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East vs. west: the political and economic situation in Ukraine suggests that, in terms of trade and geopolitics, the cold war might never have really ended.

Talk of a new Cold War between Russia and the West didn't begin with the crisis in Ukraine, but that certainly brought it to the fore. Headline writers used it as an eye-grabbing, click-baiting hook and countless pieces suggested--as they did during several other prior conflicts involving a western-friendly former Soviet satellite state and Russia--that the battle was really the start of a new prolonged conflict that would define geopolitical relations for an entire generation.

To be clear though, the West, represented by the United States and the rest of the North Atlantic Treaty Organization (NATO), and Russia are not necessarily locked in an apocalypse-threatening eye-to-eye battle for global dominance, they're not accumulating arms to create a nuclear deterrent and they're not fighting proxy wars in Afghanistan and elsewhere to compete for precious influence. In many ways, a number of the things that made the Cold War what it was are absent from today's world, and a number of them are largely absent from the tug of war between Ukraine's western-friendly, EU-hugging northwest and the predominantly Russian region of Crimea to the southeast.

Early on in the crisis, the slightly less tense nature of the relationship between Russia and the West could be seen in the highest halls of leadership. Before Russia took up its military position in Crimea, US Secretary of State John Kerry appeared on television urging Russia to partner with the West to give Ukraine the ability to determine its own future, urging them against supporting Crimean secession. "We are not looking for confrontation, but we are making it clear that every country should respect the territorial integrity here: the sovereignty of Ukraine," Kerry said in an interview. "Russia has said it will do that, and we think it's important that Russia keeps its word."

These were the terms of a relatively open discussion about Russia by the United States' top diplomat, something for which Cold War-era politics would never have allowed. Kerry continued, saying that the US was "hoping that Russia will not see this as sort of a continuation of the Cold War."

It might have just been a slip of the tongue, but Kerry's reference to a "continuation" of the Cold War, rather than a new Cold War or a restarted Cold War, could be telling. While some of the more dramatic military hallmarks are still missing at this point, and the world-ending stakes are considerably lower, when it comes to trade policy and geopolitical spheres of influence, the Ukraine situation raises the question of whether or not the Cold War ever really ended at all.

Public vs. Private

As of press time, a pledge made by Russian Foreign Minister Sergei Lavrov to Kerry that Russia would respect Kerry's previously mentioned "territorial integrity" of Ukraine had dramatically fallen by the wayside. Russian troops had taken up positions in Crimea and an armed standoff gripped the region as the West worked to respond. The US' original proposal that Russia collaborate to ease tensions in the region was clearly null and void, as Kerry made clear where America s loyalties lie by offering $1 billion in loan guarantees to Ukraine's fledgling government. The West has generally threatened a number of economic sanctions against Russia for its alleged aggression, and Russia has responded similarly, with President Vladimir Putin saying that Russia could drop the US dollar as its reserve currency in response to an attempt to isolate his country from the world of global commerce. Despite Russia's military incursion within Ukraine's borders, the terms of the public debate have almost been entirely economic, and beyond Russia's move into the Crimea, the Kremlin has also wielded its position as a regional economic lynchpin as a weapon against Ukraine.

Behind the scenes, before, during and after the crisis, the economic playbook used by Russia has been rich with Cold War-era echoes. A since-suspended $15-billion bailout agreement, from Russia to Ukraine and agreed to by Yanukovich in December, set off the violent, deadly protests in Kiev that eventually led to Yanukovich's ouster. Many Ukrainians viewed the deal as a Russian effort to bring Ukraine further under its influence, and as Yanukovich acquiescing to the Kremlin while an Association Agreement with the EU collected dust and went unsigned.

Yanukovich originally wanted it both ways, trying to benefit both from a firmer relationship with and possibly full membership in the EU, while also working its way into the Customs Union of Belarus, Kazakhstan and Russia (CU), which is Russia's own attempt to create a regional economic bloc to rival the EU. The CU doesn't get as much attention as the EU, mainly because it accounts for just a fifth of the global economic activity that the EU does, and nearly all of it comes from Russia rather than its two former satellite-state counterparts. Putin has stated that it's his intention to bring all former Soviet states into the CU, and the US has voiced its opposition to the CU for the express reason that it seems like an economic attempt to recreate a version of the Union of Soviet Socialist Republics (USSR).

The Old Front vs. the New Front

Russia wanted Ukraine on its team, not on the EU's, so the $15-billion deal was a downpayment and contingent on a friendly government in Kiev, led by Yanukovich. After disbursing $3 billion of the full package, Russia suspended the deal pending the establishment of another friendly government, which at this point is nearly impossible, but a pro-Russian Kiev looked unlikely from the jump, given the fact that the interim government hasn't been so gracious in victory. One of the first things the new Ukrainian Parliament did was to abolish a law that allows the country's individual regions to make Russian a second official language, which many viewed as a slap in the face of the 30% of the country's residents that consider Russian their native language.

As such, in addition to intervening militarily in Crimea, Russia has tried to pinch Ukraine using its old Cold War playbook, opening up a new front against the establishment of a potentially unfriendly government in Kiev on a Ukraine whose economic situation is already dire.

"The economic crisis is still full blown," said Carolyne Spackman, vice president and country risk economist with American International Group, Inc. (AIG). "There was a trade war between Russia and Ukraine for part of last year which could easily resume."

