The Old Continent’s Road to Ruin (Through Moscow)

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By Don Quijones, Spain & Mexico, editor at WOLF STREET. His blog: Raging Bull-Shit.

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

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  6 comments for “The Old Continent’s Road to Ruin (Through Moscow)

  1. Archy Don
    Aug 8, 2014 at 7:30 am

    In trade wars between democracies and tyrannies, tyrannies generally win. And, if they can’t win in the long run by sustaining hardships longer, they try to win with violence. (E.g., Japanese Empire circa. 1930-40’s.)

    Putin will outlast Obama. Hands down.

    • RDE
      Aug 8, 2014 at 12:07 pm

      Interesting choice of buzz words, Archy.

      The US democracy you refer to stages circus elections where citizens have the choice of voting for candidates who, once elected ignore their campaign promises and carry out policies favored by no one but the very small and rich class that paid for their election campaigns. The proper term for this form of government— the merger of corporate and state power—- is fascism.

      “Fascism should more appropriately be called Corporatism because it is a merger of state and corporate power”
      ― Benito Mussolini

      Perhaps there is a better word than tyranny for Russia, in view of the 87% support that Putin enjoys in contrast to Obama’s 30% and Congress’s 17%.

  2. tom kauser
    Aug 8, 2014 at 9:16 am

    What if? Just fresh reasons to QE to infinity? My question is the bond porn? Nothing about dumping treasuries and the horror? Tepid commentary! Bet if Russia started sending gold as export to global banking mechanism everybody (the chosen ones) would suddenly back the **** OFF?

  3. Aug 10, 2014 at 7:20 pm

    Regardless, of the harm to companies, it will be the citizens of the respective companies that will be harmed the most. They are the ones who will lose their jobs, have to pay more, etc.

    It never fails.

  4. Schadenfreude
    Aug 10, 2014 at 11:27 pm

    The aim of the US in moving into Ukraine was to drive a wedge between the EU and Russia, while installing a US/EU friendly government, installing NATO, pushing Russia out of its Crimea base, and selling off the assets of Ukraine through the IMF. The US saw the EU forming closer political and economic ties with Russia while the US economy, dollar, and military prestige decline, so the US decided they had to increase control over the EU nations. The ploy started off well enough, with Yanukovich forced to flee and the puppet Yatsenyuk installed, but then Crimea voted to join Russia, and the east declared independence from Kiev. The US upped the ante by going for a new Cold War, and has been provoking Putin every way it can, but Putin has refused to bite, to the frustration of the US and the EU and NATO hawks. The US continues to increase sanctions, while pushing the idea of cutting off Russian oil and gas exports to Europe. The US obviously sees benefits to the US and its oil and gas companies in this, while the EU (especially Germany) is beginning to see how costly a sanctions war with Russia will be. With friends like the US, perhaps the EU would do better to cozy up to the “great enemy”, Russia. Russia, meanwhile, is cozying up to China, India, Iran, Iraq, the BRICS, etc. European nations must decide whether they wish to develop strong trade relations with the emerging (non-Western) trade bloc, or stick with the failing Western bloc.

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