Month: March 2014

With a March 16th date set for Crimea's referendum (to confirm that the region, which has an ethnic Russian majority, is a part of Russia) and a few short days after Ukraine's Prime Minister Yatsenyuk is due to meet President Obama in the White House, Reuters reports that The United States will not recognize the annexation of Crimea by Russia if residents of the region vote to leave Ukraine. Obama has said a referendum on Crimea would violate international law and the Ukrainian constitution… but this raise 3 awkward (and apparently hypocritical) questions on the right to self-determination.

 

Reuters reports that the US will not recognize Crimea's annexation (or implicitly their right to self-determination),

Tony Blinken, U.S. President Barack Obama's deputy national security adviser, said on CNN's "State of the Union" program that Russia would come under increased international pressure as a result of the referendum in Crimea.

 

"First, if there is an annexation of Crimea, a referendum that moves Crimea from Ukraine to Russia, we won't recognize it, nor will most of the world," Blinken said.

 

"Second, the pressure that we've already exerted in coordination with our partners and allies will go up. The president made it very clear in announcing our sanctions, as did the Europeans the other day, that this is the first step and we've put in place a very flexible and very tough mechanism to increase the pressure, to increase the sanctions."

 

Obama has said a referendum on Crimea would violate international law and the Ukrainian constitution.

Which as Yanis Varoufakis writes, raises three awkward questions for Western liberals…

Let us accept (as I do) the principle that national minorities have the right to self-determination within lopsided multi-ethnic states; e.g. Croats and Kosovars seceding from Yugoslavia, Scots from the UK, Georgians from the Soviet Union etc.

Awkward question no. 1: On what principle can we deny, once Croatia, Kosovo, Scotland and Georgia have come into being, the right of Krajina Serbs, of Mitrovica Serbs, of Shetland Islanders and of Abkhazians to carve out, if they so wish, their own nation-states within the newly independent nation-states in the areas where they constitute a clear majority?

Awkward question no. 2: On what principle does a western liberal deny the right of Chechens to independence from Russia, but is prepared to defend to the hilt the Georgians’ or the Ukrainians’ right to self-determination?

Awkward question no. 3: On what principle is it justifiable that the West acquiesced to the raising to the ground of Grozny (Chechnya’s capital), not to mention the tens of thousands of civilian deaths, but responded fiercely, threatened with global sanctions, and raised the spectre of a major Cold War-like confrontation over the (so far) bloodless deployment of undercover Russian troops in Crimea?

The above three questions are being asked not because I want to challenge the notion that Mr Putin is a dangerous despot. I have no doubt that he is. Indeed, I wear as a badge of honour the fact that I was in a minority of one in the Faculty Board meeting of the University of Athens in 2003, where I voted against the award of an honourary doctoral degree to Mr Putin by the University of Athens (denying the University the opportunity to state that the award had been unanimous, and thus incurring the wrath of most colleagues who had been ‘requested’ politely by the Greek Ministry of Foreign Affairs to honour Mr Putin during his visit to Athens).

My three awkward questions have two aims: To remind readers of the West’s unprincipled attitude toward ‘other’ people’s struggles and tragedies. And to explain, in part, why such unprincipled behavior by the proponents of democratic principles ends up denigrating not only these very principles but greatly reinforcing the power and influence of the Putins of this world as well.

Europe and the Ukraine

Ukrainians fought pitched battles against the security forces in Kiev’s main square to protest against the former President Yanukovic’s decision to back out of a deal that would seal the country’s partnership with the European Union. Why? Are they blind to the incongruities of the European Union?

No, they are not. However, Ukrainians are facing a different type of problem compared to those we Europeans do. Whatever bone we have to pick with Brussels, with the ECB etc. (and we have many!), the people of Kiev had other priorities. E.g. how to rid themselves of security forces that felt at liberty to torture and to kill; how to travel freely; how to live in a country where courts were not completely run by the same mafia that run the state apparatus. To them, the fact that democracy is on the wane in the Eurozone and Europe’s principles are becoming increasingly hollow, matters little: The EU, however fast it may be descending into democratic illegitimacy, still looks like Heaven through many Ukrainian eyes.

Having said that, the greatest tragedy for Ukrainians is that their highest hopes are resting on weak shoulders: the European Union’s!

‘Europe’s Foreign Policy’ are three words that only need to be stated to cause hilarity. For there is no such thing, in truth. Even the Franco-German axis has been shuttered by Libya, let alone the ambitious idea of a common foreign policy for a United Europe that can act as a bulwark helpful to the Ukraine.

While Libya was of minimal importance to Europe’s security, even if of crucial importance to the Libyans, Ukraine is crucial and Europe ought to tread very carefully. What worries me the most is that the seriousness of the Ukrainian crisis is in inverse proportion to Europe’s competence in the field of foreign policy. Brussels may be keen to expand its ‘authority’ Eastward but it is treading into dangerous territory, ill equipped to deal with the repercussions.

