Monday, April 14, 2014

Russia Checkmates the West in Ukraine: There Were Never Any Good Options

Let's look at some of the economic, military and foreign policy options for the Western powers in Ukraine.

Senator John McCain's plea to answer the Ukraine government's call for arms and military assistance makes good theater, but it is a real non-starter. Germany and France would never bring the EU along, and we would have to go this option alone.  The government of Ukraine is itself fragile, incompetent and corrupt, as it always has been.  How would the arms arrive in Ukraine?  Whatever arrived would be commandeered by Russian "activists" who are Russian special forces in disguise or by other agents of the Kremlin.

A call for United Nations peace keepers can't succeed because a Security Council resolution, which is the only way the Secretary-General can form and send such a force, would be vetoed by Russia, with China likely abstaining.  Even if UN peace keepers were assembled, they would be hemmed in and beset by Russian enemies wearing several masks.  Supplying and replenishing a UN force would be impossible given Ukraine's infrastructure. Scratch this idea.

Economic sanctions on a few high profile officials. Have you heard anyone squealing yet?  I wouldn't think so.

As late as mid-March, Secretary of State John Kerry called for every department head at State to mobilize around climate change, as Putin's noose was tightening around Crimea.  This must have given the Russian President great comfort, as it erased any doubt that U.S. foreign policy's main concern was our own election cycle, not on saving Ukraine.

What about German Chancellor Merkel?  She seems to be busy reveling in Greece returning to the capital markets and making progress on its budget deficit reduction targets.  Going forward, some of her government's own politically motivated decisions will now come home to roost.

In order to capture the inordinately influential Green Party into her coalition, Chancellor Merkel embarked on a misguided program:
"Merkel decided in 2011 to close eight German nuclear reactors and phase out the rest by 2022 following Japan’s Fukushima Dai-Ichi disaster. Public support for the 550 billion-euro plan to expand wind and solar power is rising, even as government subsidies for the “Energiewende,” or energy shift, increase electricity bills."
Partnering with Germany's political and industrial elites to build the Nord-Stream sub-sea natural gas pipeline has now locked Germany into a reliance on Gazprom as the key supplier for natural gas, which in the absence of nuclear power, will be the preferred fuel for the German factory exports.

Despite the current bleak outlook for Ukraine, its longer-term prospects aren't good simply because of its below-replacement birth rates, which observers like Columbia's David Goldman and Mark Adomanis of Forbes contend have put it too far down the path towards inevitable economic decline.  Even if the West were to throw economic and military aid at Ukraine, the long-term battle would still be lost.

What about American and European financial markets?  The recent pull back in U.S. markets is being cited as a healthy pause in a continuing bull market.  The ECB states that European growth may exceed the diabolically low levels projected over a year ago.

Where do we go from here?  President Assad of Syria is probably drinking a nightly toast to President Putin for distracting the world from the continuing starvation, torture and religious persecutions being inflicted on Syria's own population by the Russian-backed regime.  China is probably glad to see that the West doesn't have any teeth in assertions about rolling back territorial grabs like it contemplates in the South China Sea and elsewhere. Japan has to wonder how it could go it alone were territorial disputes with China turn into armed conflicts. Our Saudi friends have already expressed their displeasure at our "leading from the back."

Much as President Putin seems to hold the cards in this year's game, his tactics, while appealing to the souls of Russian nationalists, probably signal the eventual, inevitable irrelevance for the one trick pony economy of Russia, which is built on energy and on little else.

Russia too has its own demographic issues. David Goldman notes that the Russian republic may not be ethnically Russian in a generation or two.  The oligarchs, as we've noted before, are continuously diversifying by markets and by investments. President Putin, like Warren Buffett for so long, has no succession plan.  It's highly unlikely that another figure could be found with his combination of skills and lucky timing to continue Russia forward on its current path, that is unsustainable in any case.

There is no longer any need to curry favor with the Russian President because any fantasies about his being a modern technocrat and potential partner have been smashed forever.  His leadership is all about looking back to a Russian restoration, such as in Crimea.  This isn't what his many, multi-ethnic and largely impoverished populations need or want.

Western Europe, especially Germany, has to do a strategic rethinking about talking too much and thinking only about short-term, internal politics.   While Greece has made progress on some cosmetic numbers, significant economic and fiscal reforms have still not been initiated.   The euro will continue to require subsidization of the periphery by Franco-German core, which may ultimately be the German core.  Political union will continue to be a tune piped only in Brussels.

We are still in bull market, though, as the pundits tell me.




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