Russian counter-sanctions

I couldn't say it better myself.

You wanna be Uncle Sam's bitch? Pay the price!

Vineyard of the Saker,

7 August, 2014

Dear friends,

I just took a short break from my life in "meatspace" to comment upon the great news of the day:  Russia is introducing a full 12 months embargo on the import of beef, pork, fruits and vegetables, poultry, fish, cheese, milk and dairy products from the European Union, the United States, Australia, Canada and the Kingdom of Norway.  Russia is also introducing an airspace ban against European and US airlines that fly over our airspace to Eastern Asia, namely, the Asia-Pacific Region and is considering changing the so-called Russian airspace entry and exit points for European scheduled and charter flights. Furthermore, Russia is ready to revise the rules of using the trans-Siberian routes, and will also discontinue talks with the US air authorities on the use of the trans-Siberian routes.  Finally, starting this winter, we may revoke the additional rights issued by the Russian air authorities beyond the previous agreements.  This is such an interesting and major development that it requires a much more subtle analysis than just the crude calculation of how much this might cost the EU or US.  I will attempt no such calculation, but instead I would point out the following elements:

First, this is a typically Russian response.  There is a basic rule which every Russian kid learns in school, in street fights, in the military or elsewhere: never promise and never threaten - just act.  Unlike western politicians who spent months threatening sanctions, the all the Russians did was to say, rather vaguely, that they reserve the right to reply.  And then, BANG!, this wide and far-reaching embargo which, unlike the western sanctions, will have a major impact on the West, but even much more so on Russia (more about that in an instant).  This "no words & only action" tactic is designed to maximize deterrence of hostile acts: since the Russians do not clearly spell out what they could do in retaliation, God only knows what they could do next! :-)  On top of that, to maximize insecurity, the Russians only said that these were the measures agreed upon, but not when they would be introduced, partially or fully, and against whom.  They also strongly implied that other measure were under consideration in the pipeline.

Second, the sanctions are wonderfully targeted.  The Europeans have acted like spineless and brainless prostitutes in this entire business, they were opposed to sanctions from day 1, but they did not have the courage to tell that to Uncle Sam, so each time they ended up caving in.  Russia's message to the EU is simple: you wanna be Uncle Sam's bitch?  Pay the price!  This embargo will especially hurt southern Europe (Spain, France, Italy, Greece) whose agricultural production will greatly suffer from it   These countries also happen to be the weakest in the EU.  By hitting them, Russia is maximizing the inevitable friction inside the EU over sanctions against Russia.

Third, not only will EU carriers suffer from much higher costs and flight times on the very important Europe to Asia route, but the Asian carriers will not, giving the latter a double competitive advantage.  How is that for a way to reward one side while hurting the other?  The EU got one Russian airline in trouble over its flights to Crimea (Dobrolet) and for that the entire EU airlines community could end being at a huge disadvantage vis-à-vis its Asian counterparts.

Fourth, Russia used these sanctions to do something vital for the Russian economy.  Let me explain: after the collapse of the USSR the Russian agriculture was in disarray, and the Eltsin only made things worse.  Russian farmers simply could not compete against advanced western agro-industrial concerns which benefited from huge economies of scale, from expensive and high-tech chemical and biological research, which had a full chain of production (often through large holdings), and a top quality marketing capability.  The Russian agricultural sector badly, desperately, needed barriers and tariffs to be protected form the western capitalist giants and, instead, Russia voluntarily abided by the terms of the WTO and then eventually became member.  Now Russia is using this total embargo to provide a crucially needed time for the Russian agriculture to invest and take up a much bigger share on the Russian market.  Also, keep in mind that Russian products are GMO-free, and that they have much less preservatives, antibiotics, colors, taste enhancers, or pesticides.  And since they are local, they don't need to be brought in by using the kind of refrigeration/preservation techniques which typically make products taste like cardboard.  In other words, Russian agricultural products taste much better, but that is not enough to complete.  This embargo now gives them a powerful boost to invest, develop and conquer market shares.

Fifth, there are 100 countries which did not vote with the US on Crimea.  The Russians have already announced that these are the countries with which Russia will trade to get whatever products it cannot produce indigenously.  A nice reward for standing up to Uncle Sam.

Sixth, small but sweet: did you notice that EU sanctions were introduced for 3 months only, "to be reviewed" later?  By introducing a 12 months embargo Russia also sends a clear message: who do you think will benefit from this mess?

