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.

Now to the RT interview, with the transcript below.

The gas deal between Ukraine and Russia became possible because Europe realized that it wouldn’t get the gas if it didn’t get behind Ukraine, Wall Street analyst Michael Hudson told RT.

RT: How important is this gas deal for Ukraine and for Europe?

Michael Hudson: It’s apparently most important for Europe because it was Europe that gave in on the deal. The problem was never about the price of the Russian gas. The problem was whether Ukraine was doing to keep up trying just to run up a larger and larger gas bill every month and every year and finally default. In the US Treasury, strategists have already discussed in public how Ukraine can simply avoid paying Russia the money that it owed by going to court and stalling it. So Russia understandably said, “We need credit in advance.” Mr. Oettinger of the European Commission said “Wait a minute, Russia, why don’t you just lend them the money. They will repay you.” And Mr. Putin at the Valdai Club speech in Sochi last week made it very clear. Look, [Russia] has already lent them 11 billion dollars, much more than anyone else has lent to Ukraine. Ukraine is bankrupt, it’s torn itself apart. Why didn’t perhaps a European Bank underwrite the loan? Finally, Mr. Oettinger gave in. Europe said “OK, the IMF is going to lend Ukraine the money to pay Russia for the gas for the balance of the year.” So that Ukraine would end up owing the IMF money and the European Commission money, not Russia. So Russia will not be exposed to having to lend any more money to a dead-beat economy.

RT: You think that it was the EU who gave in on that deal and not Ukraine or Russia. Why?

MH: Ukraine has passed. Ukraine said “We are broken, we don’t have any money, we have spent all our money on war. Our export industry is collapsing. If we need gas, we’ll simply steal the gas that Russia is sending to Europe. We are not going to starve – we’ll just take your gas.” And Putin said, “Well, if they try to steal gas like they did a few years ago, we’ll just turn off the gas and Europe won’t get gas”. So Europe realized that it wouldn’t get the gas if it didn’t step behind Ukraine and all of a sudden Europe is having to pay for Ukraine’s war against Russia. Europe is having to pay for the whole mess in Ukraine so that it can get gas, and this is not how they expected it to turn out.

RT: Do you think this deal will improve relations between Europe and Russia?

MH: Europe is very uncomfortable with being pressured by the US that essentially said “Let’s you and Russia fight.” Europe is already suffering. Germany has always been turning towards Russia, all the way. 50 years ago, I remember Konrad Adenauer in Germany always spoke very pro-Western and pro-American, but always turned economically towards Russia. So of course Europe, and Germany especially, has wanted to maintain its ties with Russia. The problem is the US [wants] to start a new Cold War. It created a lot of resentment in Europe, and Europe is finally capitulating. This means that the US pressure to set Europe against Russia has failed.

RT: Could we expect now easing of sanctions on Russia?

MH: No, Europe is still being pressured, the sanctions are pressured by NATO, and NATO is pressing for a military confrontation with Russia. The sanctions are going to continue unless Russia gives back Crimea, which of course it won’t. The sanctions are hurting Europe, they are turning out to be a great benefit for Russia because finally Russia is realizing: “We can’t depend on other countries to supply our basic imports, we have to rebuild our industry.” And the sanctions are enabling Russia to give subsidies to its industry and agriculture that it couldn’t otherwise do. So Russia loves the sanctions, Europe is suffering and the Americans are finding that the Europeans are suddenly more angry at it than they are at Russia.

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  1. ambrit

    I read that Ukraine was a major producer of hardware for the Russian military. How much of this productive capacity is in the “Disputed Eastern Region?” If the Russians can pull off an Autonomous East Ukraine, that, plus retooling of factories within Russia proper, would go a long way to giving Russia a high class military again. (Not that they are slouches now, to the contrary. Also, Russia beat the Germans in WW2 primarily on manpower and mass materiel of a ‘serviceable’ nature. Boots on the ground you know. [You’d think the American elites would have learned that lesson from the Iraq Debacle.])

    1. Massinissa

      Most of it was in the east, but not necessarily all in the warzone.

      Still, none of Ukraine is doing well right now.

    2. Yonatan

      Some Ukrainian factories in the east of Ukraine, rather than being bombed to smithereens by the US-sponsored Nazis, have moved lock, stock and barrel to Russia.

