Wednesday, August 15, 2018

The Impact of Anti-Russia Sanctions on Russians

Washington's current weapon of choice in dealing with Russia is the imposition of economic sanctions.  While we often hear the word "sanctions" tossed around, what is the point of sanctioning a government or a nation?  We will start this posting by looking at a definition of sanctions and the reasons for their use followed by an examination of a poll of Russians, looking at their feelings about the impact of American-led sanctions against their nation. 

Economic sanctions are defined as a withdrawal of customary trade and financial relations and are viewed as a middle course of action when compared to diplomacy and all out war.  Sanctions take two forms:

1.) Comprehensive sanctions which affect all commercial activity with a nation, for example, the United States and its decades-long embargo of Cuba.  These sanctions affect the entire civilian population of the sanctioned nation.  It would also include the current sanctions on Iran, Sudan and Syria.

2.) Targeted or smart sanctions which target certain businesses, groups or individuals within a nation, sparing the civilian population from the impact of the sanctions.

Sanctions can take the form of asset freezes, arms embargo, foreign aid reductions, trade restrictions, capital restraints and travel bans.

Why do governments choose to use sanctions?  Economic sanctions are imposed to punish, coerce, deter or shame other governments/entities/states into changing behaviours that are deemed to violate international behavioural norms.  Economic sanctions have been used to achieve foreign policy goals like promoting human rights, promoting democracy, weapons nonproliferation, counterterrorism,  counternarcotics and to resolve geopolitical conflicts.  All that said, economic sanctions are used as a stick to prod the citizens of the targeted nation to be miserable enough that they will choose to put pressure on their government to change its behaviour. 

Thanks to the Council on Foreign Relations, here is an interesting graphic showing the global sanctions regimes in 2016:

Here is a graphic showing the U.S. sanctions programs currently in place showing how long some of them have been in existence:

Since the focus of this posting is on the sanctions against Russia, let's look at the document from the Office of Foreign Assets Control (OFAC) which outlines the U.S. Treasury Department's Russia sanctions program:

Just in case you missed it, here are the penalties for violating the Executive Orders behind the Russia sanctions program:

"Civil monetary penalties of up to the greater of $250,000 or twice the amount of the underlying transaction may be imposed administratively against any person who violates, attempts to violate, conspires to violate, or causes a violation of E.O. 13660, E.O. 13661, E.O. 13662, E.O. 13685, or the Regulations. Upon conviction, criminal penalties of up to $1,000,000, imprisonment for up to 20 years, or both, may be imposed on any person who willfully commits or attempts to commit, or willfully conspires to commit, or aids or abets in the commission of a violation of E.O. 13660, E.O. 13661, E.O. 13662, E.O. 13685, or the Regulations." (my bold)

With this background, let's look at the impact of the current American-led sanctions against Russia for its moves in Ukraine and alleged interference in the 2016 U.S. presidential election from the viewpoint of Russians as outlined in a recent poll from Russia's VCIOM.

When the Russian respondents were asked if they personally had interest in news related to sanctions, VCIOM got the following responses:

Likely yes - 57 percent
Likely no - 41 percent

When asked what kind of impact the sanctions had on Russia's economy, here are the responses:

Likely positive impact - significant - 15 percent
Likely positive impact - insignificant - 19 percent
Likely negative impact - insignificant - 11 percent
Likely negative impact - significant - 19 percent
No impact - 20 percent
Don't know - 16 percent

When asked what positive impacts have been felt by the Russian economy thanks to the imposition of sanctions, VCIOM got the following responses:

Economic development - 50 percent
Import substitution - 20 percent
Revival throughout the whole country - 4 percent
Development of military - industrial complex - 4 percent
New jobs - 2 percent
Development of small- and medium-sized businesses - 2 percent
Support for domestic manufacturers - 2 percent
New technologies/innovations - 2 percent
National cohesion/patriotism - 2 percent
Other - 11 percent

When asked what negative impacts have been felt by the Russian economy thanks to the imposition of sanctions, VCIOM got the following responses:

