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“Imperialist Putin “Steals” Ukraine”… If only all those hysterical newspaper articles were true!

In reality, the only thing he stole was Ukraine’s credit card debt. He’s no idiot, of course, and is in no rush to pay it off. The drama certainly hasn’t ended. But a geopolitical pivot on the model of Khmelnitsky’s 1654 decision this is not.

Let me try to explain the actual motivations of everyone involved:

(1) The EU wants the Ukraine. No, have to be more precise. The Poles, Balts, Swedes, and Anglos want Ukraine in the EU, without Yanukovych. Scratch that. They want Russia without Ukraine without a Yanukovych. As long as Ukraine politely waits in the queue alongside Turkey and Egypt and all those other peripheral countries enjoying the glories of “European civilization” with Associate memberships, all is well.

(2) Putin wants a weak Yanukovych – because Yanukovych is loyal to his oligarchs, not Putin (duh!) – in control of Ukraine. He also wants Ukraine in the Customs Union. (But not its credit card debt). To do this he has been applying pressure, with Russia banning the import of Roshen chocolates, which belong to a particularly outspoken proponent of the EU, the oligarch Petroshenko. There are warning that EU Association will mean the setting up of tariffs on Ukrainian imports (Russia does not, after all, wish to have to compete with European goods on level territory at this stage). Russia’s long-term goal (with the Eurasian Union) is gradual convergence with EU standards, and eventually even integration. But that is very far off (2040′s maybe). The greater the scope of the Eurasian Union, the more advantageous the terms on which said integration can occur. There is no hurry.

(3) Yanukovych wants what the Donbass oligarchs want. The Donbass oligarchs want to legitimize and secure their wealth by integrating into Western institutions. But the Donbass oligarchs also want their main protector to remain in power. And unfortunately, things like raising gas prices by 40%, salary freezes, and big spending cuts – as demanded by the IMF in return for loans – is going to collapse whatever remains of Yanukovych’s support in the east and south. And why does the EU/IMF demand such stringent concessions? See above. They want a Ukraine without Yanukovych! It’s all logical.

Hence, when PM Azarov says that the decision to suspect the EU deal is “tactical,” he is in all likelihood saying the truth – as opposed to opposition claims that it is all some kind of elaborate conspiracy concocted with Putin to deny Ukraine its “European choice” and return it to imperial moskali domination.

It is also worth noting that during much of the summer, Ukrainian TV channels were propagandizing the benefits of EU association. This is presumably what caused support for the EU to start exceeding support for the Customs Union/Eurasian Union. It would have been exceedingly stupid and irrational to carry out this information campaign with the ultimate intention of performing a volte face and turning back to Russia. It would just piss off the Ukrainians who had become more energized about Europe. An own goal. Why would they possibly do it?

Now that we have a more realistic idea of how things actually work – as opposed to the fanciful tales that the Lithuanians are spinning of Russian blackmail towards Yanykovych, and its faithful repetition in the Western media – we can now look to the future.

That future revolves around February 26, 2015. That is when the next Ukrainian Presidential elections are going to take place. Yanukovych, presumably, wants to win them. But he is not very popular. He has a long-standing reputation as a thug, and a slightly less long-standing reputation as an idiot. Internet commentators frequently call him a “vegetable.”

But he does want to remain President. So Tymoshenko remains in prison, while a law is being introduced to make it illegal for Klitschko to run for the Presidency, seeing as he is a tax resident of Germany. (Aside: If I were Ukrainian, the fact that a tax resident of a foreign country is probably the most popular candidate for leadership would make me profoundly depressed).

The logical course, then, would be to sign up to the Russian deal, which could stave off what many in the financial community are considering to be imminent collapse. But EU membership remains a strategic goal for the Party of Regions and the oligarchs too. So we continue to observe very arduous attempts to have the cake and eat it too. I am talking about their pleas for a three-way trade commission between the EU, Ukraine, and Russia. But too bad for them, the EU isn’t interested. Because the EU doesn’t want Yanukovych. “Look soldier, you don’t like me, and I don’t like you.” “But I like you!” “Okay. You like me, but I don’t like you.” That’s the EU and Yanukovych, in a nutshell.

