Germany is a nation that attempted to use military power to dominate Europe in two world wars. Following a crushing defeat and being split apart for over 40 years during the cold war it has once again emerged as one of the world's major powers, but it now takes a very different approach to exerting its influence. It has become the economic power house of Europe. It is bound with other nations in the European Union, but when it comes to matters of money and trade it holds the keys. Angela Merkel is now in her third term as chancellor. She is by just about any measure one of the world's most effective political leaders.
Vladamir Putin the Russian president has thrown down the gauntlet over Ukraine and appears to be doing things the old fashion way. He is using military muscle to threaten an adjacent country and has taken control of the Crimean peninsula. At home he has whipped up the forces of nationalism using the threat of an external and internal enemies to assure himself of a position of dominant political control.
The US is attempting to play its traditional role as leader of the free world and is making most of the noise in opposition to Russia's heavy handed moves. However a direct military confrontation with Russia seems to be a thoroughly impractical option. The most likely means of applying enough pressure on Putin to force him to back off is through economic sanctions. That is where Germany holds the Keys. Germany and China are Russia's largest trading partners.
Corporate interest in the west are generally opposed to substantive economic sanctions. That is true in the US and it is even more true in Germany where many businesses are heavily involved in two way trade with Russia. Merkel and Putin have historically been on generally good terms with each other. She speaks fluent Russian and he speaks fluent German. As the Ukrainian crisis has unfolded they have frequently been on the phone with each other. There are now suggestions that she has finally begun to despair of the power of persuasion.
Angela Merkel wasn’t in a hurry to inflict economic pain on Moscow. Cautious, pragmatic, and mindful of her country’s business ties to Russia, the German chancellor doggedly tried to defuse the Ukraine crisis through back-channel diplomacy and frequent phone calls with Russian President Vladimir Putin.Merkel of course has many competing interests to juggle. The EU economy remains in a shaky state and actions that have a major impact on business could create serious problems. However, as the situation in Ukraine continues to deteriorate, western leaders are becoming painfully aware that their responses to the situation have not had much in the way of effective impact. They are now forced to look at options that would inflict increasing levels of pain on their own situations.
Those efforts failed—and now Merkel looks ready to embrace the hit-’em-where-it-hurts sanctions that some U.S. politicians have been pushing for. In mid-April, Germany stopped granting licenses for arms exports to Russia and put on hold a plan for Airbus Group (AIR:FP) to sell $973 million worth of satellite technology to Moscow. Europe “shouldn’t be filled with fear” that sanctions could provoke retaliation, Merkel said in Berlin on April 5.
Behind the scenes, Berlin is making plans for the next phase of sanctions, says a high-ranking German official who declined to be identified in keeping with government policy. The measures under consideration would be wider-ranging and more harmful to Russian business than the limited asset freezes and visa bans already in place, this official says. A possible next step: targeted measures such as curbs on critical high-technology and military exports to Russia. In one of the most extreme scenarios being discussed in Europe and the U.S., Russia could be locked out of Swift, the Belgium-based international money-transfer system, as happened to Iran in 2012. That would cripple Russia’s banking system.
One critical question in this is just how much economic pressure would be required to force Putin to alter his course. Even without the imposition of substantive sanctions by governments, global financial markets have reacted to the crisis with an attack of capital flight from Russia.
While the annexation of Crimea has rocketed President Vladimir V. Putin’s approval rating to more than 80 percent, it has also contributed to a sobering downturn in Russia’s economy, which was in trouble even before the West imposed sanctions. With inflation rising, growth stagnating, the ruble and stock market plunging, and billions in capital fleeing the country for safety, the economy is teetering on the edge of recession, as the country’s minister of economic development acknowledged on Wednesday.
In recent weeks, international and Russian banks have slashed their growth projections for 2014, with the World Bank saying the economy could shrink by 1.8 percent if the West imposes more sanctions over Ukraine. By some accounts, more than $70 billion in capital has fled the country so far this year and the main stock market index fell by 10 percent in March — and a dizzying 3 percent just on Tuesday over fears of greater Russian involvement in Ukraine.The question is just how far will Putin's domestic power and control be able to extend. How much belt tightening will the public be willing to endure on a diet of nationalist passion? When Putin came to power he managed to get rid of the most powerful oligarchs who posed a threat to his power by using an assortment of strong arm tactics. Many of the present wealthy oligarchs are creatures of his creation. How much belt tightening will they be willing to endure? Nobody can answer those questions, but I think that it would be a mistake to assume that economics and politics would inevitably work the same way in Russia that it does in the west.
Meanwhile Putin is smart enough not to put all of his economic eggs in the basket of the west.
Russia is rolling out two major projects – a gas pipeline and a Crimea deep water port – with China, as EU countries and the US weigh options on economic sanctions.
Russia’s ambassador to the EU, Vladimir Chizhov, told EUobserver on Wednesday (16 April) that work on the “Power of Siberia” pipeline and the Chinese construction of a 25-metre-deep port in Crimea are proceeding as normal despite the Ukraine crisis.