Price/tax increases - 22 percent
Economic recession - 9 percent
Fewer foreign goods - 7 percent
Worsening relationship with the West - 5 percent
Dollar exchange rate increase - 5 percent
Fall in income - 5 percent
Deterioration in quality of life of ordinary citizens - 3 percent
Rise in gasoline prices - 3 percent
Problems leaving Russia. 3 percent

One of the most important questions asked was whether the sanctions have had any impact on the families of the respondents:

Significant positive impact - 1 percent
Insignificant positive impact - 1 percent
Insignificant negative impact - 12 percent
Significant negative impact - 12 percent
No impact whatsoever - 67 percent

When asked if Russia should not pay attention to sanctions and conduct its foreign policy as before, 73 percent of respondents said yes compared to only 17 percent of respondents that felt that Russia should be willing to make concessions in order to get sanctions lifted.

Lastly, when asked if Western sanctions were harmful or beneficial to Russia, here were the responses:

Harmful to Russia - 32 percent
Beneficial to Russia - 50 percent

When asked if Western sanctions were harmful or beneficial to the nations that imposed them, here were the responses:

Harmful to the imposing nations - 78 percent
Beneficial to the imposing nations - 7 percent

With the imbalance in reportage in the Western/American media when it comes to Russia, we rarely hear what Russians think about the key issues that are impacting their lives in this time of anti-Putin/anti-Russia sanctions and how they feel about their new geopolitical reality.  The poll by VCIOM shows us that the current sanctions have been rather unsuccessful in changing Russians' opinions toward their political leadership and their actions in Ukraine and during the 2016 American election.  In any case, the four year-old sanctions have done absolutely nothing to produce the hoped for result of getting Russia to totally remove itself from the "Ukraine issue" or to get it to promise that it will never again interfere with an American election....allegedly, at least.

Tuesday, August 14, 2018

The Committee on Foreign Investment in the United States

With trade punishment being a watchword of the Trump Administration, I thought I'd take a brief look at one of America's key trade bodies, the Committee on Foreign Investment in the United States or CFIUS and the role that it plays in this important part of the U.S. economy.

The CFIUS was established by an Executive Order of President Ford in 1975 with this stipulation:

"the primary continuing responsibility within the executive branch for monitoring the impact of foreign investment in the United States, both direct and portfolio, and for coordinating the implementation of United States policy on such investment."

The CFIUS is also directed to:

1.) arrange for the preparation of analyses of trends and significant developments in foreign investment in the United States

2.) provide guidance on arrangements with foreign governments for advance consultations on prospective major foreign governmental investment in the United States

3.) review investment in the United States which, in the judgment of the Committee, might have major implications for United States national interests

4.) consider proposals for new legislation or regulations relating to foreign investment as may appear necessary

At that time, OPEC held $32 billion in deposits at U.S. banks domestically and abroad, $12.4 billion in U.S. Treasuries, $3.6 billion in non-U.S. government debt securities and $3.9 billion in stocks and equity.  Here is a sampling of the American assets held by OPEC member nations over the period from 1974 to 1977:

The interagency Committee originally consisted of nine members of Cabinet with the Secretary of the Treasury being the chairman of the Committee, two ex officio members and two members that are appointed by the POTUS with the aim of assisting the President in overseeing the national security aspects of foreign direct investment (FDI) in the United States economy.  Under Bush II, the Committee now consists of nine members of Cabinet, with the Secretary of Labor and Director of National Intelligence serving as ex officio members and five executive office members along with temporary members that are appointed at the President's whim.  Here is a quote from a report by the Congressional Research Service on the CFIUS regarding the U.S. approach to foreign direct investment and the role that CFIUS plays:

"The U.S. policy approach to international investment traditionally has been to establish and support an open and rules-based system that is in line with U.S. economic and national security interests. The current debate over CFIUS reflects long-standing concerns about the impact of foreign investment on the economy and the role of economics as a component of national security. Some Members question CFIUS’s performance and the way the Committee reviews cases involving foreign governments, particularly with the emergence of state-owned enterprises. Some policymakers have suggested expanding CFIUS’s purview to include a broader focus on the economic implications of individual foreign investment transactions and the cumulative effect of foreign investment on certain sectors of the economy or by investors from individual countries. Changes in U.S. foreign investment policy have potentially large economy-wide implications, since the United States is the largest recipient and the largest overseas investor of foreign direct investment."

