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The Chinese Solution to the Ukrainian Problem

2014 March 5
by Ian Welsh

The Ukraine was a mess even before the crisis:

  • Massively in debt.  35 billion needed over the next two  years.
  • Aging industrial sector, located primarily in the east, which produces steel goods that no one but Russia is willing to buy.
  • Massive inequality, and a private sector controlled almost entirely by oligarchs.
  • A genuinely split population, politically.
  • Vast corruption.
  • Unable to provide enough energy for its own industries and citizens.
  • Not able to sell enough to foreigners to pay for what it needs to import.

The IMF had offered 4 billion dollars, contingent on ending energy subsidies and opening the economy up.  Ending energy subsidies would double price of energy, which would mean that the aging industries would go out of business and many Ukrainians would freeze next winter, because they can’t afford the higher prices.  The EU trade deal was nothing special either: they don’t want Ukraine’s steel or lousy, Soviet era goods.

The Ukraine has almost nothing going for it.  But it does have one thing: it’s a breadbasket.  The Ukraine exports a ton of wheat.

There are growing food shortages, and food prices have been rising faster than inflation for years.  They will continue to do so.

The country which has expressed the most interest in Ukraine’s wheat is China.  They offered, at one point, to rent fully 5% of the Ukraine’s land to farm.

China is the country in the world throwing off the most money right now, their money creation dwarfs even the United States.  They cannot grow enough grain to feed their own population.  China is also the only great power which still offers development to its partners: the Chinese have built roads, ports, airports and factories in Africa and Asia.  Further, so long as deals are kept with them, the Chinese do not care what is done internally: they don’t consider it any of their business.  Their money is not contingent on other countries engaging in the sort of austerity that the IMF, Europe and the US like to force on anyone who goes to them for money.

China is also willing to lock into long term deals, and to pay somewhat more than the market rate to insure a guaranteed supply of whatever commodity they need, whether that be oil or food.

The Ukraine has two problems which cannot be tackled under the West’s aegis: inequality, and debt.  The West simply will not allow a massive restructuring or default of debt and still give the Ukraine money.  Does not happen: oligarchs are sacred in the West.  But what the Ukraine needs to do is restructure its debt: turn it all into 100 year bonds at 1% and tell investors to take it or leave it.  And they need to expropriate the oligarchs: take away their money, power and holdings.

Neither of these things, again, can be done under the West.  And once done, the West will generally refuse to trade the Ukraine what it needs.

So the obvious play is to expropriate the land needed to make a deal with China.  Cut a deal with China to take virtually all of the Ukraine’s grain exports, to develop the Ukraine’s land and make its farming even more productive, and to sell the Ukraine the goods the West will stop selling them.

Meanwhile, since Russia and China are on great terms, you don’t take the Western/IMF deal, you take the Russian offer, because in addition to food the one thing you MUST have is oil and natural gas, and Russia will give you a discount on those.  The only people whose debts you don’t roll over into 100 year bonds are the Russians (though you do renegotiate with them, and yeah, you can probably get great terms if you swing back into their sphere of influence and join their trade area.)

The odds of this happening, are, of course, exactly zero.  The Ukraine’s west, and the current government are caught in this weird delusion where they think that, like Poland, they can get prosperity by orienting to Europe.  They can’t, those days have passed, and Poland is not the Ukraine (among other things, it has very low inequality.)  And the current government is in bed with the oligarchs: they turned on the last government at the right time, and the new government is appointing them to key posts.

However, things change: Europe and the IMF will wreck the Ukraine (that’s what they do), and things will get worse for ordinary people (there may be a hiatus where things get better due to a land bubble, we’ll see).  When it does, Ukrainians will have another chance to realize that Western nations aren’t their friends, and only care about them as a took to screw with the Russians, or to the extent there is something of value left to loot.

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“Consequences” for Russia over the Ukraine

2014 March 3
by Ian Welsh

Obama and Kerry have both told Russia there will be consequences for their actions in the Ukraine.

The question is “what consequences?”  The only thing the West can do which would really hurt Russia and Putin is strong financial sanctions: freeze Russian accounts, institute a trade embargo, etc—the full Iran treatment.

The problem is that Europe needs Russia’s natural gas and oil and Britain, aka. London, aka. The City, needs Russian money.  London is awash in Russian cash, and the London Real Estate market would most likely crash if real financial sanctions were put on Russia.  Since real-estate and financial games are the only thing keeping Britain afloat, this is a total no-go: completely unacceptable to Britain.

