In his announcement to the world of the latest round of US sanctions against Russia, President Barack Obama attempted to sooth business fears by stating categorically that the spill-over on U.S. companies and those of its allies would be “limited.”
Obama’s next move was to get the U.S.’s fast dwindling collection of allies on board – or perhaps better put, in line. “We’re going to be in a stronger position to deter Mr. Putin when he sees that the world [DQ: meaning the U.S. and Europe] is unified” he told the NY Times.
Two days later, European Council President Herman Van Rompuy rallied to the cause. Speaking for 500 million Europeans – none of whom have ever voted for him; indeed most have still never heard of him – Van Rompuy said that European sanctions “should have a strong impact on Russia’s economy while keeping a moderate effect on EU economies.”
The message was clear: sanctions against Russia would have a “limited spill over” on U.S. and European businesses and a “moderate effect” on their economies. At least that was the plan – or at least the plan presented for public consumption. Unfortunately, the spoilsport that is Vladimir Putin seems rather less inclined to play along.
In its latest retaliatory act, the Kremlin announced a one-year ban on “the import of agricultural goods from countries that have imposed sanctions on Russia (i.e. the U.S. and the EU). As The Guardian reports, the move further deepens the economic standoff between the Kremlin and the ‘West’” (a term that one assumes excludes all non-aligned Latin American nations such as Brazil, Argentina, Uruguay and Ecuador, the same countries from which Russia will soon be sourcing much of its agricultural produce).
Russian officials are also reported to be considering banning European airlines from flying to Asia over Siberia, a move that would impose costs on European carriers by making flights take longer and require more fuel. It would also put European carriers at a serious disadvantage to Asian rivals, while also costing Russia money it collects in overflight fees.
And so the stakes get higher in a trade war that has already inflicted serious pain on many European and Russian companies as well as on their broader economies. The big question is:
Who Will Fold First?
My money’s on Europe – for a number of reasons. First, due to its recent history Russia, as a collective whole, is much more psychologically prepared for the sort of suffering and chaos that is likely to result from a serious escalation in the current trade spat.
“Russia… has a long history of enduring pain – these are hardy people that can deal with pain much more than the U.S. or Europe can,” Andrew Goldberg, a global market strategist at JP Morgan, told Bloomberg. It’s not so long ago that Russia went through the brutal transition from the world’s largest state-controlled economy into a market-oriented economy, albeit one with strong oligarchic tendencies. During that period Russians had to endure hyperinflation, a protracted depression, and the near-bankruptcy of much of the country’s industry.
By contrast, Europe has had it comparatively easy. Even Greece, with its near-dead, austerity-ridden economy, has seen nothing compared to what Russia went through in the nineties.
Political Stability and Popularity
The second reason why Europe is more likely to fold first (presuming the U.S. will ever let it – a big “IF”) is all to do with politics.
Whether we in the West like it or not, Putin is incredibly popular at home. The more our governments and media demonize him, the more his popularity grows. At last count, his approval rating had soared to 83% – compare that to Francois Hollande’s 18%, David Cameron’s 30%, and Marian Rajoy’s 29%. Indeed, of all the national leaders of Europe’s five biggest economies, only Angela Merkel, with an approval rating of 71%, enjoys the support of more than half of her electorate.
Further, in Russia it’s not all about Putin. For the first time since 2008, a majority of Russians (73%) believe their country’s leadership is leading them in the right direction. This renewed faith is apparent in their record-level confidence in the country’s military (78%), their national government (64%), and honesty of elections (39%) [Putin’s Approval in Russia Soars to Record, America’s Plunges to Near Zero].
By contrast, as the recent European elections showed, the level of popular support for EU institutions is at its lowest point this century. The last Gallup poll, from January this year, revealed that of the EU’s 27 Member States, only four – Luxemburg, Germany, Belgium and Denmark – showed a majority of people endorsing the EU leadership. Approval levels are lowest in Greece (19%), Cyprus (21%) and Spain (27%), the United Kingdom (29%), Sweden (30%) and the Czech Republic (30%).
A Cold, Long Winter
The contrast could not be starker: while Putin and the main organs of the Russian state ride a rising wave of popularity and support, in Europe public support for the leaders and institutions of state is in free-fall. Now, imagine what would happen in Europe if, say, Russia was to turn off the gas spigot, leading to a bitterly cold autumn of spiraling gas prices. Would the people rally around their governments?
What if, around the same time, Europe’s so-called economic recovery was to suddenly peter out, as has already happened in Italy [Italy’s Economic ‘Recovery’ from Hell in One Chart]. Or if, say, London’s historic housing bubble was to suddenly go “POP” (as has reportedly already begun, thanks in no small part to the EU’s Russian sanctions)? That’s not to mention the distinct possibility of a fresh round of banking collapses, as the ECB tries – and fails – to put the old continent’s banking sector into some shape and order. As I reported here, the ECB has already publicly stated that some banks will have to disappear – in an orderly fashion, of course!
Granted, all of these are mere “what ifs,” but the ominous signs are impossible to ignore. The future they portend for Europe is one of weakness, fragility, division, and decline; and a bitter trade war with its big neighbor will do nothing but hasten their arrival and deepen their impact. By Don Quijones. An exclusive for Wolf Street.
And Germany, the powerful engine that is supposed to pull Europe out of its quagmire? It stalls as the sanctions hit. The “disaster of 2008” is evoked, then hastily denied. Read….. Russia Sanctions Exact Their Pound of Flesh – from Germany