Russian sanctions - 03/21/2014

Petrodollar Alert: Putin Prepares To Announce "Holy Grail" Gas Deal With China

Zero Hedge,

21 March, 2014

If it was the intent of the West to bring Russia and China together - one a natural resource (if "somewhat" corrupt) superpower and the other a fixed capital / labor output (if "somewhat" capital misallocating and credit bubbleicious) powerhouse - in the process marginalizing the dollar and encouraging Ruble and Renminbi bilateral trade, then things are surely "going according to plan."

For now there have been no major developments as a result of the shift in the geopolitical axis that has seen global US influence, away from the Group of 7 (most insolvent nations) of course, decline precipitously in the aftermath of the bungled Syrian intervention attempt and the bloodless Russian annexation of Crimea, but that will soon change. Because while the west is focused on day to day developments in Ukraine, and how to halt Russian expansion through appeasement (hardly a winning tactic as events in the 1930s demonstrated), Russia is once again thinking 3 steps ahead... and quite a few steps east.

While Europe is furiously scrambling to find alternative sources of energy should Gazprom pull the plug on natgas exports to Germany and Europe (the imminent surge in Ukraine gas prices by 40% is probably the best indication of what the outcome would be), Russia is preparing the announcement of the "Holy Grail" energy deal with none other than China, a move which would send geopolitical shockwaves around the world and bind the two nations in a commodity-backed axis. One which, as some especially on these pages, have suggested would lay the groundwork for a new joint, commodity-backed reserve currency that bypasses the dollar, something which Russia implied moments ago when its finance minister Siluanov said that Russia may refrain from foreign borrowing this year. Translated: bypass western purchases of Russian debt, funded by Chinese purchases of US Treasurys, and go straight to the source.

Here is what will likely happen next, as explained by Reuters:

Igor Sechin gathered media in Tokyo the next day to warn Western governments that more sanctions over Moscow's seizure of the Black Sea peninsula from Ukraine would be counter-productive.

The underlying message from the head of Russia's biggest oil company, Rosneft, was clear: If Europe and the United States isolate Russia, Moscow will look East for new business, energy deals, military contracts and political alliances. 

The Holy Grail for Moscow is a natural gas supply deal with China that is apparently now close after years of negotiations. If it can be signed when Putin visits China in May, he will be able to hold it up to show that global power has shifted eastwards and he does not need the West.

More details on the revelation of said "Holy Grail":

State-owned Russian gas firm Gazprom hopes to pump 38 billion cubic meters (bcm) of natural gas per year to China from 2018 via the first pipeline between the world's largest producer of conventional gas to the largest consumer.

"May is in our plans," a Gazprom spokesman said, when asked about the timing of an agreement. A company source said: "It would be logical to expect the deal during Putin's visit to China."

Summarizing what should be and is painfully obvious to all, but apparently to the White House, which keeps prodding at Russia, is the following:

"The worse Russia's relations are with the West, the closer Russia will want to be to China. If China supports you, no one can say you're isolated," said Vasily Kashin, a China expert at the Analysis of Strategies and Technologies (CAST) think thank.

Bingo. And now add bilateral trade denominated in either Rubles or Renminbi (or gold), add Iran, Iraq, India, and soon the Saudis (China's largest foreign source of crude, whose crown prince also happened to meet president Xi Jinping last week to expand trade further) and wave goodbye to the petrodollar.

As reported previoisly, China has already implicitly backed Putin without risking it relations with the West. "Last Saturday China abstained in a U.N. Security Council vote on a draft resolution declaring invalid the referendum in which Crimea went on to back union with Russia. Although China is nervous about referendums in restive regions of other countries which might serve as a precedent for Tibet and Taiwan, it has refused to criticize Moscow. The support of Beijing is vital for Putin. Not only is China a fellow permanent member of the U.N. Security Council with whom Russia thinks alike, it is also the world's second biggest economy and it opposes the spread of Western-style democracy."

This culminated yesterday, when as we reported last night, Putin thanked China for its "understanding over Ukraine." China hasn't exactly kept its feelings about closer relations with Russia under wraps either:

Chinese President Xi Jinping showed how much he values ties with Moscow, and Putin in particular, by making Russia his first foreign visit as China's leader last year and attending the opening of the Winter Olympics in Sochi last month.

Many Western leaders did not go to the Games after criticism of Russia's record on human rights. By contrast, when Putin and Xi discussed Ukraine by telephone on March 4, the Kremlin said their positions were "close".

