Sunday, March 9, 2014

Ukraine—the problems only escalate

Even though I find the sabre-rattling profoundly depressing, the Ukrainian crises seriously demands attention here at real-economics.  There are a wide assortment of non-economic issues that are driving the conflict including the historical animosities between Russia and Ukraine and a lot of Cold War baggage that seems not to have gone away in spite of the collapse of the Warsaw Pact in 1991. But the economic reasons are just overwhelming.  These include:
  • The bill for energy owed to Russia / Gazprom.  One of the sweeteners Putin / Russia offered the Ukraine to turn down a closer alliance with the EU was a discount for natural gas.  The Gazprom people were probably not at all happy about this and so are probably relieved that all their customers will be charged the same market prices.
  • The energy pipelines that crisscross the region.  Reader JL sent a link that explains all the various interests involved.  Anyone who argues that most of the world's conflicts involve some aspect of the "awl bidnuss" are rarely completely wrong
  • Ukraine owes western banks $15 Billion.  These loans are teetering on default.  In a world where the Fed pumps $65 Billion / month to stave off the collapse of a hopelessly corrupt banking system, $15 Billion barely rises to the level of a rounding error.  But as the chief bad guy / philosopher king of the grasshoppers argues in A Bug's Life when asked why it is so important to take the ant's food (impose structural adjustments), Hopper points out to the other grasshoppers how greatly the ants outnumber them and is afraid that they will eventually stand up against them, which is why this is more about keeping the ants in line than taking their food.
So it turns out that the neocon wet dream of overthrowing a legitimate democratically-elected government and replacing it with a neoliberal one willing to impoverish the Ukrainian citizens is not only illegal, but like the invasion of Iraq, it will likely wind up being crazy expensive.  Even "simple" actions like economic sanctions against Russia for opposing this scheme have the potential for being way more expensive to the EU than anyone is willing to admit publicly.  From Der Spiegel, economic second thoughts about the wisdom of economic warfare over Ukraine.  Keep in mind that the Germans have already enthusiastically joined in the chorus of Putin-bashing.

Ukraine Crisis: EU Concerned about Cost of Sanctions on Russia

By Gregor Peter Schmitz  AP/dpa

Russia's aggression in Ukraine has set off plenty of bluster and aggressive rhetoric in Europe. But many EU member states are skittish about the potential dangers of imposing punitive economic measures on Moscow.

Great Britain would very much like to penalize Russia for its encroachment on the Crimean Peninsula. But it should cost the UK as little as possible. That, it would appear, is London's strategy for dealing with Moscow's aggression against Ukraine -- an approach made public through an embarrassing blunder on Monday. A freelance photographer snapped a picture of a classified document held by a government official as he entered Downing Street for consultations. The document outlined the potential punitive actions British Prime Minister David Cameron might take against Russia.

Britain should "be prepared to join other EU countries in imposing 'visa restrictions/travel bans' on Russian officials," the paper advised. It added that Britain should "not support, for now, trade sanctions … or close London's financial center to Russians."

The message is clear: The British economy, which profits immensely from wealthy Russians, should be protected from potential fallout from the ongoing stand-off over Ukraine. Sanctions of some sort, it has become increasingly clear, will almost certainly be imposed, particularly with EU leaders gathering in Brussels on Thursday to develop a joint bloc response.

But the document photographed outside Downing Street reflects the deep wariness in the EU of the potential costs associated with punitive action against Moscow. Brussels wants to send a message, while preventing excessive backlash.

Tough Rhetoric

The risks for such a backlash are high. The EU economy is heavily reliant on Russia -- the country represents the EU's third-largest trading partner. The reverse, of course, is true as well: Europe is number one on the Russian list. Economic ties between the EU and Russia continue to be tight despite the turbulence triggered by the global economic crisis and the 2008 Russia-Georgia conflict. European exports to Russia primarily include machinery, chemicals and agrarian products whereas imports from the Russians are predominantly made up of raw materials.

The EU was also a major backer of Russia's admission to the World Trade Organization in 2012 and maintains significant influence over Moscow; EU member states are by far the most important source of foreign investment in Russia.

