Who Will Win the Economic Battle for Ukraine?

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.

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.

Comments

[drevno:]

At the present, every region of the world is experiencing economic and political problems. Eastern Europe is no exception. Ukraine, which is not part of EU, is on the verge of collapse, both politically and economically. The investors in the West, and EU in particular, must be now mulling over the costs of bailing them out versus not bailing them out. It should be noted, that the governments are driven by big business more than all other considerations combined...if the business does not see possibility of a quick return on their investment (their own sector/company/project... or in general, in the form of a government bailout) they will be reluctant to continue feeding the Black Hole Ukraine.

Apropos - in 2 days Ukraine has to pay $400 million overdue for the Russian gas, or they will be without it again. The cheapest solution for Ukraine would be to exchange their political leaning for advantageous supply of energy from Russia. With the current slump in gas demand, it would cost Russia next to nothing to supply Ukraine; but the bailout from the west would be in real Euros, at a huge cost to the taxpayers in the EU. Ukrainians would get a freebie either way. Except, the cost of "freedom", which is illusory, at best, anyway.

Yes, it is a complex situation. We are in a recession, and it is deepening. The point is, that everybody is in a recession, which is deepening everywhere. One cannot blame any specific country or region or a sector for the ills faced today. Rather, due to excesses of globalization, we are as woefully and clumsily interconnected as the overloaded and outdated power grids in North America. We are, in fact, in a blackout, with some places/regions in brown-outs, at best. And Ukraine is no exception.

Mar 06 05:51 AM

[Rock Johny:]

Russia loves it's 'buffer' zones. They invaded Finland to get Karelia to move the border a big further away from St. Petersburg. As well, they like buffer states like Poland, Afghanistan etc to be relatively weak for an even bigger buffer zone.

So here you have Ukraine, the home of Khruschev, Brezhnev, Trotsky, Chernenko and other leading Soviet politicians. Russia and Ukraine have such a common history that any overt possessiveness by the West might be seen as polly annish. Like Georgia, Ukraine has historically been more like a willing partner, joined at the hip with Russia than an independent entity and much more than a mere buffer zone.

With this latest hiccup in capitalism, some turmoil in these areas is to be completely expected.

Mar 06 09:40 AM

[Roscat:]

Great article and good macro-analysis.

As you state, there will probably be no winner in the fight for Ukraine. it will continue to have Russian influences in the east and EU influences in the west. I just hope that will not become another divided Germany. The outcome would not be pretty.

It will be fantastically hard for Ukraine to manage the situation diplomatically but, they can certainly use all the help they need. Yushchenko and Tymoshenko need to understand that this issue is bigger than any of them individually.

A first step is the elimination of dependency of Russia. I am sure they understand that but, it is generally hard to implement since the vision and results are quite long-term.

I wish them the best.

Mar 06 10:49 AM

[iyamwutiam:]

As stated earlier given the historical ties and the rather large Russian population - it was foolish to expect that a coup led by Yushchenko would last. As Hungary, Romania and especially Poland is finding out the largesse of the 'west'- is generally tied into profit first. Mortgages denominated in foreign currency (Swiss Francs/Euros) coupled with the horrific depreciation of their currency (which they were availed upon to 'float' has caused an economic turmoil and anger that is barely glimpsed at in Euroland and the US.

Latvians attacking their Treasury should give pause to acceptability of bringing out the rallying cry of 'democracy' -a code word for unfettered capitalism. Social safety nets were cut in abandon and generations used to such are now causing huge swaths of the population to wax nostalgic of a an inept socialism that provided free education and plentiful support-though not the grand visitations of opulence, conspicuous consumption and of course Ipods and Iphones. This nostalgia is spreading like wildfire to Lithuania, Bulgaria and perhaps even Georgia.
Putin is in no danger - any minor hiccup by a foreign leader who is on the 'blacklist' is mindlessly turned into a 'political crisis'. We have seen these establishmentarian hacks do so time and time again with Chavez, Castro, Morales and of course Putin. Not one of these leaders actually faced a crisis -and in reality seem to cement their hold by doing the ridiculous - such as decreasing poverty, disparity of wealth, and the exodus of capital siphoned from natural resources. They have increased their hold despite the clarion calls of doom proffered by western journalists across the globe.