The punchline: "A strong alliance would suit both countries as a counterbalance to the United States." An alliance that would merely be an extension of current trends in close bilateral relations, including not only infrastructure investment but also military supplies:

However, China overtook Germany as Russia's biggest buyer of crude oil this year thanks to Rosneft securing deals to boost eastward oil supplies via the East Siberia-Pacific Ocean pipeline and another crossing Kazakhstan.

If Russia is isolated by a new round of Western sanctions - those so far affect only a few officials' assets abroad and have not been aimed at companies - Russia and China could also step up cooperation in areas apart from energy. CAST's Kashin said the prospects of Russia delivering Sukhoi SU-35 fighter jets to China, which has been under discussion since 2010, would grow.

China is very interested in investing in infrastructure, energy and commodities in Russia, and a decline in business with the West could force Moscow to drop some of its reservations about Chinese investment in strategic industries. "With Western sanctions, the atmosphere could change quickly in favor of China," said Brian Zimbler Managing Partner of Morgan Lewis international law firm's Moscow office. 

Russia-China trade turnover grew by 8.2 percent in 2013 to $8.1 billion but Russia was still only China's seventh largest export partner in 2013, and was not in the top 10 countries for imported goods. The EU is Russia's biggest trade partner, accounting for almost half of all its trade turnover.

And as if pushing Russia into the warm embrace of the world's most populous nation was not enough, there is also the second most populated country in the world, India.

Putin did take time, however, to thank one other country apart from China for its understanding over Ukraine and Crimea - saying India had shown "restraint and objectivity".

He also called Indian Prime Minister Manmohan Singh to discuss the crisis on Tuesday, suggesting there is room for Russia's ties with traditionally non-aligned India to flourish.

Although India has become the largest export market for U.S. arms, Russia remains a key defense supplier and relations are friendly, even if lacking a strong business and trade dimension, due to a strategic partnership dating to the Soviet era.

Putin's moves to assert Russian control over Crimea were seen very favorably in the Indian establishment, N. Ram, publisher of The Hindu newspaper, told Reuters. "Russia has legitimate interests," he added.

To summarize: while the biggest geopolitical tectonic shift since the cold war accelerates with the inevitable firming of the "Asian axis", the west monetizes its debt, revels in the paper wealth created from an all time high manipulated stock market while at the same time trying to explain why 6.5% unemployment is really indicative of a weak economy, blames the weather for every disappointing economic data point, and every single person is transfixed with finding a missing airplane.

Gas Talks Between Ukraine And Gazprom Cancelled, Naftogaz Chairman Detained On Corruption Probe

Zero Hedge,

21 March, 2014

Yesterday we warned that the honeymoon is over as Ukraine expects gas prices to rise 40% as Russian discounts fade. Today it appears the situation is even worse:

• *NAFTOGAZ, GAZPROM TALKS FOR MARCH 20-21 CANCELLED: INTERFAX
• *UKRAINE POLICE DETAINS NAFTOGAZ CHAIRMAN BAKULIN: AVAKOV
• *UKRAINE NAFTOGAZ RAID PART OF CORRUPTION PROBE, AVAKOV SAYS

The issues up for debate, of course, are supply and pricing of gas from Russia and the payment for over $2bn of existing debt owed. While Interfax reports that this was because the Ukraine gas company executive was unable to leave the country, which now appears due to corruption allegations ("there's corruption going on here?") but merely exacerbates any Russian gas retaliation concerns.

Via Interfax,

Talks originally planned to take place on March 20 and March 21 between Ukraine's national oil and gas company Naftogaz Ukrainy and Russian gas giant OJSC Gazprom (MOEX: GAZP) have fallen through at the last minute, a source from the Ukrainian government told Interfax.

"The Naftogaz Ukrainy delegation was prepared to fly out [for the meeting], but the head of the company [Naftogaz Ukrainy] was not allowed to leave the country at the last minute," the source said.

The main issues to be discussed were supposed to be the purchase and transit of natural gas, as well as the payment schedule for existing debt.

The source said this concerned a personal ban on leaving the country for Naftogaz's CEO Yevgeny Bakulin.

As we noted yesterday,

What is certain, is that the struggling population, most of whom never wanted the recent political overhaul and were quite happy with life as it was, will suddenly demand a return to the living standards under the old, if "horrible" regime, and demand an even quicker overhaul of the current administration.

Something Putin knows all too well.

