Oh… those Russians…..

Mint – Blain’s Morning Porridge  - February 24 2014

Has Russia just pulled off the geopolitical ambush of the decade? It feels that way as the consequences of the former Ukrainian president's moonlight flit become starkly apparent. This morning it's clear the Ukraine is in bits, and everyone should be asking how Europe will pay for it.

Sure, Western leaders have been quick to say money is available. Is it? If you don’t learn from the past…. etc, etc. The bottom line is Europe has just allowed itself to become embroiled in an unwinnable eastern front, while the crisis in the soft peripheral underbelly of Europe remains unresolved.

Ukraine's recent economic performance makes Greece look a paragon of growth. Last week we said the best outcome for Ukraine bond holders would be an acknowledgement of Ukraine's position as part of the Russian hegemony and $15bn of Russian bailout loans. While the worst option is clearly civil war, a long period of Europe dithering about assuming economic responsibility, while Putin stokes internal unrest will not be much better.

Some commentators are wondering whether Russia will contribute towards a European-led bailout. Don't count on it. Instead, the Russians will leave the EU the task of shoring up the increasingly fractional state. As eestern Ukraine swings increasingly towards Berlin, the Russian minority in the east looks to the Kremlin.

During that long dark tea-time of the soul known as Sunday afternoon, (the empty meaningless period between getting home from lunch and Top Gear), I watched the bizarre closing ceremony of the Sochi Olympics - which repeatedly swung back to the unreadable Putin. The show sent clear messages - we Russians are a modern, proud and cultured people, but ignore our history at your peril. (OK… they resisted the obvious temptation of a full-on 1812 Overture (it’s in the anthem), but War and Peace was there...)      

They say investment is a long-term game, but global politics is even more so. Putin is one of few leaders who can actually play it, being largely unconcerned by the niceties of elections, economic performance, or corruption. One of his major goals is to undo the last 20 years of Yeltsin-era embarrassment and NATO mission-creep into the borders of the Rodina - something Russian history is all-too-clear about. Re-establishing client buffer states around Russia and re-exerting hegemony will always be at the core of Russian foreign policy.

Blithely unaware of any of this, the European Union has rather foolishly justified the enormous costs of Baroness Ashton's "EU Foreign Office" and its own bureaucratic aggrandisement agenda by supporting expansion into eastern Europe. I didn’t vote for that? Did you?

Promising citizens EU "freedoms" was a direct challenge to Russia. But Putin has been smart - rather than face down Europe directly, he's going to let them solve the two intractables at the centre of the Ukraine problem - let Europe pay for it, and let Europe resolve the divide between Europe-leaning western Ukraine and Soviet-leaning east. Already Putin has bluffed La Merkel into agreement the country can't be divided.

Ukraine will likely prove an unsolvable economic black hole for Europe. I look forward to hearing how Europe will pay the billions required to repair the economic damage, while ensuring the country doesn't go to war over Russia as a language or some other real or imagined insults to the Russian minority. Putin can poke that fire whenever he wants.

And try explaining to European peripheral politicians why it’s ok to pour billions into Kiev, but austerity remains the game around the Med? Smart play for Putin - who needs to catch up Europe, when Europe seems determined to sink itself. What better way to demonstrate the limited strength of Europe? Give them an unfixable economic/sectarian quagmire to fix!

Meanwhile, back in Sydney the G20 Communique was dusted off and sent over the weekend promising a 2% increase in Global GDP… marvelous. Want to know how? Then here is the blueprint.. RTFM: http://www.imf.org/external/np/g20/pdf/2014/021914.pdf

            Lots more I meant to talk about this morning:

First, there are the dangers of not reading the prospectus and the moral quandary facing Lloyds over repaying its “ECN” CoCos early. Bit of a blow for investors holding them par-plus, but read the small print and remember companies have a fiduciary duty to act in the interest of shareholders. As I said in my most recent CoCo note – RTFP!

Second –  I missed the fact Fitch had already affirmed Austria at AAA on Friday when I suggested a downgrade was possible because of bank problems. Can’t win them all, and who cares about ratings anyway? The fact Moody’s upgraded Spain on the basis of more sustainable growth, structural reforms and stable funding is interesting – I’d suggest the new Italian chap reads carefully.

Er.. what else I missed. Lots.. Catch up tomorrow as I’m now out of time..

Bill Blain

0207 786 3877

[email protected]

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