Why Europe Shies from Ukraine Showdown

Exclusive: Despite pressure from President Obama to escalate the fight with Russian President Putin over Ukraine, the Europeans are reluctant to stoke the crisis any further because it could consume their fragile recovery and ignite more fires of political discontent, notes Andrés Cala.

By Andrés Cala

The crisis over Ukraine and Crimea threatens to touch off a new version of the Cold War’s “mutual assured destruction” – or MAD – not from nuclear warfare but from the economic damage that the two sides, particularly Russia and the European Union, could inflict on each other, with fallout reaching the United States.

Though the EU and the U.S. may have started this crisis by trying to pull Ukraine away from Russia and into the European fold – maneuvers that led to a violent coup d’etat in Kiev last month – Russian President Vladimir Putin countered the West’s moves by annexing a willing Crimea and asserting Russia’s right to protect ethnic Russians in Ukraine’s east and south.

German Chancellor Angela Merkel. (Photo credit: א (Aleph))

German Chancellor Angela Merkel. (Photo credit: א (Aleph))

That prompted the West to impose targeted sanctions against some prominent Russians, to oust Russia from the G-8 meeting of industrialized nations, and to threaten more severe sanctions that would damage the Russian economy if Putin won’t back down. President Barack Obama added insult to the injury on Tuesday by dismissing Russia as “a regional power.”

But Putin finds himself with a strategic advantage in that Europe is struggling to emerge from a long and painful recession that has divided the Continent between the EU’s stronger and weaker economies. Europe’s fragile recovery would likely suffer a crushing blow if the economic warfare with Russia escalates.

A new economic downturn would be particularly devastating to the so-called “periphery countries” –  such as Portugal, Spain, Italy, Greece and Cyprus – which still suffer from painful levels of unemployment and which could experience devastating political upheavals if the EU goes into another recessionary dip.

It is those countries and others in southern and eastern Europe that are putting up the most resistance to a determined campaign to punish Russia. Portugal and Spain are the least exposed to direct Russian ties, but their economies might not survive another external shock.

That’s why European leaders, in general, decided to take a more cautious approach than the U.S. in retaliating against Russia for annexing Crimea. The broadened blacklist of targeted individuals is still shy of seeking a direct showdown with Russia.

But the EU did sign the association agreement with Ukraine’s interim government which took power after last month’s coup ousted elected President Viktor Yanukovych, who had rebuffed the EU’s offer as too harsh and instead accepted a more generous aid package of $15 billion from Russia.

Greater Risks

The EU’s reluctance to join Obama in an escalation of the tit-for-tat sanctions war with Russia reflects the reality that U.S. bilateral trade with Russia is less than a tenth of EU’s trade. While it’s hard to quantify the exact impact of an escalation on Europe’s fragile recovery, it’s fair to say that the closer a country is to Russia the more severe the likely consequences, especially if Russia’s energy shipments are disrupted.

Before the Ukraine crisis erupted in February, the EU Commission was getting slightly more optimistic about the Continent’s economic growth, raising the 2014 outlook from 1.1 percent to 1.2 percent and the 2015 outlook from 1.7 percent to 1.8 percent. But those pallid numbers themselves explain why the EU is nervous. It wouldn’t take much to cause a new contraction and set off a new wave of political unrest.

According to several bank research notes, the GDP impact of a sustained crisis with Russia could be a decline of about 1.5 percent in the Eurozone, but nearly a 3 percent hit for Poland. Particular harm would be inflicted on the weakened banking sectors of the emerging European economies. Even stronger economies, like Germany’s, could feel some effect, a possible 0.5 percent drop.

A 1.5 percent economic slowdown for the Eurozone could prove intolerable for European populations that have already felt severe pain from the Wall Street crash of 2008 and the austerity that was prescribed by Europe’s central bank and some political leaders, including Germany’s Chancellor Angela Merkel.

Given the likely economic damage from a prolonged standoff with Russia, it is hard to imagine that the EU’s leadership could sustain the political support necessary, especially given the murky circumstances surrounding the Ukrainian uprising and the clear desire of Crimean voters, expressed in a referendum, to abandon Ukraine’s failing state and to rejoin Russia.

The five years of recession have already caused many European leaders to be voted out of office and for the EU’s unity to be strained by the uneven impact of austerity across the Continent. There appears to be no appetite for more belt-tightening to make some geopolitical point.