  2. James

    This is what real leadership sounds like:


    But the United States, having declared itself the winner of the Cold War, saw no need for this. Instead of establishing a new balance of power, essential for maintaining order and stability, they took steps that threw the system into sharp and deep imbalance.

    The Cold War ended, but it did not end with the signing of a peace treaty with clear and transparent agreements on respecting existing rules or creating new rules and standards. This created the impression that the so-called ‘victors’ in the Cold War had decided to pressure events and reshape the world to suit their own needs and interests. If the existing system of international relations, international law and the checks and balances in place got in the way of these aims, this system was declared worthless, outdated and in need of immediate demolition. 

Pardon the analogy, but this is the way nouveaux riches behave when they suddenly end up with a great fortune, in this case, in the shape of world leadership and domination. Instead of managing their wealth wisely, for their own benefit too of course, I think they have committed many follies.

    The measures taken against those who refuse to submit are well-known and have been tried and tested many times. They include use of force, economic and propaganda pressure, meddling in domestic affairs, and appeals to a kind of ‘supra-legal’ legitimacy when they need to justify illegal intervention in this or that conflict or toppling inconvenient regimes. Of late, we have increasing evidence too that outright blackmail has been used with regard to a number of leaders. It is not for nothing that ‘big brother’ is spending billions of dollars on keeping the whole world, including its own closest allies, under surveillance.

    Let’s ask ourselves, how comfortable are we with this, how safe are we, how happy living in this world, and how fair and rational has it become? Maybe, we have no real reasons to worry, argue and ask awkward questions? Maybe the United States’ exceptional position and the way they are carrying out their leadership really is a blessing for us all, and their meddling in events all around the world is bringing peace, prosperity, progress, growth and democracy, and we should maybe just relax and enjoy it all?
    Let me say that this is not the case, absolutely not the case.

    A unilateral diktat and imposing one’s own models produces the opposite result. Instead of settling conflicts it leads to their escalation, instead of sovereign and stable states we see the growing spread of chaos, and instead of democracy there is support for a very dubious public ranging from open neo-fascists to Islamic radicals.

    Why do they support such people? They do this because they decide to use them as instruments along the way in achieving their goals but then burn their fingers and recoil. I never cease to be amazed by the way that our partners just keep stepping on the same rake, as we say here in Russia, that is to say, make the same mistake over and over.

    1. Banger

      The content and style of Putin’s speech goes sharply against the grain of the Western propaganda narrative. If you compare Putin to Obama or other Western leaders you cannot be struck by the comparison. Obama speaks in a succession of silly and meaningless platitudes always playing to the audience. I have never understood anything Obama has said form the beginning–I saw him as bullshit artist from the beginning and he has remained true to form.

      But mainly the point is that Obama and the rest of them aren’t actually leaders in the way Putin is–they have no vision and not much power. The WH is one part of the faction that rules Washington and not the most powerful part. What that set of arrangements is I’ve often said should be a major subject of conversation here and elsewhere but because we live in a culture whose chief attribute may well be “denial.” Neither the people, the American intellectual class (there’s a lot about this in Chris Hedge’s work), nor the leadership class seems to have much interest in reality. Instead we deal with impossible platitudes about how we, in the U.S. at least, live in a country that is extraordinarily “open” and “free” and even more laughable “brave.”

      The chaos that Putin speaks about is a result not of “bad” policies but chaos in Washington which, despite it’s disunity, insists on ruling the world and meddling with the internal affairs of its other Western allies who are still, despite the insanity in Washington, still in thrall of Washington. Whatever… on the one hand Putin who is fairly consistent, straightforward, realistic not full of false promises and mindless assertions on the other Obama who gives them platitudes, contradictory policies and one chaotic situation after another. Well, that suits the citizens of the U.S. just fine since it reflects “our” values–but Europe–is this the sort of society you all are becoming?

      1. impermanence

        “I have never understood anything Obama has said form the beginning–I saw him as bullshit artist from the beginning and he has remained true to form.”

        Obama is doing EXACTLY what he is paid to do.

        Unfortunately, most people refuse to believe the simple reality presented and defer to their intellect which takes events and [through the magic of the intellect] transforms them into some bizarre fairy tale so that they can continue to live in the dream of world social society.

