Clouds Continue to Darken Over Ukraine

Clouds Continue to Darken Over Ukraine

We’ll post on topics other than Russia (I promise!), but for now the Ukraine situation is evolving too quickly to ignore.  As one of the world’s preeminent developing economies, Russia is a key trading partner with the US, and the impact of new sanctions could be a critical blow to US businesses.

Secretary of State Kerry met with Russia’s Foreign Minister, Sergey Lavrov, in Paris on March 30 to see if the two sides could reach a diplomatic solution.  The outlook seemed promising after direct phone conversations between Putin and Obama, but the Kerry-Lavrov meeting ended in a stalemate.  According to a press briefing from the State Department, the US and Russia agreed to disagree on how to resolve the Ukraine situation.  Un-annexing Crimea is off the table now, but the real question is whether Russia’s troop build-up on Ukraine’s border is just muscle-flexing or preparation for a broader campaign.  As Kerry pointed out, that build-up stands in stark contrast to Putin’s declaration that he does not intend to invade other regions of the Ukraine.

Gen. Philip Breedlove, NATO’s supreme allied commander in Europe, estimated that Russia has approximately 40,000 troops and supporting aircraft and equipment stationed within striking distance of the Ukraine.  Although Russia made claims last week that some of those troops were being withdrawn, NATO says there is no evidence that has occurred.  In response, NATO is making preparations for potential military deterrence in Eastern Europe, and the US is planning to send 175 troops to Romania to beef up the 300-strong force already stationed there.

In addition to the military posturing, Russia is beginning to punish the Ukraine economically.  Russia’s state-owned energy company, Gazprom, raised its natural gas prices to the Ukraine significantly last week.  This may have come partially in response to the association agreement Ukraine entered into with the EU in late March, under which the Ukraine and the EU will develop closer political and economic ties.  The form of the association agreement is nearly identical to the one dismissed by Ukraine’s former president, Viktor Yanukovich, who rejected the deal under pressure from Russia.  That move precipitated the Ukrainian protests and led to Yanukovich’s eventual ouster.

The bad news for US companies is that the US sanctions program on Russia doesn’t appear to be going anywhere any time soon.  The threat of increased sanctions is going to remain high as long as Russian troops remain close to the Ukrainian border and Russia does not take a more conciliatory tone.  Welcome back to the cold war!  US companies should prepare for the possibility of an Iran-style embargo on Russia, but let’s hope Russia won’t sacrifice its economic interests with the West in the name of recapturing the old Eastern Bloc.

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