The Cable

Russian Debt Downgraded as Western Leaders Talk Sanctions

Western leaders say they're readying further sanctions on Russia for meddling in Eastern Ukraine over the past few weeks. Though so far it's just talk, the threats are already having the desired effect of pushing Russia's economy further into recession by making investors wary of what might come next.

Rating company Standard & Poor's downgraded Russia's debt Friday and warned that it could be further demoted to "junk" status if more sanctions are imposed. S&P said the downgrade was a result of increased risk to the Russian economy because people have moved so much money -- $51 billion so far this year -- out of the country. That compares to just $63 billion in all of 2013.

"The tense geopolitical situation between Russia and Ukraine could see additional significant outflows of both foreign and domestic capital from the Russian economy and hence further undermine already weakening growth prospects," the ratings firm said in a statement.

Russian Economy Minister Alexei Ulyukayev dismissed the downgrade, saying it was "partially due to a politically motivated decision," according to a state-run news report.

President Barack Obama spoke with the leaders of France, Germany, Britain, and Italy on Friday about coordinating further costs to be imposed on Russia. The leaders agreed that Russia had failed to live up to a April 17 agreement to lessen tensions by asking pro-Russia militants in eastern Ukraine to lay down their arms, according to a White House statement.

So far, the U.S. and the European Union have levied only limited sanctions against a handful of individuals and one bank, but the threat of further sanctions, especially against the Russian financial sector, has cast a cloud over the Russian economy that has accelerated already poor conditions. While western countries aren't yet expected to sanction whole sections of the Russian economy, Obama said in Seoul, South Korea, on Friday that the U.S. was laying the groundwork for broader sanctions that could be deployed if Russia invades eastern Ukraine.

Following the downgrade of Russian debt, the country's central bank increased benchmark interest rates a half point to seven percent to combat inflation caused by the declining value of the ruble, which has fallen almost eight percent against the dollar so far this year. That's on top of a one and a half point rate hike in March, which the bank had initially said was only temporary. The bank said in a statement Friday that uncertainty about the "international political situation" was holding back production and investment.

Standard Bank analyst Tim Ash said the downgrade was "bad for investment, bad for capital flows, and bad for broader political, economic reform."

But it's unclear whether this bad economic news affects President Vladimir Putin's decision-making. Putin said Thursday that sanctions were hurting the Russian economy, but not critically.

"Overall they are harmful for everyone, they destroy the global economy (and) are dishonorable on the part of those who use those types of tools," Putin said in St. Petersburg, according to Reuters.

Western leaders have said many times that Putin could choose to calm the crisis in Ukraine, but President Obama didn't sound optimistic that would happen. Speaking at a joint press conference with South Korean President Park Geun-hye, he said that a new round of targeted sanctions wouldn't "necessarily solve the problem."

"What we've been trying to do is to continually raise the costs for Russia of their actions while still leaving the possibility of them moving in a different direction," Obama said.

EPA/ARTUR SHVARTS

National Security

Obama Administration Insists Mideast Peace Talks Still Alive

On Thursday, American-brokered peace talks ground to a halt with the Israeli government's decision to suspend negotiations with the Palestine Liberation Organization after it brokered a unity agreement with rival Palestinian faction Hamas. The decision brought the peace negotiations to one of the lowest points yet in Secretary of State John Kerry's controversial, months-long effort to bring the two sides together, but the State Department refused to declare the talks dead.

Doubts about the fate of the negotiations were fueled by loud opposition to the Palestinian unity deal by both Israel and the United States. "It's a blow to Israel; it's a blow to peace." said Israeli Prime Minister Benjamin Netanyahu. A senior U.S. administration official floated the idea of suspending aid to the PLO if it went through with the deal because Hamas has long been designated as a terrorist organization. When asked if the unity deal effectively killed the negotiations, State Department spokeswoman Jen Psaki pushed back.

"I don't think we have any such announcement to make," she said, noting the continued presence of lead U.S. negotiator Martin Indyk in the country. She said that it would be "unlikely that he would stay" in the region if there were no chance to broker an historic deal.

But keeping the talks alive will prove difficult, if not impossible. The Israeli government announced on Thursday that it would call off negotiations for at least five weeks as the Palestinians formed a unity government. Meanwhile, U.S. critics of the peace effort are beginning to lose patience, and powerful voices in Congress have made clear that taxpayer funds to a Palestinian government including Hamas is verboten.

"Hamas continues to deny Israel's right to exist and has renounced all agreements with the U.S. and Israeli governments," said Rep. Ed Royce (R-CA), chairman of the House Foreign Affairs Committee, in a statement to Foreign Policy. "Aid suspension to a Palestinian Authority that includes Hamas is the law."

Royce's Democratic counterpart, Rep. Eliot Engel (D-NY)  also suggested a suspension of aid may be in order. "Just as this deal could undermine American peacemaking efforts in the region, it would also endanger the future of American assistance to the Palestinians," he said in a statement. 

Palestinians, however, say they are committed to a two-state solution that recognizes Israel's existence. In an interview with Army Radio, senior PLO official Jabril Rajoub said Hamas agreed to the terms of a two-state solution in meetings with President Mahmoud Abbas. "We weren't willing to sign the reconciliation agreement without it being clear to all factions that we are driving forward our nation to a two-state solution," he said. "I hope that Israel will allow Abbas to continue peace negotiations, on the basis of two states for two peoples." At press time, there were no outward signs from Hamas spokespersons that those terms had been accepted. 

Despite PLO assurances, Psaki continued to call the unity deal "unhelpful" given Hamas's historic opposition to recognizing Israel. However, a senior administration official offered a less critical view in a statement to Foreign Policy. "Any Palestinian government must unambiguously and explicitly commit to nonviolence, recognition of the State of Israel, and acceptance of previous agreements," the official said. "If a new Palestinian government is formed, we will assess it based on its adherence to the stipulations above, its policies and actions, and will determine any implications for our assistance based on U.S. law."

The U.S. government's overall skepticism was not shared by the European Union, which welcomed the the unity deal. "The European Union believes that the reconciliation agreement between Fatah and Hamas is an important step toward a two-state solution,' Michael Mann, spokesperson for the EU's High Representative for Foreign Affairs, told Haaretz.

Most parties involved acknowledge that no peace deal is possible as long as the Palestinians remain bitterly divided into separate factions -- a point emphasized by Senator Tim Kaine, chairman of the Senate Subcommittee on the Middle East. "Israel could hardly live securely with an agreement accepted by only a portion of the Palestinian people and leadership," he said. He urged the unity government to affirm Israel's right to exist and its intent to live peacefully with its neighbor. "If the announced reconciliation between the PLO and Hamas holds, it will at least provide some clarity," he said. 

In any event, the longer Kerry spends on the intractable conflict, the more ammunition it gives  his critics who believe the effort is a waste of time. Earlier this month, Arizona Senator John McCain accused him of "failing very badly" and focusing on the wrong conflicts during a Senate hearing. Kerry struck back. "You declare it dead but the Israelis and the Palestinians don't declare it dead," Mr. Kerry said. "They want to continue to negotiate."

At this point, that's no longer true, at least for the Israelis.