Ian Welsh

The horizon is not so far as we can see, but as far as we can imagine

Category: Russia and Eastern Europe Page 15 of 18

Ukraine and the perils of lack of commitment

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On February 23, 2015

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The Ukrainian government has essentially admitted that their military is defeated.  The separatists (with Russian backing) are in the ascendent.  NATO countries are being mealy-mouthed about whether or not to send arms.  For now, Putin and Russia appear to have won, and any deal will have to be on their terms.

The protests which caused the crisis by engendering a coup were heavily backed by America, and to a lesser extent by the Europeans (much lesser, Europe was aware of the potential for disaster.)

America spent decades trying to get the Ukraine into the Western, NATO orbit, as a way of making sure that Russia could never rise as a European power again.

Then, having finally gotten a government which would do what it wanted, they blinked (or one hopes they have.)

Why?  Because the Ukraine is far more important to Russia than it is to the West.  They were right: Russia can’t afford to have Ukraine fall into Western hands, let alone join NATO.  Leaving aside the “empire” issue, it would put troops far too close to Moscow.

So Russia gave the separatists the necessary aid to win and America did not give the government the aid it needed.

Hung out to dry.

The game is not over, however.  In particular the results of the coming presidential election in America will matter a great deal.  Hilary Clinton is even more of a hawk than Obama, and has repeatedly insulted Putin.  She is much older than Obama and she grew up in the Cold War.  She seems to genuinely fear the rebirth of a modern version of the USSR or the Russian Empire, and she’s been playing a hawk for so long that I believe she now really is one.

Many of the potential Republican candidates are little better.

I don’t regard this is as necessarily a good thing, both because Russia is unlikely to blink, and because the antagonists are nuclear armed.

But there is a window to make a deal: Ukraine not in NATO, and federalized, with some sort of economic arrangement which acknowledges its dependence on Russia.  Ukraine’s window for this is closing not just because of the possibility of American intervention (which might be in the interests of the government, but is unlikely to be good for the actual population: war on your own soil rarely is), but because Russia is moving to reduce its dependence on pipelines thru the Ukraine to Europe.  Once they no longer need Ukrainian pass-through, they can simply shut the pipelines off.

Ukrainian winters are very cold.  Very.  And much of their industry needs those hydrocarbons.  Getting them from anyone but Russia will be much more expensive, and will come at the cost of massive IMF austerity and foreign buyouts of everything the Ukraine has worth owning.

Let us hope a deal is made, for everyone’s sake.

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Why We Should Want the Return of a Two World System

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On February 16, 2015

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Before the collapse of the Soviet Union, there was a two-world system. If you didn’t like the deal that US was offering you, you could go the USSR.  If you didn’t like the deal Russia was offering you could go to the US.

While the US probably offered a better deal, especially in later years, you could have a pretty decent life as a client state to the Soviets.  Cuba under Castro had a higher standard of living in practically every way than it did pre-Castro, when it was an American client state.

Equally, you could play the two off against each other, looking for the best deal.  This made it harder for them to screw you over.

As the USSR weakened, the deals became worse.  The USSR of the 80s could not offer what the USSR of 50s could.  Still, the ability to tell the superpower of your choice, who feared and hated the other superpower, that they had to treat you at least slightly right had benefits.

I certainly don’t want to romanticize the cold-war period.  There were ugly coups, torture regimes and wars.  There was famine.  But while we have less of that today, we don’t have less of it because of the end of the cold war.  Indeed, we have more failed states than we did during the cold war, because it is in no one’s particular interest to pick them up.

So one of the events that I have been tracking since the early 2000’s (as has Stirling) is when a viable second bloc would emerge.

To be viable, a bloc must be able to:

  • Provide relatively high technology;
  • Provide development: power, roads, railways, etc;
  • Provide the consumer goods people want;
  • Provide credit;
  • Feed countries which need food;
  • Provide energy (which still means oil and other hydrocarbons, though that’s changing);
  • Provide some sort of credible military aid or umbrella.