So that option is out of the window. The days of playing the EU off against Russia to extract concessions is drawing to a close.

What is going to happen now?

Sign up to the Customs Union and be done with all the rigmarole. This is not a choice: Extensive Russian support is predicated on joining the Customs Union.

This is what the opposition, the worshipers of the “European choice” and haters of “Aziopa,” so fervently fear. But I suspect those fears are misplaced. The Ukrainian population under 50 is more pro-EU than pro-Eurasia, and as older people die off, the balance of electoral (not to mention street) power is going to shift West. In this scenario, the Party of Regions will bear a mounting electoral toll for depriving Ukrainians of their “European choice.” The oligarchs will be none too happy either.

Incidentally, this puts the Party of Regions in a fundamental bind. Their core electorate is very slowly but surely dissipating. But should they try to tap the electoral power of younger age groups by signing the Association Agreement, the result would wreck eastern industry and collapse their existing electorate. So they would want to postpone this until after the Presidential elections if at all possible.

Another choice is to default now, devalue the currency, and hope for recovery to pick up in a year’s time, just in time for the elections. (This is what Belarus did in 2010, minus the elections). But this is very risky. Russian gas imports will become even more expensive, and crippling to the budget – and they would be loth to throw Yanukovych a lifeline. If they maintain pressure, Yanukovych would be truly doomed in 2015, even if Tymoshenko and Klitschko are both out of the game. The EU/IMF wouldn’t help either, of course (they don’t want Yanukovych). All they’d have to do is play the waiting game and just wait for a pro-European President to come to power in 2015.

Yanukovych has no good options, that much is clear. All are fraught with varying degrees of risk. But surprisingly enough, it actually appears that – in the absence of any further involvement with the EU, which has basically thrown a hissy fit and wants to have nothing more whatsoever to do with Yanukovych – the Customs Union path is the most promising one for him. Not a good one, mind. The younger people west of Donbass and north of Crimea are pissed off at him, and presumably the oligarchs are none too happy either. But unlike the alternatives – alienation of the core electorate – these are fundamentally manageable problems. Younger people are more active, sure, but the power of the street is overrated (it was a court decision, not the Maidan, that was central to the Orange Revolution); and elderly people are more likely to vote. And what other choice do the Donbass oligarchs have?

All in all, a carnival of errors. The Party of Regions making EU integration a core part of its platform to the extent of funding an information campaign in favor of it. The EU for being so hardline on fiscal matters, which was ultimately a threat to Yanukovych’s political survival and hence unacceptable. Putin is the only one who appears to have played all his cards right.

Well, this train of thought has come to a most unexpected point. I suppose the “hysterical” articles aren’t so hysterical after all… But the outcome is accidental, not having been intended by Yanukovych.

And it goes without saying that things remain very unpredictable. For instance, there’s also the Chinese variant.

(Republished from Da Russophile by permission of author or representative)
 
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If you ever manage to get a troupe as diverse as Latynina, Mark Adomanis, the Cypriot Communist Party, virtually every financial analyst, Prokhorov, and Putin united in condemning your crass stupidity and cack-handedness, it’s probably time to stop and ponder. But it’s safe to say that’s not what the Troika – the European Commission, European Central Bank, and IMF – tasked with managing the European sovereign debt crisis is going to be doing any time soon. They seem to be living in la la land.

Here is the low-down. Contrary to German/ECB propaganda, Cypriot public finances, while nothing to write home about, are not in a catastrophic state. The debt to GDP ratio, far from ballooning out of control like Greece’s, was actually lower than Germany’s as late as 2011! This was despite Cyprus being steadily hammered by the global financial crisis and the massive explosion at a naval base in 2011 that cost it about 10% of its GDP.

cyprus-debt-dynamics The main problem was in its financial sector. Although it should have been safe on paper, Cypriot banks had the bad fortune to have had many operations in Greece – which hemorrhaged money as Greek debts were restructured under EU guidance. These involved painful austerity, but the principle that bank deposits would be inviolable held across the PIIGS. But for Cyprus, the Eurocrats – egged on by Schäuble in particular – decided to make an exception, demanding a “bail-in” as part of any financial rescue package. For the ultimately trifling sum of $6 billion, they were prepared to erode basic principles such as sanctity of property that the EU is founded on.