Why does he know it? Because current events are a carbon copy of what happened in 2007 that led to the infamous 2008 Ukrainian political crisis.

European Union prepares for trade war with Russia over Crimea

Brussels drafts tougher sanctions for new battle plan against Moscow should Putin expand territorial claims in Ukraine

the Guardian,

21 March, 2014

Europe began to prepare for a possible trade war with Russia over Ukraine on Friday, with the EU executive in Brussels ordered to draft plans for much more substantive sanctions against Moscow if Vladimir Putin presses ahead with Russian territorial expansion.

But the bigger EU countries – Germany, France and Britain, all with major but very different interests at stake in Russia – split over the tactics of a new campaign with fears that a trade war would be highly risky and potentially ruinous.

A two-day summit of EU leaders dominated by the Crimea crisis ended with 12 Russian politicians and military figures being added to a list of 21 so far subjected to travel bans and asset freezes.

Unlike Washington, which on Thursday blacklisted senior Kremlin figures and oligarchs, the EU list avoided Putin's immediate entourage, instead targeting figures such as Sergei Glazyev, an economic adviser to Putin, Dmitry Rogozin, a deputy prime minister, and the heads of both houses of parliament. "The persons are not so important," said a senior EU official. "It's the climate we're creating." He denied any differences with the Americans. "It's not a beauty contest."

The summit debate, participants and witnesses said, focused on what is known as "stage 3" of a sanctions regime, meaning broader trade and economic sanctions against Russia if the Kremlin escalates operations to seize more territory in Ukraine beyond the Black Sea peninsula of Crimea, whose annexation was formally concluded on Friday in Moscow.

David Cameron reserved strong language for the Kremlin move. "A sham and illegal referendum has taken place at the barrel of a Kalashnikov," he said. "Russia has sought to annex Crimea, a flagrant breach of international law and something we will never recognise."

Moscow criticised the Foreign Office for its choice of rhetoric on the Ukraine crisis. "We are being reassured that the British government wants to maintain normal diplomatic relations with the Russian Federation. If that is the wish of our British partners, then this relationship has got to be normal and diplomatic including at the level of rhetoric. Good relations ought to be valued. The British side should mind its language. Unfortunately, that's not the case with the British Embassy in Moscow," said the Russian foreign ministry. "It seems that the harsh rhetoric, quite beyond the pale, is meant to cover up the gross inaptitude of the Brussels bureaucracy and its zero-sum motive to engineer a cold war-type geopolitical grab on Russia's borders."

Cameron pointed out that while the EU depended on Russia for a quarter of its gas supplies, the Russian gas monopoly Gazprom relied on Europe for half of its exports. "Russia needs Europe more than Europe needs Russia," he said.

The European commission in Brussels was told to draw up plans for sanctions "in a broad range of economic areas".

Such language masked differences between Britain and France on the one hand and Germany on the other. Following the summit, Germany's chancellor, Angela Merkel, failed to mention the next phase of much more serious penalties, while Cameron emphasised them.

On Thursday, the White House named metallurgy, energy, trade and other areas as possible targets for action. London and Paris wanted to echo this. "The Russians have to see where they will hurt," said one diplomat. Germany, by far Russia's biggest trade partner in the EU and the biggest buyer of Russian gas, has resisted attempts to specify what the sanctions targets might be.

Apart from its energy dependency, the Germans say they have more than 6,000 firms operating in Russia and that 300,000 jobs in Germany depend on trade with Russia.

Cameron was much more explicit on the issue and British officials admitted there were divisions. He mentioned "finance, military, energy" as areas being considered. "There's nothing left out."

That suggested equal pain for the three big countries since Britain has most to lose from financial sanctions, France has billion of euros at stake in defence contracts with Russia, while Germany suffers most from sanctions in the energy sector.

It is not clear when the European commission will deliver its battle plan for expanded sanctions but there is an acute feeling among commission officials that Brussels has been handed a poison chalice. They said as soon as the plans are published or leaked, the Russians will know what to expect or fear and will get their retaliation in pre-emptively, triggering a much bigger crisis between Europe and Russia.

The senior EU official, though, said it would be "really stupid" for the EU to reveal its hand. "The commission is keeping its cards close to its chest. We will not do this in full transparency. It will not be transparent at all."

While the Americans have been much more open in spelling out their plans, the Europeans complain that it is easier for Washington because it has much less to lose, with US-Russian trade volumes barely one-twelfth of that between the EU and Russia.