Instead, the European bloc is struggling to jump start an economic recovery and build a more solid institutional framework for sustained growth, such as a banking union. Furthermore, harsh economic sanctions – severe enough to deter Russia – would require unanimity from the 28-member European Union, a unity that is lacking.

Though Great Britain leads a small group of European countries demanding a more robust response to the annexation of Crimea, most southern and central European countries prefer to defuse the crisis. In the middle of both is Germany, which stands to lose a lot from an economic war but also sees itself as the de facto leader of Europe.

Russia’s Stake

While it’s true that Russia’s economy would likely suffer exponentially more in terms of percentage damage from a sanctions and trade war with the West, Russia’s energy exports would eventually find new markets in energy-hungry countries such as India and China.

Plus, the issue of Ukraine and Crimea has a much greater emotional pull on the Russian population than on the rest of Europe, giving Putin more political leeway than his European counterparts have.

Still, Russia is not in a great position to engage in a protracted economic war. Its economy is small, the size of Italy’s, and it’s very dependent on Europe, its most important trading partner. Europe accounts for 75 percent of Russia’s foreign investment stocks.

But Russia is vital to global oil and gas supplies, and as such wields tremendous power. About a third of Europe’s oil and even more of its natural gas comes from Russia. While it’s true that Russia would not survive without its energy industry, neither could Europe function without Russia’s critical oil and gas supply.

Even a small economic conflict could have serious repercussions. Supply disruptions, regardless if it’s over sanctions against Russia or Russian gas cutoffs, would cause energy prices to rise. Gas shortfalls would especially affect Eastern Europe and perhaps Italy.

The West also would find it hard to isolate Russia’s economy with sanctions given its land mass and its relations with other expanding economies, such as India and China. Europe and Russia additionally share significant economic interests beyond energy, especially in terms of investment and joint ventures that span the globe.

Business leaders of both sides are already lobbying for more caution, lest their mutual investments be threatened, causing collateral damage to countries far from the front lines of Russia and Ukraine.

One of the Kremlin’s strongest weapons in an economic war would be its ability to destabilize Ukraine’s economy, where European countries also have significant interests. Europe will need to help Kiev’s near-bankrupt government in any event, but the situation would get even costlier if Ukraine has to deal with the instability that Russia can cause, particularly by turning off Ukraine’s natural gas supplies if back debts aren’t paid.

With Russia also ending its gas discounts to Ukraine, the interim government may have to grapple with prices doubling. Russia entrenched itself in Ukraine precisely to make the cost of any switching sides to Europe very costly. Putin knows that. And he is wagering that even though Russia is more exposed economically, Europe is less prepared to weather the economic storm or to pay the staggering bill for rebuilding Ukraine’s economy.

So, most observers expect that the EU will wait for Russia’s next move before entering what some call “phase three” of the crisis – the first two being the original sanctions list plus the expanded one. Though the West has refused to recognize the legality of Crimea’s secession from Ukraine and its annexation by Russia, the sanctions war is only likely to escalate if Russia intervenes in Ukraine’s east and south to protect ethnic Russians.

To avert that possibility, the interim government in Kiev has softened its initial aggressiveness in asserting firm control over the eastern and southern regions which were the political strongholds of ousted President Yanukovych. A key question, however, is whether the Kiev regime can rein in the armed far-right militias that spearheaded the violent overthrow of Yanukovych.

If the civil violence in Ukraine worsens and if Russia intervenes militarily, the result would likely be more painful commercial, economic and migratory sanctions, which the EU is calculating would be more damaging to Russia than to Europe. But the consequences would be so serious that EU leaders agreed to economically compensate the most affected countries.

The reality is that Russia and Europe are mutually dependent, though each side may believe it has the upper hand. But the fundamental question boils down to which side can muster the most support at home for enduring the economic pain.

And, therein lies Europe’s weakness. In pressing for an association agreement with Yanukovych’s government last year and then quickly recognizing the coup regime that ousted him last month, the EU clearly miscalculated the Kremlin’s resolve over Ukraine. But Putin may be underestimating Europe’s vulnerability at a moment of economic weakness.

Still, considering Russia’s resolve throughout history, specifically when it comes to Crimea, which has been part of Russia since the 1700s, and Russia’s willingness to sacrifice economic benefits for its strategic advantage, Putin is unlikely to flinch first.

Given the stakes, the EU and Russia will most likely try to avoid having the crisis escalate further. That would be the economic equivalent of a nuclear bomb, or mutual assured destruction.

