Slow Burn

Western sanctions aren't having an immediate impact on Russia, but they could gradually make Moscow's economic woes much worse.

Though American and European leaders have yet to make good on threats to isolate Russia, the Ukraine crisis could still punish Russia's already struggling economy.

Russian President Vladimir Putin laughed off the United States' move to sanction a bank and several businessmen from his inner circle, promising to open a new account at Bank Rossiya, the first financial institution to find itself in Western crosshairs. "I personally didn't have an account there, but I'll definitely open an account there on Monday," he joked.

That kind of bravado comes naturally to Putin, and the initial sets of American and European sanctions were too weak to prevent him from annexing the Crimean peninsula and may not, NATO officials worry, be enough to dissuade him from invading eastern Ukraine.

That's not to say that the sanctions are completely toothless. They may not do immediate damage to the Russian economy, but analysts say they could turn potential investors away at a time when Russia dearly needs foreign money.

"The real potential damage to Russia's economic future is self inflicted," said Chris Weafer of Moscow-based consultancy Macro-Advisory, in a recent research note. "The real damage from a prolonged conflict in Ukraine," Weafer said, "may be to radically slow the inflow of much needed investment capital." Weafer recently cut his forecast for the Russian economy in 2014 from 1.9 percent to 1 percent growth.

Investors' cooling interest in Russia could make it more expensive for Russia to borrow money in international markets. Rating firms Standard & Poor's and Fitch Ratings both downgraded Russia's outlook from stable to negative, after the U.S. rolled out new sanctions Thursday. The Russian Finance Ministry has said it might delay plans to sell $7 billion in Russian sovereign bonds this year. Russian Finance Minister Anton Siluanov acknowledged Friday that Russia's borrowing costs are going up.

"The imposed sanctions are definitely negatively affecting the general perception of our country's economy," Siluanov said to reporters in Moscow, according to Bloomberg.

The falling value of Russia's currency could also be a source of pain. Companies that have borrowed money abroad and Russians planning their summer vacations could be forced to pay more, if the ruble continues its decline. It has fallen nearly 10% against the dollar since the beginning of the year.

The impact on Russia's stock market is harder to gauge, but there were initial signs sanctions were having at least a minor impact. The Russian benchmark Micex index fell almost 3 percent Friday, a day after President Obama blacklisted 20 top Russian officials and businessmen. The U.S. sanctions on Bank Rossiya were Washington's first against a Russian financial institution, and the move caused Visa and Mastercard to stop processing payments for the blacklisted bank and three of its affiliates Friday. Moscow responded by barring an array of powerful lawmakers and Obama administration officials from entering Russia. Putin indicated that he didn't think Russia needed to pursue other forms of retaliation, but Russian Deputy Foreign Minister Grigory Karasin said Russia was considering additional measures, according to Reuters.

That was the second exchange of sanctions and mocking responses between the U.S. and Russia this week, after Moscow annexed Crimea, the Ukrainian province that voted to breakaway from the country on Sunday. Obama upped the ante Thursday by laying out a plan for a broad trade blockade that - if carried out -- could cripple Russia's energy or banking sectors. The U.S. is unlikely to go down that road unless Russia moves to take over broad swathes of eastern Ukraine. Even if the U.S. acted, meanwhile, it's not clear Europe would follow. The continent's leaders' have expressed clear reluctance to levy broad punitive measures on Russia because of the boomerang effect they'd have on European trade.

While the back-and-forth over Russia's annexation of Crimea has at times hit the volatile Russian stock market, broader indicators about the Russian economy could be more worrisome. Russian stocks plunged 10 percent after Russia invaded Crimea, for instance, but bounced back immediately on the weak response from the West. The bigger concern for Russian leaders could be that the unrest makes bankers and money managers reconsider Russia as a place to make long term investments.

In the first two months of this year, investors have already moved more that $30 billion out of the country because of the standoff, Weafer said. That compares to $63 billion in all of 2013. Part of that amount is just the regular flow of money from cross-border trade, but Weafer estimates that at least a quarter of it is personal wealth.

"Russia has two problems: one is attracting foreign investment and the other is convincing Russians to keep their money in Russia and invest it there," said Weafer, speaking on the phone from Abu Dhabi.

The new sanctions against businessmen and politicians close to Putin haven't shut down the Russian economy, but they are making a bad situation worse by slashing the value of the ruble and making foreign investors think twice about putting their money into Russian companies.  

The value of the ruble could be the most important indicator inside Russia, said Weafer. He said Russians are extremely sensitive to currency fluctuations because of memories of shocks in the 1990s that crushed the ruble, including the 1998 banking crisis when Russia had to default on its debt.

"You cannot walk down a street in a Russian town without being aware of what the currency rate is," Weafer said. "The yellow currency exchange signs are as familiar as the golden arches in the U.S."

Win Thin, global head of emerging-market currency strategy at Brown Brothers Harriman, had a slightly more optimistic view. He said the Russian economy could muddle through at a growth rate of 1 to 1.5 percent and investors would likely move on -- as long as Putin doesn't go any further.

