VIF Digest: USA, Russia & European Union (Vol 1 Issue III)

Nov 16-30, 2017

USA

According to reports, Jared Kushner, Donald Trump's son-in-law and senior aide, is reportedly worried that special counsel Robert Mueller’s investigation into links between Russia and the presidential campaign, will "get" the US leader. Mr. Kushner expressed concern after Mr. Mueller’s investigation produced indictments for former campaign chairman Paul Manafort and his associate Rick Gates, who stand accused of money laundering, according to a report in Vanity Fair magazine. Both have denied any wrongdoing.

US President Trump however continued to remain calm and apparently relieved that former National-Security Adviser Michael Flynn has thus far escaped indictment. Furthermore, Trump attorney Ty Cobb believes the investigation is nearly complete and has so far not been able to uncover much against the President. “It is my hope and expectation that shortly after Thanksgiving, all the White House interviews will be concluded,” Cobb told CNN, and The Washington Post reports that he’s telling West Wing staffers that the investigation overall will conclude soon, exonerating President Trump.

But things could still go either way, especially since the indictments of Paul Manafort and Rick Gates and guilty plea from George Papadopoulos in late October. Each of those looked like a bad sign for the Trump administration: the first two because they suggested Mueller was trying to flip Manafort, and was carefully delving into financial crimes, and the second because Papadopoulos’s admissions, alongside testimony from Carter Page, further confirm that at least some members of the Trump campaign were indeed colluding with the Russian government.

Russia

Defence Modernisation

Speaking at a conference of military leaders in Sochi on November 22, Russian President Vladimir Putin said that Russian business should be prepared to switch to production to military needs at any time. “The ability of our economy to increase military production and services at a given time is one of the most important aspects of military security,” Mr. Putin said. “To this end, all strategic, and simply large-scale enterprise should be ready, regardless of ownership.”

A day earlier, the president had spoken of a need to catch up and overtake the West in military technology. “Our army and navy need to have the very best equipment — better than foreign equivalents,” he said. “If we want to win, we have to be better.”

Since the 2008 Georgian war, which was a difficult operation, the Russian military has undergone extensive modernisation. Ageing Soviet equipment has gone. There is a new testing regime. There are new command structures. The budget has also increased exponentially. This year, military expenses will cross 3 trillion roubles, or 3.3 per cent of GDP. This would be a record although over the next two years, spending is forecast to be cut back slightly, to approximately 2.8 per cent of GDP.

Though the Russian defence budget remains less than 30 per cent of the combined NATO budget in Europe, many countries are increasing their military spending in response to the "Russian threat". NATO military command has also been restructured in response to Russian cyber and military threats.

EU – Brexit Challenge

In the run-up to a crucial meeting of the European Council to finalize the BREXIT deal, EU and British negotiators are apparently close to a deal on the UK’s separation from the EU. If they can agree on money, citizens’ rights and the Irish border, talks on future relations – and transitional arrangements – could start early next year. Although the current focus is on the separation, the next phase of the talks could prove much harder and more acrimonious. EU negotiators think the British government is deluded about the kind of future relationship it can achieve.

One such issue is Ireland which is threatening to veto talks on future relations unless the UK promises there will be no controls on trade at the border. But Theresa May could not make such a promise unless Northern Ireland stayed in the EU’s customs union and aligned with many of its regulations. Moreover if the EU and the UK sort out the rest of the separation agreement, Dublin will face pressure from other capitals to soften.

Indications are that the UK will agree to pay the EU around €50 billion or slightly more. Both sides will do their best to avoid talking of precise numbers. But the UK will undertake to meet payments under specific headings: the last two years of the EU’s seven-year budget cycle, other outstanding spending commitments, additional promises to pay for structural funds, contingent liabilities (such as loans to Ukraine) and pension liabilities.

Britain will find the transition much like membership – with free movement, European Court ofJustice (ECJ) rulings and so on – except that it will be out of the EU’s institutions (and some of the EU’s free trade agreements with other countries). The EU and the UK might pretend that the transition will last for only about two years. In fact it will take much longer for the UK and its partners to build physical infrastructure at borders and for the Home Office to set up the IT systems for registering EU migrants. And it will take many years for the UK to sort out the future economic partnership. 10 Downing Street has been saying that this could be negotiated before Brexit, but the earliest that detailed trade talks will start is early 2019.

Britain is seeking a deal that provides better market access than the ‘Canada model’ (a free trade agreement or FTA with only limited provisions on services) But the EU would deny UK such a generous deal and give it very limited choice in the matter. So far the EU shows few signs of softening. But if it did ever grant the UK anything close to single market membership in specific areas, it would demand cash payments, compliance with EU rules and ECJ rulings, and perhaps a liberal UK regime on migration. If all went smoothly, a generous offer from the UK on security and defence cooperation could encourage the EU to accept Canada Plus. The EU fears the UK will steal investment by eroding social, consumer or environmental standards, slashing corporate taxes or diverging from EU rules on state aid and competition and would naturally seek guarantees.

However, Emmanuel Macron and Angela Merkel (if she survives) plan to spend next year redesigning the eurozone and EU defence co-operation. A messy Brexit would be an unwelcome distraction. So they would probably seek to intervene to broker a compromise. Furthermore, if the financial markets believed that the UK was going to leave without an agreement, they would panic. The pound would sink, business and consumer confidence would evaporate and investment would dry up. This kind of financial volatility would not suit anyone.