The senior official said the blacklist was not coordinated with Washington. "We are following our own course. The US is far away."

The EU and the interim Ukrainian government have now signed part of a political and trade pact, the issue that led to the crisis last November that ultimately triggered a revolution in Kiev and Russian intervention in Crimea.

The EU summit agreed to race ahead with similar pacts with Moldova and Georgia, concluding them by June.

Putin mocks US sanctions, vows not to strike back

Vladimir Putin has mocked US sanctions imposed on Russia, saying he will open an account at US-sanctioned Rossiya Bank. During a meeting with the country's senior security officials he added that he won't introduce a visa regime with Ukraine -

READ MORE http://on.rt.com/x16ya5

Leaning East: Russia moves towards China as West pushes sanctions

Amid the possibility of further sanctions from Brussels and Washington over Crimea - Vladimir Putin is set to address the annual session of Russia's Union of Industrials and Entrepreneurs. Live now to RT's Katie Pilbeam. Well the West may be threatening sanctions - but Russia's eastern relations are unaffected. Moscow's trade with China is on the rise - the turnover reaching 89 billion dollars last year. Most of that is made up of oil supplies being sent to Beijing, which is the world's fastest growing energy market. Let's get some analysis from Thorsten Pattberg, a writer and author of the book "The East-West Dichotomy".

American corporate media version

Russian Stocks Hit As Sanctions Affect Banks

US to hold major war games in Poland – ambassador

The US military are planning large scale war games in Poland, which would involve troops from several eastern European states, the American ambassador to the country, Stephen Mull, said.

RT,

21 Marach, 2014

Poland, the Czech Republic, Hungary, Slovakia, Bulgaria, Romania and the Baltic states (Lithuania, Latvia and Estonia) will be participating in drills, together with the Americans, Mull told Radio ZET.

Lask airbase in central Poland has been selected as the venue for the military exercise, the ambassador said, refraining from saying when it was scheduled for.

Mull’s announcement comes just three days after US Vice President Joe Biden’s visit to the Polish capital of Warsaw.

Biden’s trip was aimed at reassuring that America remains a “steadfast ally” to Poland and the Baltic States after they expressed anxiety over the events in the Crimea, which signed a treaty of accession to the Russian Federation on Tuesday.

The vice president promised an additional 12 F-16 fighter jets for Poland and 10 more US F-15’s, instead of a planned four, to be assigned to NATO operations in the skies over the Baltics.

He also spoke of rotating more American ground and naval forces through the Baltic States for training exercises.

Biden once again stressed that there’ll be no changes to the US missile defense plans in Poland and Romania, with the controversial system to be operational by 2018.

Meanwhile, an unnamed US military official told Reuters that Polish radio has misrepresented the ambassador’s remarks in their report.

Mull was only talking about the discussion between Warsaw and Washington of the “possibility of expanding aviation activities at Lask to potentially include other NATO partners, and then he mentioned those nations.”

A detachment of 10 US airmen opens America's first permanent military mission in Poland at the air base in Lask, central Poland, on November 9, 2012.(AFP Photo / Janek Skarzynski)

Stephen Mull.(Reuters / Kacper Pempel)

Poland’s geographical position has made it a strategically important NATO member as the country borders the crisis-torn Ukraine as well as Russia’s western enclave in the Kaliningrad region.

On Friday, the Ukrainian military joined two weeks of multinational military exercises that involve troops from 12 NATO members and partner nations, Reuters reports.

The Saber Guardian war games will be staged at the Novo Selo training facility in eastern Bulgaria and will include some 700 troops from Armenia, Azerbaijan, Belgium, Bulgaria, Georgia, Moldova, Poland, Romania, Serbia, Turkey, Ukraine and the US, as well as NATO representatives.

On Thursday, the US and NATO also announced that the annual Rapid Trident war games won’t be rescheduled and will take place in Ukraine this summer.

In addition to US and British soldiers, they’ll include units from Armenia, Azerbaijan, Bulgaria, Canada, Georgia, Germany, Moldova, Poland, Romania and Ukraine.

Rapid Trident 2014 is designed to promote regional stability and improve interoperability between NATO and Ukraine, which isn’t a member of the North Atlantic Alliance. 

On Friday, the Crimea and Sevastopol, which used to be part of Ukraine, officially joined Russia, with President Putin signing the finalizing decree.

Previously, Russian lawmakers ratified both the amendment and an international treaty with the Crimea and the city of Sevastopol, which the sides signed in the Kremlin on March 18.