Andrés Cala is an award-winning Colombian journalist, columnist and analyst specializing in geopolitics and energy. He is the lead author of America’s Blind Spot: Chávez, Energy, and US Security.

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11 comments on “Why Europe Shies from Ukraine Showdown

  1. Joe Tedesky on said:

    I have said this before, Ukraine why now? God only knows the EU and for that matter the US cannot afford this business with the illegimate Ukraine government. While American cities are going, or have gone bust, we are out nation building.

    Russia is making many smart moves by reaching out to China and India to sell gas to these raising nations. While the BRIC countries are struggling these days well so is the rest of the world.

    I keep coming back to the Neocon involvement in all of this. Victoria Nuland to me is a stupid person representing an evil agenda. The US would be wise to shed the likes of FU the EU crowd, and hire some diplomats who we could be proud of.

    • Steven M Zerbey on said:

      I don’t know if Victoria Nuland is evil or not but the elites in control of our foreign policy appear to be out of touch with the REAL problems facing the United States, unemployment, underemployment, and debt both public and private, income inequality, crumbling infrastructure…we as a nation simply cannot afford another war, hot or cold.

      • Joe Tedesky on said:

        I was referring to her agenda. I do apologize for such strong language, usually I do not talk that way. What you point out is what I am talking about. I think you and I are near the same page, if not on it. tks for your reply.

        • Elton on said:

          Ruling elites that become disconnected with ‘real’ life in their society, and who waste the societies resources on absurd foreign adventures instead of addressing real problems at home. ……… “The French aristocracy never saw it coming either.”

  2. Rob Drury on said:

    Europe’s motive may be economic but that motive would be misguided. Identifying a misguided motive is our main business because, in the USA that misguided motive enslaves people to perpetually plunder the planet at a rate 4x the world average. This is not good for people nor planet. So I’m a little disappointed in so many authors treating economic motives as ostensibly legitimate. How can that be when 3/4 of economic activity is highly destructive and highly unnecessary? The alternative vision is crystallizing in the minds of the people, despite the huge amounts of press still devoted to the status quo of sociopathic lunacy. Europe’s recent austerity drive further illustrates the extreme absurdity of economics as a motive. The only legitimate economic design is an absolute minimum volume of trade, on the end of a short, tight leash, to leverage a very modest level of ego-gratification that is valued by a small minority in diverse cultures. In vivid contrast to the concerns of the ego, the ethics, compassion, and cooperative energy of the human heart are obviously the people’s preferred motivators/gratifiers, and the people deploy this knowledge for (far) superior benefit, despite the propaganda of sociopath elites, to resolve all crises, naturally. The resolution of Ukraine’s crisis grows out of the human heart. Everyone knows this. Elites are terrified by the facts, predictably.

  3. Evangelista on said:

    For focusing too exclusively to economic issues the article leaves two significant additional elements out of discussion. The two are, one, the xenophobic component in the violently imposed Ukrainian coup-government and the ethnic diversity of the Ukrainian population as a whole, and, two, that elections are scheduled for the end of May.

    For both of these, along with that the EC ‘side’ is making itself look foolish by hyperventilating, and dangerous for having facilitated the radical escalation of the demonstrations crisis, Russia is unlikely to engage in any aggressive or invasive activities prior to the elections. From the outset Russia’s (re)actions have been low-key and non-confrontational, its position being to protect, not invade or overrun. The coup-government, on the other hand, has behaved in ways that have made Russia’s expressions of protective intentions show to be reasonable and justified concern.

    Why would Russia change its position and posture? A friendly independent Ukraine with an elected government that looks to Russia to support it in maintaining ethnic diversity for its whole population, that, in fact, will depend on it, will be much more useful, and easier, and cheaper, for Russia to maintain in alliance on its western border than a half-dependent and half-antagonist colonial-republic that would be constantly rebelling.

    If Russia simply sits tight, shows confidence and expresses concern for equality in a reorganized independent Ukrainian state, showing no inclination to wanting to own the Ukraine, the political result of the violent escalation of the West’s instigating the Ukrainian protests to a xenophobe-led violent coup and dangerous to minorities interim coup-government is going to be an independent Ukraine that will be more pro-Russian than it has ever in its history been.