Yesterday I wrote about Russia creating its own bank payments system to compete with the West’s SWIFT. This is important, because since the fall of the USSR, the West (or more accurately, America) has increasingly used this to punish those nations it does not like.  Piss off Washington and they will shut down your ability engage with global credit markets, and even the ability of your citizens to use credit cards.  Pretty soon you can’t buy what you want, even if you have the money, or you pay a huge premium.

So the creation of a Russian SWIFT, while woefully inadequate by itself, was a first step towards meeting one of the needs of a new bloc with rivals the West.

The linchpin nation in any new bloc would be China.  China can credibly provide development, credit and consumer goods (they make much of them anyway.)  But China will also need countries which can supply oil and raw materials: Russia, Venezuela, Iran,  Argentina, and so on.  Much of South America would rather sell food and raw materials to China (or Russia, or whoever) than to the US, because they remember, well, not being treated very well by America during and after the Cold War.

Russia’s military technology, while not as good as America’s, is good enough for most purposes, and China, as is usually the case, has vast amounts of shipbuilding capacity for those who want a navy.  America’s space program is charging forward (mostly privately) but Russia still has plenty of lift capacity for satellites, and China is working hard on its space program.

The BRICS have created their own development bank, as well, so combined with an expansion of the new SWIFT, credit which can be used to buy almost anything you want, or need, will be available.

This, my friends, is the configuration in which the unipolar moment (which has lasted two and a half decades so far) ends.

It was always going to end, for all things do, the question was how soon.  American actions have accelerated what should have taken a couple decades more, significantly, by marginalizing too many countries.  Marginalizing or destroying the occasional country was acceptable, but the number marginalized is just too high, and they have too many resources.  Combined with a great manufacturing nation, they have essentially everything they need: they don’t need the West.

And they may be wondering why they are paying intellectual property taxes (that’s what they are) and interest fees to the West, when the West clearly isn’t acting in their interest.  Why have America and Britain gain all this, when they can reap the money themselves.

Oh, there are still some areas where the West is clearly ahead, from turbines to aerospace.  But they tighten by the year, and they aren’t anything necessary any more. Virtually everything you want, save a few luxury items, you can get without America or Europe being involved.

The question now, then, is the timing and the exact events.  But the broad outline is visible and will accelerate, because it is in too many countries self-interest.

The Great Game, the Great Game never ends.

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Russia Creates Its Own Payment System

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On February 15, 2015

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This is important:

Almost 91 domestic credit institutions have been incorporated into the new Russian financial system, the analogous of SWIFT, an international banking network.

The new service, will allow Russian banks to communicate seamlessly through the Central Bank of Russia. It should be noted that Russia’s Central Bank initiated the development of the country’s own messaging system in response to repeated threats voiced by Moscow’s Western partners to disconnect Russia from SWIFT.

Much of the West’s power comes from our financial hegemony. Our ability to cut people off from loans, payments and so on.  Since this new system is Russian only, it isn’t, right now, that big a deal.

But start connecting other countries to it, say China, Iran, India and so on, and it becomes a way of breaking financial blockades.  Include some calculable financial law (less of a challenge than it used to be as New York and London courts make increasingly punitive decisions), and start lending in Yuan (with which one can buy much of what one needs in the world, since the Chinese make so much of it), and you have a fully credible financial system.

The key is to get one major manufacturing country in.  Most of the nations the West is punishing these days, financially, are oilarchies ( Venezuela, Iran, Argentina).  They need the ability to buy manufactured goods.  The obvious country is China.  If China agrees to go in, Western financial hegemony is broken.  Japan could work; India could almost work, and Japan or India have a lot more to gain from it than it might seem (as we watch the Japanese economy implode.)