"If he's stopping at Crimea, which I think he is, then I think people just kind of forget about it," Thin said.

After all, Russia is still considered an emerging market, so investors may expect a bit of volatility.

"The Russian economy is like a large old tanker," said Mujtaba Rahman, head Europe analyst at risk consultancy Eurasia Group. "These developments are tantamount to more rust, but, at current, are unlikely to represent a serious inflection point."



Move Over, Uranium, Now It's Time for Plutonium

Can the Nuclear Security Summit actually move beyond stopgap measures and vague promises?

A new proposal by Western countries to limit holdings of a key nuclear explosive, which appears in a draft communique for the Nuclear Security Summit beginning on March 24, is concise and modest.

But its uncertain fate symbolizes the uphill battle Washington faces in moving the biennial summits beyond what critics depict as stopgap measures, small ambitions, and vague promises to tighten security for the world's stockpile of nuclear explosives.

A January draft of the communique to be released at the March 24-25 summit in the Netherlands -- convened at President Obama's initiative -- for the first time includes a suggestion that nations try to restrain their stocks of plutonium, the fuel for the bomb that devastated Nagasaki in August 1945.

"We encourage states to minimize their stocks of HEU [highly-enriched uranium] and to keep their stockpile of separated plutonium to the minimum level, consistent with national requirements," the draft states.

But that promise, cautious and hedged as it is, has not yet been accepted by the summit participants, according to markings on the draft and interviews with sources familiar with the preparations.

The call to restrict plutonium production -- which applies to both military and civilian programs -- is a departure and nettlesome to some countries.

Japan, India, and Russia, for example, plan to build new energy systems based on advanced plutonium-burning reactors. France and Great Britain have produced plutonium under contract for other countries. Separately, India, Pakistan, and Israel produce plutonium for weapons, according to a 2013 report by the International Panel on Fissile Materials.

As a result, while the global stocks of weapons-grade uranium have been shrinking after the Cold War, the stocks of plutonium have been growing. They are now estimated at 490 metric tons -- enough, in theory, to fuel tens of thousands of weapons.

The two previous summits have, in contrast, focused on securing and eliminating civilian stocks of highly-enriched uranium, the other main nuclear explosive material, which has limited commercial utility.

Jonathan Wolfsthal, a former Department of Energy official and a special advisor to Vice President Joe Biden for nuclear security, said that the United States has been trying for years to persuade countries with large stocks to agree to limit or reduce the amount of plutonium they hold in storage.

But Wolfsthal said countries with civilian nuclear programs "have been reluctant to link the issue of nuclear terrorism to their stockpiles of commercial plutonium," for fear of stigmatizing those programs.

The communiques from the two previous nuclear summits, in Washington in 2010 and Seoul in 2012, mentioned plutonium only once, calling on all countries to promote measures to secure, account for, and consolidate stocks -- not restrict or minimize them.

The Netherlands, which is hosting the summit, has been the driving force behind the effort to include the language in the summit communique, according to a source who has followed the negotiations closely.

Ward Bezemer, a spokesman for the Netherlands Foreign Ministry and head of press communications for the Nuclear Security Summit, declined to comment.

The language on plutonium also represents longstanding U.S. policy. At a speech in Seoul during the 2012 Nuclear Security Summit, President Obama summarized U.S. concerns about plutonium stockpiles. "We simply can't go on accumulating huge amounts of the very material, like separated plutonium, that we're trying to keep away from terrorists," he said.

Jonathan Lalley, a spokesman for the National Security Council, said the White House had no comment on "documents that purport to be deliberative drafts of the summit communique." The authenticity of the January draft was confirmed by an individual who has seen several such drafts.

The 2010 and 2012 summits have brought new attention to the threat of nuclear terror and encouraged states to reduce, protect, or consolidate their stocks of weapons-grade uranium.

Since President Obama took office in 2009, the number of countries with at least one kilogram of nuclear explosive material has fallen from 38 to 25, a reduction of about one-third, according to the Nuclear Threat Initiative, a Washington-based nonprofit group that promotes tighter security measures for fissile materials.

In 2012, for example, Ukraine's then-President Viktor Yanukovych promised to return 234 kilograms (515 pounds) of weapons-grade uranium from a reactor in eastern Ukraine to Russia. That's roughly the equivalent of 14 bombs.

The last of the transfers took place about a year ago, before protests this year led Yanukovych to flee and ahead of Russia's moves toward annexing Crimea. But nearly 1,390 metric tons of highly-enriched uranium and 490 metric tons of plutonium are still located at hundreds of military and civilian sites in 25 countries. The majority of this total is in the United States and Russia, but large stocks also exist in Britain, France, India, Pakistan, China, and Japan.

A five-pound bag of flour filled with bomb-grade uranium and a grapefruit-sized bit of plutonium is enough to build a nuclear bomb. So altogether, the stockpiles could be used, in theory, to build 20,000 uranium bombs and nearly 80,000 plutonium weapons.

At the summit next week, several additional countries are expected to announce the elimination or transfer of weapons materials, White House officials said, without providing details.

