April 28, 2014

The threat from the East

Posted in Economic History · 46 comments ·

This week’s column comes to you from a very warm and sunny Istanbul, where I am working, for my sins. This is one of the world’s great cities and everywhere there is the evidence that this place has been at the centre of the world for close to 2,000 years, stretching down the ages from the Roman Eastern Empire to the centre of the Ottoman Empire. The Ottomans were eventually deposed and replaced by Ataturk and his extraordinary secular vision in the early 20th century, who fashioned the new Republic out of the twin ingredients of science and nationalism. Now this secular republic is under threat by the renewed religious fever of Islamists in the government of Tayyip Erdogan.

Over the years the city has been home to Jews, Greeks, Slavs, Armenians and Georgians, as well as the Muslim Turk population. It has been one of the three great Muslim Caliphates, the centre of the flourishing sophistication of the Christian Orthodox Church at a time when Rome was home to barbarians, and it was also the site of Judaism’s finest synagogues.

You can see the imprint of all these great tribes in the architecture, the places of worship and the markets. You can feel the 19th century European aspirations of the Ottoman merchant class in the wide, French-designed boulevards, but its narrow lanes and higgledy-piggledly lanes tell you this isn’t Paris, London or Berlin. It smells of the Orient, yet large parts look like the West. This is the echo of all who have passed through, set up home and then moved on again. Most of the Greeks, Jews and Armenians left in the 20th century.

However, one constant has been the Bosphorus Strait, linking the Black Sea and the Mediterranean. For thousands of years this was the single most important trading route in the world and even today, it still feels like this. I am looking out over the strait watching massive Russian cargo-ships relentlessly ploughing through it, heading from the Black Sea to the Mediterranean. This is where East meets West; and this is the place which will have to be shut if the West imposes sanctions on Russia. The fact that the West will have to get Turkey to do its bidding by closing off the Bosphorus shows how strategic this narrow channel still is geo-politically.

The congestion on the strait is amazing to see. Just outside its mouth, close to the Dardanelles, where thousands of Irish troops died almost 100 years ago next year, there is an orderly queue of ships waiting to get through.

Being here, it is unsettling to think that the Irish were the first troops who landed in Gallipoli. To put the futility and slaughter in context, the Royal Dublin Fusiliers and the Royal Munster Fusiliers were the first to attack the Turks from the SS River Clyde. Of the first 200 men to leave the ship, 149 were killed and 30 wounded immediately.

This was always a strategic spot.

From that point in Gallipoli to the far side in the Black Sea, there is a constant flow of enormous, laden-down hulls carving slowly through the waters.

Being here in Istanbul, allows you to appreciate the proximity of the eastern part of Europe and the West. All sorts of Russian, Ukrainian, Crimean and of course, Romanian and Bulgarian cargo ships use the Black Sea. And coming the other way are all sorts of manufactured products from southern Europe and North Africa.

Russia’s major export markets are the Netherlands, which buys $78 billion worth of Russian produce – mainly energy. This is followed by China, with Russian energy imports of $35 billion; Germany $35 billion; Italy $32 billion; and Turkey $27 billion. These figures show you how dependent the rest of the world is on Russian energy. I am assuming the Dutch figure is an overstatement and marks energy exports logged in Holland, but destined for other markets.

When you look at things a bit closer, it reveals just how dependent Germany is on Russia for energy. An enormous 24 per cent of all Germany’s energy needs are met by Russia, compared to just six per cent of France’s needs.

In terms of who Russia imports stuff from, not surprisingly, China and Germany export most to Russia. Russia imports $50 billion of goods from China and $37 billion from Germany. Therefore, sanctions against Russia will hurt Germany severely. In fact cessation of trade with Russia would push the world into recession and Europe’s fledgling and fitful recovery would be quenched overnight.

But could it happen? The answer must be yes. Ukraine is now getting very nasty. Russia may feel it necessary to send in troops to protect’ its people in eastern Ukraine, and it looks as if the Ukrainian government is upping the ante. It’s a game of chess now. While the Ukrainians take a few pawns, it remains to be seen whether the Russians decide to use their Bishop, Castle or Knight.

If so, we are in for a game that could end with war in Ukraine and recession in the EU. Up to now, the Russians were content to out-source nationalism to the pro-Russian characters in eastern Ukraine. This is very like what Serbia did in Croatia and Bosnia in 1992. It’s a form of arms-length trouble making. But if the Ukrainians move to eliminate these self-styled secessionists, Russia’s bluff may be called.

This is a significant risk now and, because the Europeans signaled to the Ukrainians last month that we aren’t really prepared to help them, it’s hard to see why the Ukrainians would be minded to worry about our economic concerns now.

German chancellor Angela Merkel, revealing her own personal experience as an East German brought up under Soviet occupation, appears to be more enthusiastic about punishing Putin than other European leaders. If she carries this through, she will be acting not in Germany’s self-interest but in the interest of international law.