Nevertheless, with tough rhetoric having come out of several European capitals in recent days, and equally pointed retorts emanating from Moscow, it seems likely that some form of tit-for-tat looms. French Foreign Minister Laurent Fabius on Tuesday said that EU sanctions could come as soon as Thursday. In response, Russian parliament has warned that Moscow would respond in kind, according to a Wednesday report on the Voice of Russia website.

Countermeasures from Russia could prove painful to the EU, particularly when it comes to the energy sector. Germany, for example, imports more than a third of its natural gas and oil from Russia; other European countries are vastly more dependent on Moscow for their energy needs. Theoretically, Europe could compensate by turning to Norway for its natural gas needs, but energy prices would spike as a result.

Thus far, no concrete steps have been taken to impose penalties aside from the suspension of trade talks between the US and Russia. The EU, however, has been openly considering sanctions on individuals and specific companies, so-called targeted measures.

The US is keeping a close eye on Europe's sanctions debate, knowing full well that America alone is unable to exert sufficient pressure on Moscow. The US isn't even among Russia's top 10 trading partners. "The Americans can only exert effective economic pressure on Russia together with Europe," says transatlantic expert Jack Janes of the American Institute for Contemporary German Studies in Washington.

Diligence over Speed

It is now up to the Europeans to decide how far they want to go. And given the wildly varying degrees of enthusiasm for sanctions, it seems safe to assume that they won't go far. Several Eastern European countries have emerged as hardliners, but the further the distance from Ukraine, the less the enthusiasm for confronting Russia. The Austrians, too, expressed skepticism of punitive measures on Wednesday, with Finance Minister Michael Spindelegger saying that in the Ukraine crisis, the focus should not be put on sanctions.

Germany is somewhere in the middle, with Foreign Minister Frank-Walter Steinmeier stressing the creation of a forum for direct Ukraine-Russia talks over sanctions. Gernot Erler, the German government's coordinator for relations with Russia, has also been cautious. "I would warn against imposing sanctions at the current point in time," he told SPIEGEL ONLINE on Tuesday. "Such a move could ruin chances for achieving a political solution, as small as the window for such a solution might appear."

No matter what happens, though, collateral damage is to be expected, with the New Russia-EU Framework Agreement likely to suffer. Negotiations on the deal have been sluggish recently, primarily due to Russia's focus on creating a customs union with Belarus, Kazakhstan and Ukraine.

On the website of Germany's Foreign Ministry, a blurb about the Framework Agreement reads: "Negotiations have been ongoing since 2008 on this ambitious document, which is to establish a reliable and long-term foundation for relations in the areas of politics, economics, trade, science and culture. The discussions have come a long way. But because of the importance of the agreement to both sides, diligence takes precedence over speed."

Given the current stand-off, that is likely truer now than ever before. more
Toppling legitimately elected government is just something the USA government does—ask Chile, Iran, Guatamala, Haiti, Iraq, Libya, etc. etc.  But former intelligence analyst McGovern suggests that trying this in the Ukraine may have been a really bad idea.

Ukraine: One ‘Regime Change’ Too Many?

By Ray McGovern  March 2nd, 2014

Is “regime change” in Ukraine the bridge too far for the neoconservative “regime changers” of Official Washington and their sophomoric “responsibility-to-protect” (R2P) allies in the Obama administration? Have they dangerously over-reached by pushing the putsch that removed duly-elected Ukrainian President Viktor Yanukovych?

Russian President Vladimir Putin has given an unmistakable “yes” to those questions – in deeds, not words. His message is clear: “Back off our near-frontier!”

Moscow announced on Saturday that Russia’s parliament has approved Putin’s request for permission to use Russia’s armed forces “on the territory of the Ukraine pending the normalization of the socio-political situation in that country.”

Putin described this move as necessary to protect ethnic Russians and military personnel stationed in Crimea in southern Ukraine, where the Russian Black Sea Fleet and other key military installations are located. But there is no indication that the Russian parliament has restricted the use of Russian armed forces to the Crimea.

