On The Path To War
The
US is clearly now pushing Russia towards war. But if you read the signs
correctly, Russia has been preparing for exactly this outcome for many
years.
Out
of several reasons that US power brokers specifically -- but western
power brokers more generally -- are deeply unhappy with Russia right now
is that Russia is committing a cardinal sin: it is openly, brazenly
calling for an end to dollar dominance and has moved aggressively with
China to achieve that aim.
No
oil-rich country that has tried to move away from the dollar in the
past twenty years has managed to do so without being attacked by the US,
suffering a regime change, or being ruined by sanctions. In some cases,
all three.
Not
only has Russia managed to secure a string of heavy-duty bilateral
trade and currency swap agreements over the past year, but they've done
so despite ever-increasing threats and responses from the US and its
allies. And frighteningly, the equity markets in the West are completely
ignoring the nested set of risks that accompany these moves and
countermoves by two geopolitical heavyweights, which range from
punishing trade wars (already underway), to electronic warfare, to an
actual shooting war.
Today's "Markets"Are Untethered From Reality
I
put the word "markets" in quotes above because whatever it is that
passes for an equity market these days, it bears little resemblance to
that of times past.
The
"markets" today are using the skimpiest of evidence to support their
tendency to feast on fresh central bank liquidity by either levitating
higher or failing to go down much on even the most horrendous of
geopolitical, economic or environmental news.
As
a prime example, in the pre-market on Friday, 8/7/14, beginning in the
wee hours of the morning, the S&P futures ramped up 20 points off
the lows by market open, and then poured on another 20 points in the
cash market.
The reason given? The possibility of calm in Ukraine:
Aug 8, 2014In a sign of just how much stock market moves are being driven by geopolitical headlines from abroad, pre-market futures for the Dow flipped from sizable losses to modest gains after reports that Russia is moving to de-escalate the Ukraine crisis.Increasingly, every tick of the tape on Wall Street is being driven by news flashes related to bad things happening overseas, including the Russian role in the 5-month-old crisis in Ukraine.“We are in one of those moments where markets sway on war or no-war rumors,” says Gary Kaltbaum, president of Kaltbaum Capital Management.The Dow, which is coming off a 75-point drop Thursday, knocking it down 4.5% from its July 16 record close, did an about face this morning, going from down 100 points in pre-market trading to up 42 points.Wall Street is citing the following news reports for the rebound:According to Bloomberg: “U.S. equity-index futures rebounded after RIA reported Russia is making efforts to de-escalate the Ukraine conflict. RIA cited Russian Security Council head Nikolai Patrushev.”(“Russia will continue to make all efforts for a very fast de-escalation of tensions,” Nikolai Patrushev told RIA, a state-run Russian news agency.)
That
is about as poor of an excuse for a major market reversal as any I have
run across lately. They might as well have said that Cher is
considering expanding her next tour by four cities as being the
"reason".
For
starters, consider the source. Was it Putin himself? No. Instead, it
was the very same guy that the EU had just added to their sanctions
blacklist a few weeks ago:
Jul 26, 2014MOSCOW, July 26 (RIA Novosti) – The European Union has added key Russian officials to the blacklist, including Russian Federal Security Service chief Aleksander Bortnikov and Russian Security CouncilSecretary Nikolai Patrushev.
Did
he say anything concrete, such as that meetings were going to be held
and that constructive solutions were on the table that Russia might find
agreeable?
No.
All he parroted was the standard Russian talking point, which Putin
himself has used many times, that Russia hopes for a rapid return of
peace to Ukraine.
That's it...and so I have to ask: That's worth forty S&P points?
On
the other side of the ledger, the one pointing to escalating tensions,
we have a lot of very credible items that any sane person would easily
think vastly outweigh a single talking-point sentence by a Security
Council member.
For example, consider this:
Aug 7, 2014Russia’s ban on agricultural food imports could cost the European Union about $16 billion (12 billion euro) and drag the continent into the crisis, officials warn.The Russian government signed a decree on Thursday which bans the import of beef, pork, poultry, meat, fish, fruits and vegetables, cheese, milk, and dairy products [for one year] from the EU, US, Australia, Canada, and Norway.
Now
why would a country that's about to announce that it's going to seek a
rapid return to peace in Ukraine on Friday, pass this particular and
Draconian decree on Thursday? That just doesn't make sense. And of the
two, if I get to choose between a year-long food ban and a single
sentence by a Security Council member, I'm going to have to go with the
idea that the food ban is telling us more about the actual state of
things.
Such
a ban will cause a lot of hardship in Russia. We can expect food price
spikes for sure, and possibly even food shortages, too. Therefore, it
was not done lightly.
This food ban followed the cancelation of a Russian defense deal by Germany two days prior:
Aug 6, 2014As European countries try to balance their economic dependence on Russia with their desire to punish president Vladimir Putin for meddling in Ukraine, Germany has stepped ahead of the pack to poke the bear in the eye, canceling a €123 million ($165 million) defense deal with Moscow earlier this week.In response, the Kremlin has said it will sue Rheinmetall, the German defense firm that was to supply parts for a military training facility for the Russian military. The deal, signed in 2012, was suspended by Berlin shortly after the annexation of Crimea in March; this week’s move permanently bars the delivery of the equipment. Last week the European Union banned all arms exports to Russia, but that only covers future deals.
