Published in the Orange County Register on May 17, 2014. To access the original article, click here.
Russian President Vladimir Putin is engaging in a shadow dance – maskirovka – to prove to the world he is not behind the May 11 separatist referendum in eastern Ukraine.
He has called on his allies in Donetsk and Luhansk to cancel the vote, and he endorsed the May 25 presidential election as a “step in the right direction.” He also claims Russian troops have withdrawn from the border. Pro-Moscow separatists ignored the president’s words and the Pentagon has seen no evidence of a withdrawal.
The referendum will, no doubt, show voters supporting independence. This result will be a lie. The majority of people in the East, as shown from the first vote for independence in 1991 to a Pew Research Poll taken in April, have consistently supported remaining in a unified Ukraine.
The U.S. has threatened additional sanctions if the referendum is held. Canada and Japan have already joined the United States and the European Union in leveraging sanctions against Russia for its actions in Ukraine. These measures, targeting individuals and companies instead of the Russian population as a whole, appear to be a tepid response to recent events.
However, the threat of additional sanctions is having an effect on the international financial community.
The rating company Standard and Poor’s has downgraded Russian sovereign debt from BBB to BBB-, one step above junk status. As a result, Western banks are refusing to refinance Russian debt. Moscow has had to cancel some bond auctions for lack of buyers. The Russian 10-year bond yield stands at 9.7 percent, higher than Eurobond yields from such troubled countries as Greece and Portugal.
Citigroup has reduced its exposure by 9 percent, JP Morgan has reduced its exposure by 13 percent, and Bank of America has reduced its exposure by 22 percent. Capital flight from Russia in the first quarter of 2014 was over $63 billion, approximately the same amount as left the country in all of 2013.
The actions of the financial community by itself may not be enough. In his keynote address to the Baltic American Freedom League’s annual dinner on Saturday, U.S. Congressman Ed Royce, R-Fullerton, noted the way to make Moscow pay for its behavior is through energy policy. Royce noted that 52 percent of the government of Russia’s annual budget comes from hydrocarbon revenues. “If you want to hurt Moscow,” he said, “drive down the price of energy.”
Royce proposed exporting liquefied natural gas, also known as LNG, from the United States to Europe.
This would reduce Europe’s dependency on Russia for its gas and oil, increase the depressed prices in the United States, and decrease the price for gas in Europe. In addition to the congressman’s suggestions, there are a number of other steps the world community could take.
The European Union can stand fast in opposing the construction of the Gazprom-owned and operated South Stream pipeline. This energy conduit is designed to send 63 billion cubic meters per year of natural gas to Europe. The pipeline will not increase the total amount of Russian gas delivered, however, as its sole purpose is to bypass the pipeline through Ukraine. This will allow Russia to squeeze Ukraine whenever Moscow desires, while keeping Europe “hooked” on Russian energy.
At the same time, the EU can support the Southern Energy Corridor, designed to bring non-Russian natural gas to Europe. Kazakhstan could increase its flow of oil to Europe through the underutilized Baku-Tblisi-Ceyhan pipeline.
Poland, Hungary and Slovakia can reverse the flow of natural gas in the pipelines transiting those countries, to provide Ukraine with non-Russian gas at prices at least $100 per thousand cubic meters less than what Russia is charging that country.
Middle Eastern energy production should be maximized. This requires a number of political advances. If peace were restored in the Libyan Civil War, harmony brought to the warring factions of Iraq, approvals granted to the Kurdish regional government to export its product, Iranian production brought back into the international mix and the gas deposits of the Eastern Mediterranean exploited, the quantity of oil and gas would increase markedly and Moscow’s revenues would decline precipitously.
James J. Coyle, Ph.D., is the Director of Global Education at Chapman University, and the Executive Director of the Caspian Research Institute, an online think tank.