The Ford Executive Order also stipulated that the information used in the CFIUS deliberations would not be disclosed to the public.

During the late 1980s, Japan took over as one of the world's leading foreign investors.  As such, the Exon-Florio provision was amended to the Defense Production Act, an amendment that allowed the President the authority to block proposed or pending foreign mergers, acquisitions or take-overs of persons engaged in interstate commerce in the United States that would impair national security.  In 1992, the Exon-Florio statue was amended again; the "Byrd" amendment requires the CFIUS to investigate proposed mergers, acquisitions or takeovers when these two criteria are met:

1.) the acquirer is controlled by or acting on behalf of a foreign government

2.) the acquisition results in control of a person engaged in interstate commerce in the United States that could affect the national security of the United States

Once again in 2007, the CFIUS process was amended under the Foreign Investment and National Security Act of 2007 (FINSA).  This amendment grants the President the authority to block or suspend pending foreign mergers, acquisitions and takeovers that threatened to impair national security, however, the President must conclude the following:

1.)  other U.S. laws are inadequate or inappropriate to protect the national security

2.) the president must have “credible evidence” that the foreign interest exercising control might take action that threatens to impair the national security

Under FINSA, CFIUS establishes national security risk by considering these three issues:

1.)  the threat, which involves an assessment of the intent and capabilities of the acquirer

2.) the vulnerability, which involves an assessment of the aspects of the U.S. business that could impact national security

3.) the potential national security consequences if the vulnerabilities were to be exploited

Here is a graphic showing how the CFIUS functions and the steps taken before a final determination is made by the President:

The formal review process has a set deadline; 30 days to conduct a review, 45 days to conduct an investigation and 15 days for a presidential determination.

Here is a table showing the foreign investment transactions reviewed by the CFIUS between 2008 and 2015:

Here is a table showing the industry composition of foreign investment transactions review by the CFIUS between 2008 and 2015:

Here is a table showing the country of foreign investors and industry reviewed by the CFIUS between 2013 and 2015:

As you can see, China is responsible for nearly 20 percentage of all foreign investment transactions reviewed by the CFIUS over the latest three fiscal years for which data is publicly available.

Lastly, here is a table showing the home country of foreign acquirers of critical American technology between 2013 and 2015:

Both Canada and the United Kingdom were the most significant acquirers of what was deemed critical technology, mainly in the aerospace and defense sectors and information technology sector.  With a total of only 5 acquisitions, China is responsible for a mere 3.9 percent of all critical technology transactions compared to 32.5 percent for Canada and the United Kingdom combined.

In closing, you may wonder how many transactions have actually been blocked by the CFIUS since its inception.  Here's the complete list:

1. In 1990, President Bush directed the China National Aero-Technology Import and Export Corporation (CATIC) to divest its acquisition of MAMCO Manufacturing.

2. In 2012, President Obama directed the Ralls Corporation to divest itself of an Oregon wind farm project.

3. In 2016, President Obama blocked the Chinese firm Fujian Grand Chip Investment Fund from acquiring Aixtron, a German-based semiconductor firm with U.S. assets.

4. In 2017, President Trump blocked the acquisition of Lattice Semiconductor Corp. of Portland, OR, for $1.3 billion by Canyon Bridge Capital Partners, a Chinese investment firm.

5. In 2018, President Trump blocked the acquisition of semiconductor chip maker Qualcomm by Singapore- based Broadcom for $117 billion.

It is important to keep in mind that some potential acquisitions were simply cancelled once it appeared that they might be blocked.

Considering its importance to the U.S. economy, it is interesting to note that the Committee on Foreign Investment in the United States is both little known and very poorly understood by most Americans.  Given that foreign investment in the United States is actually a very important job creator (think Toyota, Honda and other Japanese and Korean carmakers as a few examples), the role that the CFIUS plays in the United States is critical for anyone looking for a job now and in the future.  Given the protectionist mentality prevalent in Washington today, one suspects that the current administration will reject an increasing number of foreign direct investments in the U.S. economy.