    Crimea, meanwhile, having voted itself under Russia’s wing, while its doing so has reduced the numbers of pro-Russian voters in the Ukraine, is providing Russia the opportunity to model what joining its sphere can offer, with savings and pensions security among the highlights, likely to increase the pro-Russian votes in May.

  4. lumpentroll on said:

    Rising fear amongst Western elites is palpable. Everywhere media puppets seem painfully aware that their credibility is in free fall.

    Spiegel admits that 74% of Eastern Ukrainians are opposed to the Putchists in Kiev. They may well cry out for Anschlus with the Kremlin when their gas bills double overnight.

    Merkel is wobbling while EU IMF gangsters are circling the Ukrainian national corpse in preparation for an enormous dose of democratic electro shock therapy far more savage than anything experienced by Greeks or Cypriots. Putin need only lift his index finger and the wholesale physical canabilization of Ukraine will be immediately underway.

    His prestige has never been greater. His disciplined restraint over many months is remarked upon even by the hostile zionist media.

    But for all the talk of sanctions and weaning Europe off of Russian oil and gas no one has ever suggested the cancellation, for example, of the 500 billion dollar Arctic energy deal between Exxon and Rosneft.

    ***http://www.businessweek.com/articles/2014-03-20/post-crimea-exxons-partnership-with-rosneft-feels-weird

    Putin would be a fool to turn away from Europe and he knows it. Reports of a new cold war are greatly exagerated. Only intentional provocations by neoconservative thugs can cause this crisis to spin out of control.

    But there is good news: The crisis in Crimea has outed the Anglo-American gangsters once and for all. We should all be grateful that their power has been both confronted and diminished.

    Unfortunately Regime Change in the West still seems as unlikely as ever.

  5. Sam Tangri on said:

    The world is larger than the fighting duo and each country has its own interests to take care of.
    The USA is used to extorting high prices for its so called technology from poor nations which might pay all their years worth of agricultural products for one plane they may need. The Russians meanwhile have done well by entrenching themselves in Europe with their pipelines and addicting the EU to their cheap gas. Further look at who got what after the second WW? The USA has bases in almost every country in the world.Is this not an urge to control the whole world?What has Russia gained after Gorby gave up all the smaller Russian states in the name of Glasnost!!!!!To me it looks like the USA wolf pack barking hard at the door of the Russian bear’s lair…………and naturally the bear is worried.Obama meantime calling Russia a regional power isn’t helping. Not in the very distant future once China has had its fill of the American technology and market it will have problems with them too and then a Russian- Chinese alliance with India an already Russian alliy what have you left? RUSSIA AND CHINA GOING STRONG IN THE MIDDLE EAST AND Africa in terms of forging alliances and buying up natural resources who is the USA going to sell to?
    The west and East need each other and should look at ways to co exist rather than dominate their ideologies on each other.. The world has changed one heck of a lot since the 1900s and economic development is what every person in every country deserves.Let us give it a chance.Let us grow up. Let us look after our own people and their problems.Obama and Putin have a big chance to leave great legacies. Pleas don’t squander it..

  6. Paul G. on said:

    “Russia’s energy exports would eventually find new markets in energy-hungry countries such as India and China.” Ah yes, this is exactly what Putin plans. It is his “Asian pivot”, which will also feature sales not in Petro dollars but in Rubles or the Chinese currency. Once the ball starts rolling on the elimination of the dollar as the petro currency, the US could be in for quite a shock. This was Sadaam Hussein’s real weapon of mass destruction, never acknowledged, oil sold in Euros.

    Obama is oh so blind to the long term consequences of the actions of his out of control neo-conservative State Department, the same neo-cons who have caused disaster all over the Mid East and blowback for the US. He is so caught in the arrogant myth of “American exceptionalism” and his role as the cop of the world; that he doesn’t understand macro economics will come back to bite him.

    “American exceptional ism” is nothing but the US version of Britain’s “White man’s burden”; look what happened to them in the long run. Now they are Washington’s lap dog-woof.

    Speaking of Britain and Obama’s problem with Crimea’s independence; he forgets that a certain British colony in 1776 unilaterally declared independence from the mother land and proceeded to shed a whole lot of blood to accomplish that.

  7. Michael Skoruppa on said:

    The German public could very easily made angry when they learned to know about Mr. Obama’s narrative of the Iraq war as a noble gesture to the Iraqis lectured to his European friends in Brussels:
    http://www.huffingtonpost.com/2014/03/26/obama-iraq_n_5036771.html. But, good for him, the German “free press” just does not report.