When rebel crosshairs fixed on Malaysian Airlines flight MH1730,000 feet above the sunflowers of Eastern Ukraine, they had noidea what they were about to blow up. No clue they were about toincinerate hundreds of Dutch holidaymakers. None whatsoever theywere about to wreck a decade of the Kremlin's finestdiplomacy-years of cleverly preventing the Americans from buildinga united Western front by playing divide and rule amongst theEuropeans.
The rebels blew up more than a plane. They blew up Russia'swinning position in Brussels against sanctions. Europeans like tothink they play games with others, but the truth is that for yearsRussia has been pulling strings inside the European Union. The boysin Brussels like to boast about the EU. But they are ashamed toadmit how far the Kremlin had gamed them: playing them off eachother with energy, armaments and oligarchs.
None of the heavy hitters in Europe were willing to give theseup big, juicy bribes for Ukraine. This is why serious sanctionshave taken so long. Because for all the fighting talk from theEurocrats, Russian money has run rings around its interests, itscash aiming to cripple any common foreign policy. Russia isEurope's third-biggest trade partner. Moscow's investments in thecontinent are enormous: Russia does over 40 percent of its tradewith the European Union, supplying the bloc with roughly a quarterof its gas, while receiving more than $310 billion in loans fromits banks.
Kremlin tactics were simple: use this money to divide and rule.That's why Russian diplomats no longer sound like KGB agents. Theynever talk ideology; they always talk about money. Putin's bestdiplomats now sound like clever businessmen: Does Germany want itsown personalized pipeline? Excellent. Now, we only want Berlin tobe a little more understanding on human rights… WouldFrance, or Italy, like special military and energy deals? Fabulous.This could be arranged, but please, no more lectures on how tobehave. Would Bulgaria, Hungary, Romania or perhaps Austria likeour latest pipeline routed through sovereign territory? Wonderful.But remember, we need you to stand up for us in Brussels. WouldLondon like to be the destination of choice for our lovelyoligarchs? Superb. Now, let's not look too closely at offshorefinance.
Russian diplomats have been creating covert allies, especiallyout of the weaker Eurozone states such as Italy, Portugal andSpain. These recession-battered governments wanted nothing morethan millions more Russian tourists or cheaper energy discounts. Inexchange, they have been more than happy to make the case forMoscow inside the EU. They were not alone. Russian diplomats wentshopping around southeastern Europe with the proposed South Streampipeline - using the proposed route to buy friends and favors inBrussels out of Austria, Greece, Hungary, Italy and Slovenia. Thesecrafty games have stymied hopes of the bloc ever forming an energyunion to conduct gas deals with Russia. Instead states still dealindividually.
But nowhere were they as successful as in Athens and Nicosia.The European Council on Foreign Relations, a think-tank network,even went as far as labeling both Greece and Cyprus as Russian"Trojan horses." This should come to little surprise: The Kremlinhas turned Athens into a military partner and Nicosia, the GreekCypriot capital, into a money laundering hub, with roughly $150billion flowing in annually from Russia. And surely enough, bothGreek and Cypriot delegations in Brussels have consistently arguedthe Russian case on all matters to do with the Black Sea and theSouth Caucasus - even vetoing EU proposals to send border monitorsto disputed frontiers in South Ossetia, Abkhazia andMoldova.
This is why nothing big happened on sanctions before the downingof MH17. Kremlin sweeteners had divided the big three players:Britain was refusing to lose its business with Russian banks;France was determined not to lose billions in military contracts;and Germany, which gets 40 percent of its natural gas from Russia,refused to budge on anything to do with energy. With the big boysthus compromised, the weaker southern European countries gavepushback: With Italy in the lead, they wanted nothing more than towarm up European relations with Russia again.
Washington was increasingly frustrated as inaction in Brussels.European politicians were insufficiently moved by Ukraine'shumanitarian and geopolitical catastrophe to lose big money. Theyhad been looking at potential sanctions on Putin and simplyfretting - how many votes do we stand to give up with all this lostRussian money? The MH17 changed everything. That one rebel errormeans Vladimir Putin has gone from unpleasant neighbor to monsterin the court of European public opinion.
Europe's politicians woke up to tabloid headlines like: "Putinkilled my son." Suddenly for Britain, Germany and the Netherlands -the home country of most of those incinerated on the MH17 - notstanding up to Putin was no longer about money. These politicianssuddenly risked losing their credibility and their votes at home.Suddenly, the calculation flipped: For David Cameron and AngelaMerkel in particular, sanctions were suddenly politicallyprofitable.
Russia's rebels have achieved what American diplomats failed todo. For months, American diplomats had been lobbying the 28 EUmember states to take a stronger stance toward Russia. Not evenBritain was particularly obliged-all those rubles can buy a lot ofwobbly upper lips, apparently. But no longer: Russia's Europeandiplomacy now lies in the wreckage of the MH17. The package thatwas carried through this week looks set to hit the kleptocraticnetwork that underwrites Putin hard. Russia's economy is alreadyteetering on the edge of recession. The move to restrict the accessof Russian state banks to Western financial markets will hurt notonly the Kremlin's coffers, but also the Russian oligarchs whosecompanies are tied into them.
