First, news that 18 Russian diplomats are being expelled from the Czech Republic amid reports that two GRU agents were behind the 2014 explosions at a Czech armaments dump which saw 50 tonnes of munitions blow up and saw the death of two Czechs.
The link to Salisbury and Skrypal here is that the two agents seemingly behind the attack were the same two behind the Novichok poisoning In Salisbury.
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 FT with comments by US officials I think trying to clarify thinking in the WH around sanctions post last week’s sanction on primary Rouble issuance. This came after some criticism that last week’s actions were too soft. The messaging from the WH is that economic sanctions are the primary sanctions tool and that Joe 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 thru the gears – next stop will be sanctioning secondary trading in new issues, rouble and/or dollar, then eventually secondary on prior issuance. Perhaps this could come as early as the June CBW decision point – 90 days after the original certification that Moscow used biological weapons in the Skyrpal and 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 govt 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 above sanctions were rolled out, Russia responded by cutting off shipping thru the Kerch straits until October. The objective is clear – to tighten the economic noise 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 QE providing air cover (US planes) from the Med.
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 Alex 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 Moscow pushback/retaliation against the US and its allies, in addition to the sanctions Moscow unveiled Friday, including the expulsion of diplomats and sanction on individuals.
In summary I think it is fair to say we are seeing an extraordinary series of events which underscores 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 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 formats in the past.
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 ESG considerations will push investors to continue, at the margin, to reduce exposure to Russia – in anticipation of worse to come.
* Please note that any views expressed herein are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions. The views expressed do not reflect the opinions of all portfolio managers at BlueBay, or the views of the firm as a whole. In addition, these conclusions are speculative in nature, may not come to pass and are not intended to predict the future of any specific investment. No representation or warranty can be given with respect to the accuracy or completeness of the information. Charts and graphs provided herein are for illustrative purposes only.