A trial instead of a date. The referees will not let them down. The minister is not sure. A rate hike may not help
February 15, 2022
A trial instead of a date
German Chancellor Olaf Scholz is flying to Moscow on Tuesday for talks with Vladimir Putin, with an agenda that includes Ukraine, sanctions, and Nord Stream. As the cherry on the cake, the Kremlin has prepared for the German chancellor a new trial for Alexei Navalny to begin on the same day. But unfortunately, the prison colony where Alexei is being held and where the trial will take place is 105 kilometers from the Kremlin, and the German Chancellor will not have enough time to get there.
Anyway, I am not sure that, when scheduling the date of the court session, Kremlin officials considered the visit of Chancellor Scholz. But, undoubtedly, they did know that the next day, Wednesday, February 16, Alexei was scheduled to have an extended stay with his wife, which he is allowed to have four times a year. The date of this meeting was fixed by the colony’s administration two months ago, but now the conjugal visit will be canceled.
The referees will not let them down
Very often, Vladimir Putin’s tactical victories lead to his strategic defeats. A similar situation is unfolding before our eyes: Six months ago, Ukraine completely fell below the radar as President Volodymyr Zelensky demonstrated that staying in power was far more important to him than reforming the country; the topic of Ukraine’s accession to NATO was not discussed by anyone in Kyiv, Washington, or Brussels; the U.S., after its withdrawal from Afghanistan, did not consider Europe a place to apply its military and diplomatic efforts; the conflict between Germany and the U.S. over Nord Stream 2 did not allow Western countries to restore unity toward Russia.
All that changed in mid-November, when the Russian President ordered Russian diplomats to “keep the West in suspense” and agreed to use armed forces to exert diplomatic pressure. Moscow issued an ultimatum to recognize the existence of a military threat to Russia from the West and to abandon the basic principles of NATO’s presence. To make this ultimatum louder, the Kremlin placed tens of thousands of soldiers with the most advanced weaponry along the border with Ukraine, creating the illusion of an imminent attack on the neighboring country. Putin achieved his goal: He is the center of world politics. Every day, the Western media discuss new satellite images showing the deployment of Russian troops and informational reports from the Russian military about the start of new exercises. Meanwhile, the side effects caused by the Russian diplomatic offense exceeded the expectations of the Kremlin: The U.S. moved new troops to Europe, NATO countries began massive supplies of defensive weapons to Ukraine, Western countries analyzed all kinds of sanctions against Russia and refined their wording in case they should be introduced tomorrow.
As a result, the problem of Russia’s security, which in my opinion is Putin’s manic phobia, has not weakened but, on the contrary, has only intensified. Any blackmail can work if the blackmailer is ready to implement his promises. However, in this case, Putin has practically no moves to strengthen his position: He used all his resources for the first wave of diplomatic offense; he could increase pressure only by actually starting military action against Ukraine, but the Russian President is not ready to take this step.
The quite-expected unhurried reaction of the West, which sees relations with Russia as a long chess game, deprived Putin of the chance for a blitzkrieg and forced him to switch to a positional struggle. Lack of reserves for a protracted fight left the Russian President with no option but to accept proposals from Washington and Brussels to begin diplomatic talks on some of the issues Russia has identified.
Hints that the Kremlin has chosen this path now are being heard quite frequently. On Sunday, during a phone conversation with President Biden, Vladimir Putin, reiterating his grievances against the West and Ukraine, agreed to rethink the U.S. President’s arguments, and decided “to continue contacts [between Russia and the United States] at various levels on all the issues raised in the phone conversation today.” On Monday, in an open part of the meeting with Putin, Secretary Sergei Lavrov said that while he was not satisfied with the responses he had received to Moscow’s proposals,
“The second part [of the U.S. response] is constructive to a certain extent. There are also concrete measures dealing with intermediate-range and shorter-range ground-based missiles after the Americans destroyed the treaty in question. It also contains specific proposals on a range of measures to reduce military risks, confidence-building measures, and military transparency. Interestingly, in their response, almost all these Americans’ components reflect initiatives that the Russian Federation has promoted over the last few years. There is already a reasonably concrete response to all of our initiatives: A willingness to enter into serious negotiations.
“It is clear that our initiative on European security, on security guarantees, which we have put forward and very clearly promote and have clearly outlined our fundamental interests in it, has shaken up our Western colleagues and served as the very reason why they were no longer able to ignore many of our previous appeals.”
After listening to the Minister’s position, the Russian President asked him directly:
“...how do you think there is still a chance to agree with our partners on the key issues of our concern, or is this just an attempt to drag us into an endless negotiation process that has no logical conclusion?”
We should remember that this was an open part of the meeting, so the question and the answer were aimed at a broad audience, and the Minister gave the answer Vladimir Putin expected:
“As foreign minister, I have to say that there is always a chance... Still, with our consistent explanatory work and commitment to explaining what we’re right about and our readiness to listen to some serious counterarguments, I think our opportunities are far from exhausted. They certainly should not continue indefinitely, but at this stage, I would suggest that they should continue and increase.”