Even before then there are deals which can be cut.  Say Greece wants to buy Russian oil.  Russia can lend them Rubles, the use those rubles to buy Russian oil, in exchange Russia gets use of Greek ships and ports and access to the EU.

This is, then, in one sense, not a big deal.  As long as its only Russia, it’s a defensive move of somewhat limited utility.

But if it expands beyond Russia, well then, it’s earth-shaking.

Get out the popcorn and watch it develop.

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So, the Separatists are now on the offensive in the Ukraine

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On January 24, 2015

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Granted, I think the evidence points to significant Russian support.  Nonetheless, the Ukrainian army is just embarrassing at this point.

Back in 2008 I wrote that Crimea and the Ukraine would be the next likely flashpoint, and that Russia would never tolerate any possibility of losing Sevastapol.  The serious people who know how the world works told me how wrong I was—that the Ukraine and Europe and Russia were in a mutually beneficial arrangement.

But arrangements change, and Russia has always been a country with a clear view on what its strategic interests are.

So now we have an economic war against Russia and a shooting war in the Ukraine, encouraged by the Russians (and by the Americans: the first big Ukrainian offensive occurred after CIA chief Brennan visited.)

Sanctions did little to the Russian economy, but crashing oil prices did.  Russian currency dropped almost exactly in concert with the drop of oil.  Given the consensus that dropping oil prices so precipitously was a Saudi decision, meant in part to take out high cost unconventional oil production, but also in part to damage Russia and Iran, this can only be seen as hostile foreign action by the Russians.

Russia’s vulnerability is due to mistakes made by the Russians.  The lack of diversification of the economy, and the vast corruption made Russia a petro-state, reliant almost entirely on oil revenues.  Countries which need to import a great deal are always vulnerable to foreign economic action.

The question, then, is this: how threatened does Putin and the rest of the Russian leadership feel?  Putin is unlikely to survive a leadership change for long unless it is his hand-picked heir who takes over, and maybe not even then.  Many others in his government would similarly be in danger.

If they feel endangered, then the traditional thing to do is start a war.  This proxy-war in the Ukraine may not be enough.

Keep an eye on the security of Putin’s leadership.  If it starts looking insecure, the Americans will think they are close to getting what they want: a new leader, who will understand he rules only so long as they are kept happy.  But it will also be the point Russia becomes most dangerous.

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Exchange Rates 101

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On December 18, 2014

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In light of the collapse of the Ruble I think it’s worth revisiting what controls exchange rates.

Supply and Demand.

Yeah, if you know something about the subject you’re probably shaking your head.

Supply and Demand doesn’t set prices in many cases in the way that an Economics 101 course tells you.

Such texts will say that the exchange rate is based on exports and imports.

For many countries, that isn’t true; or not all the time.  The US dollar can move up even when the trade balance is south (as it has been for decades now.)  The same is true of many other economies.

Britain hardly exports anything any more.  But people want to live in London.  Or they want the city to invest their money, or they want to buy art at Sothebys, or they just want a relatively safe place they can run to if the politics in their country go south.

People likewise want Manhattan real-estate; a US passport, and so on.  A vacation or home in Paris or the South of France.

They want to buy stocks in important companies which are defining the future, like Apple, or Tesla, or Google, even if those companies manufacture overseas.

They want money in China to take advantage of China’s high growth rate and returns, while Chinese want money out for diversification and to have a safe place to go if the politics turn against them.

People don’t want vacation homes in Russia, by and large.  They may want to take advantage of growth opportunities (which exist in certain sectors), but before the sanctions they were scared of corruption (with good reason) and post sanctions they are worried about getting returns out.  Since most of Russia’s exports are of hydrocarbons, and since people don’t want to move money into Rubles otherwise, the value of the Ruble in terms of other currencies moves up and down with the price of hydrocarbons.

