Posts Tagged Sanctions


The United States, frustrated with the E.U. not wanting to play Hard Ball with Russia, recently strengthened its sanctions against Russia.  Generally, when part of an alliance take a stand and some of the other countries do not, the effects of the sanctions can hardly be effective.  In this instance, for example, the U.S.’s recent unilateral move might actually provide an opportunity for E.U. corporations to enhance their trade with Russia.  But, if nothing more, the U.S. is sending a message to Russia.

The European Union, the successor to the European Common Market, appears that after some fifty years combined, it is anything BUT a “Union”.  Just look at the current Debt Crisis.  It has been going on for approximately four and a half-years, and there is hardly a sign of resolution in sight.  The various E.U. Ministers meet frequently, eat, talk, return home and, then, go meet again, but in another city.  It’s truly a Country Club!

Europe has not been able to dig itself out of a recession that began during the Financial Melt-Down (4Q07-1Q09).  The key ingredient for any country’s economic health is a viable banking system.  But, in Europe, banks tend to be undercapitalized and there hasn’t been much of an effort to correct that problem.  You see, it had always been assumed that the various countries would each bail-out their respective banks; but, some of the countries–especially in the Eurozone–are just not too healthy themselves.

Russia has important trading agreements with many of the Western European Nations, and also sells them a considerable amount of their gas.  Given the weak economy in many of the European nations, they appear not to be willing to increase the sanctions on Russia, lest they jeopardize their important trade agreements.  So, I wonder how the European Union really views the current situation with Russia.

How can a group of countries be serious in defending allies (both E.U. and NATO members) from a neighboring nation, which has a delusional President and a history of aggression, when it is also taking a “business as usual” approach on the economic front?  It looks like the message that, at least, Western Europe is taking with Russia is that it is not really being serious.  You just cannot have it both ways, Angela, Francois, David, and Friends!


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The more that I think of the Stand-Off in Ukraine, between Russia and the West–Europe and the U. S.–I am reminded of the modern-day novel, by Ken Kessey–about the Inmates taking over the Asylum.  Namely, it seems that none of the Main Participants really wants to win.  Perhaps they just cannot bring themselves to deliver that final blow.

America cannot win by itself; because, any strong sanctions will not hurt Russia unless the European Union joins in.  Otherwise, it would just give-up Trade to European Corporations.   Besides, since America terminated its Space Shuttle Program, NASA cannot transport Astronauts to or from the international Space Station without the help of Russia’s Soyuz Fleet.

The E. U. has invited many of the Former Soviet Republics in Eastern Europe to join it and/or NATO.  But, besides not wanting to break with a major Trade Partner, Europe has allowed itself to be extremely dependent upon Russia for its Gas Imports.  In 1812, Napoleon Bonaparte committed the ultimate Strategic blunder–following the Russian Army so far into its Homeland that he could not re-supply his Army.  By depending on its opponent for a major Commodity, like Gas, Europe has repeated Napoleon’s same major blunder.

And Russia, for its part, is dependent upon the West for Hard Currency which can be used to purchase the Imported Goods which it requires, especially Agricultural Products from Ukraine.  Moscow’s own economy is a basket case and Crimea is showing the difficulty any Region would have in switching from one operational system to another.

So, if Russia is having trouble enough in paying its own bills, then just where would it get the additional resources to support Crimea?  So, it really cannot afford to take-on more responsibility; because, it has already bitten-off more than it can chew.

So far, Vladimir Putin has stopped short of endorsing the Eastern Regions from voting to break-away from Ukraine.  If Putin did remain engaged with those Regions, Russia might strengthen the resolve of Europe to stand-together with the U. S. in opposing his actions–perhaps across Eastern Europe.

I suggest that Russia do nothing whatsoever.  It should avoid any further involvement with the break-away Regions, which Putin apparently instigated.  Let them fend for themselves.  Hopefully, let’s hope that there is not a civil war before the break-away republics either find a solution of their own, or seek to re-join Ukraine.

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The White House announced further sanctions today, against seven individuals and seventeen corporations that have particularly close ties to Russian President Vladimir Putin.  In the past, some politicians and political commentators have suggested that the sanctions are too little, too late.  They also ask why the U. S. doesn’t turn-up the heat all the way–and NOW?

Here’s where it is necessary to take reality into account.  Consider the following:
1.  The Russian Economy is already a basket case. Unfortunately, most Russians, who have embraced National Pride over their Country’s Military Operations in Ukraine, just haven’t realized their Country’s economic desperation yet.  We do not want to unduly punish the Russian People!
2.  Stiffer U. S. sanctions, on a unilateral basis, would not work.  U. S. Trade with Russia in 2012, for instance, was only US$ 28 Billion, as compared to European-Russian Trade amounting to US$ 370 Billion.  It would be a minor change–a gift–for European businesses to pick-up business at the expense of their U. S. counterparts.
3.  It is always wise to hold-back some options in a “game” of posturing.  If one side shows all of its cards up-front, then it has nothing more to bargain with afterward.