Monday, August 13, 2018

Space - Washington's Rage for Dominance at Any Cost

During a June 2018 speech on immigration, Donald Trump explained one of his latest visions:

Here is a more complete transcript:

"I want to also say that when it comes to space, too often, for too many years, our dreams of exploration and discovery were really squandered by politics and bureaucracy, and we knocked that out. So important for our psyche, what’s you’re doing. It’s going to be important monetarily and militarily. But so important for right up here -- the psyche. We don’t want China and Russia and other countries leading us. We’ve always led -- we’ve gone way far afield for decades now, having to do with our subject today. We’re going to be the leader by far. We’re behind you a thousand percent.

America’s vital interest in space lost out to special interests in Washington, except, of course, for the senators and congressmen here. They would never do it. Right, Dana?

But all of that is changing. We know that. My administration is reclaiming America’s heritage as the world’s greatest space-faring nation. The essence of the American character is to explore new horizons and to tame new frontiers. But our destiny, beyond the Earth, is not only a matter of national identity, but a matter of national security. So important for our military. So important. And people don’t talk about it.

When it comes to defending America, it is not enough to merely have an American presence in space. We must have American dominance in space. So important.

Very importantly, I’m here by directing the Department of Defense and Pentagon to immediately begin the process necessary to establish a space force as the sixth branch of the armed forces. That’s a big statement.

We are going to have the Air Force and we are going to have the Space Force -- separate but equal. It is going to be something. So important. General Dunford, if you would carry that assignment out, I would be very greatly honored, also. Where’s General Dunford? General? Got it?" (my bold)

So, who did Donald Trump put in charge of kickstarting this groundbreaking project.  Here are some comments from the Chairman of the National Space Council/Space Force:

Here are some quotes from the Chairman:

"It is my great honor, as Vice President, to serve as the Chairman of the National Space Council.  And I’m pleased to report that President Trump has already signed three new space policy directives to reorient our space program toward human exploration, unleash America’s burgeoning commercial space companies, and safeguard our vital space assets with new space traffic management policy.

But as Commander-in-Chief, President Trump’s highest priority is the safety and security of the American people.  And while, too often, previous administrations all but neglected the growing security threats emerging in space, President Trump stated clearly and forcefully that space is, in his words, “a warfighting domain, just like…land, [and] air, and sea.

And just as we’ve done in ages past, the United States of America, under his leadership, will meet the emerging threats on this new battlefield with American ingenuity and strength to defend our nation, protect our people, and carry the cause of liberty and peace into the next great American frontier.

Seven weeks ago, President Trump directed the Department of Defense “to immediately begin the process necessary to establish a Space Force as the sixth branch of the armed forces….

President Trump recently signed the largest investment in our national defense since the days of Ronald Reagan.    And that new Defense budget included new resources for two cutting-edge military communications satellites and nearly $1 billion for our space defense programs.  And today, we renew the President’s call on the Congress of the United States to invest an additional $8 billion in our space security systems over the next five years.(my bold)

And, what's the rush?  Here's Mike Pence again:

"For many years, nations from Russia and China to North Korea and Iran have pursued weapons to jam, blind, and disable our navigation and communications satellites via electronic attacks from the ground.

But recently, our adversaries have been working to bring new weapons of war into space itself.  In 2007, China launched a missile that tracked and destroyed one of its own satellites — a highly provocative demonstration of China’s growing capability to militarize space.

Russia has been designing an airborne laser to disrupt our space-based system.  And it claims to be developing missiles that can be launched from an aircraft mid-flight to destroy American satellites.

Both China and Russia have been conducting highly sophisticated on-orbit activities that could enable them to maneuver their satellites into close proximity of ours, posing unprecedented new dangers to our space systems.

Both nations are also investing heavily in what are known as hypersonic missiles designed to fly up to five miles per second at such low altitudes that they could potentially evade detection by our missile-defense radars.  In fact, China claimed to have made its first successful test of a hypersonic vehicle just last week.

China and Russia are also aggressively working to incorporate anti-satellite attacks into their warfighting doctrines.  In 2015, China created a separate military enterprise to oversee and prioritize its warfighting capabilities in space.