Unless Obama is completely bereft of advisers who know something about Russia, it should have been a “known-known” (pardon the Rumsfeldian mal mot) that the Russians would react this way to a putsch removing Yanukovich. It would have been a no-brainer that Russia would use military force, if necessary, to counter attempts to use economic enticement and subversive incitement to slide Ukraine into the orbit of the West and eventually NATO.

This was all the more predictable in the case of Ukraine, where Putin – although the bête noire in corporate Western media – holds very high strategic cards geographically, militarily, economically and politically.

Unlike ‘Prague Spring’ 1968

Moscow’s advantage was not nearly as clear during the short-lived “Prague Spring” of 1968 when knee-jerk, non-thinking euphoria reigned in Washington and West European capitals. The cognoscenti were, by and large, smugly convinced that reformer Alexander Dubcek could break Czechoslovakia away from the U.S.S.R.’s embrace and still keep the Russian bear at bay.

My CIA analyst portfolio at the time included Soviet policy toward Eastern Europe, and I was amazed to see analysts of Eastern Europe caught up in the euphoria that typically ended with, “And the Soviets can’t do a damned thing about it!”

That summer a new posting found me advising Radio Free Europe Director Ralph Walter who, virtually alone among his similarly euphoric colleagues, shared my view that Russian tanks would inevitably roll onto Prague’s Wenceslaus Square, which they did in late August.

Past is not always prologue. But it is easy for me to imagine the Russian Army cartographic agency busily preparing maps of the best routes for tanks into Independence Square in Kiev, and that before too many months have gone by, Russian tank commanders may be given orders to invade, if those stoking the fires of violent dissent in the western parts of Ukraine keep pushing too far.

That said, Putin has many other cards to play and time to play them. These include sitting back and doing nothing, cutting off Russia’s subsidies to Ukraine, making it ever more difficult for Yanukovich’s successors to cope with the harsh realities. And Moscow has ways to remind the rest of Europe of its dependence on Russian oil and gas.

Another Interference

There is one huge difference between Prague in 1968 and Kiev 2014. The “Prague Spring” revolution led by Dubcek enjoyed such widespread spontaneous popular support that it was difficult for Russian leaders Leonid Brezhnev and Aleksey Kosygin to argue plausibly that it was spurred by subversion from the West.

Not so 45-plus years later. In early February, as violent protests raged in the Ukrainian capital of Kiev and the White House professed neutrality, U.S. State Department officials were, in the words of NYU professor emeritus of Russian studies Stephen Cohen, “plotting a coup d’état against the elected president of Ukraine.”

We know that thanks to neocon prima donna Victoria Nuland, now Assistant Secretary of State for European Affairs, who seemed intent on giving new dimension to the “cookie-pushing” role of U.S. diplomats. Recall the photo showing Nuland in a metaphor of over-reach, as she reached deep into a large plastic bag to give each anti-government demonstrator on the square a cookie before the putsch.

More important, recall her amateurish, boorish use of an open telephone to plot regime change in Ukraine with a fellow neocon, U.S. Ambassador Geoffrey Pyatt. Crass U.S. interference in Ukrainian affairs can be seen (actually, better, heard) in an intercepted conversation posted on YouTube on Feb. 4.

Yikes! It’s Yats!

Nuland was recorded as saying: “Yats is the guy. He’s got the economic experience, the governing experience. He’s the guy you know. … Yats will need all the help he can get to stave off collapse in the ex-Soviet state. He has warned there is an urgent need for unpopular cutting of subsidies and social payments before Ukraine can improve.”

And guess what. The stopgap government formed after the coup designated Nuland’s guy Yats, Arseniy Yatsenyuk, prime minister! What luck! Yats is 39 and has served as head of the central bank, foreign minister and economic minister. And, as designated pinch-hitter-prime-minister, he has already talked about the overriding need for “responsible government,” one willing to commit “political suicide,” as he put it, by taking unpopular social measures.

