Category Archives: Economic

Britain, Economic, European Union, Financial Markets, Government, Politics, Russia, Society, Ukraine, United States

What will happen next following the crisis in Ukraine?

ECONOMIC REALITIES

Intro: Economic havoc and a global slump could materialise from the crisis in the Crimea

So far, financial markets in the West have remained remarkably undisturbed in the face of the crisis unfolding in Ukraine. Following Crimea’s referendum at the weekend, which effectively sealed Vladimir Putin’s grip of the Ukrainian peninsula, sanctions were always likely to follow. Whilst, then, we may anticipate just how long the sanguine calm will continue, Western leaders should also be careful of supplanting diplomacy with threats to Russia that they are unwilling or unable to back up. The decision by the European Union and United States to impose sanctions on several Russian officials is a limited response to the breach of international law that has taken place in Crimea. The measures include travel bans and the freezing of assets against individuals who were deemed to have played a major role in the referendum – a vote, officials say, in which 97 per cent of voters backed a breakaway from Ukraine and, instead, opted to join the Russian Federation.

In the years since the dissolution of the Soviet Union, Russia has steadily become more integrated into the global economy. We know that many rich Russians have shifted their gains (ill-gotten or otherwise) into more stable and secure environments, such as investing on the London Stock Exchange or by diversifying their stocks in the UK property market. In actual fact, more money has flowed into Russia than out. According to data from the Bank for International Settlements, foreign owned banks have lent the country at least $260 billion. That is nearly double the value of its estimated assets in the West. As a consequence, Russia’s bilateral trade has risen to more than $100 billion annually. Almost a third of Europe’s gas, coal and oil imports come from Russia, and there has been a huge upsurge in direct investment by foreign firms.

Rhetoric used by the international community implied that there would be consequences if the referendum went ahead while the peninsula was still occupied by Russian troops. No doubt, Mr Putin will have considered the penalty a price worth paying. The question now, though, is what will happen next. Washington insists the screw will be tightened if the situation were to escalate in Ukraine – a distinct possibility that could happen fairly swiftly since the aim of the Crimean separatists is to secede from Ukraine within a month. They also aspire to adopt the rouble and by joining the Russian time-zone.

Whilst a military response to Russian aggression has already been ruled out by Western leaders, meaningful sanctions are not really much of an option, either. A full-blown trade-war would inflict serious damage on both sides. However, capital flows between Russia and the West are already in a parlous state in anticipation of lesser action, including assets freezes and travel restrictions already imposed. In order to defend the rouble, Russians are withdrawing billions from Western banks and selling off US Treasury Bonds. Mr Putin also raised interest rates to 7 per cent; a move that will discourage capital outflights from Russia to the West, a rate of interest that will be far more attractive for Russians to invest at home. The West seems certain to reciprocate by dumping Russian assets.

Yet, this all comes at a particularly delicate time for the world economy. Emerging markets, including China, have rapidly slowed down; the Eurozone is expecting a period of deflation to start anytime soon; and, America’s economy has started to inflict severe withdrawal symptoms to many countries around the world following its tapering of quantitative easing. The global economy may be just one sharp shock away from lurching into another recession.

A standoff with Russia over Crimea’s breakaway is the last thing the world needs. Economic considerations cannot surpass the higher purpose of defending international law, and as such must be secondary to it. Nonetheless, the interplay between politics and economics is what is making this situation so dangerous and destabilising. All concerned should be aware of just how very much more disruptive this crisis could yet become.

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Economic, European Union, Government, History, Russia, Society, Ukraine, United States

An outcome in Crimea must be fair…

CRIMEA

Intro: The current situation in Ukraine has been described as the biggest crisis in Europe since the turn of the 21st century

Russian troops are now controlling Crimea in the south-east of the country. The chaos in the former Soviet state is the most troubling development on European soil since the turn of the millennium. The crisis has all the hallmarks of a 20th century conflict; one that resembles the days of the Cold War, or even beyond it. The American missile destroyer USS Truxton has arrived in the Black Sea and will permitted to stay there for a period of only 21 days under the Montreux Convention, an international agreement that allows a warship of any non-Black Sea country to be in its waters.

Whilst European leaders have spoken about ramping up tough diplomatic measures against Russia, Vladimir Putin is unperturbed and so far seems untroubled by the prospect of their disapproval. Mr Putin is determined to see the Crimean peninsula become part of his wider Russian Federation, particularly given the economic advantages to the Russian economy of its offshore gas fields. There also remains a strong pro-Russian element in the Crimea, a factor that Mr Putin will wish to capitalise upon. It was, after all, fierce disagreement over whether Ukraine should forge closer links with the European Union or Putin’s Russia which brought about the crisis in the first place. The very idea that former Soviet states be integrated into the European Union is an anathema to Mr Putin as he seeks, instead, to build a Russian dominated Eurasia Union.