As their actions make clear, our adversaries have transformed space into a warfighting domain already." (my bold)

In other words, according to Mike Pence, the Pentagon and the American defense sector have been sitting on their hands since China's 2007 operations to destroy one of its own satellites in space using once of its own missiles and three years since it created an enterprise to fight wars in space?  Maybe the money for the Space Force would be better spent on inventing a time machine so Washington can go back in time and start developing America's Space Force in 2007. 

If we look at another excerpt from Donald Trump's speech, we'll get an idea of who is going to really benefit from a Space Force:

"And I also have a list of some of the CEOs and chairmen and presidents of these incredible companies. Wes Bush, CEO of Northrup Grumman. Where’s Wes? Wes, thank you. Thank you very much. Thank you, Wes. Gwynne Shotwell (President and CEO of SpaceX). Gwynne? Stand up, Gwynne. She’ll end up running for office. Right?  Bob Smith, CEO of Blue Origin, who’s very active. Thank you, Bob. I hear you’re doing a great job.  President and CEO, United Launch Alliance. That’s a combination of Boeing and Lockheed on the Space Launch System, SLS.

I don’t like when Boeing and Lockheed get together because the pricing only goes up, but that’s okay in this case.  I don’t know. I don’t love that stuff. We’re going to have to talk about that, your joining those two companies. Oh.   Oh, boy. Look at Dennis. Dennis is so happy. I don’t like that stuff, Mike. 

Marillyn Hewson, who has done a fantastic job at Lockheed Martin. Marillyn? Marillyn. You have done.  What do you think of that merger for the space -- what do you think? Look at them; they’re sitting together. Oh. Boeing.  Oh, it’s -- no wonder we don’t get the pricing we want. Huh?

Dennis Muilenburg, friend of mine. A great guy. The head of Boeing. And, boy, have you done a good job on all fronts -- commercial, military. Both of you. What a job you’ve both done. Thank you.  Stay apart. Stay apart. Don’t get together. Stay apart."

In case you were curious, here is a list of members of the National Space Council Users' Advisory Group, taken from the minutes of a meeting held on June 19, 2018:

Note the presence of Wesley Bush, President and CEO of Northrop Grumman, Salvatore Bruno, President and CEO of United Launch Alliance (a joint venture of Lockheed Martin Space Systems and Boeing Defense, Space and Security), Marilyn Hewson, CEO of Lockheed Martin Corporation and Dennis Muilenburg, CEO of the Boeing Company.  It is also interesting to note that Eric Schmidt, former Executive Chairman of Google and Alphabet was also in attendance.

To distract us all from the potential billions and billions (and likely trillions over the long-run) of additional tax dollars that will be flowing from Main Street America directly into the pockets of the military-industrial complex, at least we get to help choose a Space Force logo from this selection:

There's nothing like a few shiny baubles to get us to forget about all of our troubles, is there?

One last question.  Given this:

...and this: has to wonder on how many fronts can Washington keep expanding America's military with the goal of fighting and actually winning a war before it collapses under the weight of its expenditures?

Space Force - just another example of Washington's rage for dominance at any cost.

Friday, August 10, 2018

The Saudi - Canada Dispute and the Russian Viewpoint

The recent diplomatic spat between Canada and Saudi Arabia has made the news cycle around the world but one aspect of the dispute has received very little coverage.  Given that Saudi Arabia is actually growing closer, particularly since the October 2017 summit between the two nations, and given the fact that Russia has banned Canada's Minister of Foreign Affairs, Chrystia Freeland, it shouldn't come as a surprise that Russia has offered its considered opinion on the recent fray.

Let's open this posting by looking at recent developments which show us the recent evolution of the relationship between Russia and Saudi Arabia, two nations that have not particularly "played well together".  On October 5, 2017, Saudi King Salman became the first Saudi monarch to ever visit Russia.  After the summit, Russia and Saudi Arabia signed documents that covered various agreements and memoradums as reported on the Kremlin website:

As well, according to Israel's Haaretz, Saudi Arabia has agreed to buy Russia's S-400 Air Defense System as shown here:

Here is an additional quote from Haaretz:

"SAMI (the state-owned Saudi Arabian Military Industries) said the MoU with Russian state-owned arms exporter Rosoboronexport came in the context of contracts signed to procure the S-400, the Kornet-EM system, the TOS-1A, the AGS-30 and the Kalashnikov AK-103.

