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Background in economic research, project management, business change management, and Austrian economics.
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  • Ukraine Crisis: What Are The Likely Outcomes ? 0 comments
    Mar 9, 2014 5:40 PM

    Unfolding events in the Ukraine since the ousting of President Yanukovich, have unnerved investors and commercial enterprises in the West. The Ukrainian currency has taken a hit; down 40% at one point. Prospective loans to the Kiev government from both Russia and the EU are on hold pending resolution of the crisis. Planned foreign investments and contracts are also likely stopped under "force majeure" conditions. Natural gas supplies from Russia to some EU countries, which pass through Ukraine, are at risk of being blocked too.

    So what are the likely outcomes of this potentially combustible flare-up which now encompasses conflict between Russia and the USA/EU/NATO ? In the following we try to answer five main questions that are being asked, amongst others, by Western executives of banks and multinationals that have current and/or prospective business interests in either Ukraine or Russia.

    1/ Will there be a war between Russia and NATO/US ?

    NO, it is not probable so long as there is not a Sarajevo "Archduke Ferdinand killing" -type event in Ukraine. However, that "no" is conditional on:

    1a/ both the EU and US correcting their failure to take seriously the positions publicly enunciated by President Putin and Foreign Minister Lavrov that the new interim government in Kiev is unconstitutional because the ousting of Yanukovich did not comply to the Constitution (Article 111);

    1b/ a negotiated crisis resolution that recognises Russia's refusal to accept that Ukraine allows US missile bases on Ukrainian territory;

    1c/ how the US and EU interact with Kiev in what is now a destabilised internal political situation. The West has been supporting the Opposition. This is, in effect, the old government alliance based around former Prime Minister Tymoshenko. The West's uncritical political support of these people is highly risky. Their past is clouded by untransparent connections between government and business interests. A stable unity government will unlikely be found in Ukraine in circumstances where the West continues blithely to preference these interests. In its 2012 "Doing Business Survey", the World Bank ranked Ukraine 152nd in a list of 189 countries.

    2/ Will there be a new "Cold War" between Russia and the West (US and EU) ?

    If the US persists with military/political/diplomatic/economic sanctions against Russia, Russia will continue to adopt the playbook of old style inter-state relations with retaliatory actions. This action/reaction process could become long and harden into a new "Cold War", even if it is "irrational" from the viewpoint of each's respective fundamental economic interests. Russia perceives the West's pronouncements as an aggressive posture to Russia's own strategic national interests. But Russia has already stated that military conflict can and should be avoided.

    As concerns Europe, some individual countries' economic interests vis a vis Russia are far from homogeneous with the EU's currently adopted statements. Germany and Poland both have major existing and prospective trade and investment interests in Russia and Ukraine. Germany and several Eastern and Central European countries are heavily dependent on Russian natural gas supplies to meet their energy consumption needs.

    It is highly probable that these considerations will play a major part in the EU's degree of commitment to any extended period of US belligerence (sanctions). Expect therefore to see Germany take the lead in looking for pragmatic, diplomatic negotiated solutions. Their Foreign Minister, Steinmeier, has already initiated intense talks with his Russian counterpart. These discussions are more likely to yield practical outcomes than the efforts of US Secretary of State, John Kerry.

    If the US government understands that Germany (which is leading the EU policy) is intent on a negotiated solution to protect and secure its interests, this should give it (the US) pause for thought on its own apparent Russian military encirclement ambitions. Thus a Cold War II can and will be avoided.

    3/ Will the Autonomous Region of Crimea re-join the Russian Federation ?

    The Crimea region will proceed with a vote and the outcome will probably be to secede. The Russian Parliament is already drafting a law to render joining the Russian Federation easier (with the intent, precisely, to help Crimea return to Russia). Putin will leverage this outcome first, to ensure the security of the Sevastopol Russian naval base. Thereafter, he may or may not accede to Crimean secession from Ukraine to join Russia. The outcome of that decision will depend on the wider negotiated settlement with the US/EU about the future of Ukraine.

    4/ Will Ukraine become integrated into the EU ?

    No. The pro-EU enlargement faction in Brussels had been making all the running up till before this crisis broke. It had backed the signing of an EU Association Agreement with Ukraine, but put it on hold as political leverage against the Yanukovich regime in Kiev for the jailing of former Prime Minister Tymoshenko. The ( largely unspoken) aim of the pro EU enlargement faction is to make Ukraine an EU member. Its' (uncritical) support for the political Opposition (and Tymoshenko) was echoed by Washington. Indeed, evidence is now in the public domain that the US Administration was actively financing the Ukrainian Opposition to the tune of $4 billion.

    This dynamic of US and EU political support for the Opposition fundamentally miscalculated Russia's interests in Ukraine: notably, military (Sevastopol naval base) and strategic (gas pipelines cross Ukraine to eastern and central Europe).

    The Russian government's offer of a loan to the Yanukovich regime was explicitly to counter the perceived political "buying" of Ukrainian influence and interest. Russia understands that, should Ukraine become an EU member, then it would be able to join NATO. That would enhance further the US strategy to contain/surround Russia militarily (as it has done with China).

    The eventual negotiated conflict resolution will have to entail a resumption of diplomatic co-operation between NATO and Russia. Plus, at least, a postponement of NATO and EU proposals to upgrade the Ukrainian military.

    5/ Will the territorial integrity of Ukraine be maintained ?

    The default positions of the Superpowers is to maintain the territorial integrity of third countries. In the case of Ukraine, that principle is enshrined in the 1994 Treaty of Budapest, signed by Russia, the US and Britain.

    However in the current Ukraine crisis the political terrain has shifted. Russia no longer recognises the interim governmentt in Kiev. That position allows them - in their view - to ignore the persons claiming political authority in Kiev and not negotiate with them. At the same time, they await the outcome later this month of a self-determination referendum in Crimea.

    Russia will then likely play the "territorial integrity" card with the EU and US, claiming that it cannot be sustained unless "constitutionality" is restored in Kiev.

    Likely that will be through new national elections ? But, bearing in mind other calls for secession from Ukraine extant in the major regions of Kharkiv and Donetsk, Russia may call for more stringent autonomy concessions for these Russian speaking regions as well as the exclusion of "internationalisation" crisis resolution proposals from the West.

    The likely outcomes ?

    Russia and the West will agree on the secession of Crimea from Ukraine and "impose" this decision on Ukraine as bottom line component of the "crisis resolution". Russia will obtain clear possession of its military-strategic Sevastopol naval base.

    Russia and the US/EU will agree on means to "re-constitutionalise" the government in Ukraine. As a part of this, Russia will obtain confirmation that Ukraine will not join NATO until/unless all strategic co-operation between NATO and Russia are re-established.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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