On the same day, Defense Minister Sergei Shoigu reported to the Russian President on the progress of the exercises, saying that “Some of these exercises are coming to their conclusion, some will be completed shortly.” An obvious hint that military tensions on the border with Ukraine could ease in the coming days.
In the events unfolding before our eyes, Putin’s judo character, of which I have spoken several times, has fully manifested itself: The strategy is based on achieving victory through short, abrupt actions when the opponent is thrown off balance. If that fails, the bout switches to a phase of mutual restraint, hoping that the referees will give the victory to the fighter whose actions they recognize as more active. Because for Putin, the judges—in this case—are the Russian voters, he does not doubt their verdict: The victory will be his.
However, Western politicians should not get upset because their referees will undoubtedly give the victory to those who prevented military operations in Europe.
The minister is not sure
On Sunday, February 12, the Russian Defense Ministry stated:
“... a Virginia-type U.S. Navy submarine was detected in the area of a planned exercise of Pacific Fleet forces in Russian territorial waters near the island of Urup in the Kuril Ridge.
“A message in Russian and English was transmitted to the crew of the foreign submarine in audio-submarine communication mode: ‘You are in Russian territorial waters. Surface immediately!’
“The crew of the American submarine ignored the Russian request.
“By the guiding documents on protection of the state border of the Russian Federation in an underwater environment, the crew of the frigate Marshal Shaposhnikov of the Pacific Fleet used appropriate means.
“The American submarine used a self-propelled simulator to bifurcate the target on radar and acoustic control facilities and left Russian territorial waters with maximum speed.”
Sometime later, the U.S. military issued a rebuttal. “Russia’s claims that we are conducting operations in its territorial waters are not true,” said Kyle Raines, a spokesman for the U.S. Indo-Pacific Command.
In a meeting with President Putin on Monday, Defense Minister Sergei Shoigu did not insist on the Russian version of what happened, saying that a “submarine was detected, most likely of the United States.”
Suppose such a statement by the Russian Minister had come before the telephone conversation between the two presidents. In that case, it could have been taken as a reluctance to escalate the situation before the talk. The Minister changed his agency’s position a day and a half after the dialogue between the two presidents—I see this as another signal that Vladimir Putin has no desire to escalate the diplomatic confrontation.
Ukraine and Belarus don’t go to a war
On Monday, “to restore the atmosphere of dialogue, reduce the degree of public displays and ensure security in the region,” the defense ministers of Belarus and Ukraine held a telephone conversation, during which they “discussed the implementation of confidence-building and transparency measures during military exercises near the state border. As well as the exclusion of possible incidents and mutual reporting on the occurrence of extraordinary situations.”
After Russia and Belarus announced that they would hold a joint exercise, Union Resolve 2022, near the Ukrainian-Belarusian border, Ukraine proclaimed the start of its Blizzard 2022 command-staff exercise in adjacent areas. In a telephone conversation, the ministers briefed each other on the training, “emphasizing its defensive nature,” and agreed on mutual visits of military attachés to the exercise areas.
A rate hike may not help
Consumer inflation in Russia continues its upward trend: In January, it stood at 8.7%, the highest level since the fall of 2015, when the inflationary wave caused by the ruble devaluation following the imposition of Western sanctions ended. The Bank of Russia’s rate hike last week to 9.5% (by 100 bps) should come as no surprise in this regard: The monetary authorities are doing everything they can to carry out President Putin’s orders.
I do not doubt that the rate of price growth in Russia will start to decline as soon as possible, but it will not be the result of the actions of the Bank of Russia. The classical theory assumes that an increase in the interest rate should lead to a reduction in demand in the economy: On the one hand, the propensity of the population to save and the volume of deposits grows; on the other hand, the inclination of households to obtain credit decreases. But in the Russian economy, the effect of these mechanisms is not yet evident.
During the acute phase of the crisis caused by the pandemic in Russia, the government supported the economy not on the demand side but on the supply side: Payments to the population were significantly less than the financial assistance to enterprises. As a result, unlike in developed countries, the real income of the Russian population declined, and the growth of savings in real terms was extremely insignificant (less than 1% in 2020 against 6.7% in 2019). Although the acceleration of inflation in 2021 was accompanied by an increase in the key rate of the Bank of Russia, it did not lead to an increase in savings of the population—they grew by only 6.8% in nominal terms, while inflation rose by 8.4%.
The households’ demand for credit also changed, not corresponding to the theory. Except for a short pause in May-June 2020, it grew relatively evenly in nominal and real terms. The slowdown in credit growth at the end of 2021 does not look sustainable and may be associated with the end of the calendar year, rather than the impact of the interest rate policy of the Bank of Russia.