Ukraine's fortunes are still tightly connected to Russia, which has a routine when it comes to clamping down on its satellite states, using trade policy as the weapon. For instance, reports have indicated that Russia has taken steps to make it harder for Ukrainian goods to enter the country. And, of course, Russia takes more of Ukraine's exports than any other country," Spackman said, so this will negatively affect the country's already low current account balance of -8%, as estimated by the World Bank.

The other question for Ukraine is Russia's control over the nation's gas prices. The terms of the since-canceled $ 15-billion bailout deal from Russia also included a one-third reduction in the price that Ukraine paid for Russian gas, and since conditions between the two nations have only rotted further, Russia could take even more steps to hurt Ukraine at the pump. "Russia could raise the gas prices if they decide to," Spackman said. "There are some potential problems if you're producing in Ukraine. Your cost of energy is something to worry about, as is getting your product to market. Those are the major issues for exporters operating in the country."

Another economic arrow in Russia's Cold War quiver stems from the fact that many of the residents of former Soviet republics have migrants working in Moscow, and sending their remittances back home to support their families. Russia can easily decide to block their work visas to put further pressure on Ukraine to abandon any efforts to get any closer with their European rival. Russia has taken similar steps when other countries that used to reside firmly in its sphere of influence have made moves to get closer to the EU, and really, they use the same tactics every time. Ukraine's experience is similar to other countries like Moldova, Armenia, Georgia and others that found themselves in Russia's crosshairs when their governments attempted to lean west in terms of political influence.

Money vs. Power

However, in the recent past, when Russia trained its trade restrictions on certain key buffer states in order to get them to pledge fealty, the EU, or, generally, the West, has worked to shelter Russia's intended targets. In September, a few months after Moldova inked a trade agreement with the EU, Russia banned imports of Moldovan wine, citing impurities. Moldova is a predominantly agricultural economy, one of Europe's smallest, and wine exports form the backbone of the sector, so a ban from Moscow posed a relatively serious threat to the continuing operation of its economy

The EU immediately sprang into action, lowering tariffs on Moldovan wine imports, and Secretary Kerry announced a trade mission in December that would send Moldovan wine producers to the US to learn more about the market there and how to take the best advantage of it.

This was no sweat off either country's back. The EU was already Moldova's largest trading partner, and continues to be, involved with 54% of Moldova's total trade activity (Ukraine is second with 15% of Moldova's trade activity and Russia ranks third with 12%). The fiscal, economic benefit to the US would be negligible as well, meaning that both the US and EU opened up and started focusing on Moldova exclusively as a gesture of geopolitical power wrangling. This sends a message to Russia, that if Moscow wants to use its economic dominance in the region to try to get its preferred buffer states to bend the knee, the West will react to counteract their efforts.

Ukraine's precarious economic situation has demanded similar action from the West, because Russian trade, resource and visa restrictions will only worsen the crisis. Ukraine needs money and if they can't get it from Russia, then they'll get it somewhere else, particularly as their reserves continue to plummet, especially if Russia continues to make it harder on exporters. Ukraine's reserves have been falling for the last few years, but analysts have suggested that beyond maybe the second quarter of this year, it might get hard for the country to function economically. Needless to say, between the economic crisis, the ethnic discord between Ukrainians and Russians and the ongoing political reformation, there's no shortage of uncertainty surrounding just how this situation gets resolved.

But the relatively uneventful resolution of Moldova's situation is instructive for exporters that might be worried about retaliation from Russia as the EU and US come to Ukraine's economic rescue. Whatever happens, and however each party competing for economic influence and power in the region reacts to the other one's actions, it's unlikely that this scenario escalates to the point where trade stops altogether between the West and countries within Russia's sphere of influence.

Certain economic realities just make it improbable that any party would take such a drastic step for an extended period of time to generate a lose-lose outcome for all parties involved. Russia may have created the CU in order to create a new rival for the EU, but Russia's energy industry is currently extraordinarily dependent on the EU. They can't really afford to let that relationship sour too greatly without shooting themselves in the foot economically. Furthermore, while cutting off the EU's access to Russian oil would deal a serious blow to their economy, the EU, as the world's largest economic bloc, commands a great deal of buying power and can still find alternative sources to fill the gap, whether that's from friendlier suppliers or from increased reliance on renewable energy resources. Russia can only retaliate if the EU doesn't have another means of supply, which they can find and are already developing on their own.

Also, Russia joined the World Trade Organization (WTO) in 2012, following nearly two decades of negotiations, and their membership accession agreement, just like every other membership accession agreement, is contingent on behaving appropriately, from a trade perspective, when it comes to its dealings with other WTO members. Disputes can be settled within the WTO framework, so if any major trade problems come up, there's at least a venue through which member nations can find an answer.

If the Cold War had an end date, Russia's WTO membership might've been it, but the crisis in Ukraine is a larger entry in a series of skirmishes between countries in the overlapping spheres of influence that both the EU and Russia are continually trying to maintain, or expand. Trade actions will always remain an element of that struggle but, in general, it's unlikely that any of these will balloon into the long-term sustained state of tension and outright trade stoppage that people might think of when they think of the Cold War. If Moldova's situation provides any lesson, there's still a Cold War going on, but it's being fought with wine instead of weapons. With any luck, the resolution of Ukraine's economic crisis will be similarly benign.

Jacob Barron, CICP, NACM staff writer can be reached at jakeb@nacm.org.
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Author:Barron, Jacob
Publication:Business Credit
Geographic Code:4EXRU
Date:Apr 1, 2014
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