Saturday, 8 March 2014

Ukraine Is Going To The Dogs - Part 7

Ukraine is bankrupt. That fact, is part of the reason for the current events. Despite being provided with cheap gas from Russia, Ukraine owes Russia $1.5 bn for the gas it has had. Like other less developed economies, its currency has benefited over the last 20 years from US money printing, which flattered the strength of these economies, pushed down their import costs, and thereby artificially lowered their inflation rates. As the US ends QE, to prevent the rise of consumer price inflation, and a precipitous sell-off in its bonds, the back-wash affects those less developed economies. Literally dozens of them are seeing their currencies drop sharply against the dollar, their import costs are rising, pushing up inflation sharply, and making it necessary to raise official interest rates to defend their currencies. In effect they are experiencing a compulsory expansion of their money supply. Ukraine needed to cut its spending and increase domestic prices. It couldn't do that without provoking the kind of civil unrest that unseated the last government.

Yanukovitch sought loans to postpone that process. The EU offered some money, but as with its response to Greece, the money on offer was not even enough to fulfil that function, and came with the same kind of austerity strings that were imposed on Greece, Portugal, Ireland etc. Russia, offered $15 bn. and a continuation of cheap gas. The EU told Yanukovitch that he could not retain his economic relations with Russia, and take EU money, as part of signing the deal with them. So, Yanukovitch signed up with Russia, prompting the revolt.

Its reported that Ukraine needs $35 bn. in the next few weeks. Without it, government workers will not be paid. Given what we have seen in Greece, Ireland, Spain, Portugal etc. the real figure required is likely to be up to ten times the $35 bn. figure, when all of the interlocking debts between sovereign debt, and bank debt is taken into account. The EU, IMF etc. are unlikely to be able to provide those resources. What is likely, as originally happened with Greece, is that existing sovereign debts will be rolled over – a soft default – when they fall due. This puts additional stress on banks, particularly EU banks, at a time when they are still massively under-capitalised, and after they took big capital losses with the Greek, Cyprus and other defaults. But then we know from the comments of the US Ambassador that the US says "Fuck The EU" when it comes to Ukraine.

It will not come at a good time given the asset quality review and stress tests that these European banks are going through, even though that is as much of a sham as the previous exercises. But, there will be every effort to avoid an actual default that would bring into play claims under credit default swaps, which could spark another global financial crisis. But, its probably inevitable that any roll-over of debt will see Ukrainian banks, holding that debt, go under. ECB officials are already saying that a number of EU banks will fail the stress tests, and that this time they should be allowed to go bust. As with Lehman's any such process could quickly spiral out of control given the interlocking nature of the global financial system.

Russia will not now hand over the $15 bn. it had promised, and is demanding Ukraine pay its $1.5 bn debt for gas supplied to it. Ukraine is likely to face higher gas prices, its currency is falling even faster due to current events, and its credit rating has been reduced to junk. In some ways, this is just another volley in the process of volley-firing described recently, in relation to the effect of the unwinding of QE described earlier. Ukraine already needed to raise prices, and with its currency tanking and its economy flailing, it will suffer sharply rising levels of inflation, as has happened with Turkey and other such economies. Again, as with Turkey, South Africa, India, Russia, Brazil, Argentina and so on its interest rates will have to rise sharply. That is just another manifestation of the fact that global interest rates are rising, and that is manifest unequally, as some economies suffer sharp rises, whilst others temporarily benefit from the concomitant flight to safety, which causes their interest rates to fall. But, that is only temporary. At a certain point money will flow back the other way, pushing interest rates much higher in the US, UK and EU.

The economic chaos in Ukraine is likely to add even more grist to the mill of the fascists and extreme nationalists, who have already been raising demands for some form of autarchy. With the rise of extreme nationalists like the FN in France, UKIP in Britain and so on, the danger is, as the EU elections approach, in May, this could provide it with another leg of support. Moreover, there has been a worrying increase in the extent to which government positions have been taken over by non-elected politicians. That was true in Greece and Italy, and is true in Italy again, and is certainly true now in Ukraine. It is also reflected in the way state bureaucrats like Mario Draghi, or Mark Carney are looked to as having god-like powers, to determine prices and thereby prevent the inevitable crash of financial markets.

In 1914, eight shots from the revolver of an anarchist provided the excuse that the Austro-Hungarian Empire needed to invade Serbia, which in turn sparked a conflagration that led to the senseless slaughter of millions. Wars always start with some such provocation, and not infrequently they turn out to have been the work of those who wanted some justification for their own actions.  The CIA are past masters of such tactics.  Similar things have been seen in Syria, where atrocities have been committed by the clerical-fascists and then blamed on the Assad regime.  One of the best documented cases is probably the Israeli attack in 1967 on the USS Liberty, designed to provide the justification for a US nuclear strike on Cairo.

Something similar seems possibly to have happened with the sniper attacks on demonstrators in Kiev, according to the leaked phone conversation between the Estonian Foreign Minister, and Kathy Ashton, that they are now furiously trying to explain.  No one can predict the ramifications of the events in Ukraine, and unfortunately, today, the global labour movement is even less able to influence them than it was a century ago.

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