- Posted March 10, 2014 by
The economic story behind the crisis: More than just hot air...
By Mark Esposito & Terence Tse
The standoff between Ukraine and Russia is much more a crisis than hot air. As there is no real geopolitical reasoning behind the events that triggered this “cold war 3.0. “ since the end of February, there are important economic considerations to take into account when we look at the distribution of gas that transits through Ukraine.
The chart here summarizes the degree of exchange that runs from the East to the West and the numbers and the markets are significant. Even a partial control over the pipes would provide an unexpected source of growth for Russia. This is of particular importance as its economy is in the dumps and has been struggling for the last couple of years. The high deficiencies of competitive industries of the country, a stagnant internal economy, an increasing inflation and a negative exchange rate with the USD have weakened the Russian oligarchs in the past few years. With the cost of living skyrocketing, pockets of profound inequality are emerging in the country as well asa waterproof system to foreign direct investments, isolated the country from innovation. If we top that with the fact that Russia is one of the most dysfunctional public sectors on the planet, we understand why this crisis carries more significance than we think. If the auspices of a promised new “Russia-land” had distracted policy makers in the country and the international community on the other, the true story lies beneath the numbers.
Gas and oil have been Russia’s –largest if not the only source of revenue – salvation. Yet its exporting market in Europe appears to have already reached the point of saturation. In a report conducted by Reuters, in these past days, Russian gas accounts for 100% of the consumption in some Nordic European economies and Eastern Europe. The largest economies (Germany, France, Italy) import significant amounts of Russian gas, although not more than a third of their entire consumption. This is due to both trade agreements than the emergence of national policies for renewable, like in the case of Germany and its Energiewende, to cite the most renowned program of energy diversification.
The Ukrainian crisis started as a profound discontent of the Ukrainian population for a faulty democracy. But it was never meant to represent Russia’s glossy opportunity to establish a new geopolitical order because of economic interests. This is not dissimilar to what happened with Turkey and Cyprus in the 70’s, and we know the rest of the story, after 40 years of illicit occupation. The crisis in Ukraine shows us again that the arrogance of our economic model and the abuse of the same from those powers who can militarily influence a territory.
The more we will continue to be driven by the exploitation of finite resources, as we have been doing since the times of the industrial era, the more we will think of making inroads in the geopolitic sphere could be a way to secure new businesses and national revenues. There are countries that exploit resources through suffocating financial loans and others that simply do it in the open, like the Russian Federation in these days.
We cannot separate economic interests, economic modeling and the shortcomings of this system from the consequences on global stability. The Ukrainian crisis is not just about two countries disputing or agreeing over Crimea. It is about an old economic imperative that has not yet ceased to exist or to cause profound sufferings.
Charts: Chatham House & Reuters