The United States, the IMF, Germany and the Ukraine

The Ukraine is, and was always going to be, the battleground between Russia’s industrial neo-feudalism, the US State Department’s ambitions, and Germany’s neo-Lebensraum policies. Various ‘Eurasianists’ see the crisis in Kiev as a great opportunity to promote a program of full confrontation with Russia, one that is reminiscent of Z. Brzezinski’s 1970s anti-Soviet strategy. Importantly, they also see the Ukraine as an excellent excuse to torpedo America’s role in normalising relations with Iran and minimising the human cost in Syria. At the same time, the IMF cannot wait to enter Russia’s underbelly with a view to imposing another ‘stabilization-and-structural-adjustment program’ that will bring that whole part of the former Soviet Union under its purview. As for Germany, it has its own agenda which pulls its in two different directions at once: securing as much of the former Soviet Union as part of its neo-Lebensraum strategy of expanding its market/industrial space Eastwards; while, at the same time, preserving its privileged access to gas supplies from Gazprom.

As for the White House itself, there is little doubt that both President Obama and Secretary of State Kerry understand the limits of Western power and the danger that too much of a hawkish reaction to the events in the Ukraine will undermine their efforts vis-à-vis Syria and Iran, at a time when Iraq is being increasingly destabilised.

 

The bottom line, unfortunately, it would appear therefore that this referendum may well be the tipping point in this crisis. With a second city in Crimea revolting today, it would appear a foregone conclusion that the referendum will come down in favor of annexation which will pit Russia (forced to support its countrymen who it sees as having voted legally for self-determination) against US (cornered by comments on the legitimacy of the referendum and likely promises to Yatsnyuk) – we suspect March 16th will be the risk-off moment.

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Remember: in every socialist utopia, at the end of the day, everyone is equal… in their poverty.

Venezuelans queue long hours at markets to buy “whatever they have” http://t.co/q5A1U4NzLg by @LThometAFP http://ift.tt/Pgm1dk

— Agence France-Presse (@AFP) March 8, 2014

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While the US may be rejoicing its daily stock market all time highs day after day, it may come as a surprise to many that global equity capitalization has hardly performed as impressively compared to its previous records set in mid-2007. In fact, between the last bubble peak, and mid-2013, there has been a $3.86 trillion decline in the value of equities to $53.8 trillion over this six year time period, according to data compiled by Bloomberg. Alas, in a world in which there is no longer even hope for growth without massive debt expansion, there is a cost to keeping global equities stable (and US stocks at record highs): that cost is $30 trillion, or nearly double the GDP of the United States, which is by how much global debt has risen over the same period. Specifically, total global debt has exploded by 40% in just 6 short years from  2007 to 2013, from “only” $70 trillion to over $100 trillion as of mid-2013, according to the BIS’ just-released quarterly review.

It should come as no surprise to anyone by now, but the only reason why global stocks haven’t plummeted since the Lehman collapse is simple: governments have become the final backstop for onboarding risk, with a Central Bank stamp of approval – in other words, the very framework of the fiat system is at stake should global equity levels collapse. The BIS admits as much: “Given the significant expansion in government spending in recent years, governments (including central, state and local governments) have been the largest debt issuers,” according to Branimir Gruic, an analyst, and Andreas Schrimpf, an economist at the BIS.

It should also come as no surprise that courtesy of ZIRP and monetization of debt by every central bank, debt has itself become money regardless of duration or maturity (although recent taper tantrums have shown what will happen once rates start rising across the curve again), explaining the mindblowing tsunami of new debt issuance, which will certainly never be repaid, and whose rolling will become impossible once interest rates rise. But of course, under central planning that is not allowed. As Bloomberg reminds us, marketable U.S. government debt outstanding has surged to a record $12 trillion, up from $4.5 trillion at the end of 2007,  according to U.S. Treasury data compiled by Bloomberg. Corporate bond sales globally jumped during the period, with issuance totaling more than $21 trillion, Bloomberg data show.

And as we won’t tire of pointing out, China’s credit expansion over this period is easily the most important, and overlooked one. Which is why with China out of the epic debt issuance picture, and with the Fed tapering, all bets are slowly coming off.

 

Bloomberg also comments, humorously, as follows: “concerned that high debt loads would cause international investors to avoid their markets, many nations resorted to austerity measures of reduced spending and increased taxes, reining in their economies in the process as they tried to restore the fiscal order they abandoned to fight the worldwide recession.” Of course, once gross government corruption and incompetence made all attempts at austerity futile, and with even the austere nations’ debt levels continuing to breach record highs confirming there was never any actual austerity to begin with, the push to pretend to reign debt in has finally faded, and the entire world is once again engaged – at breakneck speed – in doing what caused the great financial crisis in the first place: the issuance of record amounts of unsustainable debt.

All of the above is known. What may not be known is just who is issuing, and respectively, purchasing, this global debt-funded spending spree, especially in a world in which one’s debt is another’s asset. Here is the BIS’s answer to that question:

Cross-border investments in global debt markets since the crisis

Branimir Grui? and Andreas Schrimpf

Global debt markets have grown to an estimated $100 trillion (in amounts outstanding) in mid-2013 (Graph C, left-hand panel), up from $70 trillion in mid-2007. Growth has been uneven across the main market segments. Active issuance by governments and non-financial corporations has lifted the share of domestically issued bonds, whereas more restrained activity by financial institutions has held back international issuance (Graph C, left-hand panel).