Seventh, it is plain wrong to calculate that EU country X was exporting for Y million dollars  to Russia and to then conclude that the Russian embargo will cost Y million dollars to EU country X.  Why is it wrong?  Because the non-sale of these product with create a surplus which will then adversely affect the demand or, if the production is decreased, this will affect production costs (economies of scale).  Conversely, for a hypothetical non-EU country Z a contract with Russia might mean enough cash to invest, modernize and become more competitive, not only in Russia, but on the world market, including the EU.

Eighth, the Baltic countries have played a particularly nasty role in the entire Ukrainian business and now some of their most profitable industries (such as fisheries), which were 90% dependent on Russia, will have to shut down.  These countries are already a mess, but now they will hurt even more.  Again, the message to them is simple: you wanna be Uncle Sam's bitch?  Pay the price!

Ninth, and this is really important, what is happening is a gradual decoupling of Russia from the western economies.  The West severed some of the financial, military and aerospace ties, Russia severed the monetary, agricultural and industrial ones.  Keep in mind that the US/EU market is a sinking one, affected by deep systemic problems and huge social issues.  In a way, the perfect comparison is the Titanic whose orchestra continued to play music while the sink was sinking.  Well, Russia is like a passenger who is told that the Titanic's authorities have decided to disembark him at the next port.  Well, gee, too bad, right?

'clock' by Josetxo Ezcurra

Last, but most definitely not least, this trade-war, combined with the West's hysterical russophobia, is doing for Putin a better PR campaign than anything the Kremlin could have dreamed of.  All his PR people need to tell the Russian population is the truth: "we did everything right, we played it exactly by the book, we did everything we could to deescalate this crisis and all we asked for was to please not allow the genocide of our people in Novorussia - and what was the West's response to that? An insane hate campaign, sanctions against us and unconditional support for thegenocidal Nazis in Kiev".  Furthermore, as somebody who carefully follows the Russian media, I can tell you that what is taking place today feels a lot like, paraphrasing Clausewitz, the "a continuation of WWII, but by other means", in other words a struggle to the end between two regimes, two civilizations, which cannot coexist on the same planet and who are locked in struggle to death.  In these circumstances, expect the Russian people to support Putin even more.

In other words, in a typical Judo move, Putin has used the momentum of the the West's Russia-basing and Putin-bashing campaign to his advantage across the board: Russia will benefit from this economically and politically.  Far from being threatened by some kind of "nationalistic Maidan" this winter, Putin's regime is being strengthened by his handling of the crisis (his ratings are higher than ever before).

Yes, of course, the USA have shown they they have a very wide array of capabilities to hurt Russia, especially through a court system (in the US and EU) which is as subservient to the US deep state as the courts in the DPRK are to their own "Dear Leader" in Pyongyang.  And the total loss of the Ukrainian market (for both imports and exports) will also hurt Russia.  Temporarily.  But in the long wrong, this situation is immensely profitable for Russia.

In the meantime, the Maidan is burning again, Andriy Parubiy has resigned, a the Ukies are shelling hospital and churches in Novorussia.  What else is knew?

As for Europe, it is shell-shocked and furious.  Frankly, my own Schadenfreude knows no bounds this morning.  Let these arrogant non-entities like Van Rompuy, Catherine Ashton, Angela Merkel or José Manuel Barroso deal with the shitstorm their stupidity and spinelessness have created.

In the USA, Jen Psaki seems to be under the impression that the Astrakhan region is on the Ukrainian border, while the Russian Defense Ministry plans to "open special accounts in social networks and video hosting resources so that the US State Department and the Pentagon will be able to receive unbiased information about Russian army’s actions".

Will all that be enough to suggest to the EU leaders that they have put their money on the wrong horse?

The Saker 

PS: have to leave again.  Will be back on Saturday afternoon.

Europe Furious That Putin Dares To Retaliate To Sanctions, Blames Economic Slide On Kremlin

Zero Hedge

7 August, 2014

Either Europe is run by a bunch of unelected idiots, or... well, that's about it.

After blindly doing the US' bidding over all propaganda matters Ukraine-related, and following just as blindly into round after round of US-inspired sanctions, sanctions to whose retaliation Europe would be on the frontline unlike the largely insulated US, Europe appears to be absolutely shocked and is apoplectic that after several rounds of sanction escalations, Russia finally unleashed its own round of sanctions and yesterday announced a 1 year ban on all European food imports, something which will further push Europe into a triple-dip recession as already hinted by Italy yesterday.

In fact, Europe is so stunned by this unexpected "politically-motivated" retaliation by Russia, it issued a press release.