Sources say one of them is Japan, which will announce its intention to return to the United States 330 kilograms (730 pounds) of U.S.- and British-origin high-quality plutonium, the kind favored by weapons designers, from a research reactor at Tokai, on its Pacific coastline.

But that amount represents just 3.5 percent of the plutonium Japan has in its own warehouses, and less than 1 percent of its total holdings (some is stored outside the country). Moreover, it is 4 percent of what the country can produce in one year at a new factory scheduled for completion in October.

According to a document published this month by its Radiation Safety Authority, Sweden is willing to transfer ownership of 834 kilograms (1,835 pounds) of plutonium to the decommissioning authority in Britain.

The summits have also encouraged many countries, nonproliferation experts say, to strengthen their rules and procedures for securing nuclear weapons, materials, and the facilities that produce and store them.

Three particularly vulnerable sites in non-weapons states with enough weapons-grade uranium for the kind of simple bomb terrorists might make have put significant security upgrades in place, said Matthew Bunn, a former White House official now teaching at Harvard's Kennedy School of Government. The sites are in Sosny, Belarus; Pelindaba, South Africa; and Tokai, Japan.

But nonproliferation experts have expressed frustration that Washington has secured only vague security commitments from some countries.

Administration officials say in their defense that many countries remain jealous of their sovereignty, suspicious of foreign scrutiny, and wary of the expense of increased regulation. As a result, the world's defensive armor against nuclear terror still has many gaps.

"Today, we do not have an effective global security system, based on common international standards, to protect dangerous nuclear materials," former Sen. Sam Nunn, the head of the Nuclear Threat Initiative, told a conference in Washington earlier this month.

Bunn said he agrees that the "patchwork of existing nuclear security agreements and initiatives is weak and urgently needs to be strengthened with new standards and new measures."

Nunn and other public figures have called for a new agreement authorizing the International Atomic Energy Agency (IAEA) or some other body to set and enforce tough international rules for securing nuclear explosive stockpiles.

But there is no consensus on the issue, with some experts saying that member states would never give the agency sufficient money and power to act effectively as the world's nuclear security watchdog.

A Harvard study released this month recommends as a stopgap measure that the IAEA gradually raise the profile of its nuclear security programs, until participation and compliance are viewed as the norm. It could, for example, change the name of its nuclear security "guidelines" to "standards," implying "more of a baseline that states should at minimum meet."

The January draft of the summit's communiqué refers to the IAEA's "essential responsibility" and "central role" in nuclear security, but does not give the agency a new regulatory mandate. Instead, it emphasizes the IAEA's advisory capacity. Signatories are being asked only to encourage adherence to the IAEA's security guidance, while providing greater political, technical, and financial support.

Nunn and others have also called on summit participants to focus on securing the 85 percent of the nuclear explosives in the hands of the nine countries with nuclear arsenals, something that they have so far failed to do.

"The real working focus of the summits has been on civil materials, with the assumption, fair or not, that weapons materials will be more secure because they're military," said Miles Pomper, a senior researcher with the Monterey Institute's Center for Nonproliferation Studies.

But Laura Holgate, who has overseen the summit's preparation as senior director of weapons of mass destruction terrorism in the National Security Council, said in an interview with the Center for Public Integrity that the United States "makes no assumptions" about the relative security of military stores. Both must get better protection, she said.

She added that governments are still trying to work out how they can protect military weapons materials without compromising what they see as vital national security secrets.

While the communiqué requires consensus, some of the countries attending the summit have promised what the administration likes to call "gift baskets," or joint agreements to take action or highlight achievements.

Holgate said that in one gift basket, the United States, South Korea, and the Netherlands will pledge to ensure that their domestic nuclear security practices conform to IAEA standards, in hopes other states will do so as well.

The United States will also join another statement calling for improved maritime security, including support for the installation and operation of radiological detectors in major ports, Holgate said.

Further progress will not come easily, experts say.

Two non-weapons nations, Belarus and South Africa, are still holding onto large stocks of weapons-grade uranium. Japan has 44 tons of plutonium, the fifth-largest stockpile in the world, set aside for its commercial nuclear power program. Rokkasho, a new plutonium plant capable of producing an additional eight tons a year, is scheduled for completion in October.

Both the Kremlin and the White House over the past several days have been careful to say that President Vladimir Putin's decision not to attend the Nuclear Security Summit was not a result of the recent tensions.

Former President Dmitry Medvedev, now prime minister, attended in 2010 and 2012. Russian Foreign Minister Sergey Lavrov is expected to represent Russia this time.

"We do expect the Russians to continue the important work that we do with them in this context, unabated," Sherwood-Randall said Monday.

But Harvard's Bunn said the absence of top Russian leaders at the event will be noticed, if only because Russia and the United States together control the bulk of the world's nuclear explosive materials.

Bunn, an expert on physical security, said that the summits have focused too much on short-term fixes rather than on building more robust systems to prevent nuclear terror. In a report, Bunn and his colleagues call for the establishment of a database of nuclear terror-related incidents to demonstrate that the threat is urgent.

This story was published by the Center for Public Integrity, a nonprofit, nonpartisan investigative news organization in Washington, D.C.

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