I believe that the gradual, calculated strategy, which President Obama is currently using, will be the best after all is said and done. The intelligent, reserved Barack Obama will show the pompous, shoot-from-the-hip Vladimir Putin how Poker should be played.

NOTE: As an analogy, during the eighteen months of the Great Recession (4Q07-1Q09), there were concerns that, since the FED had already lowered interest rates to virtually nothing, it had no more “bullets” left to revitalize the Economy.  That appears to be the case today as to how the situation is currently being played-out in Ukraine, between Obama and Putin.

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President Barack Obama held a conference call, from Seoul, South Korea, with the G-7 Leaders of Germany, France, Italy and the United Kingdom on Friday.  Unfortunately. it sounds like “all talk, and no action”.  A list of potential sanctions will be released, and which the U. S. might implement as early as Monday; however, each of the other countries will voluntarily select which ones they will act on…and when.  (HUH?)   Isn’t that like declaring War, but at a time, date and manner to be determined later?

The Russian economy is already a basket case.  The Ruble is floundering and has never been a convertible currency.  Even worse, $50 Billion (US Dollars) has been transferred out of Russia in the first quarter of this year, and that could reach $200 Billion by Year-End.  Dollar-denominated Russian bonds were recently downgraded by S & P to BBB-, just barley above Junk Bond Status, and S & P already has them placed on “Negative Outlook” (for more potential downgrades).  They’re already trading like “Junk”.

And, in addition to the outflow of Cash and higher borrowing costs, for both the government and corporations, Energy prices–which represents approximately 70% of Russia’s economy–are down.  The Uncertainty, due to the situation in Ukraine, just makes things even worse.  So, what external source would even think of investing in Russia now?  Russian Fiscal and Monetary Policy are being managed counter to each other.  Oh, and the Central Bank is raising interest rates due to an Inflation Rate of 7.0%.

It should be noted, however, that President Vladimir Putin’s approval rating has skyrocketed.  Patriotism runs very high in Russia; however, that’s because Putin, at least so far, hasn’t presented the bill for the Sochi Winter Games, let alone for what the cost of Annexing Crimea will be.  But, what happens when the Russian People stop living on Emotion and Propaganda, and realize the truly sorry state of their Nation’s Economy?

Now is the time for the American-European Alliance to move in for the kill.  But, tougher sanctions need to be initiated immediately and in concert,  throughout the US-EU Alliance.  Republicans in Congress keep stressing that Obama should do more.  Well, guess what GOPers: Americans do not want the U. S. to enter another Military Conflict, and certainly not in Russia’s backyard.  Also, if our banks disrupt the flow of US Dollars to Russia and American corporations stop the flow of trade, that would mean absolutely nothing if Europe doesn’t act simultaneously.

German Chancellor Angela Merkel basically calls the shots.  Germany is the strongest country within the European Union–both in regard to population and GDP, and it has the most economic strength and diversity, by far.  Unfortunately, as it always seems to do, the European Union operates more like a country club, with each of the individual Member Nations focusing on their own agendas, rather than acting as a United Front.

So, as we have seen before, in this game of cat-and-mouse with Russia, the U. S. would accomplish nothing by acting unilaterally.  However, we only have a small fraction of the Trade with Russia that Europe does.  The German chemical giant, BASF, and the British oil company, BP, are leading the European Industrial Community to suggest more diplomacy, rather than action.  And, their prediction that sanctions won’t work merely begs the question: Well, why not try them since the Russian Economy is already down on the mat?

Each of the Member Nations in NATO, which is somewhat different than the E. U., have signed onto a Mutual Defense Pact: an attack against one NATO Nation is considered to be an attack against all of them.  Ukraine hasn’t joined; but, some of the other former Soviet Satellites are already Members.  That really irks Vladimir Putin.

Since the Collapse of the Soviet Union, in 1991, the West has been regarding Russia as a civilized adversary.  Someone to bargain with and to jointly take disagreements to the United Nations.  But Russia currently seems to be neither East nor West.  At the beginning of Moscow’s invasion of Crimea, Angela Merkel said that Putin is delusional.

Gary Kasparov, the famous Russian Chess Grandmaster and political Dissident, made a very cogent observation of Vladimir Putin. He said that Putin makes a better Poker Player than a Chess Player; because, in Chess, you have to play by the rules.

Many still doubt that Moscow wants to start a War, or even to instigate a Ukrainian civil war.  If so, Putin couldn’t deny his responsibility.  He might still be jockeying for concessions, such as: recognition of Crimea’s annexation; removal of all sanctions against Russia and complete autonomy for Eastern and Southern Ukraine.  Or, might that be just enough for now–until The Bear returns in the future?  Angela, it’s your move!

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Both Parties in Congress have historically joined together with the President in times of International Turmoil.  Now, however, it seems that some prefer to publicly castigate President Barack Obama, suggesting that he should be doing more in Ukraine, while dragging their feet at appropriating Aid to the embattled Ukrainians.