It did not specify the number of each system or the value of the procurement deal.

It said the procurement was "based on the assurance of the Russian party to transfer the technology and localize the manufacturing and sustainment of these armament systems in the Kingdom," but provided no timeframe...

The two leaders (Putin and King Salman) had a "friendly and substantial discussion based on a desire by Moscow and Riyadh to consistently grow mutually-beneficial partnerships in all spheres," Lavrov said at a briefing alongside his Saudi counterpart Adel al-Jubeir.

"We believe that new horizons have opened up for the development of our relations that we could not previously have imagined," the Saudi foreign minister said, speaking through an interpreter."

In addition, going back further in time, in June 2015, the Saudi Arabian Public Investment Fund and the Russian Direct Investment Fund signed a memorandum of understanding in which the Saudi fund would invest as much as $10 billion over the next four to five years in various projects within Russia's borders and to cooperate on development of nuclear energy.  this followed a meeting between Vladimir Putin and then Deputy Crown Prince and Defense Minister Mohmmad bin Salman al Saud at the 19th St. Petersburg International Economic Forum as shown here:

...and here:

"President of Russia Vladimir Putin: Your Highness, colleagues, good afternoon. It is a pleasure to meet with you here in Russia, in St Petersburg.

We have enjoyed friendly relations with the Kingdom for a number of years and we highly value these relations.

I would like to note with satisfaction that our trade is growing. Although it is still rather modest in absolute figures, the trend is very good.

As you may know, during my telephone conversation with the King of Saudi Arabia I invited him to visit the Russian Federation. I would like to confirm this invitation and convey my best wishes to His Majesty.


Deputy Crown Prince, Defence Minister of Saudi Arabia Muhammad bin Salman Al Saud (retranslated): I am very happy to have this opportunity to meet with you for the second time. I have the honour of conveying to you the greetings and best wishes from the Custodian of the Two Holy Mosques and expressing his great respect for your Excellency.

I would like to say that the Custodian of the Two Mosques confirms his acceptance of your invitation. I also have the honour of inviting you to visit the Kingdom of Saudi Arabia.

We view Russia as an important state in the modern world. Our relations have a long history. Russia was the first foreign state to recognise Saudi Arabia in 1926. Therefore, we will work to develop bilateral relations in all areas.

Vladimir Putin: Thank you.

I remember the warm welcome I received in Saudi Arabia during my visit. I accept the invitation with pleasure."

With that background, let's look at Russia's comments on the ongoing Canada - Saudi Arabia dispute which started with this tweet from Canada's Foreign Policy (aka Chrystia Freeland):

Here's what the spokesperson for Russia's Ministry of Foreign Affairs, Maria Zaharova, had to say about the tension between Canada and Saudi Arabia:

"Question: Relations between Canada and Saudi Arabia have recently soured after Canada’s Foreign Ministry criticised human rights violations and called for the immediate release of political activists in Saudi Arabia. Riyadh has announced its decision to call its ambassador in Ottawa back for consultations, expel the Canadian Ambassador and suspend flights to Canada by the Saudi Arabia state airline.

Will you comment on this, please?

Maria Zakharova: We consistently and firmly advocate compliance with universal human rights with due regard for the specific national customs and traditions that developed in a given country over a long period of time. We have always said that the politicisation of human rights matters is unacceptable.

We believe that Saudi Arabia, which has entered a path towards large-scale socioeconomic reform, has the sovereign right to decide how it will proceed in this vital sphere. What one probably needs in this situation is constructive advice and assistance rather than criticism from a “moral superior.

At the same time, we hope that Saudi Arabia and Canada will find a civilised solution to their differences."

I find these comments from the Russians quite interesting, particularly when put into the context of the growing diplomatic, economic and military closeness between the Saudis and the Russians.  As well, given that the Saudis are the biggest purchasers of weapons in the world, it's not terribly surprising that Canada's traditional ally, the United States, a world leader in the manufacturing of weapons and major seller of materiel to the Saudi royal family, has remained quite subdued when it comes to supporting the Canadian side of the contentious Saudi human rights issue.