What just happened in Moscow? The European Union's top diplomat Josep Borrell was sitting in a room with Russian Foreign Minister Sergei Lavrov in a highly anticipated meeting in the Russian capital, when in the course of the meeting Russia announced it was expelling three diplomats from Germany, Poland and Sweden.

Borrell has been slated for what has been seen as a disastrous trip, where he failed to threaten Russia with more sanctions in response to the decision to jail Alexey Navalny, who was sentenced to 2.8 years in prison just two days earlier.

He also suggested that the EU would buy the Sputnik V vaccine, which is increasingly being seen as a success following a peer reviewed paper in Britain’s The Lancet after it was universally lambasted during the trials stage. Indeed, the EU has already launched the certification procedure for the drug in the middle of January – another PR victory for the Kremlin.

And in general his message was one of accommodation and the search for a middle ground. That has led to comparisons with Neville Chamberlain's meeting with Hitler in the run-up to WWII.

What is going on here is that in the first weeks following the departure of US president Donald Trump, everyone is laying out their positions for the post-Trump era. And Russia just laid out its position: it made it very clear that it will no longer brook any interference in what it considers to be domestic affairs (and for the purposes of diplomacy it considers Belarus to be a domestic affair as well).

This hardening of the Kremlin’s line is bound to lead to new clashes.

"While we fully respect Russian sovereignty... the European Union considers issues related to the rule of law, human rights, civil society and political freedom are central to our common future,” Borrell said. Lavrov’s answer was to expel three diplomats while Borrell was talking.

Borrell went to Moscow in the hope of creating at least a pragmatic basis for EU-Russia relations in the post-Trumpian era. Russia has responded by setting the bar to zero: no co-operation, no compromise, no tolerance of any criticism of its domestic affairs, and it has put the onus on the EU to back off if it wants anything from Russia.

Post-Trump world

New beginnings are a chance for making big changes. Trump was not just the worst president in US history; the real problem was he was totally incompetent and entirely unpredictable.

That meant there was no diplomacy. Everyone was left to wing it, reacting to the damage Trump did as he careened from one disaster to the next train wreck: trade wars, visa bans, detaining immigrants' children, ignoring the coronavirus [COVID_19] pandemic, treaty withdrawals and so on. The last four years have been a diplomatic nightmare.

And this unpredictability had serious economic consequences. As chief economist at Renaissance Capital Charlie Robertson pointed out in the bne IntelliNews cover story “Brighter Days”, foreign direct investment (FDI) into the US during Trump’s reign led to a strengthening dollar as major companies eschewed cheaper emerging market bases and moved their factories back home, afraid of the consequences of the break-out of a Trumpian trade war that could wreck their investments.

That is expected to change now, and a net $1bn a day will begin to flow out of the US into other markets as before, which will lift emerging markets and at the same time weaken the dollar in the next few years, which is also good for EMs.

Biden summed up the consequences of the end of the Trumpian madness in his first major foreign policy speech on February 2: “Diplomacy is back.”

Belarus context

The expulsion of the EU diplomats should first of all be seen in the context of the mass demonstrations in Belarus against Belarus' self-appointed President Alexander Lukashenko.

Team Navalny have been trying to link Russia’s demonstrations with the Belarusian demonstrations that are now in their sixth month. And parallels have already been drawn, including likening Navalny’s wife Yulia to opposition leader Svetlana Tikhanovskaya.

The Kremlin is obviously extremely keen to cut this link off at its inception, and it seems it has managed to do so with some success. The police response to the unauthorised demonstrations was brutal – the crackdown was immediate – but it has been done with a fine sense of violence: brutal enough to dissuade more protesters from coming out onto the streets, but not brutal enough to radicalise the population, as has happened in Minsk and happened twice before in Ukraine.

The Team Navalny organisers of the protests did not call for protests this weekend as it was clear not enough people would show up. The numbers at the second demonstration last week had already dropped from the initial estimated 100,000 that protested on January 23. In short, Navalny has failed to start a revolution.

Part of the reason for its purposeful humiliation of Borrell was to make its message crystal clear: the Kremlin will not brook any criticism or sanctions whatsoever linked to Navalny or domestic politics – especially with Duma elections due in September.

Russian presidential spokesman Dmitry Peskov telegraphed this more aggressive line ahead of the Borrell meeting, saying he hoped there was going to be “no link” between Russia-EU relations and the Navalny affair. The Kremlin has cause for concern on this score, as previously the EU linked the release from prison of former Ukrainian prime minister Yulia Tymoshenko and aid to Ukraine, after ousted president Viktor Yanukovych jailed her on trumped up charges.