      2. susan the other

        Great comment Banger. I keep thinking about Rumsfeld’s unknown unknowns. Actually he developed a matrix that left out one fourth of the permutations. There are in fact Known Knowns, Unknown Knowns, Known Unknowns, and Unknown Unknowns. The Unknown Unknowns are my favorite. Commonly known to us humans as “denial” or maybe “hubris” and etc. And the source of all comedy.

      3. susan the other

        I responded to you with some stuff about Rumsfeld’s Unknown Unknowns and made the point that he left out “Unknown Knowns” from his clevel little matrix. Or commonly known as “denial”, or sometimes as “hubris.”

  3. sevenleagueboots

    You have a wolf by the ears:
    You can’t hang on. You can’t let go.

    Old Russian adage.

  4. Seamus Padraig

    I remember Konrad Adenauer in Germany always spoke very pro-Western and pro-American, but always turned economically towards Russia.

    What the hell is Mike Hudson talking about here? Adenauer was extremely anti-communist. He played the star-role in creating the Federal Republic of Germany and bringing it into NATO.

    1. NotTimothyGeithner

      “Economically towards Russia” is code for not taking a dump on the 99%.

      Putin’s greatest sin in the eyes of Wall Street is moving Gazprom from a company that returns 0 dollars to the Russian people to one that returns 90% of its profits in rubles to the Russian treasury.

      Also terrorism doesn’t scare voters into okay in military contracts, so they need Russia.

  5. diptherio

    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.

    This is known as the “infant industries” argument, and it’s anything but new. I think it says something about the stupidity of (many) development economists that they’re only now figuring this out. Fortunately for the Asians, their development economists are not so dense as ours and have been using protectionist strategies quite successfully for some time now.

      1. Generalfeldmarschall von Hindenburg

        I’m a little baffled to find that since I was at university, the obvious and observable fact that protectionism works to develop native industries and works very well was written out and a neoliberal teaching put in its place.

        If protectionism didn’t work, Japan would have ended up like the Phillipines.

      2. Vj

        If so I find it noteworthy and curious that the Nehruvian model moves mainstream even as India races to abandon protectionism and the mixed economy model.

    1. LifelongLib

      I had the same reaction as diptherio, since I’ve been reading for decades that most countries (including the U.S.) start off protecting domestic industries and only beat the drum for “free trade” when they think their industries will come out on top.

      1. Yves Smith Post author

        What you read and what is accepted by Serious Economists are two different matter. The standard advice to emerging economies was to liberalize trade, period, and even get capital markets put in place, which BTW would weaken domestic financial institutions.

  6. Michael Hudson

    Russian agricultural output is up sharply — mainly at the expense of the Baltics and other gung-ho NATO supporters. Food was the easiest commodity for Russia to produce, and will now build up its agriculture towards European standards. sanctions spur self-sufficiency, as in times of war (viz. English agricultural output during the Napoleonic Wars and blockade)
    Manufacturing needs protectionism, and NATO threats show Russia the need to achieve self-sufficiency in basic needs. So the sanctions will work as a catalyst. As for the temporary hardship they cost, this seems to be galvanizing the Russian population, much as civilian bombing does in warfare (or 9/11 did in the US).

    1. Banger

      It goes beyond Russia, of course–it begins to change the seemingly inexorable movement towards a neo-feudal-based Empire focuses real political power on the barons connected with the corporate sector. If a country can show some independence from the “global marketplace” (aka NWO, aka Global Empire) then those countries that are today not completely dominated by the corporate oligarchs will start charting a course for self-sufficiency since sanctions are always going to hang over these countries’ head making them susceptible to blackmail from Washington and who really wants that? Also happening, is the rapid dissolution of a unified Washington which continues to fragment into factions pushing policy first one way then the another way depending on who is holding the balance of power at the moment. Eventually, even “allies’ in Europe and elsewhere are going to wonder whether it is worth meekly following what certainly appears to me as a “drunk” imperial regime in Washington.

      1. Lexington

        If a country can show some independence from the “global marketplace” (aka NWO, aka Global Empire) then those countries that are today not completely dominated by the corporate oligarchs will start charting a course for self-sufficiency since sanctions are always going to hang over these countries’ head making them susceptible to blackmail from Washington and who really wants that?

        It’s a good thing I wasn’t enjoying a cup of joe when I read that – otherwise I’d be wiping it off my monitor.

