West has responsibility to engage with Russia
EDITOR'S CHOICE | 26.12.2014

West has responsibility to engage with Russia

The politics of power and the arrogance of the military-industrial complex in the US is what started the momentum towards what is now unfolding in Russia, writesRay Kinsella

THE EU, commenting on the crisis in Russia, said they were watching developments with “concern” and that the EU would not benefit from an economic collapse in Russia.

What did they expect in imposing sanctions that undermined — and were intended to undermine — the Russian economy and its capacity to absorb shocks?

In this instance, the shock of an unprecedented collapse in oil prices which dominate both Russia’s external trade and its government revenues.

The collapse from $100 (€80.58) a barrel to $60 has cost Russia over $100bn, undermining both growth and budgetary projections.

The US-led sanctions, fully supported by the major EU countries, were intended to put Russia into financial quarantine from global capital markets.

In other words, to restrain its capacity to borrow on financial markets and to engage in external transactions in today’s highly integrated set of global markets.

That’s a bad place to be — not just for Russia but also for the global economy and, especially, for Europe.

The reality is that the West simply didn’t reflect that the effects might well collapse back on their own economies.

The key issue here is not about the relative size Russia in the global economy. Contraction will of course have some impact in macroeconomic projections.

More important is the impact of the psychology of markets and the possibility of contagion across investor confidence.

It wasn’t the size of the Irish economy that spooked the IMF at the start of our own drama — it was the possibility of contagion across global markets of a bank collapse in Ireland.

That is the fear that now exists in relation to Russian banking sector.

The instability in Russia is, at a number of levels, an extension of the eurozone crisis. It hasn’t gone away.

Germany tethers on the brink of deflation. France is, for all practical purposes, in recession.

Developments in Belgium clearly point to an anti- austerity movement that is gathering momentum.

Greece is insolvent — and has been for some time.

This reflects not just domestic economic failures but the wholly negative effects of austerity on a fragile economy, badly in need of managed adjustment and economic growth to support that adjustment.

There was no joined-up thinking behind the sanctions.

The recent visit of a special EU commissioner to Greece resonates with the appallingly insensitive notion of Herr Schaubel’s ill-considered move of sending a special commissioner to take over whatever vestiges remained of Greece’s democracy.

Last week’s visit was not sparked by concern for the Greek economy — but by the very real possibility of a general election and a victory for the far-left anti-austerity parties.

This would, of course, spook global markets and create a political tsunami across the eurozone where opposition to austerity has been sat on, but never gone away.

Ireland is a case in point.

The effects of a Russian collapse arising from the effects of sanctions and political estrangement from the west, against the backdrop of an exit by Greece were not thought through.

The same simplistic and non-reflective thinking that has contributed to the continuation of the eurozone crisis has been equally responsible for attempting to push Russia into a cul-de-sac but whose real effects, both now and into the future, are incalculable.

The politics of power and the arrogance of the military-industrial complex in the US, is what started the momentum towards what is now unfolding in Russia.

Prior to the revelations of Edward Snowden, the activities of the NSA, and much more recently, the US senate report on the torture carried out globally by the CIA, the notion of a foreign policy based on the politics of power and on the profitability of the military industrial complex, would have been discounted.

Not anymore.

The effects of Pax Americana, rooted in the “corporatisation of war” are all too readily evident in Iraq and Syria. So, too, is the appallingly and nihilistic terrorism which it has helped to spawn.

Successive US administrations have advanced the military assets of Nato towards the frontiers of Russia’s borders without any understanding whatever if the mindset of Russia scarred by successive invasions from the west.

The same mindset that saw the failure of Soviet communism not as a victory for capitalism and democracy but for “corporate capitalism”.

And a political regime weaned on corporate capitalism saw an opportunity to encircle Russia, enfeebled in the aftermath of the collapse of Soviet Empire.

This was short-term opportunist thinking.

Sanctions were supposed to deter Russia taking back the Crimean peninsula from Ukraine. They didn’t.

They were supposed to make President Putin pay a price for the invasion of Eastern Ukraine.

In fact the consequences have already been visited upon Russia.

The West sowed the seeds of an illusion that the sanctions might precipitate a “regime change” in Russia. T

hat’s all it was, an illusion.

The Russian people are experienced in austerity. There will be no regime change.

Sanctions have hamstrung the Russian central bank’s ability to respond to the collapse in oil revenues.

In fact, with all of the cards stacked against it, the bank has been calm and insightful in its policy response.

The rise in interest rates was a calculated gamble that was not successful.

But so far it has not resorted to capital controls.

Yesterday, it announced new measures to maintain the stability of Russia’s financial sector by offering to assist banks in recapitalising, easing pressures on them to recognise losses on their securities portfolios while providing opportunities to acquire foreign exchange through auctions held by the central bank.

The bank demonstrated real insight in its recent comment on what was happening, taking the longer-term view and arguing that the Russian economy would have to restructure to a “new order”.

Equally, the prime minister, Dimitri Medvedev, in seeking to mobilise a consensus within the country, has said “all the economic and production goals that you have set for yourselves, the country has the resources to achieve” and that “it is in our joint interests to bring order to the currency market as quickly as possible.

No-one, neither the citizens, nor banks, nor the real economy, needs such instability”.

That is what the sanctions-brigade should have foreseen.

In sum, the sanctions are likely to have much the same counter- productive effect in the political sphere as the troika has had on Europe in the sphere of economics.

It’s not yet clear whether all of this will be sufficient to stabilise the economy and to prevent further instability in the Forex and capital markets.

What is clear is that not only has the West a responsibility to work with Russia to undo the damage brought about by sanctions, but it is very much in its interests in containing the crisis rippling across financial markets, the old shibboleths that define Western and Russian dialogue.

Equally, in Europe the implosion of the eurozone and the instability which this has generated is inextricably linked to the undermining of the original vision for the EU.

Somewhere in between, there will have to be a constructive engagement with Russia which is informed by Russian history and sensitive to the impact of policies crafted in the corridors of chancelleries on the lives and living standards of people.

Ray Kinsella, Irish Examiner

Tags: European Union  Russia  US