Germany, meanwhile, will find any sanctions on energy completely unacceptable.  They can’t replace all that natural gas before next winter, even if the US agrees to sell American natural gas to Europe.

The Russians, to put it crassly, have paid their bribes.  They have made the right people in England, and Europe, rich.  On top of that they supply something Europe absolutely must have: hydrocarbons.

Further, if real sanctions, like the Iranian ones were applied to Russia, the price of oil and natural gas would spike so high the world economy would go into a tailspin, even before one considers the spin-off financial effects.  Russia would then orient hard to China, who in no way would go along with such sanctions, and while the initial affect would be massive, in time, all that would happen is that Russia would now firmly be a Chinese client state.

Many have noted that the ruble is dropping relative to the dollar and the Euro and say that “markets” are punishing Russia.  They aren’t, because oil and natural gas prices have increased, and Russia doesn’t get paid for hydrocarbons in rubles.  In fact, the crisis will probably make Russia money.

The intermediate sanction would be Visa restrictions on Putin’s closest associates, along with freezing their accounts.  The problem with that is that Putin has plenty of ways to retaliate, starting with not letting the US get its gear out of Afghanistan when the Afghan government kicks the Americans out.  (Getting that gear out through Pakistan will be much harder, dangerous and much more expensive.)

China, of course, is the actual threat to American hegemony.  It is also the country that the Ukraine should actually be going to for help, not to the West.  More on that in future posts.

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The 2012 IMF/Ukraine Negotiations

2014 March 2
tags: ,
by Ian Welsh

These are the reform the IMF wanted for a 4 billion dollar loan:

the IMF demanded that Ukraine double prices for gas and electricity to industry and homes, that they lift a ban on private sale of Ukraine’s rich agriculture lands, make a major overhaul of their economic holdings, devalue the currency, slash state funds for school children and the elderly to “balance the budget.”

This is what the IMF does to your country. Note that 4 billion doesn’t even come close to covering Ukraine’s debts.  Moscow offered 15 billion and a one-third reduction in natural gas prices.

If the Ukraine wants something close to prosperity, this is a sideshow.  The first thing they have to do is destroy their own oligarchs: take away their money and power.

But remember how the West squealed when Putin brought his oligarchs to heel?  Or at Venezuelan redistribution?  Oligarchs are even more sacrosanct in the West than the East.  The IMF would never allow the Ukraine to destroy their oligarchs and throw them all in jail.

The next step after that would be solidly reorient to China.  They want Ukraine’s food, and  the Chinese are willing to pay a premium for the resources they buy, at least by developing world standards (and that this point, that’s what Ukraine is.)  What, exactly the Ukraine thinks it will sell the West is beyond me: their Soviet era factories don’t make anything we want, and the West heavily subsidizes its own agricultural production.

Does Sprint Nuclear Ability Matter? How much? Ukraine Edition

2014 March 1
by Ian Welsh

Ukraine is talking about getting nuclear weapons.  Interesting.  Or perhaps, worse:

According to translated news sources within the country, Ukraine interim representative threatened Russia with nuclear weapons, if Russia does not remove their troops from within the Ukrainian borders.

Mikhail Golovko said in a live interview that,“Russia can not win in this situation, it is a violation of all international norms and guarantees … If they are violated, we reserve the right to recover a nuclear weapon. Resume nuclear status and will be quite different to communicate, “ he said.

Golovko said that Ukraine has all the necessary technology to recreate nuclear weapons, for these purposes must be “3-6 months,”

This is insane.  Putin now has reason not to annex Crimea, but to conquer the entire country.  You don’t talk about doing something like this, you just do it.

Ukraine should never have given up its nuclear weapons. The lesson on nukes is clear. As the joke ran in the 2000′s “Iraq was invaded because it had no WMD, not because it did.”  Libya gave up its nuclear program, Qaddafi got sodomized by a knife.  Meanwhile North Korea is still pissing in America’s face whenever it wants.

But Ukraine did give up its nuclear weapons.    As such, threatening Russia with them is crazy, just crazy.  At the least, as Putin, I would now want to decommission all of Ukraine’s nuclear reactors and establish surveillance to ensure they aren’t trying to get nukes.  And if they are: bomb them into dust, just like the Israelis do whenever they think they can get away with it.

Of course, nuclear reactors are hard to decommission safely with military force, aren’t they?