But, the real unknown factor in this situation is how forceful Europe will be in putting Russia in its place.  Europe generates a great deal of Trade with Russia and buys a substantial amount of Natural Gas from it.  So, does it want to rock the boat?

The Russian Ruble is hardly a “Convertible Currency” and, thus, quite volatile.  Accordingly, Moscow depends on a combination of US Dollars and EUROs for transacting its World Trade.  Thus, the West does actually have teeth to bite into the Russian Economy, if only the West could act as a United Front.

It has been widely reported that the Russian Media has been falsifying reports internally; however, there have recently been protesters publicly accusing Vladimir Putin of lying.  The Russian Media claims that the West is instigating the turmoil and jeopardizing the safety of Russians in Ukraine,  So far, the domestic audience has approved of Russian actions in Ukraine, as they have been reported.  But, if the European Union and the U. S. act jointly to inflict even more pain on the Russian Economy, perhaps it might cause an internal backlash.

Russia, with a small Economy ($2.12 Trillion), which is over-concentrated (70%) on Energy, can be easily squeezed.  For perspective, the European Union and the U. S. have GDPs of $17.37 Trillion and $16.80 Trillion, respectively, as the IMF reported in 2013.

NOTE: Frankly, I don’t see what the many Members of Congress, traveling to Ukraine, are accomplishing by distracting that Country’s officials from their focus on Russian President Putin. Well, perhaps they are looking for a photo-op for the folks back home.

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On March 2, I suggested that Crimea might be ceded back to Russia–from whence it came–as part of an Agreement, by all parties involved, to defuse the evolving political confrontation in Ukraine.  Instead, it now looks like the Ukraine, European Union and the United State are stuck with Crimea’s recent annexation by Russia.  But, I believe that the economics of the situation will now prevail–and stop any further developments of the current national boarders.

This past Sunday, I wrote that I believed the marginal incursion by a small team of Russian Troops, in order to secure the pump station for its gas pipeline, might cause a bit more weakening of Financial Markets; however, that the overall confrontation would probably be short-lived.  Instead, most World Markets strengthened over the past two days. Perhaps that was because the Economic Sanctions against Russia appeared to be more metaphorical, rather than actual.  Even Russian Markets have strengthened!

Russian President Vladimir Putin declared today that Crimea is now a part of Russia, as it has always been (his words), and that Moscow has no further plans to move into Ukraine.  Now, you cannot really take Putin at his word: a few weeks ago, he said that Russia was just carrying-out military maneuvers on its boarder with Ukraine and it had no plans to move into Ukraine.  Famous last words, huh?

Logistically, it would be virtually impossible for the West to try to fight Russia, militarily, on its own boarders.  Remember, that was Napoleon Bonaparte’s error, when he marched into Russia in 1812, and over-extended his supply lines.  Russia burned its own towns, to include food and supplies, and retreated further into Russia. And, as Napoleon followed, he simply could not supply his Army of 500,000 Men.

Going back to the economics of the situation: Russia needs the West as much as Europe needs Russia.  Ukraine is dependent upon both.  So, I still believe that a political solution will be found, and peace should follow.  Moscow really doesn’t have a viable alternative.  But, just remember what German Chancellor Angela Merkel said about Putin: “He’s delusional”.  In fact, it appears that he still wants to re-build the old Soviet Empire.  Once an (KGB) Agent, always an Agent!

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I have been predicting such a fait accompli, whereby Russia would take-back the Ukraine peninsula, which Nikita Khrushchev gave it in 1957.  There is no way that Putin will allow the Western Allies to have access to–or control of–its huge Naval Base, at Sebastopol.  Crimea also has a long history with Russia and its language is Russian.

Russia depends upon Ukraine for agricultural products and Ukraine needs Moscow’s gas and oil.  Europe and Russia are likewise very dependent upon one another.  Now, Europe has more economic flexibility, whereas Russia’s financial markets (stocks down 25% YTD), currency (the Ruble) and its overall economy have already fallen considerably.

Part of vladimir Putin’s strategy, in all his saber-rattling, I believe, is to distract his own People from how bleak things have recently become–and how they will continue to worsen if he isolates Russia further from the World, at large.  Even China did not go along with him when he refused to sign the so-called Sunday Agreement, which supposedly was to have ended the political stand-off several weeks ago.

The very minor incursion that 80 Russian soldiers made, barely across the Crimean boarder, was to take control of a pipeline pump station–but it is still on the sand bar which links Crimea to the mainland of Ukraine.  So, Putin is merely safeguarding the control of gas to the Crimea and, more importantly, to the warm water home, in Sebastopol, for his Black Sea Fleet.

As I have noted in prior Blog Posts, there should now be an Agreement to draw the respective boarders where they are currently (to include that pump station), and have both sides pledge not to try to lure the Ukraine into either political camp; but, also enable both sides to trade with it freely.

I believe that the U. S. financial markets will weaken further on Monday; however, Wall Street has only barely found Ukraine and Crimea on the Map.  My personal opinion is that such a solution will not be drawn-out into a lengthy process. And, hey, John McCain is over  there: he’ll shake them up!

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