Statement by Commission spokesman on the announcement of measures by the Russian Federation

The European Union regrets the announcement by the Russian Federation of measures which will target imports of food and agricultural products. This announcement is clearly politically motivated. The Commission will assess the measures in question as soon as we have more information as to their full content and extent. We underline that the European Union's restrictive measures are directly linked with the illegal annexation of Crimea and destabilisation of Ukraine. 

The European Union remains committed to de-escalating the situation in Ukraine. All should join in this effort. Following full assessment by the Commission of the Russian Federation's measures, we reserve the right to take action as appropriate.

Surely, Putin is waiting for the European Commission to also issue a #hashtag before he starts shaking in his boots.

For an indication of just how clueless Europe is, we also read that it is ready to appeal to the World Trade Organization to have the Russian agriculture import bans lifted, a European diplomatic source told ITAR-TASS.

“Politically motivated large-scale trade restrictions are a direct violation of WTO rules, which Russia pledged to comply with,” the diplomat said. “These measures will be thoroughly analyzed, and then relevant claims will be submitted with the WTO.”

The source added that the European Commission would start analyzing Russia’s ban on imports from EU states as soon as the official list of banned goods would be published.

The EU Council may convene an urgent meeting in connection with Russia's response to European sanctions.

It is early to say whether the EU will take measures in response to the Russian ban on imports of food products from Europe, source told.

“First, it is necessary to see and analyze the official list of product that Moscow intends to ban. After that, decisions will be made both at the European and the national level,” the source stressed.

The punchline: "The Russian ban on agricultural imports from the European Union is an “irresponsible measure” that can lead to losses of billions of euro for European as well as Russian consumers, the source told ITAR-TASS."

In other words, Europe actually thought it would keep escalating without Russia retaliation. If confused, see the first sentence of this article again.

In the meantime, Europe counter-retaliating to Russia's retaliation to European sanction aggression is sure to make the already bad trade war, worse. A trade war so bad in fact, that what snow was to Q1, "evil Putin" will be to Q3. From Bloomberg:

The crisis in eastern Europe is showing signs of disrupting Mario Draghi’s economic outlook.

Evidence is building that the conflict in Ukraine and European Union sanctions against Vladimir Putin’s Russia are undermining a euro-area recovery that the European Central Bank president already describes as weak. With the ECB expected to keep interest rates on hold near zero today and refrain from any new policy measures, Draghi is likely to face questions on how he plans to keep the economy on track.

The ECB may have few tools left to mitigate the impact of political turmoil that European companies from Anheuser-Busch InBev NV (ABI) to Siemens AG (SIE) say is hurting their business. A volley of measures introduced in June will take time to work, and policy makers have so far shied away from wheeling out a full-scale asset-purchase program.

“The euro-zone recovery is very fragile and the macro situation fluid,” said Andrew Bosomworth, managing director at Pacific Investment Management Co. in Munich. “Expect Draghi to elaborate on spillover risks from the Russia-Ukraine crisis.”

Ironic, because this is just as we said would happen when we predicted that Putin will soon become Draghi's best friend and as a result of Putin "aggression" Draghi will have "no choice" but to boost Europe's monetary insanity, which recently crossed into the NIRP twilight zone, even beyond the rabbit hole.

Finally, Bloomberg actually did touch correctly on what the recent trade war escalation is all about in "Russia Sanctions Accelerate Risk to Dollar Dominance."

U.S. and European Union sanctions against Russia threaten to hasten a move away from the dollar that’s been stirring since the global financial crisis.

One place the shift has become evident is Hong Kong, where dollar selling has led the central bank to buy more than $9.5 billion since July 1 to prevent its currency from rallying as the sanctions stoked speculation of an influx of Russian cash. OAO MegaFon, Russia’s second-largest wireless operator, shifted some cash holdings into the city’s dollar. Trading of the Chinese yuan versus the Russian ruble rose to the highest on July 31 since the end of 2010, according to the Moscow Exchange.

While no one’s suggesting the dollar will lose its status as the main currency of business any time soon, its dominance is ebbing. The greenback’s share of global reserves has already shrunk to under 61 percent from more than 72 percent in 2001. The drumbeat has only gotten louder since the financial crisis in 2008, an event that began in the U.S. when subprime-mortgage loans soured, and the largest emerging-market nations including Russia have vowed to conduct more business in their currencies.

"No one is suggesting"? We are!

As for the propaganda landscape, the scene is already set: