With the Russian military interference on the weekend, tensions are escalating in the Ukraine region. Furthermore, only last Monday the Central Bank of Russia hiked up interest rates, while the country’s PMI is running below 50.0 for a fourth consecutive month.
Russia is in a deadlock – politically, economically and strategically! The problem is, however, it is not a small country and such an impasse impacts everybody, particularly Europe which imports about 75% of its gas to Russia through Ukraine. More significantly though, Russia is too rich in resources to be squeezed by economic sanctions – therefore, the problem cannot be ignored for now.
The present crisis has some parallels with another recent event in Russian history. In 2008, when Vladimir Putin was out of the country attending the opening of the Beijing Olympics, political and financial crises led to one of the biggest sell-offs in the history of the Russian stock market. This time around in Sochi, he used the end of the games to escalate the political situation, taking advantage of the fact that the world media’s was focused on the Olympics to get away with something even more dangerous.
Despite high energy and raw material prices in recent years, Russia’s economy has moved into trade deficit. Expected growth for 2013 is less than 1.3% and it can be assumed that the country will slip into recession this year, particularly given recent events.
Whatever the immediate outcome of the present Ukraine crisis, it’s conceivable a new paradigm now exists. Because Russia has the necessary resources in terms of population, territory and most importantly raw materials such as oil and gas, it will defend its position as a superpower. But the problem lies in the fact that politically and economically Russia is in a difficult situation, and strategically speaking its present government will do whatever it takes to avoid a change.
Conclusion:
In the event the recent manoeuvres escalate, a regression back to pre-1989 and pre-Berlin Wall times could be possible. Having travelled to Russia, I observed that Western technologies and applications are used extensively there; however, I also understand that Russia could survive without these, if necessary. Europe’s loss, however, would be more critical. Not only would exports to Russia disappear, but also, and more importantly, stability and the possible drive to achieve its long-term goals would be questionable. Only 25 years after the fall of the Berlin Wall, such a wall could be rebuilt, just a bit more to the east; the impact of this, however, would be highly negative on the economies of Europe.