Just bad all round.

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Some Perspective on Russian Intervention in the Ukraine

2014 March 1
by Ian Welsh

1) The journalists talking about anschluss are morons.  This is not Germany in the 30s, Russia is not going to try and conquer Europe.

2) The Ukraine was part of Russia for centuries, and has been independent for about 20 years.

3) The Russian Army is not the Red Army: it is not capable of conquering Europe.

4) The Crimea is majority Russian already and had been part of Russia, yes, for centuries.

5) Russia was NEVER going to allow Ukraine to kick them out of Sevastopol and the Crimea.

6) Americans spent 5 billion dollars promoting the Ukrainian revolution.  That’s a lot of money.  Granted that the Ukrainian government was a corrupt bunch of thugs, Putin is not crazy to think the West fomented the revolution.  The West DID foment revolution.  There was fertile ground, but 5 billion dollars is not chicken feed.

7) The West is not going to fight a war for the Ukraine.  Russia is.

8) The East of Ukraine is still pro-Russia.

9) What the Ukrainian parliament did with armed protesters standing over them is not, ummm, necessarily what they would have done without guns being waved in their general direction.

Analysis: it is highly unlikely that Putin will go for Kiev, though I won’t categorically rule it out.  Crimea will be part of Russia, whether de-facto or de-jure.  The eastern parts (which is where all the industry is, by the way), may be partitioned off as a rump state, or brought into Russia.  In both cases, if it happens, referendums will be held.  They will not need to cheat on them, as long as they don’t go too far West, they’ll win them fairly.

I will be frank: the West needs to stop fomenting these revolutions.  Russia is not going to allow NATO to creep up to their border without taking action.  You’d have to be crazy to think that Russia was going to allow the Ukraine, including Crimea, to become part of NATO, and yes, that was the West’s (or rather, America’s) endgame.  (The Europeans think the Americans are crazy to be baiting the bear like this.  But the Europeans need Russian natural gas.)

Russia is no longer the USSR.  It is not an existential threat to the West, or even to Europe.  It is a corrupt resource state with a big army and nukes which controls a lot of territory, but the idea that it would win a full-on conventional war with America is deranged.

All the US is accomplishing here is driving Russia into the country which is actually a danger to American dominance: China.  This was totally unnecessary, but the entire thrust of US policy since the USSR has been to try and cripple Russia, starting with the completely deranged “shock doctrine”  economic policies foisted on Russia right after the USSR’s collapse: doctrines which lead to an actual collapse in Russian population.

Putin thinks the US and the West are Russia’s enemies. He is not wrong.

Can you imagine if Russia spent 5 billion dollars fomenting a pro-Russian revolution in Mexico?  How would the US react? (And let us not forget the US invasions of Grenada and Panama).  If the US had broken up and California was its own state, would the rump US state feel they had a right to intervene in it?

Also, once more, the IMF will give Ukraine money in exchange for “reforms”. If you think those reforms will be good for the Ukraine, you are not just sadly mistaken, you are an idiot, or I hope you’re well paid to have such opinions.  IMF reforms do not help ordinary people.

Finally, if I were a Western Ukrainian, I probably would have supported the revolution: Yanukovych was just too corrupt and too brutal. This isn’t about choosing sides, this is about understanding them.

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So Much for the Crimea

2014 February 28
by Ian Welsh

They’ve scheduled a referendum on Crimea’s future, though the exact question isn’t clear.  Given the demographics in the Crimea, that it will leave the Ukraine, and very possibly join Russia seems quite likely.  This doesn’t require any dishonesty, a straight up, fair referendum will likely lead to that result.  In the meantime, militia have been formed, and have not just taken control of arms depots (as did the protestors in Western Ukraine), but have started controlling the borders, checking who is coming and out of the Crimea.

As for the gunmen who took control of the Crimea’s parliament; the full story is interesting and most Western news articles didn’t include it.  Parliament had wanted to meet and pass legislation for the referendum, but couldn’t, because Crimean Tartars blocked access to the building.  So the gunmen came in and took control, and the Tartars decided not to block access any more.

A slightly different story, isn’t it?

Update: it seems the parliament in Kiev is debating ending the agreement which lets Russia use Crimean bases.  Wow.  Just—wow.  They want a war?  They’ll lose it.

