Tuesday, October 21, 2014

Why the West will surrender in its new cold war with Russia » The Spectator

After months of escalating tensions over Ukraine and talk of a new cold war, Russia and the West could soon reach a surprising rapprochement. The eurozone economy is suffering badly and sanctions against Russia are partly to blame. Winter is also upon us, and that reminds every-one Vladimir Putin still holds the cards when it comes to supplying gas.

The clincher, though, is that Ukraine is heading towards financial meltdown. Unless an extremely large bailout is delivered soon, there will be a default, sending shockwaves through the global economy. That’s a risk nobody wants to take — least of all Washington, London or Berlin.

Sanctions against Russia were always going to hit western Europe hard. The eurozone did 12 times as much trade with Russia as the United States did last year — that’s one reason Washington’s attitude towards corralling Russia’s economy has been somewhat more gung-ho.

Most big European economies, particularly Germany, only explicitly backed western sanctions after flight MH17 was shot down over Ukrainian airspace in July, killing 298. After that tragedy, which was instantly blamed on Moscow, it was politically impossible to suggest that sanctions might be counterproductive. The result was the biggest clampdown on Russian trade since the Soviet era — mainly targeting energy, defence and financial services companies — and the deterioration of East-West relations to their lowest ebb since the Cold War.

The western economy that’s suffered most, by far, is the largest one in the eurozone. Germany’s manufacturing thoroughbreds have sunk tens of billions of euros into Russian production facilities in recent years. Volkswagen has several full-cycle Russian plants and is the middle-class brand of choice in what will soon be Europe’s largest car market. Siemens is central to the upgrade of Russia’s vast rail network and the specialised manufacturer Liebherr has a big presence too. Numerous ‘Mittelstand’ firms — those are the medium-sized enterprises that account for over half the German economy — have also built lucrative trading links since Russia opened up 20 years ago, selling everything from plaster-board to machine tools. Over 6,000 such of them operate across the country, with 350,000 German jobs directly dependent on Russian trade. And they’re feeling the pinch.

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