Category Archives: Russia

Oil, Ruble and Ideology

Yves here. Since the financial media is covering the continuing meltdown of the ruble intensely, we thought it would be helpful to add some information that seems to be missing from most reporting. This post by Jacques Sapir from the 14th (hat tip Michael Hudson) provides important detail on the importance of oil to the Russian economy (far less than typically depicted, although it is the biggest source of foreign exchange), the impact of the fall of the ruble and oil prices on the domestic budgets, and the odds of a Russian default. Note that Sapir is sanguine on the default front and does not see a rerun of 1998 in the offing, by virtue of of Russia having large foreign currency reserves. Note that Menzie Chinn of Econbrowser differs, and uses a chart from the Economist to make his point:

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IMF, World Bank Halt Lending to Ukraine – Franklin Templeton $4 Billion Ukraine Bet Goes Bad

Yves here. While the financial media is riveted with the spectacle of the ruble meltdown and the Russian government rate hike to 17%, and the investor rush out of all things emerging markets, another drama is playing out in Ukraine. If you’ve been following this drama, the Ukraine economy is substantially intertwined with Russia’s, and Russia was already subsidizing it by giving it a break on gas prices. When things got ugly, Russia revoked the subsidy, demanded repayment of outstanding gas debts, and cut off gas shipments. This made for an ugly situation, since 70% of gas to Europe goes through pipelines that transit Ukraine meaning Ukraine could simply steal European-bound gas if they got desperate, creating a conflict with one of their new patrons. Moreover, it raised the specter that any rescue of Ukraine would wind up routing funds to Gazrpom to pay off the gas bill, another outcome unappealing to a West determined to punish Russia every way it could (the dispute over the outstanding debt is being arbitrated, with a decision due next summer, which also allows Europe to wash its hands of money going to Gazprom).

This detailed account of the wrangling over what to do about supporting the basket case of Ukraine makes a couple of issues very clear: one, the amount of funding needed is much larger than the officials want to admit to, and two, the approaches under discussion are at best stopgaps. A default and restructuring look inevitable.

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Yanis Varoufakis: How the United States Rolls (Post-Global Minotaur) – by Slavov Žižek

By Yanis Varoufakis, a professor of economics at the University of Athens. Originally published at his website. In this article, aptly subtitled It’s lonely being the global policeman, Slavoj evokes a parallelism between the age of extremes that began as the British Empire was losing its grip with the present moment in history. Now that the […]

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Michael Hudson: U.S. New Cold War Policy Has Backfired

Yves here. Michael Hudson looks at the way what he calls “the New Cold War” is creating alliances among countries that the US has as designated enemies, when the classic foreign policy playbook is to do everything you can to keep your opponents isolated.

One thing that is striking about the US decision to escalate against Russia is that it’s not at all clear what the trigger was. And that raises the possibility that these hostilities were instigated out peeve, or what one might more politely call imperial reflex, reflecting the belief that Russia needed to be punished for its various sins, such as supporting Iran, outmaneuvering the US in Syria, and harboring Snowden. And the assumption appears to have been that Russia could be taken down a notch or two on the geopolitical stage at no cost to the US. Hudson explains that the reverse is proving to be the case.

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Meet and Greet Natalie Jaresko, US Government Employee, Ukraine Finance Minister

The new finance minister of Ukraine, Natalie Jaresko, may have replaced her US citizenship with Ukrainian at the start of this week, but her employer continued to be the US Government, long after she claims she left the State Department. US court and other records reveal that Jaresko has been the co-owner of a management company and Ukrainian investment funds registered in the state of Delaware, dependent for her salary and for investment funds on a $150 million grant from the US Agency for International Development. The US records reveal that according to Jaresko’s former husband, she is culpable in financial misconduct.

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Russia Can Survive An Oil Price War

Yves here. This article is an important sanity check on the impact of the current oil price war on Russia. We’ve seen similarly skewed conventional wisdom on the Saudis: “No, they can’t make it on a fiscal budget basis at below $90 a barrel,” completely ignoring the fact that the Saudis clearly believe it is in their long-term interest to suffer some costs to inflict pain on some of their enemies, and render some (a lot) of shale oil and alternative energy development uneconomical, which increases their ability to extract more in the long term from their oil asset.

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Michael Hudson, Other Experts Discuss America, China and Russia Jockeying in G20 and APEC Summits

Yves here. This is an intriguing exchange among Michael Hudson, John Weeks, professor emeritus of development economics at the University of Long and Colin Bradford of Brookings. The points of difference between Hudson and Bradford are sharp, with Bradford admitting to giving a Washington point of view that Obama scored important gains at the APEC summit, with Hudson contending that both confabs exposed America’s declining role and lack of foreign buy-in for its neoliberal economic policies.

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Michael Hudson: Putin’s Pivot to Asia

Yves here. Understandably, US reporting on the just-finished APEC summit focused on Obama’s objectives and supposed achievements. Russia has historically not been a major force in the region and thus received less coverage here. It was therefore surprising to see our man in Japan Clive tell us that Japanese media coverage of Putin at APEC was on a par with the column-inches given to Obama.

On Real News Network, Michael Hudson describes how Putin is shifting Russia’s export focus and economic alliances towards Asia, particularly China. Putin did better at the APEC summit than most Western sources acknowledge, and that could have longer-term ramifications for the US.

