The Mess in Ukraine Bears Watching
By Staff News & Analysis - January 23, 2015

The winter brings the heat in Ukraine … The fighting in Ukraine has returned to an intensity not seen since last summer, and the government claims Russian weapons are once again streaming across the border to support the rebels. So it is a curious moment for the European Union's top foreign policy official to bring up the prospect of normalizing relations with Russian President Vladimir Putin. Instead, the EU should be bracing to make sure that every member supports sanctions, because unanimity will be needed to extend them in March when they begin to expire. – Bloomberg

Dominant Social Theme: Europe must do whatever is necessary to make sure Putin's impudence is punished.

Free-Market Analysis: The drumbeat advocating additional sanctions against Putin and Russia is evident in this Bloomberg "editors" editorial.

It is this attitude that will support a continuance of the Ukraine standoff. From what we can tell, the episode was initiated by the West to put pressure on Russia and Putin. Putin certainly has responded and the situation has escalated.

Most recently, Putin decided to reroute oil and natural gas to Turkey from Ukraine. As Europe does not have pipelines from Turkey, Putin advised Europe to build them. This solution, while practical, does nothing to help Europe come in from the cold this winter. Pipelines cannot be constructed in a day.

And now comes this editorial from Bloomberg: Probably one of a number that will be launched as Europe contemplates whether or not to continue sanctions against Russia.

Here's more:

The sanctions regime, with a hearty boost from low oil prices, has been helping to slow the Russian economy and thus pressure Putin to back away from the fight in Ukraine. Yet the sanctions are vulnerable because several of the bloc's members — including Italy, France, Hungary and the Czech Republic – want them to end.

On Monday, EU foreign policy coordinator Federica Mogherini put forward a discussion paper outlining how Europe could gradually normalize its ties to Russia – if Russia moves to end the crisis in Ukraine. Mogherini insists that there is no question of lifting sanctions at this moment, but her paper said nothing about increasing them should Russia escalate the war, as previous EU statements and papers have done. Hers is an attempt to steer a new course, and it sends exactly the wrong message.

There are arguments for easing the sanctions: They haven't stopped Putin's meddling, for one. And they have damaged the fragile economies of the EU. At the same time, Putin's captive news media have been able to exploit them to further stoke nationalist fervor at home. Yet these pale next to the solid reasons to keep the sanctions in place.

To start with, there is evidence they have had an impact: On at least two occasions, they have caused Putin to scale back aggression in Ukraine – in May, when a threat to broaden sanctions pressured Russia to drop opposition to Ukraine's presidential election, and again last fall, when a Russian military buildup and rebel plans to take three Ukrainian cities evaporated.

Just as important is that exacting a price from Russia for its military aggression unites the EU behind the vital security interests of at least four members – Poland and the three Baltic states. The measures also serve as a financial disincentive for Putin to embark on military adventures beyond Ukraine, and they erode support for him among neighbors such as Belarus and Kazakhstan, now alarmed about what Putin may intend for them.

Everybody wants to see the sanctions removed someday. Yet to do so before Putin withdraws Russian troops from Ukraine and its border, and before that border is put under the control of international monitors, would be to waste the pressure already applied. It would also put significant trust in Russia's good faith – even though there's been little evidence lately that such trust is warranted.

We can see the editorial is relentlessly negative regarding Putin. Yet surely in a struggle such as this one, there is blame to go around. The West has been pressuring Putin and Russia – both militarily and economically – in part because Russia is an ally of Syria, where the West and particularly the US also want regime change.

The article makes the other side of the case, pointing out that "Russia continues to support the separatists militarily while lying about it." We learn that, "Putin is cultivating far-right political parties in Europe that seek to break up the EU, including by lending 9 million euros ($10.4 million) through a Russian bank to Marine Le Pen's Front National in France."

Now, we don't think it would be a bad thing for the EU to fracture, but paying cash to buy political schisms is probably not the way to advance a more appropriate legislative solution. In other words, the standoff between Russia and Europe – and the West generally – is not getting any better. It is getting worse.

The Bloomberg editorial concludes that "Putin seems always to assume the EU will be too weak and disunited to say no to him … Until Putin puts a full Russian withdrawal from Ukraine on the table, the EU has to maintain its unanimous resolve."

Where will all this end? We have no idea. But the constant ratcheting up of tensions is bound to harm not just the region but larger parts of the world's economy as well.

With all the news of Western economic deficiencies, it seems self-defeating to aggravate the situation with Russia. And yet this is just what the Bloomberg article advocates.

Such escalation will surely have an impact on growth, profits and prosperity in Europe and Russia in the weeks and months to come. No doubt, it will have an impact on the US as well and the BRICs generally.

It is not in any of the parties' interests for this standoff to continue. And yet it doesn't seem as if many avenues to reduce tension are being explored or are practical at this point.

After Thoughts

The Ukraine situation continues to simmer in the background, but a serious flare-up could have an impact on already troubled Western economies. For investors, especially, it bears watching.

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