Sunday, March 23, 2014

What's Really At Stake in the Crimea

As most everyone knows, the Crimea now officially has been returned to the Russia, despite Obama's finger pointing and posturing. It kind of reminds me of a parent threatening to "count to three" if their wayward child doesn't do as they're told, and just before getting to "three", they either try to make some sort of deal or start over counting to three, only to walk out of the room in frustration while mouthing some idle future threat over their shoulder. Meanwhile, the little tike goes about their business in blissful reassurance that nothing of consequence happened or will likely happen. Such has been Putin's reaction to Obama's sanctions.
Ever since Russian Special Forces seized control of key installations, roads, and airports throughout the Crimea, catching the US and Western governments flatfooted in an apparent failure of the intelligence, Putin has been busy solidifying his hold on the predominately Russian peninsula following the overthrown of the pro-Russian Ukrainian president,Victor Yanukovych. At stake, though not much discussed in US, are the vast naval facilities in Sevastopol, currently the home of the Russian Black Sea Fleet, Yalta, and extensive offshore natural gas reserves.

President Obama made numerous implied threats; basically demanding that Russia withdraw. Obama has even implied that only the US has the "right" to such interventions, as the people of Crimea voted overwhelming to leave the Ukraine and return to Russia. The Crimea has been a part of Russia since 1753 and Katherine the Great, where it remained until 1991 and the fall of the Soviet Union and Eastern Bloc. 58% of the population are ethnic Russian, while the predominant language spoken in the Crimea is Russian, not Ukrainian.

Obama, in what has to be considered "unique" response, issued sanctions, but not on the Russia government. Nope. Obama issued sanctions on approximately 33 individuals--advisers, diplomats, and government officials---personally close to Putin. Typically governments deal with governments in the appropriate fashion, but issuing sanctions against individuals has got to be a first in the annuals of international diplomacy. The sanctions are suppose to restrict their entry into the US and freeze any personal assets held in the US. In addition, they will hopefully have a negative effect on Russian stocks traded domestically, and the Russian Stock Exchange, the MICEX. Although the stocks did take a slight hit, most on the "revenge list" were far from intimidated and thought it was a joke at best.

Slightly more serious, Standard and Poor's, as well as Fitch Ratings cut Russia's credit rating, citing a potential slowing of the economy as a result of the sanctions (how does "sanctions" against individuals affect a country's credit rating?). Moody's has already downgraded Russia to Baa1 status. The MICEX has fallen 2% ---14% on the year---since the sanctions were imposed while the ruble has remained stable. As far as the effect on the various individuals, not so much. Since most are billionaires, impact would be slight, and additionally, most claim to have little in the way of assets in the US. Meanwhile, Obama is trying to get the EU, lead by Germany's Merkel, to take similar action, not to mention various credit card companies which would have an impact on tourism.

However, there's a fly in the ointment for Merkel and the rest of Europe in the form of Russian oil and gas. Europe has become heavily dependent---40% on average---on Russian oil and gas, so any serious sanctions, let alone military action, would obviously result in Putin turning off the tap (32.6% and 38.7% respectively as of 2007). That would kill Europe's already puttering economy, and likely collapse economic support for Greece, Spain, and Portugal (and Italy and France aren't doing too the swift either). Germany gets 36% of its oil and gas from Russia while France gets 14%. Greece receives 76% while Austria depends on 49%; Poland 48%; Bulgaria 92%; Italy 27%, Hungary 60%, and the Czech Republic on 77.6% as examples. So, with all that's at stake, let's cut to the chase and discuss what this is really all about.

As I previously reported, the Crimea is, for all intent and purposes, Russian. Russia will no more surrender its naval bases and access to the Black, Avov, Aegean, or Mediterranean seas any more than the US would give San Diego or Corpus Christi to Mexico. But that's not what is really is at issue here. Again, as I had previously reported, aside from tourism and a marginal agricultural economy, the crown jewel is the vast offshore oil and natural gas reserves which Europe and especially the US, would like to have access to. How much are we talking about? How does 7 million tons annually sound? What's more, Exxon and UK/Dutch Shell had a tentative contract with Ukraine to those reserves worth at least $1 billion dollars. Now with Russia in control, production will fall to the state owned Gazprom. And you thought this was all about the Crimean and Ukrainian people because the media told you so didn't you? Silly rabbits.

While the Cold War ended essentially in 1991 with the fall of the USSR, what we are now witnessing is the start of a new type of cold war---an economic war. Natural resources are quickly drying up. Despite a shift to shale gas, the US oil production is expected to peak by 2019 according to the US Energy Information Administration, and Middle Eastern oil capacity is at or near peak production capabilities, with the exception of a few nations, most notably Iraq and Iran. Meanwhile, China has been on an all out buying spree in Africa and South America to acquire rights to minerals and other natural resources. What is happening here is the global financial institutions of the West, most notably the US, turning the economic screws to get access to those offshore reserves behind a screen of "sanctions" and nothing more. Transnational corporations openly exercising power that was once the prevue of national governments. Welcome to the New Cold War.

Crimea's economy in numbers and pictures

Russia Credit Outlook Cut as US, EU Widen Sanctions List

With Crimea annexation Putin expands oil and gas empire

Europe's dependence on Russian oil and gas makes it hard to enact meaningful trade sanctions

US Energy Information Administration: Petroleum and Other Liquids

Climate Progress

Peak Oil?

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