Former A-list member Michael Hudson: Europe to Pay for the Whole Mess in Ukraine

[Charles Brown]

http://www.nakedcapitalism.com/2014/11/michael-hudson-europe-to-pay-for-the-whole-mess-in-ukraine.html

Michael Hudson: Europe to Pay for the Whole Mess in Ukraine

Posted on November 1, 2014 by Yves Smith

Yves here. This discussion with Michael Hudson on RT focuses on the
real meaning of the Ukraine-Russia gas deal. One point that Hudson
makes that readers might doubt is that Russia loves the US sanctions.
I’m not sure “love” is the right word, but there is reason to think
they aren’t working out as the US had hoped. First, they’ve greatly
increased Putin’s popularity. Even the intelligentsia in Moscow, who
were hostile to him, have largely rallied to his side in the face of
foreign bullying. Second, the Western press may be overstating the
amount of damage done to the economy by the sanctions. Arguably the
biggest negative is the fall in the price of oil, which came about
growth in Europe and China slowing, and the Saudis announcing that
they’d allow the price to reset at a much lower level than most
analysts anticipated. But the ruble has been falling, which blunts
that effect, but increases the drain on FX reserves as Russia tries to
keep it falling too far and will increase inflation. Third, the
sanctions have allowed Russia to engage in protection of domestic
industries as a retaliatory measure, for instance, blocking many food
imports from Europe.

Now all good well-indoctrinated neoliberals will say, “Trade
protectionism merely allows domestic producers to become inefficient
and uncompetitive.” It’s not so simple. Development economists are
increasingly of the view that trade restrictions can help smaller
economies develop domestic businesses to the point where they can
compete in international markets, while if they foreign firms in,
they’ll find it nearly impossible to build any local champions.

A colleague who does business in Russia but has no deep loyalties
there, says he sees no signs of negative impact of the sanctions in
Moscow (he describes it as now looking like any post World War II
European capital). This is confirmed by recent surveys in Russia, so
the lack of meaningful impact on Russian citizens isn’t an artifact of
his seeing only the better parts of Moscow. Note that the latest EU
forecasts anticipate very weak growth this year and next, as opposed
to outright recession.

This visitor describes how the sanctions are helping Russian
businesses. One of his friends has the Papa Johns franchise. They used
to get their cheese from the Netherlands, but those supplies were cut
off by the Russian sanctions against Europe. So they had to buy cheese
domestically. It was cheaper but not as good. So he is working with
the local farmers and cheese-makers to bring the cheese up to the
standard of the cheese he used to import. So he expects to eventually
have cheese that is lower cost than what he brought in and of
comparable quality. And if he succeeded, the cheesemakers will be more
competitive in Europe when the sanctions are relaxed.

The shorter version of this story is that Russia has a large enough
domestic market and enough resources that unlike Iran, it may be
closer to being able to function as an autarky when its imports and
exports are restricted. The open question is whether it can go through
the pain of a reset, with some serious and painful short-term
dislocations, and escape the slow strangulation that the US claims it
has imposed.

Now to the RT interview, with the transcript below.

The gas deal between Ukraine and Russia became possible because Europe
realized that it wouldn’t get the gas if it didn’t get behind Ukraine,
Wall Street analyst Michael Hudson told RT.

RT: How important is this gas deal for Ukraine and for Europe?

Michael Hudson: It’s apparently most important for Europe because it
was Europe that gave in on the deal. The problem was never about the
price of the Russian gas. The problem was whether Ukraine was doing to
keep up trying just to run up a larger and larger gas bill every month
and every year and finally default. In the US Treasury, strategists
have already discussed in public how Ukraine can simply avoid paying
Russia the money that it owed by going to court and stalling it. So
Russia understandably said, “We need credit in advance.” Mr. Oettinger
of the European Commission said “Wait a minute, Russia, why don’t you
just lend them the money. They will repay you.” And Mr. Putin at the
Valdai Club speech in Sochi last week made it very clear. Look,
[Russia] has already lent them 11 billion dollars, much more than
anyone else has lent to Ukraine. Ukraine is bankrupt, it’s torn itself
apart. Why didn’t perhaps a European Bank underwrite the loan?
Finally, Mr. Oettinger gave in. Europe said “OK, the IMF is going to
lend Ukraine the money to pay Russia for the gas for the balance of
the year.” So that Ukraine would end up owing the IMF money and the
European Commission money, not Russia. So Russia will not be exposed
to having to lend any more money to a dead-beat economy.

RT: You think that it was the EU who gave in on that deal and not
Ukraine or Russia. Why?

MH: Ukraine has passed. Ukraine said “We are broken, we don’t have any
money, we have spent all our money on war. Our export industry is
collapsing. If we need gas, we’ll simply steal the gas that Russia is
sending to Europe. We are not going to starve – we’ll just take your
gas.” And Putin said, “Well, if they try to steal gas like they did a
few years ago, we’ll just turn off the gas and Europe won’t get gas”.
So Europe realized that it wouldn’t get the gas if it didn’t step
behind Ukraine and all of a sudden Europe is having to pay for
Ukraine’s war against Russia. Europe is having to pay for the whole
mess in Ukraine so that it can get gas, and this is not how they
expected it to turn out.

RT: Do you think this deal will improve relations between Europe and Russia?

MH: Europe is very uncomfortable with being pressured by the US that
essentially said “Let’s you and Russia fight.” Europe is already
suffering. Germany has always been turning towards Russia, all the
way. 50 years ago, I remember Konrad Adenauer in Germany always spoke
very pro-Western and pro-American, but always turned economically
towards Russia. So of course Europe, and Germany especially, has
wanted to maintain its ties with Russia. The problem is the US [wants]
to start a new Cold War. It created a lot of resentment in Europe, and
Europe is finally capitulating. This means that the US pressure to set
Europe against Russia has failed.

RT: Could we expect now easing of sanctions on Russia?

MH: No, Europe is still being pressured, the sanctions are pressured
by NATO, and NATO is pressing for a military confrontation with
Russia. The sanctions are going to continue unless Russia gives back
Crimea, which of course it won’t. The sanctions are hurting Europe,
they are turning out to be a great benefit for Russia because finally
Russia is realizing: “We can’t depend on other countries to supply our
basic imports, we have to rebuild our industry.” And the sanctions are
enabling Russia to give subsidies to its industry and agriculture that
it couldn’t otherwise do. So Russia loves the sanctions, Europe is
suffering and the Americans are finding that the Europeans are
suddenly more angry at it than they are at Russia.