National Defence Committee on Nov. 6th, 2018

[John Herbst]

I've mentioned most of what I have to suggest.

One thing I did not mention that we should continue to give was counter-battery radar for missiles. As I said, the Obama administration made that wise decision three years ago, and that's an important article because most Ukrainian casualties have come from Russian missile fire. This system targets those missiles, which makes the firing and targeting of the Russian missiles much less accurate. This is something else I think the United States has to supply.

A serious effort by your military authorities and American military authorities to meet with Ukrainian counterparts and agree on a package would make a great deal of sense. It would send a clear message to the Kremlin that aggression is going to come at a higher cost, and it would buck up the Ukrainians, although their morale is still pretty good.

[James Bezan, Conservative, Selkirk—Interlake—Eastman, MB]

Mr. Fried, you mentioned the proactive and escalatory sanctions. Of course, here in Canada we have a number of sanctions in place. Now we've added Magnitsky-style sanctions to the list, as well as tools to actually target those who are directly linked to the war in Donbass and the illegal occupation and invasion of Crimea.

Should we be looking at sectoral sanctions against Russia? We have done some, but we haven't gone far enough, whether we're going after energy products, or whether we're going after financial institutions and financial products they offer. I know we've already put sanctions in place on defensive weapons that they build, but should we even expand that to things like wheat, other agricultural commodities and other things they produce?

[Daniel Fried]

In general it's a good idea for Canada to work in parallel with the United States and the European Union. The financial and energy sector sanctions that the U.S. and the EU imposed on Russia are worth following up on.

The Trump administration in my country poses special challenges of coordination. I get that, but the Trump administration also has solid people in it who are working on these issues, and I'm confident Canada could work with them.

[James Bezan, Conservative, Selkirk—Interlake—Eastman, MB]

Mr. Aslund.

[Dr. Anders Aslund]

If I may continue there, private Russians have about $800 billion hidden abroad. Let's say that one-third of this wealth belongs to Putin and his cronies. It could be more. This money is their soft point.

If you take this total amount, it's more than half of Russia's GDP. Today we don't know where it is. We can say with great probability that the vast majority is in two countries, the United States and the United Kingdom. Some of it is also probably here in Canada, but it's in anonymous companies, and these are typically 20 to 30 shell companies on top of each other. This is what we should go after.

[James Bezan, Conservative, Selkirk—Interlake—Eastman, MB]

How do we go after it? If already we know how much it is, and we know that it's sitting in these shell companies, then what's preventing us from actually sanctioning those organizations and hitting back directly at the pocketbooks of Putin and his oligarchs?

[Dr. Anders Aslund]

The European Union has in its fifth anti-money laundering directive now from this summer decided that all anonymous companies need to be revealed to law enforcement until the end of 2020. The U.K. Parliament has made such a decision also for the U.K. overseas territories. It's the United States and Canada that have not done anything about it as of yet. I think this is something that you could really do something about.

[James Bezan, Conservative, Selkirk—Interlake—Eastman, MB]

Thank you.

[The Chair, Liberal, Stephen Fuhr]

Thank you.

Thank you for your intervention earlier, Mr. Fisher.

Mr. Robillard, I'd like to give you the floor for the remaining two minutes of your questioning.

[Yves Robillard, Liberal, Marc-Aurèle-Fortin, QC]

Thank you, Mr. Chair.

What do you think of the joint border control agreement signed last year by Ukraine and Moldavia, and how did this affect domestic security in both countries, in your opinion?

[John Herbst]

This was an important step to help Moldova secure its border with Ukraine. Up until the Kremlin launched its war on Ukraine, Ukraine was reluctant to annoy Moscow by working with the government in Chisinau on the border. Obviously, once Russia launched the war on Ukraine, that concern fell apart. This has enabled Chisinau to have some control over the border between Transnistria, which is not controlled by Chisinau, and Ukraine. This in turn has made it easier for Chisinau and authorities in Tiraspol, the chief city of the separatist area of Transnistria, to make a deal with Chisinau. They have made some progress on resolving their differences. More progress is needed, but this has been a positive step.

[Dr. Anders Aslund]

Let me respond to your previous question about Donbass.

Occupied Donbass today is a real hellhole. Half the population, which was almost five million, has fled, two-thirds to Ukraine and one-third probably to Russia. Essentially all industry is standing still. Donetsk has an elementary food industry and shops, hardly anything more. All the banks were robbed and there are now a few Russian state banks that are operating.

