Friday, April 11, 2014

What is Putin really saying to the EU - negotiate or else...

Earlier today I posted the letter Putin sent to the heads of state of the 18 countries which purchase gas from Russia, but I did not have the time to write a commentary about it, so I am doing in now.

In my opinion, Russia is responding the the imminent attack by the neo-Nazis in the eastern Ukraine and to the PACE decision to basically slap Russia in the face.  What Putin is doing is introducing the first among several weapons Russia has in reserve: energy and money.  He basically tells the West "you either sit down, eat your stupid PACE resolution, and come negotiate with us, or you will be in a great deal of pain very soon".  Under the pretext of negotiating for gas, he is forcing Europe to negotiate for the future of the Ukrainian economy and that, in turn, means negotiating for the political future of the Europe.  Brought down to is core message Putin just told the EU: agree to the Federalization of the Ukraine or lose 30% of your energy supplies.  The corollary message is: there is a price to pay for being the USA's bitch.

The EU needs to be *VERY* careful now as Russia is clearly poised to respond to a major crisis: Putin has told his government that all supplies from the Ukraine are likely to stop.  This there are two levels to this message: one minor one, in which he tells the Russian MIC that it has to prepare to produce indigenously what they got for cheap in the past from the Ukraine.  Everybody noticed that, but that is not the important part.  The important part is that he basically told the Ukrainians "expect a total severance of all contracts and agreements between what is left of your industry and us".  Basically, this might as well be a death sentence for the last and only sector of the Ukrainian economy which was profitable.  Putin will observe what happens over the next couple of days (crackdown or not) and he will observe what comes form the West (negotiations or not).  But unless the freaks in Kiev and the clowns in the West very rapidly take him seriously and finally come to the negotiating table, Putin will shut down what is left of the Ukrainian economy.  This will trigger an immediate panic of the rating agencies and markets and the Ukraine will default.

At this point I do expect a very forceful reaction of western bankers and economists who will, I am quite sure, understand the message very well, and they will probably put a great deal of pressure on the political leaders in the EU and even the USA which can think of itself safe from a crisis in Europe, but if you look at how heavily the USA is invested in Europe, you will see that this is not so.  There is also a very real risk of a domino effect on the rest of the EU if any of its weakest members - the so called PIGS - hits the wall.  France too is essentially bankrupt, so the risk form a Russian action on gas is really serious for all the western economies.

Make no mistake: triggering an economic crisis in Europe is not at all in Russia's best interest.  In fact, this would be very bad for Russia, but if that is what it takes you can count on the Russians doing it.  Right now, the West's position on the Ukraine is simple: no negotiations whatsoever and total support for the Nazis in power.  That is just not something Russia can accept short of committing national suicide.  By taking this maximalist and, frankly, insane stance the West has pushed the proverbial "Russian bear" into a corner and the only option this bear now sees is to fight his way out with his claws and fangs.  I can't think of a dumber policy to have towards any free animal, nevermind a bear.

The Saker