Thu Apr 3rd, 2014 at 11:04:17 AM EST
The phone call between Putin and Obama two days ago, and assurances from Russia's Foreign Minister Lavrov that "...we have absolutely no intentions of crossing Ukrainian borders", made in yesterday's interview with Rossiya 24 TV channel, likely indicate that all parties involved in this conflict are prepared to make certain concessions, and common ground has started to emerge. Understanding of the simple truth that further escalation of the tensions is a "loss-loss" proposition seems to gradually take hold in European capitals, Kiev, Moscow, and even Washington. Let's take a look what is at stake here.
front-paged by afew
It's no secret that oil and natural gas contribute over 70% of its total export revenue, followed by metals and precious stones. These are industries controlled by oligarchs close to Putin. In an unlikely scenario of Europe trimming its purchases of oil and gas from Russia, pain will be felt there, no doubt about that. Currently, Russian exports of natural gas to Europe are in the order of 200 bcm annually. There is a project (code name `Altai') to build a pipeline to China, with design capacity of 30 bcm a year, which should be operational in 2015. As it stands now, Russia doesn't have a viable option to compensate for potential losses on the European market. Besides, according to Greenpeace International, "... 5 million tons of crude oil are spilled in Russian oil fields each year "due to lack of maintenance and obsolete drilling and production equipment. And if this happens in the industry, which is considered a cash cow, one can imagine what is going on elsewhere. The country is looking for ways to modernize and diversify its economy by bringing in advanced technologies, knowledge and expertise. If Russia is subject to the same kind of sanctions that were imposed on Iran, it will also have crippling effect on its economy and military. Moving into Eastern Ukraine would make both prospects a less distant possibility. Unlike in Crimea, there will be at least some resistance and casualties, which is not going to improve the image of Russia and Putin. Moreover, quite a few regional king makers will almost certainly feel at risk to be pushed aside under the Russian rule. And don't forget the poor state of local economies, which Russia will have to take responsibility for.
On average, Europe gets more than 30% of its natural gas, and 35% of oil from Russia. At the same time, there are several nations in Eastern and Central Europe (such as Lithuania, Latvia, Estonia, Bulgaria, the Czech Republic, to name a few) that almost entirely depend on it. Currently, there are limited options to replace Russian gas, and all of them require substantial initial investments with energy costs rising regardless. Russia also produces (and exports) about 12% of world oil. Taking even some of it out will send a shockwave through the markets, with a devastating effect. Keeping in mind that the recovery in Europe is still fragile, this may throw a monkey wrench in the works. For Germany, it would be a double whammy: it imports 36% of its gas and 39% of its oil from Russia, and is the second largest (after China) exporter of manufactured goods there. No wonder that Germans are very cautious when it goes about economic sanctions against Russia.
Judging by the sheer volume of trade with Russia - which is almost ten times as low as the EU has - the US economy may not be as vulnerable to direct impact of sanctions. Although, imports still cover roughly 40% of its oil needs, so there will be costs for the US too. What is also likely to happen, is the reversal of the current trend towards cuts in defense spending in an attempt to reign in budget deficits, which the GOP-controlled House felt uneasy from the outset. Conflict with Russia would shift focus away from the civil war in Syria, Iran's nuclear ambitions, and revived Taliban in Afghanistan and Pakistan.
Ukraine, especially its east part, has high concentration of Soviet-era coal and ore mining, metallurgy, chemical and machinery industries, which are extremely energy-inefficient. What keep them afloat are relatively cheap oil, natural gas and raw materials from Russia, and local labor. Ukraine exports ferrous and nonferrous metals, fuel and petroleum products, chemicals, machinery and transport equipment, food products, largely to Russia (~25%). They can't compete with similar goods from developed and developing economies on quality. Once the price advantage disappears, there is nothing much Ukraine will have to offer to the world. On top of this, the government provides gas subsidies to households. In these circumstances, any attempt to make a sharp turn away from Russia will be equivalent to economic seppuku. The amount of aid required to survive the shock will be enormous. And all of this is accompanied by the urgent need to reform the political and legal system, which is a separate can of worms.
If Russia occupies East Ukraine, torn apart, the nation will struggle with identity and sense of inferiority for a while. Expect extremists taking charge on each side, at least, initially. Eventually, there will be largely industrial East integrated into the Russian economy, and West, a primarily services-based, backyard (rather than showcase) of Europe, neither doing particularly well. Under continuous uncertainty, private capital will hardly be willing to take a risk of investments there.
I must admit this is a rather simplistic view of the reasons why I think a political solution is in the best interests of all major players in this conflict. Ukraine can actually benefit from its proximity to, and economic ties with, Russia, even drifting towards European- style democracy, as long as pragmatism and cool heads prevail.