Your Economy (No Politics)

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Russian Economic Power Driving Wedge Between Indebted Western Governments

May 13, 2014
Goldseek

Officials in the U.S. and European Union are having second thoughts about punishing Russia with sanctions targeting entire industries and the Russian economy, opting instead to focus on tightening pressure by targeting more individuals and companies.

Policy makers say they are concerned that broad-brush sanctions on Russia’s energy and financial sectors, the two areas mentioned as possible targets, risk provoking economically costly retaliation by Russia according to Bloomberg.

Gazprom, Russia’s massive gas-export monopoly, yesterday threatened to cut off supplies to Ukraine, a reminder of the power Russia wields over energy supplies to the rest of Europe.

A gas cutoff by Russia would wipe out half of Ukraine’s supply and could severely disrupt supplies to the EU. The EU, Turkey, Norway, Switzerland and the Balkan countries received 30% of the natural gas they burned from Russia last year, according to the U.S. Energy Department.

“We have to be very careful not to hurt ourselves more than we hurt the other side,” Polish Foreign Minister Radoslaw Sikorski said yesterday in a speech in Brussels, echoing comments made by U.S. Treasury Secretary Jacob J. Lew last week.

In a sign of Russia’s ability to use its economic power to drive a wedge between its former G20 allies, France’s government said this week it will deliver Mistral helicopter carrier warships to Russia as planned, thus rejecting requests from its European and U.S. allies to cancel the sale.

There are also significant dependencies on Russian grain exports, particularly in the EU.

It looks like the pragmatists and non ideologues may be gaining the upper hand over the more hawkish western voices who were risking conflict with Russia, potentially militarily.

Russia is powerful both in terms of natural resources and in terms of finances given their very significant foreign exchange reserves. Ukraine is bankrupt and on the verge of hyperinflation as we pointed out here. Ukraine desperately needs some $20 billion to avoid financial collapse.

With Western nations heavily indebted including the hugely indebted U.S., Russia looks like the only realistic source of such funds.

Geopolitical risk remains very much underestimated and there remains the risk of financial, economic and currency wars where the Russians use gold as a geopolitical weapon to undermine the dollar.

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