There are other factors, for example if you offer high returns, that can matter (raising returns didn’t matter to Russia, because the potential value was swamped by fears of further ruble and oil devaluation.) Speculation of future gain or loss in the futures and options markets can raise or lower the value of your currency as well.  You can fix your currency and you can make it stick if your economy is strong enough in specific ways (mostly having to do with producing what you need).  China did this for years, and so have many other countries.  This can lead to black market currency markets and problems, but that can be better than the alternatives (as Russia may now be finding out.)

But if you float your currency, the bottom line is that excahnge rates (with a few exceptions) to rise and fall based on how much people want from  your country which they have to buy with your currency.

Collapse of oil prices and the Russian Ruble

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On December 16, 2014

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These are the same thing.  Russia sells oil to the world, and their currency is based on the price of oil.  (It is for this same reason that the Canadian dollar has been sliding.)

Putin has been a competent leader for Russia in many ways, but the failure to diversify the economy from oil is his primary failure.  You might say “corruption”, but resource economies are almost always corrupt.  The only way to (somewhat) avoid it is to put the money away in a sovereign fund or the equivalent.

It is also important to not allow the currency to become a resource currency, because that crushes all other export businesses.

Why did the price of oil drop?  There are a lot of theories, from screw-ups in the futures market, to increased supply and reduced demand, to intent to destroy Russia.

What is interesting is that OPEC (meaning, in this case, Saudi Arabia) has refused to do anything to stabilize oil prices and prevent the collapse.

Saudi Arabia needs higher oil prices, they have no economy other than oil of significance, but they also have more ability to handle oil price collapses.  Saudi crude is cheap to produce, under $10/barrel.  The profit may be less, but they are making a profit.  A lot of Russian, American, Canadian and other oil is not profitable at low prices.  Letting oil prices be low for a year or two will probably help Saudia Arabia more in the long run.  Certainly it hurts their competitors more than it hurts them.

Many also believe that the US and Saudi Arabia are doing this deliberately to hurt Russia.

Of more fundamental interest is that China has been buying less and less commodities (not just oil, but metals like copper).  China is the most important economy in the world now for hard commodity prices.

The Ruble collapse is going to hurt a lot of people, most especially the Europeans.  Europe sells a lot of goods and services to Russia, and Russia is no longer going to be able to afford them.

For now, low oil prices will be good for the US, but the general commodity price drops are hammering many other countries, and that will lead to reduced demand globally.  This isn’t a good thing, however much many Americans are enjoying Russia (and Putin”s woes.)

I will note also that Russians seem to be blaming the West for the collapse of the Ruble.  That’s a good thing if they decide going supine will help them.

It’s not a good thing if they get angry about it and decide the West (meaning the US) is deliberately trying to destroy them.

Rumors of the Ukrainian Rebels demise

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On September 9, 2014

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were exaggerated.  Or rather, the information in the Western press was essentially propaganda.

I think it’s worth acknowledging that I swallowed it, only to be corrected by a number of readers.  The Ukrainian rebels were tougher than I expected, Russian support seems to have been more significant and the Ukrainian military was simply not up to the task.  They couldn’t win the street fighting.

This means that Russia still has a strong negotiating position with regards to Ukraine’s future: their preferred option, of course, is federalization and forbidding NATO expansion into the Ukraine.

Meanwhile we must continue to keep an eye on sanctions.  The risk here is real sanctions being imposed on Russia, Russia retaliating with a gas shut off and an economic collapse in Europe.  Note that the key player here is actually China, who can easily keep Russia afloat if they choose to (China is printing far more money than the Fed was at the height of its unconventional monetary policy.)  The West keeps assuming it is the only game, and that it controls the money spigots: shut them off and they can crush anyone.  That is no longer true.  The question will be “what does China want to keep Russia afloat, or alternately, from the West, to cut them off.”