Update 2:

In further worrying signs for Kiev, Russia’s parliament began considering two new laws on Friday. One of them offers eased citizenship requirements for Russian-speaking Ukrainians, removing the requirement that they should have lived in Russia for an extended period, while the other makes it easier for Russia to add new territories to its existing boundaries.

The latter law, which appears to be aimed pointedly at the Crimea situation, says territories can be added by a local referendum “in the case that a foreign country does not have effective sovereign state authority”.

Corruption, Don’t Talk To Me About Corruption

2014 February 28
by Ian Welsh

I have a hard time these days getting worked up over corruption charges. It’s clear Yanukovych stole billions, along with giving billions to his his friends and family.

George W. Bush, Barack Obama, Paulson, Geithner and Bernanke, bailed out their friends for trillions.  Bill Clinton repealed Glass-Steagall (leading directly to the financial crisis) and was worth a hundred million only a few years out of office (one might remark that politicians are still very cheap for what they give the people who buy them.)  In England, RBS just got half a billion dollars in taxpayer financed “bonuses” for driving the bank into bankruptcy and requiring the government to bail it out.  LIBOR was fixed, and the fine for that was a small fraction of the profits made.

The bailout and the financial crisis have led to an actual decrease in earnings and wealth for average people.  They have thrown the south of Europe into semi-permanent financial crisis; they are complicit in the turmoil in the Middle East.

Corruption?  Don’t talk to me about corruption. That the West’s corruption is winked at by legal authorities, does not make it any the less corruption.  And because the West is vastly richer, our corruption is vastly larger.  You may (or may not) have potholes on your roads, but you paid the bill for bailing out the rich: that money, and your futures, were stolen from you as surely as Yanukovych stole from the Ukrainians.

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This Ukraine Stuff Writes Itself

2014 February 27
by Ian Welsh

Gunmen seize parliament and the main administrative building in the Crimea and NATO’s Secretary General says:

Rasmussen, NATO’s secretary general, described the seizure of the regional government administration building and parliament as “dangerous and irresponsible.”

Wait?  Weren’t other government buildings seized by gunman in Kiev, just recently?


International Monetary Fund chief Christine Lagarde said Thursday that her organization was ready to respond to a request for assistance from Ukrainian authorities and would send a fact-finding team to Ukraine to assess the situation and begin discussion of reforms the country needs. “We are also discussing with all our international partners — bilateral and multilateral — how best to help Ukraine at this critical moment in its history,” she said.

Reforms, eh?  Remind me of the occasions on which IMF reforms have been beneficial to the average citizen of any country?

Then there is this:

A senior U.S. official familiar with the most recent administration assessment told CNN that now that the Russians “have brought troops out of garrison,” they could potentially move “quite quickly” once an order comes.

At that point, the official says, the U.S. assessment is that its “warning time” that Russian forces were on the move might be so short, it would be difficult for the United States to move diplomatically to try to stop it.

I—I, what?  If you don’t want them to, the diplomacy is done now, and it involves threats and carrots.  But the problem is that Ukraine is in Russia’s sphere of influence.  Do you think that the new, IMF funded, Western supported government will be asking for NATO membership?  I would be if I were them.  Do you think Russia finds that, in any way, acceptable?  Have you looked at a map?

The Ukraine in NATO is a strategic threat to Russia. It is of no value to NATO except as a threat to Russia.  Russia knows that.

The strategic situation is such that Putin has many reasons to find an excuse and annex both the Crimea and Eastern Ukraine (which contains most of Ukraine’s industry, by the way.)  The rest can do whatever they want.  And if Europe doesn’t like it, well Gazprom can sell its natural gas to the Chinese and Europe can go dark.  As for the US, bluster all they want, they aren’t going to fight a war against Russia for the Ukraine.  Russia’s still a real country; it has nukes.

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Ethical Priorities: frack, kill, keep people homeless

2014 February 27
by Ian Welsh

In the US there are five times more houses sitting empty than there are homeless peopleIn the EU there are twice as many empty houses as homeless.  In the US, the EPA’s budget has been cut 25% since 2010.

To say that having houses sitting empty while people have no shelter is an ethical abomination is an understatement.

To cut the EPA while the Oceans are acidifying, fish stocks are collapsing, climate change is continuing and will wipe hundreds of millions of poeople minimum, and while the world is in the middle of a human caused great die-off of species is an ethical abomination.

Meanwhile there is plenty of money for drones and for spying.  And even more money for the bankers who are sitting on empty homes.

This is deliberate government policy.  Be clear, the government effectively owns those homes, since it underwrites almost the entire mortgage market.  It could do something other than just leave them empty, but its first priority is to artificially keep housing prices high by keeping supply off the market, and to slowly transfer those houses to private investors so they can use them as rental property.

Likewise, Obama talks a good game on the environment,  but actual government policy under his administration has been to increase domestic hydrocarbon production as fast as possible: which means fracking and unconventional oil, both of which are vastly harmful to the climate and the environment, and which poison water supplies.  Destroying your own country’s water supply in exchange for a short term boost in oil production is the very definition of short sighted, crazy and evil: the number of people who will die because of poisoned water supplies, and because that water can’t (or shouldn’t) be used to grow crops is immense.

Watch the hand: actual government policy is to impoverish you, destroy the land, air and sea, and to make you sick.

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The Golden Rule: Why Bankers Are In Charge

2014 February 26
by Ian Welsh

In our society, we determine much behaviour, and most economic behaviour, through the medium of money. This is not universal: many societies have not used money as their main means of determining who received goods, but we do.

If someone receives money for doing something, it is also a message which says “do more of this.” The more money, the stronger the message.

The most potent message, and the strongest effect on behaviour, is when someone has the right to create money. Money, in our society, is created by borrowing. Banks and other financial institutions which have the right to lend thus have the right to create money. They have to have some form of collateral, even if that collateral is just an expectation of future earnings “great business idea, we’ll lend you money, and use your expected profits as our collateral.”

This money can be loaned out at multiples of the underlying asset. During the 2000s some brokerages were allowed multipliers (leverage) of over 40X. Even better, often whatever you buy with a leveraged loan can then be used as an asset for another round of leverage, leading to extremely high levels of effective leverage.

Some organizations also have access to very low interest rates: they can borrow at close to “prime” the rate the central bank offers to the very best credit risks. Major banks are amongst those who can borrow at this rate. They can then lend out to other people, again, at a higher interest rate, and with leverage.

If you, personally, could borrow money at 1% annual interest rate, and lend out ten times that, do you think you could make a profit? What is your mortgage rate? What is your credit card’s interest rate?

This is as close as it comes to free money, and it takes a special genius to lose money when given these advantages.

The first rule of money is the rule of profits: if a group of people are making more profits than everyone else, they will come to control more and more of the society. Not only can they buy up other companies, but they can afford to donate to politicians, give politicians and regulators cushy jobs between government gigs, and they can afford to set up think tanks and endow university chairs and buy newspapers and television stations and so on in order to control the dissemination of ideas.

In theory profits are supposed to be self-limiting. If an industry makes more money than other industries, outsiders should see an opportunity, start up businesses, compete and drive down prices.

In the real world, that doesn’t happen as often as it does in theory, because you can’t just start up a bank with access to the Central Bank’s window. You can’t easily start up new pharmaceutical businesses, because it’s vastly expensive and there are huge regulatory hurdles. And when it does happen, why would you compete? Why not take the outsize profits? Why would you drive down profits? How does that benefit you?

The other check is supposed to be diminishing returns. The more money you have, the harder it is to find something to invest in: you run out of mortgages, or you run out of businesses to invest in which can make those returns. This does work, somewhat. It is at the heart of why the financial collapse happened: there weren’t enough assets for all the money chasing them, so widespread fraud occurred (liars loans, for example) and many people were given loans who couldn’t pay them back, while artificial assets were created which were not worth what they were sold for. Eventually this collapsed, but because the financial industry had already bought the political world, they were bailed out at a cost of trillions.

Behaviour you reward, is repeated. Bankers made millions of dollars, personally, in bonuses. This told them that what they did was valued, and they should do more of it. They did.

The fact that Wall Street and Fleet Street salaries and bonuses were so large also made financial executives not care about the future. When you make millions in a few years: enough to live on for the rest of your life, in high style, it isn’t important if you’re driving the firm to bankruptcy. You don’t need the bank or the firm to be there, you’ve already made your mint.

Now, as a politician, if you do what the financial industry (or any other wealth industry) wants, they donate to your reelection campaign. They make sure your friends and family have jobs. They invite you to the best parties. And if you’re defeated, and have voted the right way, well, they’ll take care of you afterwards as well, with a cushy job. Bill Clinton, who deregulated Wall Street, is worth 100 million dollars.

Because bankers control a lot of money, they control what other people do.

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