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
http://rt.com/business/crimea-economy-referendum-results-102/

Russia Credit Outlook Cut as US, EU Widen Sanctions List
http://www.bloomberg.com/news/2014-03-20/russia-outlook-cut-to-negative-by-s-p-as-obama-widens-sanctions.html

With Crimea annexation Putin expands oil and gas empire
http://www.csmonitor.com/Environment/Energy-Voices/2014/0321/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
http://news.nationalpost.com/2014/03/03/europes-dependence-on-russian-oil-and-gas-makes-it-hard-to-enact-meaningful-trade-sanctions/

US Energy Information Administration: Petroleum and Other Liquids
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MCRFPUS2&f=A

Climate Progress
http://thinkprogress.org/climate/2011/02/09/207484/wikileaks-peak-oil-saudi-arabia-reserves-overstated/

Peak Oil?
http://www.geo.cornell.edu/eas/energy/the_challenges/peak_oil.html

Corporate Welfare

I’m sure just about everyone has noticed that a bipartisan Congress gave some $4 billion dollars worth of subsides and tax credits to the oil companies, and yet oil company executives belly ache about how much money they’re not making. We notice their “plight” every time we buy gas, oil, or anything else made with petroleum (like plastic). We notice Exxon made $7 billion dollars in profit the first three months of this year, but that’s just a fraction of the story.

Last year, according to the Spark newsletter, Exxon made after-tax profits of $26 billion dollars, an increase of 52% over 2003. Chevron-Texaco made $13 billion, an 86% increase from the previous year. Shell Oil was up 48% over 2003, with $19 billion dollars in profits. Poor babies. I suppose the increase in pump prices is to compensate oil companies for hiring more accountants to count all the money they’re raking in.

Continuing increases in oil prices will in the long run severely damage the economy. People will stop spending as much in order to compensate for the increase in gas and oil prices. The decrease in purchases will lead to a decrease in sales, which in turn will lead to layoffs. Service businesses, ranging from anyone in the transportation industry down to the pizza delivery person, will see a decrease in business in direct relationship to the increase in costs of their services as a result of the cost of oil and gas. Manufactures of high end vehicles such as trucks and SUVs will see a decrease in purchases as customers move to more cost effective cars. Businesses which use petroleum based products, which includes everything made of plastics, will see the costs increase. While some of the increase can be offset internally, it will eventually be passed on to the consumer in the form of higher prices for such things as milk (plastic containers) and computers. For fun, take a minute and look around. Count the number of items made of plastic. That will give you an idea of where the increases will come from.

In short, consumers will have less disposable income, and will make adjustments to compensate for the increase. Manufactures will be forced to increase costs to adjust for the increase of supply costs on their end. With less money to go around, companies will be forced to reduce costs in the form of “sales” which may offer a short term boost in the economy, but will make the economy more instable, forcing marginal companies to either layoff or close. Housing and “big ticket” sales will suffer as folks have less money to spend, and are increasing worried about the economy, which feeds into an increasing unstable economy. The Fed may have to step in to reduce interest rates in order to artificially stimulate the economy. This may, again, have short term benefits, but doesn’t address the cause. The long term result could be a recession.

In 1976, during the “Oil Crisis”, then President Jimmy Carter promised Americans that the US Government would do whatever was necessary to harness alternative energy sources. Well folks, we’re more dependent on foreign oil than ever before, and geo-political nature of world is far more dangerous and volatile than ever. The hated “oil rich Sheiks” of the 1970s turned out to be the same US oil companies that boasted such impressive profits cited above. Oil companies stifled any real efforts to develop alternative energy while it was still in its infancy. President Bush recently remarked that he couldn’t understand the public’s concern over the increase in pump prices, and cited that the increases had “been gradually coming over time.” What he meant to say was that the oil company’s dominance over energy has been gradually coming over time. My solution would be simple. First, invest heavily in alternate fuel sources. Set “non-breakable” time tables, and require oil companies to contribute to its financing. After all, since they spent millions trying to stop it, seems only fair they should now have to fund it. Second, demand auto manufactures develop energy efficient cars and trucks (as an aside, the auto industry has been very successful in dodging this one. In fact, cars are less efficient now than just 10 years ago). Set specific “drop dead” dates with stiff financial penalties, and accept no more whiney ass excuses. Third, nationalize oil and gas companies, along with all other energy and water producing facilities. Industries that have such an effect on national security and the public’s well being should not be in the hands of folks motivated solely by profit. Fourth, and perhaps the most important, put the presidents, CEOs, and boards of directors on trial for war profiteering, for clearly that’s what it is.