Flynn Resignation Shows Russia Still A 'Virus' In Washington
By Kenneth Rapoza
Someone in Washington does not like the Russians. The recent resignation of Trump's National Security Advisor Michael Flynn shows the lengths that official Washington will go to deter any sort of detente with Russia. Flynn resigned on Tuesday after a leaked transcript from a telephone conversation with a Russian diplomat showed he discussed sanction removal once Donald Trump took over as President. Flynn did not come clean about the conversation and left his post on Tuesday. His resignation was made official on Monday after market hours.
"I inadvertently briefed the Vice President-elect and others with incomplete information regarding my phone calls with the Russian ambassador. I have sincerely apologized to the President and the Vice President, and they have accepted my apology," Flynn wrote, as a copy of his resignation letter published by CNN verifies.
Flynn made numerous phone calls to foreign diplomats just prior to Inauguration Day, he said in the letter. But one call in particular, made to Russian ambassador Sergey Kislyak, was the biggest point of contention. Someone in the intelligence service leaked details about the phone conversation to the press where he discussed the easing of sanctions. News of the call broke five days ago. The transcript of the conversation was not revealed so it is unclear which sanctions Flynn was addressing.
What matters to the market in this case will be the tug-of-war between those in the Trump administration who want peace with the Russians and those who want to keep Russia adversarial. Depending on which side prevails will determine sanction relief, not likely until January 2018 anyway. U.S. sectoral sanctions are set to expire in December.
Russia has had three series of sanctions slapped on it over the last two years. The first came against individuals and companies that aided in the March 2014 secession vote and annexation of Crimea, a peninsula once owned by Ukraine and now owned by Russia in the Black Sea. The second wave came in the summer of 2014 when both Washington and Brussels placed sanctions on Russian banks and oil and gas companies for the Kremlin's support of an armed separatist movement in eastern Ukrainian industrial hub towns. The third wave came this December when the Obama administration surprised everyone and expelled around 30 Russian diplomats for allegedly aiding in the hacking of Democratic National Committee emails.
Investors meanwhile have been waiting for cooler heads to prevail between Washington and Moscow. They will have to wait until Vladimir Putin and Trump meet later this year to see how this relationship pans out. Reuters reported that the two presidents might meet before July. Trump and Putin spoke by phone within days after his Inauguration. A positive relationship with Russia could, in theory, erase much of the negative headlines associated with the country and provide sentiment lift to a market that outperformed the world in 2016.
The Russian media, meanwhile, has reported that there are some rumblings in the government that Trump will be swayed by "anti-Russia hysteria", putting any camaraderie between the two presidents on ice. The Russian bogey man has been gripping the West ever since the U.K. voted to leave the European Union. Like the Trump electoral victory in November, Brexit was also partially blamed on Russian influence. The same story is currently being played out in French and German elections, where a weakened establishment opposition continues to spread the story of an omnipresent, Russian "virus" usurping European democracy.
On Tuesday, Russian authorities fired a very loud shot across the bow of Deutsche Bank, saying it was investigating tax evasion. Russia is not short of stories about foreign-owned companies who have mysteriously run afoul of tax laws. This is something investors will have to watch closely to see if Russia and the West are on the mend or if it will be more of the same. The Deutsche Bank investigation could be taken as par for the course if it was to occur in the U.S., but such actions taken by the Russian government will call into question political motivations for doing so, even if they are not entirely verifiable. In Russia, perception is always greater than the reality.
Trump said during his campaign that he wanted to work closer with the Russians, particularly on matters regarding jihadism in Syria. However, Trump's disdain for Iran could prove to be a major factor. This means Trump's version of the Russian Reset, therefore, is also hamstrung by the ongoing foreign intrigue in the Middle East. Iran is a key Russian ally in the fight against ISIS and other terrorist groups in Syria. Russia considers Iran a partner there. And so Iran could be used as a wedge that pulls Trump from his stated policy of working with Putin.
Obama also wanted to reset ties with Russia and, like Trump, spoke out against regime change policies. Despite Obama's campaign promise to do just that, Libya ended up being the next victim in a series of regime change episodes that have now occurred in back-to-back Republican and Democratic presidencies. Moreover, Obama's pledge to be less adversarial fell flat as Russia also contributed to this deteriorating relationship.
Trump remains highly popular in Russia. If money is any guide of political direction, then fund managers have said in informal polls here that they expect sectoral sanctions to stick for the rest of 2017. Russian assets remain a key overweight, with Prudential Group saying in a report on Monday that Russian securities were a favorite. BlackRock is overweight Russian stocks.
On Tuesday, the Russian ruble hit its strongest level against the dollar since July 2015, trading at 57.44 to the dollar thanks to stronger oil prices.