The American missile destroyer USS Truxton has arrived in the Black Sea and will permitted to stay there for a period of only 21 days under the Montreux Convention.

The American missile destroyer USS Truxton has arrived in the Black Sea and will permitted to stay there for a period of only 21 days under the Montreux Convention.

But with European measures to find a solution reaping little success, the arrival of a US destroyer in the region seems likely only to exacerbate the situation. Russia has a strong naval presence in the Crimean port of Sevastopol, the deployment of US gunboat diplomacy surely misreads the temperature in the Ukraine and the temperament of the Russian president. The Americans insist that Truxton is merely participating in a ‘planned exercise’, but the timing of its arrival will be more suspicious to those who doubt such an announcement.

Observers and analysts have turned to the 20th century to draw parallels with the actions that led to both world wars. It is not unthinkable that the crisis in Ukraine could be allowed to escalate with similar consequences.

On 16 March, the people of Crimea will be offered two choices in a referendum – they can either vote to become subjects of the Russian Federation or by favouring the restoration of the 1992 Crimean constitution (which would be a declaration of independence from Ukraine). Transparent democracy seems the only hope for a peaceful solution.

Crucially, however, this referendum doesn’t offer citizens the choice to remain with the status quo, with Crimea as an autonomous republic within Ukraine. The options on offer are either to join with Russia or declare independence, then join with Russia soon after.

The referendum has no credibility. How can it be when the outcomes it promises amount to no more than a stitch-up? The West should be concerned that the people will be asked to make a decision while their homeland has effectively been seized by Russian forces. Putin may tell the world that his troops are there to protect Russian speaking people, but that argument ran out the very moment Russian soldiers displayed their intention to protect by pointing their threatening weapons in the direction of their Ukrainian counterparts.

Mr Putin’s troubling empire-building is at the heart of the issue. It may well be that a majority of the people of Crimea will choose to enter the Russian fold. We would have no concerns if such a transition took place openly and democratically, and in full view of the world. A vote is needed that is open, honest and fair, and a plebiscite that is carried out without Russian soldiers prowling the streets.

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Britain, Economic, European Union, Government, Russia, Ukraine, United States

Drawing a line with Russia…

THE UKRAINIAN DICHOTOMY

Intro: The West should have concerns, and these should leave Mr Putin in no doubt that his forceful entries in Georgia in 2008 and now in Ukraine, cannot be allowed to extend to those former Soviet countries – such as in the Baltic States – that are now part of the European Union and NATO, but which also have Russian-speaking populations

A meeting of the NATO-Russia council earlier this week to discuss events unfolding in Ukraine was a welcome development in the efforts to defuse the crisis. Dialogue has been important because not only is ‘jaw-jaw’ better than ‘war-war’, but because of the need to minimise the risk of misunderstandings and misjudgements.

The West appears to have allowed the Russians to annex Crimea without the slightest of physical restraint, a position that has immediately led to the Kremlin redrawing the map of Russia that now contains and subsumes the southern region of Ukraine. The perception that the West was rather relaxed was reinforced when a document photographed in the hands of a British government security adviser appeared to rule out any direct response to Russian aggression in Crimea, whether military action or economic sanctions. There is also irony in the fact that Vladimir Putin says he did not aim in annexing the Crimea, a portrayal that will be impossible for some to untangle.

A political anomaly arose, too, when the US Secretary of State, John Kerry, said that Washington was reaffirming its guarantee of Ukraine’s territorial sovereignty and integrity as set out in the Budapest Declaration of 1994, which the UK is also a party and signatory to. How, though, this can possibly extend to keeping Crimea within Ukraine is not clear. Even if sanctions are off-limits – for the Government will be acutely aware that any British sanctions could soon backfire, such as energy supplies from Russia to Europe being curtailed or Russian capital outflights from the City of London – it is difficult to see Mr Putin being cowed by diplomatic isolation or the cancellation of the planned G8 summit in Sochi in June. No doubt, the Russian leader can probably have confidence in the quickly arranged referendum planned for March 30, which will aim to grant greater autonomy for Crimea, to do his annexation for him.

But the West should have concerns, and these should leave Mr Putin in no doubt that his forceful entries in Georgia in 2008 and now in Ukraine, cannot be allowed to extend to those former Soviet countries – such as in the Baltic States – that are now part of the European Union and NATO, but which also have Russian-speaking populations.

John Kerry said the United States did not seek a confrontation with Russia, but will stand-by Ukraine. How, when US sanctions on Russia has already led to Mr Putin selling billions of dollars’ worth of his country’s gold in propping up the Russian Rouble? Further volatility on the Russian currency could have a devastating effect on the livelihoods of almost all Russians.

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