        Has it really escaped your attention that the Russian economy is in fact dominated by “corporate oligarchs” and that the distinction you are making is therefore meaningless?

        1. Banger

          First, very little is known about Russia in the West since the Western mainstream cannot be believed about anything–but we do know that Russia WAS dominated by oligarchs as are most countries. Putin re-established the authority of the central state through a series of deals and brute force so the current oligarchs are not quite the same bunch of pirates allied with Washington that looted and strangled the country in the 1990s.

          At any rate the power of the major corporate elites does not play the central role they do in the U.S. where they dominate the federal and state governments. Oligarchs rule most societies–it’s just a question of whether the oligarchs are centered in the country they dominate and try to, at least, act in the interests of the country they influence. That’s my impression at any rate.

          1. Vatch

            Banger, you’re quite correct that oligarchs rule most societies. And when they don’t, it’s usually an especially influential Power Elite that provides the rulers, such as the elite members of the Communist Party in the Soviet Union. Those elites function in much the same way as oligarchs.

            Jeffrey Winters’s book Oligarchy is very informative. On page 34, there is a chart showing 4 basic types of oligarchy: Warring, Ruling, Civil, and Sultanistic. The oligarchy that quickly developed following the fall of the USSR seems to have been a blend between the Warring and the Ruling variety. The new oligarchs had to provide their own private security. After Putin came to power, he succeeded in imposing a Sultanistic model of oligarchy, as discussed on pages 277-278 of Winters’s book.

            The United States has a Civil Oligarchy, although we are clearly moving in the direction of a Ruling Oligarchy. We see this in the number of plutocrats who are becoming actively involved in government by running for office.

          2. DiogenesTheC

            Your view is one I’ve come to myself. Even the best-designed democratic institutions contain unintended levers that allow informal exercise of power, and oligarch’s will always find ways to exercise these levers effectively. A primary one in our own situation is use of cash-backed mass advertising, from lobbying lawmakers to slanting media reporting. Consider the antics of institutions such as USAID (who would be anti-development?), the NED (how could you not simply LOVE democracy), or Freedom House (redefining freedom for the 21st century). How ironic is it that the people of the main western democracies hold so little democratic approval for their “elected” regimes, as measured by opinion polls, compared with the democratic approval that Russians hold for that thuggishly oppressive Mr. Putin? There must be something wrong either with the people or the polls.

  7. steviefinn

    If historical precedents count for anything & I happen to think they do ( Afghanistan for example ), then it’s not a good idea to push Russia into a corner, particularly if the majority of the population understand the threat & their leader has around an 87% popularity rating.

    Most people thought that Novarossiya would be a walkover for the much larger forces & Hitler thought he had crushed the Soviets, but mainly due to the titanic operation which moved about 50,000 factories East beyond the reach of the Wehrmacht’s advance, the materials produced – including roughly 24,000 tanks in 1942, eventually changed the course of the war.

    Perhaps in this economic war, cheese could be the new much tastier version of the T-34 tank.

  8. Paul Hirschman

    Wasn’t “protectionism” the core of the Republican Party from the 1850s through Teddy Roosevelt–based on the the idea of early 19th century political economy of protecting native industrial development? What the hell is the news here? (Ever hear of Alexander Hamilton?)

    1. Michael Hudson

      Hamilton is only the first. The generation inspired by Henry Carey, highlighted by E. Peshine Smith (see my dissertation on my website) developed the sophisticated protectionist argument that made American dominant.
      I have described this in America’s Protectionist Takeoff: 1815-1914.
      As for Japan, Peshine Smith served as advisor to the Mikado introducing protectionism. His Manual was translated into 7 languages — and my book into Chinese, where I used it as the basis for my lectures in Wuhan and Beijing.
      The American protectionists have been expurgated from the history of economic thought, although they shaped American policy for over half a century. Carey, Smith, Simon Patten, Alexander Everett, Calvin Colton, Henry Clay et al — forgotten names.

    2. Vatch

      Protectionism enabled the economic success of both Great Britain and the United States. Neither country abandoned protectionism until after it had become very successful. And now both countries are in deep economic trouble, partly as a result of free market policies.