The
scuttled deal was simply for parts for a training facility, the sort of
thing that might just as easily have been covered under normal import
and export trade agreements. But since the facility was military in
nature, it fell to the sanction sword.
And only a day prior to that, Putin called for an emergency meeting of the UN Security Council:
Aug 5, 2014Russia called for an emergency meetingof the United Nations Security Council on Tuesday over what it called an urgent humanitarian situation in Ukraine, according to a report from the Russian news agency ITAR-TASS."We are convening an emergency meeting of the United Nations Security Council on the humanitarian situation in Ukraine," Russian Ambassador to the U.N. Vitaly Churkin was quoted as saying.Earlier on Tuesday, the Russian Foreign Ministry said the U.N. and the International Committee of the Red Cross expressed"readiness" to discuss its plan to deploy a "humanitarian mission" to Ukraine, which some consider to be a pretext for an invasion by Russian forces.The White House has openly worried about what would be, for all intents and purposes,an invasion under the guise of a "peacekeeping" operation."We’ve seen a significant re-buildup of Russian forces along the border, potentially positioning Russia for a so-called humanitarian or peacekeeping intervention in Ukraine," deputy national security adviser Tony Blinken said last week.
Those
quotes by US officials make it sound unreasonable for Russia to be
considering a "so-called humanitarian intervention" into Ukraine. And
most in the West might agree with that assessment because the western
press is virtually unanimous in its failure to cover the actual
humanitarian crisis that is happening over there right now.
But
other countries are not ignoring it. For instance, as reported by the
Japanese press, we find that entire cities, packed with hundreds of
thousands of civilians, are under constant bombardment by Kiev forces:
Aug 5, 2014ONETSK, Ukraine —Residents say the eastern Ukrainian city of Luhansk is dying. The power grid was completely down Monday, the city government said, and fuel is running dry.Store shelves are emptying fast, and those who haven’t managed to flee must drink untreated tap water. With little medicine left, doctors are sending patients home.As Ukrainian government forces slowly tighten their ring around the city — one of two major pro-Russian rebel strongholds — traveling in and out has become a perilous undertaking.In an impassioned statement released over the weekend, mayor Sergei Kravchenko described a situation that is becoming more unsustainable by the day.“As a result of the blockade and ceaseless rocket attacks, the city is on the verge of a humanitarian catastrophe,” Kravchenko said. “Citizens are dying on the streets, in their courtyard and in their homes. Every new day brings only death and destruction.”Luhansk, a city of more than 400,000 people at peacetime, now has seen its population dwindle as citizens flee violence and deprivation. Located about an hour’s drive from Russia, which Ukraine insists is supplying rebels with weapons and manpower, Luhansk is being fiercely fought over by all sides of the conflict.
What
would the US, the UK, Germany or Japan do if several million of their
native-tongued people living right along their border were under siege
by a possibly illegitimate government force that had openly expressed
its desire to kill as many of those people as it could?
I
think we all know the answer to that: they'd already be in there with
humanitarian and possibly also military support. Heck, the US invaded
an entire country 7,000 miles away under the pretext that Iraq might have WMD's that could someday, possibly, be used against American interests. And Iraq never once openly threatened the US.
But
to top it all off, there was a second recent news item which was the
most frightful bit of news that anybody in Europe could ever hope to
hear. And if it happens, it will be an open act of war against Russia by
Ukraine:
Aug 8, 2014Ukraine said it’s open to halting Russian gas supplies to Europe through the country as it plans sanctions on President Vladimir Putin’s government as part of its battle against pro-Russian separatists.The list of possible sanctions includes a“complete or partial ban on the transit of all resources,” Prime Minister Arseniy Yatsenyuk told reporters in Kiev today in response to a question about halting gas flows.Measures may also include a ban on Russian planes overflying Ukraine, he said, while defense-industry cooperation will be reduced. A draft law, which requires parliamentary approval, also proposes restrictions on ships entering Ukrainian waters.
Good
grief! If Ukraine halts the gas flows, Europe will be in big trouble
and very quickly. I have to assume that EU ministers are reading the
Ukraine leadership the riot act.
But this news is also a very strong sign of escalation, not de-escalation.And
so the 'market' response to the statement by Russian Security Council
Sec?retary Nikolai Patrushev is really grasping at straws. For my money
the gap between the news events and the 'market' reaction is so huge
that I have to wonder if there isn't a different explanation that makes
more sense, such as a Plunge Protection Team intervention at a critical
moment as US stock futures were headed over a cliff (which they seemed
to be before the miracle reversal).
However,
even if such interventions are occurring, they cannot change the tide.
Something has been put in motion that cannot be easily undone, And
Russia is furiously signing deals that are a far greater risk to the US than anything happening in some remote corner of eastern Europe.
In Part 2: The End of Dollar Dominance?we
look at the reason that suddenly makes the US' reckless aggression
towards Russia much more understandable: Russia is pivoting from West to
East, and in the process, seeking to diminish the dollar's supreme
regime as the world's reserve currency. When viewed through this lens,
Russia's prodigious string of recent trade and energy deals with eastern
nations suddenly looks very calculated, and the US' itchy nervousness
in response makes more sense.
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