the author of the report. Elleman’s critics put him down an agent of Moscow, not even bothering to note that he does not exclude the possibility of the engines having gone from Russia to North Korea.

Two days after the publication of the report, President Poroshenko rejected the allegation as “absurd”, but nevertheless ordered an official investigation. The result of the investigation was conveyed to Poroshenko on August 22nd. Unsurprisingly, it allowed Poroshenko to confirm “the impossibility of the missiles in question being transferred from Ukraine to North Korea” as well as to emphasize Ukraine’s fulfillment of its international obligations and to hint at a Russian provocation. Poroshenko is now asking for the matter to be reviewed by the UN Security Council.

In all good conscience the Ukrainian authorities can continue to deny the transfer of Ukrainian hardware from Ukraine to North Korea. (They can even plausibly continue to try to deflect some of the allegations toward Russia.) Yuzhmash and its affiliated design bureau are Ukrainian state entities that would never enter into any such arrangement with North Korea. The release of video material relating the arrest of two North Korean spies in 2011 is meant to show how Ukraine security services, even during the Yanukovich era, seriously defended Ukrainian missile technology. Paradoxically, it serves to confirm the fact that the North Koreans knew where the technology was and that they knew as well they that they would have to revert to clandestine means to acquire it.

In the chaotic period that followed the collapse of the Soviet Union, one of the major concerns griping the Western security establishment was that some elements of the military arsenal and capacity of the Soviet Union would get into the wrong hands. Michael Elleman himself was involved in the Cooperative Threat Reduction programme. The deteriorating economic situation and rampant corruption across the former Soviet space compounded the challenge facing such programs. In that context, the idea that some Soviet-era technology, fortuitously based in Ukraine, would make it one day to North Korea is not that far-fetched. Despite all the critical comments directed at it, the Elleman paper remains valid and has moved to a prominent position on the home page of the IISS website.

The current Ukrainian authorities cannot be blamed for what is now happening in North Korea. For one thing, the North Korean program began to show positive results in July 2016. Whatever process brought the relevant missile technology to North Korea would well predate current management. The problem is reputational damage. The story has raised some doubts that will not easily go away. This will comfort those who remain reluctant to provide the advanced defensive weapons that Kyiv would want and that the US is still talking about offering.

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NUCLEAR ARMAGEDDON PUT ON HOLD-FOR NOW

Kim Jong un, the enfant terrible of the nuclear family has graciously decided not to lob his freshly developed missiles at the US military outpost at island of Guam for several reasons. First and foremost the US threat of trade war against China has been seriously taken by the leadership in Beijing-particularly now when top executives of the Communist party gathered in Beijing suburb for a strategic meeting aimed at defining the main direction for the next 10 years and prepare for the planned change of leadership. Trade war with the US is not among those priorities.

That is why China pressed North Korea to take a step back and scale down its warmongering rhetoric. The economic situation in DPRK is beyond salvation. The sanctions have deprived the North of hard currency from exports and the only hope can come from assistance of South Korea and China. Moon Jae-in, South Korean president has immediately offered economic cooperation and peace negotiations.

For a while, things looked better, but by just sending a missile over Japan the restless Kim Jung un has revived tensions. Bringing Japan to play an altogether more active role may, in the end, help solving the crisis.

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PERSON OF THE MONTH: MIKHEIL SAAKASHVILI

As a young populist politician Saakashvili came to power in January 2004 on the wave of the so-called "Rose Revolution" which began in 2003. He deposed President Eduard Shevardnadze, "the lion of perestroika" who was closest associate of Gorbachev at the time of the Soviet empire's collapse. As Georgian president Saakashvili managed to carry out the most radical set of anti-corruption reforms in the history of this ancient country. He re-oriented Georgian economy and social structures along Western lines and started to move Georgia closer to EU and NATO. In 2008, in the hope that the West would support him, he decided to carry out a military attack against the South Ossetia separatist enclave where Russian troops were stationed. That Saakashvili made the ill-fated decision was just now re-confirmed by one of his close associates at the time, then Speaker of Parliament Nino Burjanadze. The attack provoked a powerful Russian response ordered by the then president Dmitry Medvedev. As a result, Georgia lost 20% of its territory and ruined the relations with its mighty Northern neighbor for the foreseeable future.

In 2012 Saakashvili lost parliamentary elections and was barred by the constitution to run for a third term in 2013. After being accused of political adventurism, attempted political assassination and mistreatment of his political opponents Saakashvili left Georgia for Ukraine.

President Poroshenko issued him a Ukrainian passport and appointed him Governor of Odessa in 2015. However in late 2016 Saakashvili was forced to resign as he accused president Poroshenko (as a side note; they attended the same University back in their youth and were friends) of enabling corruption not only in Odessa but in the rest of Ukraine. Saakashvili organized a political party with the idea of becoming Prime Minister of Ukraine. His ambitions were cut short when during his US visit on July 26^th, Poroshenko stripped him of Ukrainian citizenship and threatened to deport him to Georgia. 