In my opinion, while China and Russia have some differing interests, those pale compared to their need for each as allies against the West.  The American Foreign Affairs and security establishment has been clear that they want to pivot against China, whom they see (correctly) as the largest threat to American hegemony.  For China to allow the West to crush Russia would be a colossal mistake, especially when the cost of keeping them alive is not that significant a world awash with printed money.

As for Europe, they are being fools and they will pay the price for it.  Satraps of a self-interested and cruel hegemonic power are never treated well, and Europe does not need to be a satrap, yet chooses that path against their own self-interest.

So be it.

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The End of the Rebels in the Ukraine and the Ukraine’s Future

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On August 20, 2014

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We’re down to street fighting in Donetsk.  The Russian leaders resigned in the last two weeks.  The rebels appear to be done, at least in terms of their conventional military phase (of course, I could be wrong depending on how much stomach Ukrainian troops have for house to house fighting).  It seems like that would only change if Russia decided to actually invade, and that seems unlikely (though predicting Putin’s decisions is always difficult.)

The Eastern Ukraine, bottom line, does not have enough support for joining Russia, nor coherent enough borders to avoid the West and Ukraine running an insurgency in it.  Conquering it would leave Russia controlling territory which could turn into a bleeding ulcer if it didn’t join peacefully (unlike Crimea, where the population overwhelmingly wanted to join, and where the geography is highly defensible.)

I’m not sure this is the “right” decision for Russia, because I can’t see that Ukraine won’t become a NATO member rather soon if Russia’s preferred solution, federalization with anti-NATO guarantees does not happen.

However, Russia does still have leverage: there are enough Eastern Ukrainians who will now hate the central government and want to join Russia, and the border is long enough and porous enough, that Russia can easily support an open ended insurgency within Ukraine.

Likewise, Winter is Coming, and the prospect of turning off the gas to the Ukraine and Europe will become much more effective.  Russia may believe that these two factors will enable it to get its minimal demands.  I doubt it, personally, because NATO expansion to Ukraine is something the US wants desperately, but we’ll see.

We move now to Ukraine’s future.

Dismal. Absolutely dismal.

Ukraine will be the second Greece of Europe, and soon.  Pensions slashed by half, gas prices through the roof, crown jewels sold to Westerners, civil servants slashed to the bone.  Its industry is integrated not with Europe, but with Russia, and Russia will move to get rid of its dependency on Ukrainian factories as fast as it can, especially as some of those factories create key defense equipment, and the Ukraine obviously cannot be counted on to supply them in any time of crisis, going forward.

Those factories are not competitive with Western factories, and when energy prices skyrocket, they won’t even be competitive with Russian factories.

Ukraine has some hydrocarbon reserves (though much will be lost with Crimea); it is an agricultural breadbasket, and that’s about all it has going for it.  Again, the economy will be opened by the IMF to the West, and whatever is worth buying, and throws off actual profits or can be downsized and firesaled, will be sold to Westerners.

Ukrainians, including the Western Ukrainians who think that joining the West will solve their problems, are about to find out that Russia’s deals and treatment were far more kind than anything the IMF will do to them.  Eastern Ukrainians, having lost a war, and being FAR more dependent on Russia, will find their economy devastated within a few years.  (This will make them far more willing to resort to violence again, of course.)

The key thing to watch now will be the negotiations between Russia, Ukraine and Europe to see if there are any NATO guarantees.  If not, well, we’ll see what the Russian response is.  Internally the Russian public does not want to attack Ukraine to take Eastern Ukraine, but that could change if an atrocity occurs or is created.  More likely, support for an insurgency, then the Ukraine building a huge wall across its border, and as noted, economic ruin.

This game isn’t over yet.  In a few years Russia may yet wind up with the East, with its citizens practically begging to join.  Not mostly because of anything Russia does, but because of what the IMF does.

Note also that efforts to de-dollarize the world are ongoing by the BRICS in general, and China in particular, and Russia is moving to decouple as much of its economy as it can from the West. In a few years the West will have far fewer levers to pull to hurt Russia.

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