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Russia to Launch New Payments System to Circumvent SWIFT Network

Many observers have become unduly excited about what they depict as efforts to break the dollar hegeomony, such as the joint effort by the so-called BRICS nations to form a development bank. While having a suite of internationals funding entities, particularly ones focused on activities that in theory increase the collective benefits of relying on a reserve currency, are seen to be important, it does not follow that launching useful new funding institutions will break dollar dominance. As much as US abuse of its position as issuer of the reserve currency is correctly resented, there isn’t a competitor waiting in the wings. The Eurozone has blown it with its failure to clean up even sicker banks than the US has, and by compounding a bad situation with its adherence to destructive austerity policies. China clearly has the potential to displace the US longer-term, but it is unwilling to run the requisite trade deficits, since that means exporting demand and hence jobs. And no country had made the transition from being a major exporter to being consumer-driven smoothly; a crisis or protracted malaise would also delay China displacing the US as currency top dog.

But not being able to get rid of the dollar any time soon does not mean that countries that the US is trying to punish by using its influence over international payments system won’t find nearer-term escape routes.

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The Return of the Trade Cold War?

Yves here. With an active US effort to isolate Russia, which Russia is seeking to undermine (with only limited success so far) in strengthening ties with China and other emerging economies, most analysts have seen the geopolitical struggle in terms of short-term effects, such as on Russia’s and Europe’s growth rates over the next year. At the same time, the Chinese initiative to create a development bank, meant to rival the World Bank, is seen by many as an important step in breaking the dollar hegemony, along with moves by China and Japan to enter into oil contracts denominated in currencies other than the greenback.

As we’ve discussed in previous posts, we believe the frisson over the demise of the dollar as the world’s reserve currency is greatly overdone. As much as the US is abusing its role, particularly in its aggressive use of its influence over the dollar payments system as a weapon, there are simply no viable candidates for replacement on the horizon.

However, this post examines a consequence of US economic aggression against Russia that has not rceived the attention that it merits: that of reducing the amount of international trade, something economists see as a driver of growth. Note that per the Lipsey Lancaster theorem, there is ample reason to doubt the near-religious belief that more open trade is always a good thing. However, sudden restrictions in trade, which is what is taking place with US/European sanctions on Russia and Russia implementing counter-sanctions, is certain to cause short-term dislocations. And as we noted in a recent post, the cordon sanitaire being placed around Russia will led it to operate more as an autarky, which may not necessarily be a negative in the medium to long term.

This post seeks to identify the impact of reduced trade between Russia and Europe. This sort of analysis could become more germane going forward. While a currency rival to the dollar any time soon looks to be far-fetched, ever-more obvious US economic imperialism may lead other countries to strengthen trade ties among themselves to the detriment of the US, or like Russia, to move to greater self-sufficiency as a defensive measure. While economists assume that our current open trade system could never be rolled back, that was the tacit assumption during the last great era of open trade, the period right before World War I. The Great War put that all in rapid reverse gear. While no one expects a violent rupture, we may be in the early stages of seeing fractures developing in the trade system.

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Michael Hudson: Europe to Pay for the Whole Mess in Ukraine

Yves here. This discussion with Michael Hudson on RT focuses on the real meaning of the Ukraine-Russia gas deal. One point that Hudson makes that readers might doubt is that Russia loves the US sanctions. I’m not sure “love” is the right word, but there is reason to think they aren’t working out as the US had hoped. First, they’ve greatly increased Putin’s popularity. Even the intelligentsia in Moscow, who were hostile to him, have largely rallied to his side in the face of foreign bullying. Second, the Western press may be overstating the amount of damage done to the economy by the sanctions. Arguably the biggest negative is the fall in the price of oil, which came about growth in Europe and China slowing, and the Saudis announcing that they’d allow the price to reset at a much lower level than most analysts anticipated. But the ruble has been falling, which blunts that effect, but increases the drain on FX reserves as Russia tries to keep it falling too far and will increase inflation. Third, the sanctions have allowed Russia to engage in protection of domestic industries as a retaliatory measure, for instance, blocking many food imports from Europe.

Now all good well-indoctrinated neoliberals will say, “Trade protectionism merely allows domestic producers to become inefficient and uncompetitive.” It’s not so simple. Development economists are increasingly of the view that trade restrictions can help smaller economies develop domestic businesses to the point where they can compete in international markets, while if they foreign firms in, they’ll find it nearly impossible to build any local champions.

A colleague who does business in Russia but has no deep loyalties there, says he sees no signs of negative impact of the sanctions in Moscow (he describes it as now looking like any post World War II European capital). This is confirmed by recent surveys in Russia, so the lack of meaningful impact on Russian citizens isn’t an artifact of his seeing only the better parts of Moscow. Note that the latest EU forecasts anticipate very weak growth this year and next, as opposed to outright recession.

This visitor describes how the sanctions are helping Russian businesses. One of his friends has the Papa Johns franchise. They used to get their cheese from the Netherlands, but those supplies were cut off by the Russian sanctions against Europe. So they had to buy cheese domestically. It was cheaper but not as good. So he is working with the local farmers and cheese-makers to bring the cheese up to the standard of the cheese he used to import. So he expects to eventually have cheese that is lower cost than what he brought in and of comparable quality. And if he succeeded, the cheesemakers will be more competitive in Europe when the sanctions are relaxed.

The shorter version of this story is that Russia has a large enough domestic market and enough resources that unlike Iran, it may be closer to being able to function as an autarky when its imports and exports are restricted. The open question is whether it can go through the pain of a reset, with some serious and painful short-term dislocations, and escape the slow strangulation that the US claims it has imposed.

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