The sanctions imposed on Russia by the US and Europe for its interventions in Ukraine have worked much faster and inflicted much more damage on the Russian economy than anybody could have expected. The sanctions sought to deny Russian banks and companies access to the international capital markets. The increased damage is largely due to a sharp decline in the price of oil, without which the sanctions would have been much less effective. Russia needs oil prices to be around $100 a barrel in order to balance its budget. (It is now around $55 a barrel.) The combination of lower oil prices and sanctions has pushed Russia into a financial crisis that is by some measures already comparable to the one in 1998.
In 1998, Russia ended up running out of hard currency reserves and defaulting on its debt, causing turmoil in the global financial system. This time the ruble has dropped by more than 50 percent, inflation is accelerating, and interest rates have risen to levels that are pushing the Russian economy into recession. The big advantage Russia has today compared to 1998 is that it still has substantial foreign currency reserves. This has enabled the Russian Central Bank to engineer a 30 percent rebound in the ruble from its low point by spending about $100 billion and arranging a $24 billion swap line with the People’s Bank of China. But only about $200 billion of the remaining reserves are liquid and the crisis is still at an early stage.
In addition to continued capital flight, more than $120 billion of external debt is due for repayment in 2015. Although, in contrast to 1998, most of the Russian debt is in the private sector, it would not be surprising if, before it runs its course, this crisis ends up in a default by Russia. That would be more than what the US and European authorities bargained for. Coming on top of worldwide deflationary pressures that are particularly acute in the euro area and rising military conflicts such as the one with ISIS, a Russian default could cause considerable disruption in the global financial system, with the euro area being particularly vulnerable.
There is therefore an urgent need to reorient the current policies of the European Union toward Russia and Ukraine. I have been arguing for a two-pronged approach that balances the sanctions against Russia with assistance for Ukraine on a much larger scale. This rebalancing needs to be carried out in the first quarter of 2015 for reasons I shall try to explain.
Unintended consequences and Europe down the tubes as "collateral damage."
In order to shift the emphasis to assisting Ukraine, the negotiations have to be moved from the bureaucratic to the political level. The European financial bureaucracies find it difficult to put together even the $15 billion that the IMF considers the absolute minimum. As it stands, the European Union could find only €2 billion in its Macro-Financial Assistance program, and individual member states are reluctant to contribute directly. This is what led Ukraine to pass on December 30 a stopgap budget for 2015 with unrealistic revenue projections and only modest reforms. This is an opening bid in the negotiations. The law allows for modifications until February 15, subject to their outcome.
European political leaders must tap into the large unused borrowing capacity of the EU itself and find other unorthodox sources to be able to offer Ukraine a larger financial package than the one currently contemplated. That would enable the Ukrainian government to embark on radical reform. I have identified several such sources, notably:
1. The Balance of Payments Assistance facility (used for Hungary and Romania) has unused funds of $47.5 billion and the European Financial Stability Mechanism (used for Portugal and Ireland) has about $15.8 billion of unused funds.…
2. Larger matching funds from the European Union would enable the IMF to increase its lending to Ukraine by $13 billion …
3. European Investment Bank project bonds could yield €10 billion or more.…
4. Long-term financing from the World Bank and the European Bank for Reconstruction and Development for restructuring the banking sector. This should yield about $5 billion…
5. Restructuring Ukraine’s sovereign debt should free in excess of $4 billion scarce foreign exchange reserves.…
6. Ukraine must also deal with a $3 billion bond issued by the Russian government to Ukraine coming due in 2015.…
Perhaps not all these sources could be mobilized in full but where there is a political will, there is a way. German Chancellor Angela Merkel, who has proved to be a true European leader with regard to Russia and Ukraine, holds the key. The additional sources of financing I have cited should be sufficient to produce a new financial package of $50 billion or more. Needless to say, the IMF would remain in charge of actual disbursements, so there would be no loss of control. But instead of scraping together the minimum, the official lenders would hold out the promise of the maximum. That would be a game-changer. Ukraine would embark on radical reforms and, instead of hovering on the edge of bankruptcy, it would turn into a land of promise that would attract private investment.$50 billion needed to stabilize Ukraine that Europe needs to come up with. Because Russia under Putler is attacking Europe militarily. Uh huh.
Europe needs to wake up and recognize that it is under attack from Russia. Assisting Ukraine should also be considered as a defense expenditure by the EU countries. Framed this way, the amounts currently contemplated shrink into insignificance...A mere pittance. At least he is honest about the number it will take anyway. "Nice country you have there..."
I just skimmed the highlights. The whole thing is much more alarmist.
But it is essential that by April 2015 Ukraine should be engaged in a radical reform program that has a realistic chance of succeeding. Otherwise, President Putin could convincingly argue that Russia’s problems are due to the hostility of the Western powers. Even if he fell from power, an even more hardline leader like Igor Sechin or a nationalist demagogue would succeed him.Soros gets that the possibility of a Western-looking neoliberal "democrat" replacing Putin is a neocon pipe dream. The reality is far darker for Europe.
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