Not surprisingly, given the significant expansion in government spending in recent years, governments (including central, state and local governments) have been the largest debt issuers (Graph C, left-hand panel). They mostly issue debt in domestic markets, where amounts outstanding reached $43 trillion in June 2013, about 80% higher than in mid-2007 (as indicated by the yellow area in Graph C, left-hand panel). Debt issuance by non-financial corporates has grown at a similar rate (albeit from a lower base). As with governments, non-financial corporations primarily issue domestically. As a result, amounts outstanding of non-financial corporate debt in domestic markets surpassed $10 trillion in mid-2013 (blue area in Graph C, left-hand panel). The substitution of traditional bank loans with bond financing may have played a role, as did investors’ appetite for assets offering a pickup to the ultra-low yields in major sovereign bond markets.

Financial sector deleveraging in the aftermath of the financial crisis has been a primary reason for the sluggish growth of international compared to domestic debt markets. Financials (mostly banks and non-bank financial corporations) have traditionally been the most significant issuers in international debt markets (grey area in Graph C, left-hand panel). That said, the amount of debt placed by financials in the international market has grown by merely 19% since mid-2007, and the outstanding amounts in domestic markets have even edged down by 5% since end-2007.

Who are the investors that have absorbed the vast amount of newly issued debt? Has the investor base been mostly domestic or have cross-border investments grown at a similar pace to global debt markets? To provide a perspective, we combine data from the BIS securities statistics with those of the IMF Coordinated Portfolio Investment Survey (CPIS). The results of the CPIS suggest that non-resident investors held around $27 trillion of global debt securities, either as reserve assets or in the form of portfolio investments (Graph C, centre panel). Investments in debt securities by non-residents thus accounted for roughly one quarter of the stock of global debt securities, with domestic investors accounting for the remaining 75%.

The global financial crisis has left a dent in cross-border portfolio investments in global debt securities. The share of debt securities held by cross-border investors either as reserve assets or via portfolio investments (as a percentage of total global debt securities markets) fell from around 29% in early 2007 to 26% in late 2012. This reversed the trend in the pre-crisis period, when it had risen by 8 percentage points from 2001 to a peak in 2007. It suggests that the process of international financial integration may have gone partly into reverse since the onset of the crisis, which is consistent with other recent findings in the literature.

This could be temporary, though. The latest IMF-CPIS data indicate that cross-border investments in debt securities recovered slightly in the second half of  2012, the most recent period for which data are available.

The contraction in the share of cross-border holdings differed across countries and regions (Graph C, right-hand panel). Cross-border holdings of debt issued by euro area residents stood at 47% of total outstanding amounts in late 2012, 10 percentage points lower than at the peak in 2006. A similar trend can be observed for the United Kingdom. This suggests that the majority of new debt issued by euro area and UK residents has been absorbed by domestic investors. Newly issued US debt securities, by contrast, were increasingly held by cross-border investors (Graph C, right-hand panel). The same is true for debt securities issued by borrowers from emerging market economies. The share of emerging market debt securities held by cross-border investors picked up to 12% in 2012, roughly twice as high as in 2008.

* * *

Source: BIS

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Despite clear evidence otherwise, presented here extensively yesterday, this morning Ukraine has denied that is has “plans to send armed forces to Crimea” and instead Ukrainian troops are performing “training exercises” in base, Interfax news agency quoted Acting Defence Minister Ihor Tenyukh as saying on Sunday. Responding to media speculation about Ukrainian military movements after Russian forces took control of Crimea, Tenyukh said the only troop movements that might be seen would be from one base to another to take part in the training exercises. “No movements, no departures for Crimea by the armed forces are foreseen. They are doing their routine work which the armed have always had,” he said. Right, and Russia just happened to launch an ICBM as a “drill” in the middle of the greatest Cold War re-escalation in 30 years.

Adding somewhat to the confusion was the statement by Pavlo Shysholin, head of country’s border guard service tells reporters in Kiev, who said that so far Ukrainian border guards denied entry to 3,500 people and that Ukraine border troops remain in Crimea, would leave only if “forced” but more importanly:

• UKRAINE BORDER TROOPS BOOST FORCES ON EAST BORDER: SHYSHOLIN

So there is an escalation in the mobilization, only not toward Crimea, which the Russians already control entirely, but the critical East, which as everyone knows, is the next target for Putin annexation once the Crimean referendum passes in one week.

Confirming just this were just released photos from another major city in east Ukraine, this time Lugansk, where pro-Russian protesters just stormed and took over the city administration building. Their demand: to be part of the March 16 referendum to become part of Russia.

 

A clip of the latest peaceful pro-Russian takeover via LifeNews:

 

Lugansk’s location in context:

 

And so one by one, the cities in east Ukraine are slipping away to Russia, even as Obama continues his Key Largo vacation and makes the occasional phone call.

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