  9. Paul Hirschman

    One of my favorite primary sources about Hitler’s invasion of the USSR is a letter written by a German soldier in the summer of 1941, when things are going just dandy for the Nazis in Ukraine. The soldier describes the daily retreat of Russian soldiers (as well as the capture of tens of thousands). He also notes the immense landscape and the fact that he feels depressed: every day we Germans roll back the Russians by the hundreds of thousands, every day we move further east with little effective opposition, and every day there is still an endless amount of territory we must still conquer. It never ends.

  10. susan the other

    This was interesting. I’m not sure how to comment. But I’m pretty sure Hudson is correct. Europe is gonna pay for the whole mess because the US State Dept. essentially wrote it off. “Fuck Europe.” We are not going to subsidize Russian oil directly. That’s just too insane even for us. But consider all the other stuff. Russia is building several military/air bases in the Arctic to protect their oil interests there. Our answer to their development is to commit capitalist suicide – lower the price of oil. The whole thing, the whole global mess, is incomprehensible.

  11. dSquib

    How much of Russian history consists of it dealing, in some way or another, with isolation, outwardly or self imposed? What does it mean for such a vast country to be “isolated”? Imagine a number of countries amounting to the same size and population “going it alone” with an exclusive trade zone. Not the same thing, exactly, but worth considering I think. Would it be a disaster? Doesn’t seem likely.

  12. RBHoughton

    The remarkable thing from my point of view was the ease with which Europe submitted to direction through NATO. I guess they would prefer not to have to do that so publicly.

    They mind sanctions less although its hurting most EU members because sanctions only cost money whereas impugning European sovereignty as NATO did might lead to questions from the citizenry

  13. different clue

    One thing these sanctions can help Russia achieve is to displace the fishmeal-pellet-fed shit-salmon from aqua-feedlots with wild-creature-fed shinola-salmon from Kamchatka and elsewhere in farthest Eastern Russia.
    The Russian middle classes may like the taste of shinola-salmon so much more than the taste of shit-salmon that they won’t go back to farmed shit-salmon even when the sanctions are lifted.

    If the Russian “body political-economic” gets richer and stronger because sanctions forced the internal development of internal suppliers for internal markets, then the Economystic Hasbara for Free Trade may itself become a visible casualty.

    1. RBHoughton

      If the tasty Japanese seafood from Hokkaido, a little further south, is any measure, you are right and I will look forward to a supply becoming available locally.

      But its not all hunkidory In Russia. Regulation ended with the break-up and the caviar and sturgeon industry has collapsed, having sold everything they had without thought of tomorrow.
      Strange that a Communist government could regulate the caviar industry but not a democratic one.

      1. different clue

        My memory is that the sturgeon egg-fishery was anarchised and piratised during the Yeltsin period. Were there even any commercially relevant amounts of sturgeon left by the time Putin came into office?

  14. Marc

    Good point about how sanctions can sometimes serve as a catalyst for building the global competitiveness of local businesses. All depends on what types of public and private alternatives/investments are made to “replace” the imports. South Africa under Apartheid, while not a perfect comparison because they were helped by some outsiders, certainly was able to develop local industrialization processes(both in absolute terms and relative to neo-liberal/structural adjusted neighboring African economies) in a few sectors when they were subject to international sanctions.

    1. different clue

      Why does a local bussiness even have to be globally competitive? And in a country the size of Russia, just how “local” would a protectionized wild-salmon fishery selling to salmon buyers across Russia be? And what would even be the basis of the comparison/ competition? If millions of Russians taste wild-caught shinola salmon would they even go back to farm-raised shit salmon anyway?

  15. KatKan

    Free trade is a hoax, anyway.
    Protectionism is dropped at the border…no tariffs are charged. But the developed industries are still heavily (and secretly) subsidised, so the developing new industries in the other countries don’t stand a chance. How much does the US spend on farm subsidies? on tax breaks (right down to zero) for industries? while the struggling developing nations are expected to hock themselves up to the eyeballs for “upgrading to EU standards” before they are allowed to even try competing?

    The primary purpose of industry is NOT to export (whether they lose on it or not). The primary purpose is to provide jobs, so the population has income to buy their necessities with. That purchasing ability can then use the products.

    The majority of Russians don’t live in city apartments. If the sanctions make food more expensive, perhaps more will go back to the old idea of growing some of their own food. Even a “weekend farmer” can grow substantial amounts for his own family, and end up eating more healthily.

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