Apparently - someone forgot to tell the entire populations of Bolivia, Cuba, Venezuela and Russia - since it is much easier to just publish the drivel meant primarily for the consumption of gullible 'western' populance who remarkably after two elections of Chavez winning by large margins -still can not get over the fact that he and all others are elected leaders. I would seriously disregard any further writings of this journalist- next he will write how Bear Stearns is fully capitalized - or perhaps he already did.

Mar 06 01:50 PM

[Duude:]

I understand Russia is ready to shut off natural gas to the Ukraine, yet again. This tactic must surely be wearing down the average Ukrainian's will. Doubtless, with Putin its not about extracting more money out of Ukraine as it is about wearing down the will of the Ukrainian people and government. With the world in economic turmoil and the Eastern European countries experiencing more than their fair share of suffering, Russia will seek to capitalize on Western European inattentiveness and Obama's anti-war credentials, to take the Ukraine back under Russia's influence through the Russian military. At the very least, they will keep beating them down, so as to influence the Ukrainian electorate into choosing a Pro-Kremlin candidate for the next election.

Mar 06 04:28 PM

[Alan Young:]

The picture of Ukraine as the launching pad for a land war against Russia seems quaint. In civilized countries, wars are now carried out by computer-designed financial manipulations, not armies.

At this juncture, neither Western Europe nor Russia has a viable economic model. If or when a winner emerges, the Ukrainian people will likely throw their lot in with the winning side. But it may be years before anyone is solvent in the region.

Mar 06 04:34 PM

[Ergo:]

Winning against Russia in the Ukraine would have other consequences. But regardless, Russia is too close with too big a stick for Ukraine to break free. And historically, in times of cirsis, people seek authority more than democracy.

Mar 07 10:13 PM

[Woofer:]

It's good to see Ukraine getting the attention that its strategic position warrants. But the article vastly oversimplifies the political situation. Describing Tymoschenko as "very much pro-Russia" is simply false. With presidential elections coming up, three major figures are jockeying for position: Tymoschenko, Yuschenko and Viktor Yanukovitch, the former president whom Yuschenko defeated and who heads up the Party of the Regions.

It is Yanukovich who is "very much pro-Russia". Tymoschenko and Yuschenko were in fact allies during the Orange Revolution but their personal ambitions have now made them rivals. Tymoschenko is currently trying to position herself between Yuschenko and Yanukovitch as a centrist with the pragmatic ability to work with both the Eastern and Western camps. Although there is an element of opportunism to her position, there is an essential logic as well. Ukraine's survival depends on maintaining at least a working relationship with Russia, and the Russian-speaking Eastern Ukrainians woulds never accept a 100% pro-Western policy.

With Yuschenko as president and Tymoschenko as prime minister, the current Ukrainian economic collapse is exacerbated by their standoff because it results in political paralysis at a moment of crisis. Stalemate wasn't such a bad thing when the economy was doing well, but now it's a tragedy. And it reinforces Ukrainian cynicism about the capacity of a democratic government to manage public affairs.

By the way, a good English-language source of current news about Ukraine is the Kyiv Post online edition.

Mar 09 02:54 PM

[anvor:]

Beware of amateurs like this author offering you professional advice.

Mar 10 05:00 PM

[John Polomny:]

Exactly the situation in Ukraine is much more complicated. The Dneiper river is a good dividing point between predominately Russian speaking people in the East and Ukranian speaking peoples west of the river. Most of the heavy industry and coal lies in the east. Furthermore there is an ongoing situation in the Crimea autonmomous region where the Russians want to have access to the Black Sea port at Sevastopol. I would not be suprised to see the country split into two at some point.


On Mar 10 05:00 PM anvor wrote:

> Beware of amateurs like this author offering you professional advice.

Mar 10 07:56 PM

[Alex Filonov:]

Timoshenko and Yushchenko are playing Putin as dummy. They create image of big fight between themselves with 2 goals:

1. Politically kill Yanukovich, former Putin's favorite.

2. Squeeze as much money from Russia as possible.

And both goals are working. Maybe Yushchenko and Timoshenko hate each other, hard to say, but they both are as anti-Russian as only possible for moderate Ukrainian politician. And neither of them would make Ukraine move to be Russian ally. Ukraine would move towards NATO and EU under any leadership, even Yanokovich, but under Timoshenko it's a sure thing.

Putin's goal to make Ukraine Russian satellite is dead on arrival.

Mar 13 12:21 PM