Where do you find free cheese?
In what may be the biggest auction since Moscow and Washington vied for influence in various third world countries during the Cold War, Ukraine (pop: 45 million) is attracting some hefty bids. Russian President Vladimir Putin yesterday upped the ante: he plunked down $15 billion to buy potentially worthless Ukrainian government bonds and cut the price of Russian natural gas (by what I figure is one third). At the same time, he said he wasn’t insisting on Ukraine joining his Eurasian customs union. He figures the European Union won’t be willing to match that.
That does not mean “game over,” because the demonstrators are still in Maidan calling for President Yanukovich to sign an association agreement with the EU, one that Catherine Ashton is claiming will not hurt Russia’s interests in Ukraine. It would open Ukrainian markets and force its producers to adjust, which is why Yanukovich is asking for another 20 billion euros (per year!) from Brussels. I suppose he may still get some substantial fraction of that, provided he didn’t make the mistake of promising Putin he would not sign with the EU. The parliamentary opposition is threatening to block the Russian deal, prompting the choicist comment I’ve heard on the situation:
I know of only one place where you can find free cheese – and that’s in a mouse-trap
A cartoon sent to me yesterday portrays two demonstrators, one with a sign saying no to Moscow’s orders and the other saying he prefers Europe’s diktats. I would too, but the irony is still appropriate.
There is a bubble in international relations elsewhere too. Saudi Arabia is pledging to match and raise Moscow’s bid for Syria, which includes weapons, cash and diplomatic support. Iran and Hizbollah are pouring resources into that fight as well. The Gulf states have plunked down more than $10 billion for Egypt, countering American and Turkish hesitation about the coup that ended President Morsi’s year in office. China’s establishment of an air defense identification zone in the East China Sea has Secretary of State John Kerry careening through the Pacific dropping admittedly small morsels of military, humanitarian and economic assistance everywhere he goes. Turkey is enjoying the spectacle as Erbil–the capital of Iraqi Kurdistan–and Baghdad vie to supply their northern neighbor with oil.
I suppose it is natural that in a period of upheaval and shifting power relations that those with cash try to buy as many friends they can. But I don’t remember a stronger bull market in international relations. Is it a bubble that might burst soon, or are we still just at the beginning of a secular rise in the price of international friends?
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As long as Russia retains the possibility of destroying the the Ukrainian economy as a means of gaining control of the country, the EU would be crazy to start throwing money at it. Let the Russians tap their reserve fund for pensions to prop it up for a while yet.
On the other hand, Putin’s actual ability to threaten Ukraine with financial ruin became significantly less yesterday when the Final Investment Decision on the first stage of the Southern Energy Corridor was signed in Baku. This is the competitor to the South Stream that the Russians want to build to bring Russian gas to Europe by some other route than through Ukraine’s pipeline, unless it agrees to allow the Russians a controlling stake in said pipeline.
The Azeris’ Caspian gas will mean a new source of gas, not just a new route for the Russian gas they are currently buying, and is therefore a more highly-prized project by the EU.) In addition, under EU anti-monopoly law, the production and transport of gas are not supposed to be provided by a single entity, which of course is exactly the preferred Gazprom/Russian model. (The reason given for the recent EU threat to its construction.) The new Western-consortium pipeline will be more like a toll-road, open to whomever is willing to pay to transport their gas, meaning the possibility of competition arises. This will be especially important for some countries now completely dependent on Gazprom for gas – Macedonia, for example, has paid the highest price in Europe for Gazprom gas (nice map at http://izvestia.ru/news/544100) – >$560/1000 m3 compared to $313 for the UK in 2012).
Recently, with the economic downturn and the decline in international prices due to American shale gas production, Gazprom has had to cut prices to its Western European customers, paying rebates in some cases. As the company’s profits shrink, and along with them Russian government revenues, Putin may find propping up the Ukrainian economy is not a particularly cheap deal.
Meanwhile, there is rejoicing in Albania at the prospect of becoming a link in the European gas supply system. The Transadriatic Pipeline will bring not only a reliable source of energy at non-confiscatory prices and a steady source of income in the long-term, but immediate improvements to the roads and work for local construction firms – see http://www.oxfordeconomics.com/Media/Default/economic-impact/economic-impact-home/Economic-Impact-trans-Adriatic-Pipeline.pdf to understand why Berisha pushed so hard for the project.
In the long run, the EU may have done Ukraine a bigger favor by throwing monkey-wrenches at South Stream than it could have done by sending cash. Even if the South Stream terms are eventually renegotiated to meet EU objections, its worth to Russia as a geopolitical weapon and a cash stream for supporting the current regime will have been degraded and could possibly be cancelled. Acrimoniously, of course, but to Ukraine’s great relief.