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Could Putin's Syria Deal Spell Sanctions Relief for Russia?

Vladimir Putin's olive branch may be just the excuse Europe needs to lift sanctions it no longer wants

The Russian government surprised everyone on Monday when it said it will be slowly winding down military operations in Syria in a move that forces Bashar al Assad to the negotiating table with forces unfriendly to his government.  The move comes less than 24 hours after both Russian and European officials met in Europe to discuss a peace deal later this month.

Although the Syria imbroglio has nothing to do with the ongoing sanctions regime against Russia in Washington and Brussels, it is clear that Europe has grown more wary of punishing Russia for its actions in east Ukraine — for which the sanctions are in place — while the leadership in Ukraine does absolutely nothing to alleviate political unrest in the region.

Syria’s deal between Russia and the West can easily be seen as Moscow’s ability to play in good faith. While the sanctioning bodies in the U.S. and European Union look at Ukraine as a separate matter, it is harder to ignore the fact that Ukraine is also not abiding by the Minsk II Accord. That deal required Kyiv leaders to permit a vote in some eastern Ukraine regions, which would have led to autonomy and a closer alignment with Russia, something the Ukrainian government does not want.

It will be harder to blame Russia for the morass in Ukraine, and Russia’s help in Syria — for which a million-man migrant crisis was created on Europe’s borders — is more likely to come with a deal that sanctions be lifted by July. This is speculation, of course.  Investors took positively to the news. The Market Vectors Russia (RSX) exchange traded fund, one of the most popular Russia trades in the market, closed green on Monday while both the S&P 500 and MSCI Emerging Markets Index closed in the red. Gold dropped over $8 an ounce soon after Vladimir Putin’s 1:30pm ET announcement, to $1245/oz, likely reflecting the dollar-positive impact this geopolitical development brings.

Although a Russian presence in Latakia and Tartous, Syria will remain, the withdrawal marks a significant step to end the civil war that has ravaged Syria since 2011. Since the cessation of hostilities on February 26, optimism has been growing that a political solution can be reached, even if Assad remains the country’s leader.

“This latest development looks positive all the way around,” Vladimir Signorelli of Bretton Woods Research said in a note to clients today.

Putin’s announcement follows a meeting last week with strictly European leaders that included U.K. prime minister David Cameron, France’s president Francois Hollande and German chancellor Angela Merkel over a political solution to Syria. Each leader is incentivized to see an end to the Syria crisis. Cameron is facing the potential of voters voicing their desire to leave the European Union, which is in part being driven by immigration concerns.

Hollande is facing a challenge from nationalists who are against Russian sanctions and migration from war torn Middle East and Afghanistan. Merkel, whose immigration policies are responsible for Germany bringing in more than a million refugees last year — the bulk of which came from Syria — just suffered a drubbing in Sunday’s state elections at the hands of the anti-immigrant, euro-skeptic AfD Party led by Frauke Petry.

For their part, European foreign ministers in Paris this weekend, speaking alongside Secretary of State John Kerry, did not provide any hint that a deal in Syria came with an easing of sanctions pressure though the market is willing to bet otherwise.

“Russia should be putting pressure on separatists for a ceasefire,” said French Foreign Minister Jean-Marc Ayrault. But, he added, the Kyiv government “should be implementing the political part of the (Minsk II) agreements and with the adoption of the electoral law, allowing the country to hold elections as soon as possible in the Donbas region.”

Kyiv has shown no indication that this is yet a possibility, giving separatists in the Donbass reason to keep up with hostilities against the Ukrainian government.

Both Syria and Russia are not out of the woods yet. A ground offensive is planned in northern Syria in May against ISIS. European sanctions expire in July.

Source: Forbes
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