This is a massive cost. I did a report for the Atlantic Council earlier this year and assessed that the total asset cost of Crimea and the Donbass is $100 billion. Ukrainian private companies are now claiming in arbitrage $10 billion from Russia, essentially in the private arbitrage in The Hague. The first case of $189 million has been won and more are coming. The biggest is Naftogaz, with $7 billion. The Russians are very bad at international arbitrage. They always lose. So this will be a big thing. They also need some help from Canada in these matters.

Thank you.

[The Chair, Liberal, Stephen Fuhr]

Thank you.

It looks like the last question will go to Mr. Fisher.

[Darren Fisher, Liberal, Dartmouth—Cole Harbour, NS]

Thank you, Mr. Chair.

I have a few somewhat short questions, but I guess that really depends on the answers.

I'll try to remember which gentleman said it, but you were talking about the difference between covert and conventional warfare, and then someone said that Russia could easily defeat Ukraine in a war. Could Russia still defeat Ukraine in a war while pretending they are not actually the troops? Do they have the ability to fight a covert war against Ukraine and still win?

Any one of you can take that.

[John Herbst]

The short answer is no. They tried to do that in the first half of 2014 and they lost. The Ukrainian forces were on the verge of taking back all of Donbass in August when the regular Russian Red Army went in and defeated Ukraine at Ilovaisk in early September. So the mask came off at Ilovaisk. But they do not have the ability to do that, and that surprised them.

[Darren Fisher, Liberal, Dartmouth—Cole Harbour, NS]

Okay.

You've all mentioned the weak economy that Russia has. Is that a resource issue, a sanctions issue or is it a combination of both?

[Daniel Fried]

It's a combination. Russia is a value-extracted, not a value-added, economy. The lack of reform, lack of property rights and lack of rule of law is keeping Russia a kleptocracy with rent-seeking behaviour right now. Those are not the conditions under which there will be a generalized prosperity. The sanctions add to that and put pressure on the system.

Anders was spot-on recalling the 1980s. It reminds me of the early 1980s, the late Brezhnev era, when Russians were quietly whispering that they couldn't go on like this and they didn't know what to do. They have reached a developmental dead end as long as Putinism is in effect.

[Dr. Anders Aslund]

Putin and his friends probably take out $15 billion to $25 billion a year from the state companies. This is probably the biggest theft ongoing by a very small group we have seen. This means that they're completely focused on their own money.

[Darren Fisher, Liberal, Dartmouth—Cole Harbour, NS]

That's interesting, thank you.

[Adrian Karatnycky]

There's one demographic issue that is important to note. Russia has the wrong demography. Only 20% of the Russian population is between the ages of 21 and 40, and that is, typically, the most value-added dynamic part of any economy; the most hard-working, motivated people who are trying to accumulate wealth. The U.S., by contrast, has about 30%.

Russia has corruption, has over-extended itself in its warfare and subsidies of the territories it occupies and it also is not coping with the demographic problem.

[Darren Fisher, Liberal, Dartmouth—Cole Harbour, NS]

Again, you've all chipped in that the reforms are occurring in Ukraine, but they're taking longer than you would like, and longer than most would like. Are they moving backwards? When we were in Ukraine, we met with a young police officer who said that they're working on clearing out the corruption in Ukraine.

It looks like Anders wants to take this. Tell me a little bit about what's happening on the ground with the reforms.

[Dr. Anders Aslund]

Lots of things have been done. Ambassador Herbst said it in the beginning. We have had a cut in public expenditures of about one-tenth of GDP. We have seen a cut in payroll taxes by half to now 22%, which means that people are showing their incomes to a much greater extent. We have a big cleanout of energy subsidies, also of public procurement. Big reforms that are going on right now are decentralization—

[Darren Fisher, Liberal, Dartmouth—Cole Harbour, NS]

What about the police?

[Dr. Anders Aslund]

The police, I don't think, is a very successful reform, unfortunately. The problem here is that the patrol police, which Canada also supported, was run by the first deputy interior minister. It has to be the minister who does it and who's fully vested in it. It has to come from the top of the organization.

[Darren Fisher, Liberal, Dartmouth—Cole Harbour, NS]

Have the police reforms failed?