According to Edward Scicluna, the Maltese Finance Minister, his Cypriot counterpart Michalis Sarris was for all intents and purposes brow-beaten into accepting the deal – a 6.75% levy on deposits of less than 100,000 Euros, and 9.9% on everything above that – that the country’s parliament would later decisively reject. The Europeans, according to him, were dead-set on “downsizing” Cyprus’ supposedly overgrown financial sector and in particular its status as a tax haven and alleged center of Russian money laundering. After 10 grueling hours of discussions, Sarris finally conceded, and as soon as that happened, “Schäuble demanded that all wire transfers to and from the Cypriot banks would cease forthwith.”

In other words, they wished to destroy Cyprus’ financial system, and it seems certain that they have succeeded in this. As soon as the banks reopen (now delayed until at least May 26th), who exactly will continue to keep their deposits in a Cypriot bank?

This wanton destruction however seems to have been based not so much on any sense of pan-European fairness or social justice as misconceptions about the nature of the Cypriot banking system, or even more mercenary motives such as a desire to help Merkel win the upcoming elections or encourage capital flight from the PIIGS to German banks (the latter possibility was raised, only half in jest, by Craig Willy). As we see above, Cyprus’ sovereign debt situation was manageable. While it is true that it had a huge financial sector relative to its GDP, this is not atypical for a nation of its small size and location (consider Luxembourg, or London were it independent from the UK), and this sector did not experience any critical difficulties until the EU-spearheaded restructurings of Greek debt into which C ypriot banks were heavily invested, as a natural result of their geographic and cultural position.

How Cypriots see the Cyprus crisis.

How many ordinary Cypriots see the Cyprus crisis.

Nor is it even true that the Cypriot banking system mainly serviced dodgy offshore aristocrat types. Of the €68 billion in deposits as of end-January 2013, some 63% were held by Cypriots, and 7% were held by citizens of Eurozone countries, while 30% were held by nationals of other countries *. Although according to honored representatives of the Eurocrat class like Jean Pisani-Ferry, it is the Cypriots’ own fault for banking in their own damn country as opposed to Germany:

And of that 30%, not all was held by Russians, as Cyprus is popular among Chinese and Iranians too (indeed, an acquaintance who was there recently saw far more signs in Chinese than in Cyrrilic). As for the notion that all or even the majority of Russians with money are “oligarchs”, “mafiosi”, and “Chekists” (interchangeable terms, to many of the people who engage in this kind of rhetoric)… well, no way to statistically prove it one way or another, so anecdotes will have to suffice. Ironically enough, the only Russian I know with a bank account in Cyprus is actually a fairly anti-Putin liberal, and as far as I know not an oligarch or a mafiosi – unless you consider journalists to be such. The commentator JLo also reports a liberal acquaintance with money in Cyprus. No doubt those two will be thrilled to hear from former Economist Russia journalist Edward Lucas, whose Russophobia is frankly pathological, that as Russians with money in Cyprus they should be automatically expropriated.

This is not of course to argue that having such a large segment of the Russian economy “offshore” is a good thing. Many Russians really do have accounts in Cyprus because of its perceived benefits such as the local (English-based) legal system, greater financial security, greater ease of capital movement around the world, and yes, tax evasion or “tax optimization” as it is euphemistically called – and productively utilized by entirely respectable Westerners like Mitt Romney. It would undoubtedly be a good thing if there was less of that and ironically the Troika’s ham-fistedness will have only helped Russia in its struggles to de-offshore its economy. But what is entirely mendacious is to start throwing around terms like “money laundering” as if they were synonymous with offshore banking, or “the Russian mob” as if it was synonymous with “oligarchs”, “Russian politicians”, “Russian bureaucrats”, and all Russians in Cyprus in general for that matter. There is of course some overlap between all these categories but to conflate them all as the Lucas types insist on doing is pathologically Russophobic, and frankly driven by the very same Bolshevik spirit that they profess to despise but actually embody.

