Cold War 'The Sequel'

Crisis In Crimea

The Ukraine crisis appears to be anything but a storm in a tea cup. Not only has this crisis in the Baltic reshaped parts of the geographical map that borders with Russia but it is also unnerving smaller sovereign states bordering with Russia.  No doubt some former Soviet States are probably wondering whether they are going to be next in what is now a growing suspicion of Russia’s expansionary intentions.

The rapid increase in NATO troop movements near Russia’s borders underscores the escalating tensions between Russia and her bordering States. On Saturday 150 US troops arrived in Lithuania at the Lithuanian Air Force Aviation Base in Siauliai, according to Reuters. This recent deployment is part of a larger contingent of 600 troops that have already been deployed throughout Eastern Europe to reassure NATO allies. An additional company of soldiers arrived in Poland on Wednesday and in Latvia on Friday and more troops are also expected to arrive in Estonia today.  Equally, there have also been troop movements on the Russian side.  

Last month NATO’s top military commander expressed concerns about the buildup of Russian troops on the Ukrainian border. “Russia is acting more like an adversary than a partner,” stated NATO’s top commander.

The Ukrainian crisis is already reconfiguring NATO’s armies. Prior the crisis in the Baltic, defense officials held the view that large armies weren’t necessary to fight threats from terrorism, that military spending could be scaled down. In the age of austerity public expenditure on defense is a hard sell to a public weary of tax hikes and diminished essential public services.  

So a bloodless war, a cold war, maybe precisely what western defense makers may need to boost their lackluster sales.  If NATO armies are scaled up it means an increase in manpower that translates to the demand for more boots more rifles and more ships to cruise the seas   and planes to patrol the skies to protect us from the Russians. Even if this fear is illusory it becomes apparent that the defense sectors are going to be big gainers from the Ukrainian crisis.  

A conventional war with Russia would be unlikely-it would be MAD (Mutually Assured Destruction.)  MAD was the military doctrine behind cold war where both sides, the US and Russia, have the capabilities to destroy each other completely in a thermo nuclear war. So through terror, total annihilation, paradoxically we have had no major wars in Europe for the last 70 or so years.

The previous cold war between the West and the former Soviet Union was not only a period of heightened tension between the blocks but also a tremendous amount of competition, which had a huge impact on science and technology.  For example, the space race, the two superpowers competition in space exploration drove a lot of advances in aerospace and rocket technology. The humble remote control device that we all use to change TV stations in many ways owes its existence to guided missile technology.  So maybe a new cold war might also give the science and technology sector a new boost?  

However, there are a number of possible negative impacts that the Ukrainian crisis could have on the world economy.  Firstly, perhaps one of the most apparent fears is that the crisis might spark off of a trade war, which would almost certainly damage the global economic recovery.

Already US leader Barack Obama is planning to levy new sanctions on Russia. The US Presidents is also attempting to increase further pressure on Vladimir Putin, said Mr. Obama. There will be new sanctions on Russian individuals and companies in relation to Moscow’s alleged provocations in the Ukraine. The sanctions would include high technology exports to Russia’s defense industry, according to the US President. Over the previous week the US administration has been spearheading support in Europe for sanctions against Russia.             

But it has been a difficult call because Europe’s dependence on Russian gas means that it is not keen on the idea of sanctions that could deteriorate relations between Russia and Europe. Germany, the most dominant member in Europe is in no mood to rock the boat with Moscow, since it has no natural resources, and almost completely reliant on Russian gas for more than a third of its oil and gas needs.   Note, also that Russia is a large trading partner with Europe, exporting automobiles, parts while Europe imports Russian raw materials and commodities.

In view of the above, it would seem unlikely that Europe would willingly pass any sanctions with teeth.  Nevertheless, the Ukrainian situation is fluid and if the situations where to deteriorate further then Europe may have to come on board with more drastic sanctions.  

Assuming, the worst case scenario, that Russian troops walked into Poland, or say another NATO member, then Europe along with its NATO allies would be forced to take more severe measures against Russia.  Based on the NATO members’ agreement that an attack on one member is an attack on all-this could mean military intervention against Russia.

Assuming this unlikely event occurred Russia could retaliate by refusing to sell its oil and gas to Europe and instead sell it to China. This could have implications on energy security for Europe. Energy dependant countries like Germany would be adversely affected, unless they were able to source new supplies and the likely beneficiary here might be the Fraking industry.

Russia could also restrict grain sales to Europe, bearing in mind that the Ukraine is the bread basket of Europe. The reduction in grain supplies would result in a hike in world grain prices, food inflation for essential products like bread could spark off food riots in already severely economically depressed parts of southern Europe.

Indeed, commodities that do well during an economic and political turmoil would do better than other asset classes. 

In the worst case scenario Europe would be adversely affected, the EU may not survive a worse case scenario, resulting in the possible collapse of the euro.

In times of trouble there is normally a flight to the US dollar, gold and sterling.

Darren Winters