The Colder War: Crisis in Ukraine

March 4, 2014

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You’ve seen the news reports. Read about the protests, perhaps even seen them or been to one. The crisis in Ukraine, a country that is important not only to Russia (who has cultural and ethnic ties to Crimea) but to the rest of Europe, the United States, and the global economy as a whole. As young people you might be wondering why this latest crisis in yet another world hotspot is so different from the ones in Syria and Venezuela.

The short answer is: the economy.

The political turmoil – and why world leaders are in a virtual panic to find a quick resolution – is rooted in the country’s strategic economic position. It’s an important conduit between Russia and major European markets, and also a major exporter of grain. Here are three reasons the world’s largest economies are sitting on pins and needles while events in Ukraine unravel.

A Bridge Between Giantscrisis-in-Ukraine

Ukraine is a key tie between Russia and Europe. It may not have the economic power it used to have, but it still has one very important thing: its geography. Russia has gas, and a lot of it. It supplies about 25% of Europe’s gas needs, and half of that is pumped via pipelines running through Ukraine. See the (literal) connection? If Moscow cuts off that flow as it has done in past disputes with Kiev it could push up energy prices for businesses and households. That is something our slowly reviving economy absolutely doesn’t need.

Also, the Crimean peninsula is basically in the Black Sea, which just happens to be home to Russia’s Black Sea navy. Kind of an important detail.

Sanctioning Russia

Something that’s under consideration by the White House is the unusual step of sanctions against Russia, which equates to a top-10 global economy placing sanctions on another. As unprecedented as that might sound, Secretary of State John Kerry said Sunday the U.S. is “absolutely” willing to consider it, while President Obama “is currently considering all options.”

Oil Pumpjack on Crimea Peninsula

This possibility is on Russia’s mind in a very real way, which is why its “looking very seriously at the economic component of its military and diplomatic moves”, said John Beyrle, a former U.S. ambassador to Russia.

“The reality is that Russia is dependent on the international economy in a way that wasn’t true 10 years ago,” explains Beryle. “Fully one -half of Russia’s foreign trade now…is with European Union countries. Russia depends on European imports to keep its stores filled, to keep the standard of living that Russians have gotten accustomed to.”

One other consequence is the relationship between Russia and the U.S. It’s hard to see it ever fully recovering with or without sanctions. The president did spend an hour and a half on the phone with Russian President Vladimir Putin on Saturday, however the U.S. is expected to skip out on the upcoming G8 meeting in Sochi. On Sunday, U.S. officials also canceled upcoming energy and trade talks with their Russian counterparts.

Ukraine is in Serious Debt

The situation probably wouldn’t be so volatile if the country’s finances were a bit more stable. It owes $13 billion in debt this year and $16 billion comes due before the end of 2015. Without help, the country appears to be headed for default, which is something we know about all too well.Ukraine-in-Debt

“In order to avoid a complete collapse in the coming weeks, Ukraine needs money now,” Lubomir Mitov, emerging Europe chief economist at the Institute of International Finance, said. “Ukraine cannot survive without reforms in the next few months.”

No one knows where this assistance is going to come from. Especially after the ouster of key officials who were Russian allies. Moscow freezed a $15 billion bailout as a result and there is no comparable alternative in sight. However, the IMF is looking into ways to help while the US is “prepared to work (with) partners to provide as much support as Ukraine needs”, said Jack Lew, Treasury Secretary.

The bottom line is that this is a very fragile situation that could impact all of us, and it’s unpredictable. Stay tuned, stay informed, and let’s all hope for a peaceful resolution.

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