Europe turns blue and gold for Ukraine

| March 7, 2022

To my elderly ears, the wails of air raid warning sirens seemed eerily familiar. They reminded me of my childhood in South London as my father picked me up and carried me down into the dank, concrete underground bunker that sheltered us from Hitler’s bombs. Emerging one early morning, we found our home badly damaged, the house next door demolished, and the family there all killed. That memory, and the long painful years that followed, underpin my empathy with the Ukrainian people now cowering in basements or fleeing Putin’s bombardment.

Much has changed over the past week, and we don’t know how Putin’s unprovoked invasion of Ukraine will end. At worst, in the words of Russia’s foreign minister Sergei Lavrov, a third world war would be “nuclear and destructive.” If Russia occupies Ukraine, and instals a puppet government or annexes the country, which is Putin’s ambition, there will be prolonged resistance and sanctions on Russia, weakening its already diminished economy. In the longer term, this will likely lead to challenges to Putin, but perhaps not before Russians (and Europeans) have paid a hefty price in living standards. That these are possibilities which could have been avoided is deeply depressing.

The European Union was built on the foundations of the European Coal & Steel Community out of the ashes of World War II, with the primary aim of ending the bloodshed that tore the continent apart in the first half of the 20th century. After the collapse of the Soviet Union, the EU has steadily expanded east. It now has 27 members, forming the world’s largest single market. In the queue to join is Ukraine.

The EU, for years slow to counter Russian threats and appearing to give president Putin the benefit of the doubt, went into overdrive last week. It managed to get all 27 members to sign up to several packages of EU, US, and G7 sanctions on Russia, limiting Moscow’s ability to transact and trade in foreign currencies, removing a number of Russian banks from the Swift international payments network, and freezing transactions with Russia’s central bank.

As the Institute for International Finance put it, “We expect (sanctions) to have a dramatic effect on Russia’s financial system as well as the country as a whole.” In fact, Russian families are already feeling the pain as the rouble has dropped like a stone, providing an immediate hike in the cost of exports, while interest rates have doubled to above 20 percent.

Of course, EU countries will themselves be harmed by the sanctions, much more so than the US or Australia. In 2021, Russia was the EU’s fourth-largest export market, with a big trade surplus in machinery, other engineering products, and motor vehicles. Germany’s big three automakers, BMW, Mercedes Benz, and Volkswagen, will definitely feel the pinch.

On the other side of the balance sheet, energy forms a big chunk of European imports. With oil prices rising to 2014 levels and natural gas at record highs, Europe is likely to be paying Russia more in dollar terms than in any recent year. Again, in trade, the US will not be affected – as it is now an energy exporter.

Most European countries, except France, are heavily reliant on Russian gas for power generation and home heating. In recent months, they have been taking emergency measures to reduce that dependency. The gas comes from Siberia through two pipeline systems, and there are fears, particularly in Germany, that because of the EU sanctions on Gazprom, the Russian state-owned exporter, Putin may order the pipeline to be turned off.

That seems unlikely for two reasons. First, Russia values its reputation as a reliable energy provider, and does not appear to have used this weapon before.  More significantly, Europe – and particularly Germany – is Russia’s biggest customer for gas exports, by a long chalk. Russia is 90 percent dependent on Europe as a purchaser of its gas. It is arguable that the Russian gas industry might not be viable without Germany as attempts by Gazprom to sign lucrative contracts with China and other Asian countries have met with little success. With the largest oil and gas reserves in the world, Russian now needs the income stream from energy exports more than ever.

The other big move this week was Germany’s decision to increase its contribution to NATO to above two percent of GDP, a move long requested by the US but resisted by former chancellor Angela Merkel. That such a move should be announced by her Social Democrat successor, Olaf Scholz, supported by his coalition partner, the Greens, was a big a surprise.

Equally surprising was Scholz’s announcement to the Bundestag that €100 million would be added to the 2022 budget for military investment, and new generation F35 jets would be ordered from Lockheed Martin if the US company agreed a deal to have them built in Germany or France.

The German decision provides the biggest boost to NATO in years and strengthens the alliance in a way not foreseen or thought possible just two months ago. But it has also raised the stakes between the West and Putin, increasing fears of escalation into World War III. The possibility of a nuclear confrontation was raised by the Russian foreign minister last Tuesday at a United Nations meeting in Geneva, which he addressed via video link.

The world looks on horrified as analysts consider the implications of Putin’s statement that there will be consequences for those who provide military support to Ukraine. In fact, the Russian leader quoted Liz Truss, the United Kingdom foreign secretary, who publicly suggested freelance British fighters (mercenaries) might want to join the battle in Ukraine, only to be slapped down by her own department, which put out a statement warning British people not to make the journey to Ukraine.

Putin, of course, has a vast nuclear arsenal at his disposal. But would he really use it?  One who believes that he would is the highly-respected Fiona Hill of the Brookings Institute. She has studied Putin for decades, worked in both Republican and Democratic administrations, and has a reputation for truth-telling, earned when she testified at the Donald Trump impeachment hearings. In an interview with Linda Reynolds, editor of Politico US, Hill says Putin is acting emotionally, and will not hesitate to use nuclear weapons.

Martin Wolf, writing for the Financial Times, fears the West’s weakness in confronting Putin will not come from Europe, but possibly the United States. He says “Europe needs to recognise that the United States will not be a reliable ally so long as Donald Trump, who views Putin as a genius, commands the Republican party. Britain, for its part, must recognise it will always be a European power.” The latter, of course, will require Boris Johnson to give up his fantasy of a Global Britain, and pivot back from the Pacific. But that’s for a later debate.

This article was published by the Australian Institute for International Affairs.