U.S. meddling has been so obvious that at President Barack Obama’s hastily scheduled Friday press conference on Ukraine, Yats’s name seemed to get stuck in Obama’s throat. Toward the end of his scripted remarks, which he read verbatim, the President said: “Vice President Biden just spoke with Prime Minister [pause] – the prime minister of Ukraine to assure him that in this difficult moment the United States supports his government’s efforts and stands for the sovereignty, territorial integrity and democratic future of Ukraine.”

Obama doesn’t usually stumble like that – especially when reading a text, and is normally quite good at pronouncing foreign names. Perhaps he worried that one of the White House stenographic corps might shout out, “You mean our man, Yats?” Obama departed right after reading his prepared remarks, leaving no opportunity for such an outburst.

Western media was abuzz with the big question: Will the Russians apply military force? The answer came quickly, though President Obama chose the subjunctive mood in addressing the question on Friday.

Throwing Down a Hanky

There was a surreal quality to President Obama’s remarks, several hours after Russian (or pro-Russian) troops took control of key airports and other key installations in the Crimea, which is part of Ukraine, and home to a large Russian naval base and other key Russian military installations.

Obama referred merely to “reports of military movements taken by the Russian Federation inside of Ukraine” and warned piously that “any violation of Ukraine’s sovereignty and territorial integrity would be deeply destabilizing.”

That Obama chose the subjunctive mood – when the indicative was, well, indicated – will not be lost on the Russians. Here was Obama, in his typically lawyerly way, trying to square the circle, giving a sop to his administration’s neocon holdovers and R2P courtiers, with a Milquetoasty expression of support for the new-Nuland-approved government (citing Biden’s assurances to old whatshisname/yatshisname).

While Obama stuck to the subjunctive tense, Prime Minister Yatsenyuk appealed to Russia to recall its forces and “stop provoking civil and military resistance in Ukraine.”

Obama’s comments seemed almost designed to sound condescending – paternalistic, even – to the Russians. Already into his second paragraph of his scripted remarks, the President took a line larded with words likely to be regarded as a gratuitous insult by Moscow, post-putsch.

“We’ve made clear that they [Russian officials] can be part of an international community’s effort to support the stability of a united Ukraine going forward, which is not only in the interest of the people of Ukraine and the international community, but also in Russia’s interest.”

By now, Russian President Vladimir Putin is accustomed to Obama, Secretary of State John Kerry, National Security Adviser Susan Rice, et al. telling the Kremlin where its interests lie, and I am sure he is appropriately grateful. Putin is likely to read more significance into these words of Obama:

“The United States will stand with the international community in affirming that there will be costs for any military intervention in Ukraine … and we will continue to coordinate closely with our European allies.”

Fissures in Atlantic Alliance

There are bound to be fissures in the international community and in the Western alliance on whether further provocation in Ukraine is advisable. Many countries have much to lose if Moscow uses its considerable economic leverage over natural gas supplies, for example.

And, aspiring diplomat though she may be, Victoria Nuland presumably has not endeared herself to the EC by her expressed “Fuck the EC” attitude.

Aside from the most servile allies of the U.S. there may be a growing caucus of Europeans who would like to return the compliment to Nuland. After all does anyone other than the most extreme neocon ideologue think that instigating a civil war on the border of nuclear-armed Russia is a good idea? Or that it makes sense to dump another economic basket case, which Ukraine surely is, on the EU’s doorstep while it’s still struggling to get its own economic house in order?

Europe has other reasons to feel annoyed about the overreach of U.S. power and arrogance. The NSA spying revelations – that continue, just like the eavesdropping itself does – seem to have done some permanent damage to transatlantic relationships.

In any case, Obama presumably knows by now that he pleased no one on Friday by reading that flaccid statement on Ukraine. And, more generally, the sooner he realizes that – without doing dumb and costly things – he can placate neither the neocons nor the R2P folks (naively well meaning though the latter may be), the better for everyone.

In sum, the Nulands of this world have bit off far more than they can chew; they need to be reined in before they cause even more dangerous harm. Broader issues than Ukraine are at stake. Like it or not, the United States can benefit from a cooperative relationship with Putin’s Russia – the kind of relationship that caused Putin to see merit last summer in pulling Obama’s chestnuts out of the fire on Syria, for example, and in helping address thorny issues with Iran. more

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