Saakashvili announced that he was ready to face his destiny and will return to Kiev on September 13.

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BRIEFLY NOTED

US VISAS FOR RUSSIANS

In response to the Obama administration’s December 2016 expulsion of 35 Russian officials, and in the light of Congress passing new Russia Sanctions legislation in late July, Russia announced its decision to have the exact same number of employees working at US diplomatic and consular establishments in Russia as there are at similar Russian establishments in the US. In response the Trump administration, basing itself on personnel shortages, decided to reduce visa services for Russian residents. There had to be some sort of response, but the US did not really have a lot of options. The visa service reduction measure does not serve any US interest and targets Russian citizens rather than the Russian government. Russia had vowed not to leave the latest US action unanswered, but not to retaliate on visa matters as such.

BELARUS

The diplomatic showdown between Washington and Moscow that came down to American decision to severely limit US visas for Russian citizens seriously affected Belarus. From now on a Belarus resident has to travel either to Kiev, Vilnius or Warsaw to obtain a US visa. The changes are not only geographical. The situation brings Belarus closer to the West and consequently further from Russia. President Lukashenko is becoming slightly more open to the West, and a touch more weary of Putin and therefore is not regretting the changes.

LITHUANIA

This former republic of the Soviet Union obtained its capital Vilnius only in 1939 as the result of the German/Soviet division of Poland. The current Polish Government has come out with a list of national symbols that includes several former Polish cities such as currently Lithuanian Vilnius and Ukrainian Lviv. This expression of wounded Polish national pride has made its neighbors somewhat uneasy.

RUSSIA (TATARSTAN)

Moscow refused to extend the agreement between Russia and Tatarstan within the framework of relations between the federal center and that important Muslim- dominated republic in central Russia. This area is one of the most industrialized regions of Russia and though the problem so far seems mainly economic and fiscal it can have political implications due to its Islamic component.

In search of compromise Tatarstan offered Moscow to conduct additional talks in in September 2017.

TAJIKISTAN

President Rahmon decided to return to the negotiating table with the US on bringing back American military base to his country. Tajikistan again will become a host to both Russian and American military presence. While Rahmon justifies his decision by citing the growing threat of Taliban in neighboring Afghanistan, the US on the other hand may need the base for its never-ending action in Afghanistan.

ARMENIA

Armenian Prime Minister Karen Karapetyan has said that his government is very determined to sign an agreement with EU and to deepen country's ties with the Union. Armenia will be the only country which being member of Eurasian Economic Union could have strong association with the EU.

POLAND

Polish right-of center government has simultaneously strained its relations with two leading EU members; France and Germany. The unusual terse statement by its Foreign Ministry accused French president Macron of statements it described as "arrogant and misplaced". Macron's criticism centered on Poland's discriminatory practices towards migrants which, as he stated, had moral and economic consequences unacceptable for a European state and member of the EU.

Meanwhile Polish Prime Minister Beata Szydło, suddenly came up with claims of reparations (to the tune of 45 billion dollars) from Germany for the occupation and destruction of Poland during WW II. Germany flatly refused to even discuss the claims for two reasons: Poland received large chunks of German territory after the war and, in 1953, Warsaw turned down reparations from East Germany on its own accord.

 It looks like Poland wants upgrade its role within EU after Great Britain's exit.

CANADA

Ministers of Fisheries representing 7 Atlantic countries and entities (Canada, Russia, Norway, Denmark, Faroe Islands, Greenland and Iceland) met in New Brunswick in late August to discuss economic cooperation in light of the impact of ecological and climatic changes on the planet's oceans.

It has to be noted that the most difficult relations with any G7 country Russia has with Canada. This forum is one of the very few remaining bridges of cooperation where some form of thaw between the two countries could begin.

THE AUTHORS

Ilya Gerol, former foreign editor of the Citizen in Ottawa, syndicated columnist in Canadian, US and European media specializing in international affairs. His particular area of expertise includes Russia, Eurasian Economic Union, Eastern and Central Europe.  Ilya Gerol has written several books, one of them, The Manipulators, had become a textbook on relations of media and society.

During his career in the Canadian Foreign Service, Gilles Breton had three assignments at the Canadian Embassy  in Moscow. His first posting there began during the Soviet period, in 1983. His last was from 2008 to 2012 as Minister-Counsellor and Deputy Head of Mission. He also served as Deputy Director responsible for Canada’s relations with Russia from 2000 to 2008. As an international civil servant, he was Deputy Director of the OSCE Office for Democratic Institutions and Human Rights in Warsaw from 1994 to 1997.