Tuesday, December 23, 2014

Russian economic troubles and the EU

Wolfgang Münchau addresses the question of a Russian "bankruptcy," as people are speculating about it, in Auf dem Weg in die Staatspleite Spiegel Online 22.12.2014.

Bankruptcy is actually a legal term applying to the working out of private insolvencies. Governments don't technically go bankrupt. Although the term is often used in practice to refer to sovereign default, which is a threat that investors have to take seriously in the case of Russia.

But Münchau doesn't believe that a Russian default is imminent for 2015. There are certainly grounds for concern. As part of its effort to stop the dizzying plunge of the ruple, Russia has jacked up its interest rates to 17%, which is likely to further depress an economy hard hit by the fall in the price of oil. He notes that Russia has €400 million euros (around $330 million) in foreign reserves that give it breathing room.

But he stresses the seriousness of Russia's economic situation:

Vor der Währungskrise war die russische Wirtschaft ungefähr so groß wie die von Frankreich. Jetzt spielt sie in der Liga der Niederlande. Und sie bewegt sich in Richtung Griechenland.

[Before the currency crisis the Russian economy was about as big as that of France. Now it is playing in the Netherland's league. And it is moving in the direction of Greece.]
He notes that the US and EU sanctions are not an immediate cause of Russia's economic problems

Die Finanzsanktionen des Westens sind für die jetzige Krise nicht direkt verantwortlich, aber sie spielen eine wichtige, indirekte Rolle, die erst in ein oder zwei Jahren offensichtlich werden wird.

[The Western financial sanctions are not directly responsible for the current crisis, but they play an important, indirect role that will first become clear in a year to two.]
But he thinks that some EU leaders are now surprised at the implications of sanctions as the prospect of a major decline in the Russian economy are already facing the EU.

With the eurozone in a protracted depression, they are taking on a lot more risk with sanctions against Russia than they would be taking absent Angela Merkel's draconian austerity policies.

The pro-Western Ukrainian parliament has rescinded Ukraine's position of not joining any military bloc, indicating their intent to proceed to seek NATO membership. Russian Foreign Minister Sergei Lavrov called the action "fully counterproductive," following a statement Monday from Russian Prime Minister Dmitriy Medvedev that the action Ukraine took Tuesday would make Ukraine "a potential military opponent of Russia." (Ende der Blockfreiheit: Lawrow warnt Ukraine vor Eskalation Spiegel Online 23.12.2014)

Spiegel Online also notes that Ukraine formally adopted its neutral status of staying out of military blocs under Russian pressure in 2010.

Tomothy Garton Ash adopts a triumphalist tone in Angela Merkel has faced down the Russian bear in the battle for Europe The Guardian 12/22/2014

The fact that he describes Merkel in the first paragraph as "strongest on economic power" makes me wonder just how much attention he's paying to the actual state of the eurozone under Merkel's austerity policies, though he says he "remain[s] critical of her handling of the eurozone crisis."

But he gushes over her handling of the Ukraine crisis:

At the beginning of this year, German president Joachim Gauck, an east German Protestant, took up the appeal that other Europeans had already made for Germany to assume more leadership responsibility in Europe. In the course of the year, Merkel, an east German Protestant, has answered that appeal. The eastern half of Europe is her world. She has it in her bones. She understands it.

One of the early influences on her was a teacher of Russian. As a schoolgirl, she won East Germany’s Russian-language Olympiad. On her office wall, she has a portrait of Sophie von Anhalt-Zerbst, the Pomeranian princess who became Empress Catherine the Great of Russia. She can speak to Putin in Russian, as he can to her in German. [my emphasis]
The touch about her keeping a potrait of Catherine the Great on her wall adds a bit of reinforcement to my thought that she takes the Soviet management of the Warsaw Pact as her model for managing the European Union.

Ash treats the Ukrainian crisis as though it were a Russian aggression that fell unexpectedly on the virtuous West. In that spirit he quotes Merkel, who has had no compunction about pushing for the ouster of democratically elected governments in Greece and Italy as part of her eurozone crisis management, saying, "Old thinking in terms of spheres of influence, whereby international law is trampled underfoot, must not be allowed to prevail.”

As Charlie Pierce might say: Honky, please.

He even goes on to say, "Everyone knows she is Europe’s real chair." But that doesn't count for him as a sphere of influence.

He also sees in her enthusiasm for sanctions against Russia Churchillian resolve:

As she never tires of repeating, her strategy has three prongs: support for Ukraine, diplomacy with Russia and sanctions to bring Putin to the negotiating table. To see Germany leading the way in economic sanctions against Russia is extraordinary. In the early 1990s, I wrote a history of West Germany’s Ostpolitik, culminating in German unification, and the first commandment of that Ostpolitik was that eastern trade should always go on. Sanctions were called for by the US and resisted by Germany. Today, Germany has more trade with Russia than any other European power. Its energy, machine-tool and other eastward–oriented businesses form a powerful lobby, not least within Merkel’s own Christian Democratic Union. Yet she has taken them down the path of sanctions. [my emphasis]
Ostpolitik was successful in dialing back tensions between East and West and reducing the risk of nuclear war.

Merkel's policy looks to me like a reckless roll of the dice, particularly since she undertook it with no indication she intends to abandon her destructive austerity policies.

Where Garton Ash sees a cautious, determined stateswoman, I'm inclined to see a talented political tactician locked into a dogmatic, unrealistic economic dogma ("ordoliberalism") who gambles big and is constantly riding the tiger.

Garton Ash isn't entirely unaware of that. At the end of his gushing piece he notes:

And then she has been lucky – an essential attribute for any successful stateswoman or statesman. (I can’t bring myself to write statesperson.) Without a spectacular fall in the price of oil, the sanctions, which are still patchy, and not supported by China and other important economic partners of Russia, would not have had this dramatic impact.

The battle of Europe is far from over. In Russia itself, deepening economic crisis will not necessarily translate into more accommodating policy. There is no route map to a post-Putin regime. The cornered bear may lash out. In the bloodied fields of eastern Ukraine, there is still the risk of a series of 1914-style miscalculations leading to an escalation. Russian military planes have flown into the air space of Baltic Nato members.
"The battle of Europe": Western policymakers need to dial back the melodrama and try to stay with a don't-do-stupid-stuff approach to the Ukraine crisis.

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