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Ukraine, a geopolitical linchpin that could tip the balance of power between Russia and the West, is divided right down the middle... and the fate of Europe potentially hangs in the balance.

Bigger Than Europe

Now, the potential collapse of Europe might be considered a pretty big deal, right? Of course it is.

But there is another flashpoint here... one that ties into the longer-term possibility of war. (Just keeps getting better and better, no?)

I speak here of Ukraine.

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source: CIA World Fact Book

The most notable thing about Ukraine, from a geopolitical standpoint, is the long border it shares with Russia.

The political orientation of Ukraine is deeply important to Russia for the following reasons:

  • As a “Russian satellite state,” Ukraine offers aid and comfort to the Kremlin. With Ukraine under the sphere of Russian influence, Russia enjoys an extension of power and a natural buffer between itself and Western Europe.
  • As a “Western state,” Ukraine is a nightmare for Russia. The geographical layout means that, were Ukraine to fully throw in its lot with the West, Russia’s entire southwestern flank would be exposed. This would dramatically complicate the Russian defense question in the event of future military conflict.

Ukraine Is Now “In Play”

On Wall Street – the Wall Street of old at any rate – there were occasional excited whispers of a company being “in play” when a potential takeover was in the offing.

On a balance beam between the influences of Western Europe and Russia, Ukraine is now “in play” as a country.

Ukraine itself is in a deep shambles – much worse so than many of its neighbors. A New York Times piece captures the scene:

Steel and chemical factories, once the muscle of Ukraine’s economy, are dismissing thousands of workers. Cities have had days without heat or water because they cannot pay their bills, and Kiev’s subway service is being threatened. Lines are sprouting at banks, the currency is wilting and even a government default seems possible.

The Financial Times further reports on the trials of Olexander Pavlenko, a young man who is “one of tens of thousands of Ukrainians who cannot get their money out of the bank.”

“I stood in line a couple times with other bank clients who were protesting, crying and screaming,” Pavlenko said. “But the bank told me: ‘Sorry, we simply don’t have the money now and can’t help you.’”

Remember Ukraine’s “Orange Revolution” some five years ago? Putin and the Kremlin were both infuriated and humiliated by that turn of events. In the aftermath of that moment, the die seemed to be clearly cast against Russia and in favor of Europe. Ukraine was on the path to becoming a full-fledged part of the West.

But now the pro-Western strides of the Orange Revolution are coming undone. Even within Ukraine itself, the political leadership is split...

Yushchenko Versus Tymoshenko

On one side of the chasm, you have Ukrainian President Viktor Yushchenko. Mr. Yushchenko was the pro-Western leader who came out on top in the Orange Revolution. He is also the leader who was famously poisoned by Dioxin around the time of the 2004 elections, with facial disfigurement that lasts as a reminder to this day.

It’s little wonder that President Yushchenko is widely considered a “Russia basher.” After all, he has ample reason to believe that Russia tried to kill him (after their attempt to install a puppet via ballot box fraud came up short).

Opposite Mr. Yushchenko stands Yulia Tymoshenko, the Prime Minister of Ukraine. The two are bitter rivals... and where Mr. Yushchenko is anti-Russia, Ms. Tymoshenko is very much pro-Russia.

Ms. Tymoshenko’s poll numbers are now rising, according to Bloomberg. Western Europe’s dithering further helps her pro-Russia cause. While Germany and other EU nations hem and haw over the possibility of writing a bailout check, the Kremlin makes soothing noises of friendship and cooperation.

It’s a fascinating situation. Ukraine, a country of 46 million and a geopolitical linchpin that could tip the balance of power between Russia and the West, is divided right down the middle – even down to the sentiments and loyalties of its leaders.

And then you throw our good buddy Vlad into the mix...

Putin’s Peril

As mentioned earlier, there are key reasons why Ukraine is vital to Russia’s long-term strategic interests. But there are also a few compelling short-term reasons for Russia’s interest in Ukraine.

St. Petersburg native Alexander Etkind points out that, “ever since Vladimir Putin came to power a decade ago, the Kremlin regime has relied on two pillars: the security forces and energy exports. By suppressing internal rivals and absorbing their assets, the regime created a dual monopoly.”

So the basic strategy behind Vladimir Putin’s invincible mantle of popularity ran roughly as follows:

  • Exploit high and rising oil and gas revenues by partnering up with the oligarchs (and destroying the ones who refused to “cooperate” on dictated terms).
  • Use the flood of oil and gas cash to buy popularity among the Russian populace via rounds of rising salaries, bank loans, business opportunities, charitable handouts and so on.
  • Keep the virtuous circle sealed and intact with an overlay of security forces, suppressing anti-state opinion wherever or however it arises. (And, perhaps, killing off the overly nosy journalist/spy or two.)

Trouble is, the whole shebang relied on a fat pipeline of oil and gas revenues. With the price of oil and gas collapsing in the face of synchronized global recession, Putin’s magic popularity formula is collapsing too.

This is why the world now hears unsettling whispers of growing unrest among the Russian populace... outbursts of popular violence and calls for Putin’s resignation... and even signs of open rebellion from President Medvedev and Putin’s clutch of once-loyal Kremlin cronies.

Bottom line: Ol’ Vlad is in a tight spot. And that’s why Ukraine could factor even bigger in Russia’s short-term plans.

Winning Ukraine back from the West – i.e. nestling it firmly once again in the sphere of Russian influence – would be a huge win for Putin.

It would play well to the Russian masses in terms of fierce nationalistic pride – especially after the deep humiliation of the Orange Revolution five years back. And it would also play well to Putin’s Kremlin cronies, who would be delighted and relieved to see Russia’s vulnerable flank shored up once again.

Not to Be Ignored

Meanwhile, across the Atlantic, the United States has its own headaches to worry about. But America cannot afford to ignore the tug of war that is playing out in Ukraine for much longer.

After all there are deep strategic concerns for America, too, in the idea of a cracked and battered Europe facing down a wounded (but resurgent) Russian bear.

Not only that, but if the West were to truly “lose” Ukraine, other Eastern European nations – the ones who deeply fear Russia – could be thrown into an emotional maelstrom, mixing feelings of betrayal, terror, rage and despair.

That’s an extremely volatile cocktail... the stuff from which wars ignite. I do not think it an overstatement to say that Ukraine is a domino that could lead to some truly hair-raising chain reactions. The fate of Europe could depend on how future dominoes fall.

I’ll continue to monitor developments in Europe, and in Ukraine in particular. It’s too early to tell how this will all play out, but needless to say the endgame could have a dramatic impact on the macro-economic landscape.

And by the way, if you like this kind of analysis, it’s at the core of what I do for Macro Trader members.

The key difference being that in Macro Trader we are always focused on how to exploit the next opportunity for specific trading gains, wherever in the world those gains might come from. For example, we recently took short-term trading gains in gold, the S&P, and T-bonds (via various ETF option related positions), and are currently short a major currency.

One last thing: I place a high value on “boots on the ground” type intelligence, and know that at least a few of our readers are sprinkled throughout Russia, Europe and Eastern Europe.

Source: Who Will Win the Economic Battle for Ukraine?