American diplomats have now got what they wanted. Europeansanctions have spooked Russian elites. They may try and laugh itoff, but behind the scenes they have been busy calculating how muchthey stand to lose. Banks are the organs of an economy: Start torestrict their access to financial oxygen and they can strangleinterlinked, and unexpected, parts of the system down the line.This has shaken their confidence in Russia's banking system. Thereis a growing consensus in Moscow that the Kremlin has been sodistracted with the geopolitics, and its diplomatic fallout, thatit has completely taken its eye off the country's worseningeconomics.
But these sanctions are first a psychological blow to Russia'sruling class. They like to think of themselves as businessmen,tycoons, captains of industry. They love nothing better thaninvestment summits and watching the flashy advisory boardpresentations where they can feel fully part of globalization.Nothing, perhaps, save their Mayfair mansions and French chateaux.They have Swiss bank accounts and German business partners. Theynow see it all at risk.
Those around Putin have become globalized: The oligarchs, theministers, the security chiefs known as the siloviki- theyhave gotten to know London well. The have grown accustomed tojetting to Davos to clink champagne and munch canapés with WesternCEOs. And of course, they have their own pet Westerners - Britishbankers, French lawyers, German accountants - helping themgracefully integrate, and elegantly hide, their ill-gottenmoney.
The only major player in the Russian elite who has notglobalized is Vladimir Putin. If reports of his secret wealth aretrue, he's the only Russian billionaire not regularly flying in andout of London and Zurich, or enjoying summers in renaissanceItalian villas, or grandiose French country estates. Putin is theonly major player in Russian politics not to have built an airportlife for himself-bouncing back and forth on the morning flights andletting life in Moscow and London begin to blur. He prefers hisholidays in Russia: hunting in Siberia or sailing on theVolga.
These sanctions - limited though they might be - open the doorto more. Russian elites now fear Western sanctions will becomeroutine answers. This is why the Kremlin is dreaming about China.The men who run Russia are paranoid they will slowly have to swapLondon living for Shanghai nights. Their foremost hope is that theycan make up for sanctions on Western financial markets by movingtheir financial activity to Singapore, Shanghai and Hong Kong.Russian bankers and lawyers who know the Asian markets well aresuddenly overloaded with oligarchs and officials investigatingopening Far Eastern accounts. With gritted teeth, they are preparedto get to know Chinese nightlife.
Russia's pivot to Asia does not mean American sanctions arefailing. There is little confidence China's shaky banks can everreplicate the Western financial security they had grown used to.Russians are right now holding more and more money in cash, andultra-secure safes are selling out fast in Moscow. There is anincreasing fashion to put your savings in bundles of dollar cash.With nobody sure what happens next in Ukraine, or how far sanctionswill now go, huge distrust and uncertainty has been injected intothe banking system.
Let us not make overmuch of Europe's sudden display offortitude, though. Russia's ruling classes are not about to throwPutin out: They are too bugged, too monitored, too frightened toattempt that. These banking sanctions are mild, but sanctionsnevertheless. And yet something very important has changed inRussia. Putin is slowly morphing from being the guarantor of theoligarchs' billions into a threat to their wealth. They havestarted - for the first time - to become losers inPutinism.
Russia's establishment has not reacted uniformly to thesanctions, either. The Kremlin looks more united then ever: Underthreat, the gray men who rule Russia have come together. They havemore or less stopped travelling to Europe for pleasure and are nowtaking their holidays at home. For them, it is not all bad: Thereis a mixture of nationalist euphoria and a sense, in severing fromthe West, that they may get the chance to seize an even largershare of a shrinking pie.
But the business elite has become full of grim pessimism anddepression. There is a grim mood, with fretful talk that Putin, inbetting on the hapless Ukrainian rebels, may just have endedRussia's chance to grow like an emerging market again without therebeing anyone strong enough to stand up to him. Minds have driftedto an expected economic crunch. Many fear that the coming financialbite will see the president's current 80 percent-plus popularityratings quickly vanish. Russia has of course seen this before:Putin secured similarly sky-high popularity ratings during the 2008Georgian war. But they almost halved during the steep 2009recession in Russia, a downturn that fueled major middle classprotests against his rule in Moscow a in December 2011.
When the next crisis comes round, Moscow billionaires areunlikely to remain as loyal to the Kremlin as they were then. Butthey are also likely to be more intimidated into doing so. This iswhat the United States needs to start thinking about: how to playthe politics of a Russian fiscal crisis someway down the road. Whatguarantees and concessions could it offer the Russian elite totempt them away from Putin? That, of course-not the faint rumblingsof a rejuvenated NATO-is exactly what Vladimir fears most.
Ben Judah, Politico