Many Western papers even went so far as to hint that the reason Russia was so “concerned” about Cyprus was because Putin and other members of his inner circle had money in Cyprus. This was echoed by the (viciously anti-Putin) Russian business newspaper Vedomosti, which alleged that “it is hard to believe, but it appears as if European politicians are ready to risk a lot in order to pressure a certain influential politician secretly hiding money in Cypriot banks.” They did not have the courage of their convictions to say it outright, but the hidden subtext is obvious to all. We call these conspiracy theories. Were this true, in fact, it would be indicative of severe schizophrenia on Putin’s part – that is, if he actually DID have quadrillions parked in Nicosia – considering that previous discussions on Russian loans to Cyprus had been linked to Cyprus becoming more proactive about revealing the identities of Russians with bank accounts there to the Russian tax authorities.

How the Western media/political class see the Cyprus crisis.

How the Western media/political class see the Cyprus crisis.

At this point it hardly bears mentioning that, as an institution that so regularly and pompously lectures Russia about things like rule of law and sanctity of property rights, it is quite hilarious that the Troika would “demonstrate” those concepts by doing things like retroactively abrogating European-wide deposit insurance of 100,000 Euros and freezing and confiscating the savings accounts of the very Russians whom they expect to listen to their pontifications.

But as these recriminations and general debility went gone back and forth, Nicosia burned. The initially proposed “medicine”, it seems, will turn out to be the deadly pill that kills the Cypriot financial system. It is hard to imagine anyone, be they foreigner or even Cypriot, now willingly leaving their money in Cypriot banks; trust has been destroyed, and short of capital controls, massive bank runs and capital outflow seem to be all but inevitable whenever the banks open again. The original $15 billion that could have nipped this problem in the bud is probably no longer sufficient. I don’t pretend to have any precise idea of how things will develop now – Will Cyprus hurtle out of the Eurozone? Will contagion spread to Spain and Portugal? Will Gazprom get exploration rights to the recently discovered oil fields in return for loans? Will China get involved? – but a few things I think we can be pretty sure of: (1) The ECB/Eurocrat class are either utterly, frightfully oblivious, or have altogether darker ulterior motives; (2) The Cypriot banking system is finished; (3) It will be a reality check for Russians who firmly believe their assets are automatically safe abroad and will help the de-offshoring process, though I don’t expect any sudden radical changes because there are still plenty of alternatives like Latvia which I hear is getting pretty hot with Russian money nowadays.

PS. For further reading (and people who influenced my perception of this) consult Mercouris, Dmitry Afanasiev (Russian version at Vedomosti), and Craig Willy’s Twitter.

*UPDATE: The commentator Temesta links to an article by Paul Krugman in which he points out that “Cypriot residents” very likely directly include foreigners:

I’ve done some asking around, and cleared up something that was puzzling me. Officially, only about 40 percent of the deposits in Cypriot banks are from nonresidents, which would imply resident deposits of almost 500 percent of GDP, which is crazy. But the answer is that I do not think that word “resident” means what you think it means. Some of the money is from wealthy expats living in Cyprus; much of it is from rich people who have resident status without, you know, actually living there. So we should think of Cypriot deposits as mainly coming from non-Cypriots, attracted by that business model.

That said, speculation is one thing, concrete numbers are another: “Cyprus Central Bank Gov. Panicos Demetriades, in an interview published Thursday in Russian newspaper Vedomosti, offered more specifics. “The deposits of Russians range from €4.943 billion to €10.225 billion, depending on how you count them,” he said.” Even if the highest estimates of $20 billion are correct, it would still mean that the total value of Russian deposits there account for less than 25% of the total.

(Republished from Da Russophile by permission of author or representative)
 
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Anatoly Karlin
About Anatoly Karlin

I am a blogger, thinker, and businessman in the SF Bay Area. I’m originally from Russia, spent many years in Britain, and studied at U.C. Berkeley.

One of my tenets is that ideologies tend to suck. As such, I hesitate about attaching labels to myself. That said, if it’s really necessary, I suppose “liberal-conservative neoreactionary” would be close enough.

Though I consider myself part of the Orthodox Church, my philosophy and spiritual views are more influenced by digital physics, Gnosticism, and Russian cosmism than anything specifically Judeo-Christian.