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 14 of 17

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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Russian Sanctions against the West

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On August 8, 2014

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Per Russia, from a speech by Medeved:

Russia has completely banned the importation of beef, pork, fruits and vegetables, poultry, fish, cheese, milk and dairy products from the European Union, the United States, Australia, Canada and the Kingdom of Norway.

He also noted that Russia is considering revoking or changing airspace rights over Russia’s Asia Pacific region or Siberia.  This is not a small matter, and would make many flights from airlines in the affected countries far more expensive (while allowing their competitors, in countries which  haven’t imposed sanctions on Russia to out-compete them.)

As zero-hedge points out, the agricultural ban will have a significant negative effect on the European economy, which is already sputtering, and will likely lead to more special monetary policy (giving money to the already rich).

Such policy is very good at pumping up stock markets, but as the US experience indicates, it does nothing for ordinary people, whose wages in the US have fallen (only the top 10% has seen increases).  I warned in 2009 that the policies of the Fed and Obama would lead to at least a generation of worse economy.  Special monetary policy is worse than doing nothing, and very quickly.

The continued pivot away from the West and towards BRICS and other nations is not a good thing for the West.  An integrated Russia is in the West’s best interest: a Russia in the arms of China, is not.  I still cannot imagine anything in the Ukraine that is worth this.

The line in most Western media is that this will hurt Russia more than it does the West and perhaps even cause protests in Russia due to rising food prices.  We’ll see, to be sure, in the short to medium term it will hurt Russia, but Russia does still have plenty of inefficiently utilized agricultural land, and the rest of the world will be happy to sell to Russia.  Note, however, that the US, Canada, and the EU are very cost-efficient agricultural producers and the alternative suppliers are in the southern hemisphere, as a rule.    This will cause a permanent rise in the cost of food in Russia, whether it will be offset by a rise in domestic production leading to higher incomes for farmers remains to be seen.  Such would take time, in any case.

I note, finally, that if you are going to go to war with someone, you should cut off your food dependency before you do. Certainly NATO may not intervene if Russia decides to help the rebel states in the Ukraine, but certainly sanctions would ratchet.  If Russia intends to invade the Eastern Ukraine, it might as well do this now and prepare its economy.

Interesting times.  Let us hope this isn’t another step towards the interesting experience of a nuclear exchange over a country most Americans couldn’t find on a map.

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Enough Russian Roulette with Nuclear Fire

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On August 2, 2014

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As commenter OldSkeptic points out, Russia has now called up reserves:

“Russia’s Defence Ministry plans to call up military reservists across the country for two months of training exercises on new weapons, news agency Interfax reported on Friday.

Moscow has previously used such exercises to boost troop numbers on its border with Ukraine. There are concerns in the West that Russian forces could intervene in the conflict between the Kiev’s government forces and pro-Russian separatists in eastern Ukraine.

The exercises were planned last November, the defense ministry said, and will last from August until October.”

I have covered the Ukrainian crisis closely since it began for a reason: the real antagonists: Russia and the US, with NATO as an American proxy, are nuclear armed.  Let us review:

  • The Ukraine was part of Russia for about 200 years.
  • Crimea is Russia’s most important naval port.
  • The Maidan protests overthrew a government which, whatever you think of it, was democratically elected.  The Maidan protests were heavily backed by US money and aid.
  • The Russian deal with the Ukraine was far more generous than the EU/IMF deal, which requires cutting pensions in half and likely doubling gas prices, if the gas supplies continue at all. Russia, on the other hand, offered subsidized gas and a fifteen billion dollar loan at nominal prices.
  • While there are those in Crimea who did not want to join Russia, I am aware of no convincing evidence that a supermajority did not wish to. The referendum was somewhat coercive and produced results in line with the last referendum in the region.
  • The rebellion in the East and the South is in regions where the strongest economic ties are with Russia.  While I have seen no polls indicating majority support for the rebels, I have also seen no polls indicating majority support for the Kiev government.
  • Ukraine is very close to Moscow.  Moscow is not defendable, in war, if enemy forces are in Ukraine.
  • It is American doctrine that Russia without Ukraine is not a European Empire; with it, it is.

In 2008, during the Georgian war, I wrote that the next flashpoint would be Crimea.  The experts sneered at that: it could never happen, Russia and the EU had nothing to gain and everything to lose by allowing it.

The EU is, as Old Skeptic points out, however, not in the driver’s seat.  The US is, and NATO is, and NATO is currently led by a hawk.  What Merkel, or Germany, think is irrelevant  unless they are willing to threaten to leave NATO and follow through if necessary.  While Mark From Ireland has pointed out that there are signs of German and European realignment away from the US, they seem to be signs that will take years to develop to actual estrangement.  The current leaders, like Merkel, are of a generation which grew up under American hegemony. While many balked at Iraq, it will be far harder for them to refuse to act if NATO, including Britain and the US, goes to war.

It would take an incredibly brave leader to say no if NATO mobilizes to help Ukraine in light Russian regular forces.

The question, then, is whether Russian regular forces will be needed, or used.

We have, meanwhile, sanctions. So far they have amounted to not much, though they will increase financing costs.  However threats of greater sanctions continue, and slowly the strength of the sanctions has been increased.

I don’t know if OldSkeptic is right, and the plan is to force Russia into a humiliating retreat in the face of sanctions, with the use of military force ok’d to break Russia.  I actually doubt it, because it would be insane.

You don’t risk a shooting war with a nuclear armed state like Russia, who has enough nuclear weapons not just to destroy the US and Europe, but the world, multiple times over; and which has second strike capability which NATO cannot credibly expect to take out.  If either side starts losing and resorts to nukes, things can get out of hand very, very quickly.

But something being insane, or boneheadedly stupid does not mean it won’t happen: if Iraq or Syria (and the rise of ISIS) has not taught us this, nothing will.  American leaders are ideologues, drunk with power, who believe they rule the world and everyone else must bow.  Putin tweaked them hard over both Snowden and Syria, and they have worked since the fall of the USSR to move NATO right to Russia’s borders, something George Bush Sr. promised they wouldn’t do.

Russia feels itself under threat.  The military believes it cannot defend Russia from NATO if NATO is in the Ukraine, and notes also the constant moving up of anti-missile defense, closer and closer to its border; something it believes is meant to degrade its nuclear deterrent (it is, how well it will work is another question.  My suspicion is “not nearly well enough”.)

There is West’s sanction threats have been all stick: there is no upside to Russia buckling to the sanction threats, all they get back is the status quo.  Going forward, Russia having given in to sanctions once, they would have no independent policy the West could not veto by threatening them again.

So how does this play out?

I don’t know.  I do know that the people in charge in America, Britain and NATO are stupid, mad-drunk with power, and ideologues who believe in American primacy at any cost.  I do know that Russia believes it faces a potentially existential threat, and that Putin personally could not survive a humiliating capitulation.  And by not survive I mean he would probably wind up, personally, dead.  Russian leaders like Putin rarely leave office except in a casket.

This confrontation is over Russia claiming some right to interfere in territory it ruled for about two centuries.  Longer than the US has ruled most of its territory, I might note.  If the West can interfere in practically any country in the world, the Russians see no reason why they don’t have the right to interfere in their sphere of influence.

This is not, necessarily, to say that Russia should have the right to interfere with other countries, but given the West’s record of invasions, occupations and coups, it is simply laughable hypocrisy to make any claims that this is about territorial integrity of Westphalian states.

Please.

So if it is happening, it is happening for a reason.  To bring Ukraine into the Western fold, to force Russia to bow, and to show the world that even a power like Russia, with nuclear weapons and a huge arsenal, was forced to bow.

As much as the Gaza assault is an endless series of war crimes, and tragic, the greatest danger in the world today is in the Ukraine.  We are closer to nuclear war than we have been since the early 1980s when the Russian leadership was crazed by fear by US deployment of first strike missiles to Europe.

I will suggest, simply, that NATO needs to be disbanded.  The Europeans should simply step outside of it and put together their own military.  They can defend themselves from Russia if it comes to it (it won’t if they don’t poke Russia repeatedly with sticks).  They have a nuclear deterrent (I’m talking France here, not the UK, who probably can’t even use their nukes without American approval, and whose leadership are complete poodles for DC) and can build more if they so desire.

It’s time for Europe to grow back up, take responsibility for their own defense and future, and stop allowing America to drive the world to war, the brink of war, and possibly nuclear armaggedon.  As for the Ukraine, the Russian proposal of keeping it together, minus Crimea, but with a decentralized structure, and out of any Western alliance is entirely reasonable.

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