Likewise, responding to Biden’s “We will not hesitate to raise the cost on Russia,” comments, Peskov retorted: “This is very aggressive, unconstructive rhetoric, to our regret.”

“Any hints of ultimatums are unacceptable to us. We have already said that we won’t pay attention to any lecturing announcements," he added. 

Will the West and EU follow through on sanctions because of Navalny? Both have been remarkably quiet on specifics so far, as there are several important differences in the two cases.

Navalny is not Tikhanovskaya, nor even a Tymoshenko. He is a political activist with only a 4% political approval rating, according to the independent pollster the Levada Center. Tikhanovskaya is the nominal victor in the August 9 Belarusian presidential election and universally popular. Latvia has gone as far as calling Tikhanovskaya the “president-elect”.

Russia is not Belarus. Belarus is an insignificant economy on the EU’s periphery, whereas Russia is a major player on the international stage and a big supplier of arms, energy and raw materials to the world. Moreover, it is the largest consumer market in Europe and most of Europe’s leading multinational corporates are already heavily invested in the country.

One of Navalny’s strengths has been his high international profile as “opposition leader”, which has allowed him to seriously embarrass the Kremlin, but his weakness is his lack of actual popular support amongst Russian voters. Both Tikhanovskaya and Tymoshenko have electoral mandates (even if in Tikhanovskaya's case it has never been confirmed).

It appears that Team Navalny has miscalculated. In calling off this weekend's protest, Navalny’s campaign manager said they wanted to end on a high note and would focus on “international pressure.” However, without Tikhanovskaya’s widespread domestic political support, it appears that Navalny is banking on his high international profile to put pressure on the West into bringing down sanctions on Russia. Team Navalny has already issued a list of 35 Russian officials and businessmen that it wants the West to sanction. But as push comes to shove it appears the EU is not prepared to scupper its relations with Russia entirely over the sake of one jailed activist who is not actually that popular with the Russian electorate, even if his cause is just.

Certainly the international investment community is not expecting anything more than symbolic sanctions to be imposed on Russia, as inflows into Russia’s bond and equity market have been heavy since November.

Russia gives up any attempt to be nice

Beyond Belarus the Kremlin has just laid out its longer-term foreign policy principles for dealing with the West and it is a significantly harder line.

Moscow is making it explicit that in the new era of “diplomacy is back” it has entirely given up on the possibility of cordial relations with the West as its starting position.

If the West wants to create a better work environment and do arms control deals, for example, which Russia wants, then the West will have to deal on Russia’s terms. There can be no dual policy of co-operation on arms on one hand, and sanctions because of things like the Navalny affair on the other.

This is a total rejection of the way business between Russia and the West has been done so far. What Moscow is saying now is: “Do your worst. We won’t be forced by you to change anything.”

The golden rule of Russian watching is if the Kremlin is faced with a choice between hurting its international reputation and a domestic policy goal, it will always choose the domestic policy option – in this case taking Navalny out of the game ahead of the elections.

Lavrov actually said this out loud at the joint press conference he held with Borrell on Friday. “Lack of normalcy in relations between Russia and EU, [the] two biggest Eurasian actors, is not a healthy situation, benefits no one and is the main issue to be addressed.”

The expulsion message is also aimed at the White House and is a rejection of the dual policy that newly installed US President Joe Biden has been hinting at. During his first call with Putin, Biden talked about arms control and Navalny. Lavrov is saying in very clear terms the Kremlin is prepared to talk about the first one but not the second.

And Russia has put its money where its mouth is. The rapidity of the passage of the new START III treaty and Biden’s clear call for new arms control deals with Russia – as bne IntelliNews has argued, a significant departure from the previous policy of pulling out of all the Cold War era security deals – was a signal that there is in fact common ground on which a new relationship can be built. Russia immediately followed up the START III deal by calling for the two sides to move on directly to re-making the Cold War-era Intermediate-Range Nuclear Forces Treaty (INS).

Putin feels he can now afford to thumb its nose at the West. With Russia’s huge $600bn cash pile, its deepening ties with China, its friendly relations with most of the G20 countries, its re-equipped military, its soft power success from supplying many of the emerging markets countries (who have been ignored by the developed nations) with the Sputnik V vaccine, Moscow is saying it needs nothing from the West and will do without unless the West rethinks its position on Russia.

In a week where Biden was laying out his foreign policy goals and intending to set the tone for his tenure, the Kremlin has just answered with its version of how things will work. Russia is demanding that the EU and US stop treating Russia like an emerging market in need of help and advice, and start treating it like a developed market and global power peer.