Equally, it is hard to see Putin backing down from provocation in Ukraine. Having sub-contracted nationalism out to pro-Russian militia in eastern Ukraine, the Russian president could find himself in the bizarre position that he has to move to protect the creatures he created. If the secessionist tail does end up wagging the Russian dog, then sanctions may well be on the cards. The first place this trade dislocation will be felt is here in Istanbul. However, as with so many other historical episodes when Istanbul has been at the epicentre of the crisis, the ripples will be felt all over Europe.

David McWilliams writes daily on international economics and finance at www.globalmacro360.com

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  1. I have been on that bridge linking the two continents and it is so wide and high above sea water with lots of International Shipping and local traffic and in a part of it it has local fishermen with their lines dropped . There is an amazing buzz there and everyone is so busy .

    Sarsfield Bridge/ Limerick is the biggest Irish city local pedestrian bridge in Ireland over the Shannon fresh water and with local fishermen .

    There are similar bridges in Cairo founded by the Turks but very little traffic as compared to Istanbul .

    There are still lots of successful Jews in ~Istanbul and many live on Princes Island an amazing place to walk around .

    I guess the next political strategy there will embrace belly dancing that will distract the Russians .

  2. stevedublin

    What effect would the economic disruption caused by possible future sanctions on Russia have on Ireland?

    • cianireland

      If Europe enters recession our trading partners will suffer, clearly not good. However, it is entirely possible that it could lead to a form of European Quantitative Easing, which could be locally good for Ireland.

      Negative interest rates have been mentioned and there has been talk of the ECB considering buying bundles of Small and Medium Sized Enterprise business loans from banks to stimulate grass roots job creation.

      Recession in Germany/core of Europe may therefore lead to helpful stimulus in Ireland.

      • Europe has had unannounced QE via the FED using money issued to European branches of US banks that are then passed on to European banks. This circumvented the ECB restrictions and thus enabled the ECB to issue statements they were not expanding the money supply. Dragi is on record as saying he will do anything to protect the EURO. Watch what happens in the next few months as the ECB goes into overdrive as Russia imposes retributive sanctions on the west.

  3. michaelcoughlan

    “Of the first 200 men to leave the ship”

    Boys David, Boys.

    There were so few of the Dublin and Munster Fusiliers left that they banded into one group called the Dubsters.

    There is an excellent parallel here in that small nations have always been the first to cough up the troops for slaughtering at the front when dominated by a bigger neighbor.

    Now we have a situation here in Ireland where we are being asked to make sacrifices in Ireland to protect European banks and THEIR follies with a resulting catastrophic loss of talent to emigration and a suicide rate at 500pa or 10per week.

    People ARE Dying again.

    Shame on all of us.

    • Deco

      War ? What is it good for ? Absolutely nothing.

      The problem is that the West is pushing matters and is trying to make a military conflict problem.

  4. StephenKenny

    It’s only fair to remind everyone that the Ukrainian ‘government’ is unelected, very far from being clearly popular, and was put into power by by a coup. Prior to the coup the Ukrainian was broadly pro-Russian, and after the coup it is pro-Western.

  5. [...] full article at source: http://www.davidmcwilliams.ie/2014/04/28/the-threat-from-the-east [...]

  6. Adelaide

    Crisis? What Crisis?

    IMF’s latest Irish review warns that Ireland is facing “an acute
    unemployment crisis” with a broad jobless rate at 24%.

    Constantin Gurdgiev in yesterday’s Sunday Times estimates the broad jobless rate at 32%.

    We already have the highest long term unemployment rate in Europe. Both assert that the government have already admitted defeat on the jobs front with its narrow focus on the high-skilled export-driven economy. Most of the 32% need to be up-skilled and retrained, and what do they say about Ireland’s retraining structures, the worst in Europe, abysmal. And to hammer home the last nail, they project the quantity of new people entering the workforce will outnumber the quantity of new jobs for the next decade. So our staggering rate of joblessness will actually increase for the foreseeable future and become a permanent feature as projections stand.

    You don’t have to be Nostradamus to predict how this all ends.

    ps Reminds me of an academic paper I read in the early 90′s “The Future Without Work”, it charted the decline of employment due to automation up to 2050 and so far its dire predictions have been near the mark. 2000 10%. 2010 15%. 2020 20%. 2040 50%. 2050 80%.
    Those figures have bizarrely always stuck in my mind.

    • michaelcoughlan

      Hi Adelaide,

      Gurdgiev is probably right. You know what never gets mentioned though is that of the 68% of the workforce employed how many have public service or civil service jobs? I’m not anti the public sector I’m just wondering what percentage of the workforce is in private wealth creating employment propping up the whole house of cards or are we like cuba in that the politicians don’t need an internal economy since we are surviving on transfers from Europe.

      The other thing I’m really fuc%ed off about is that if you are registered as self employed you are not counted at all even if you income is ZERO.



      • Adelaide

        The same question occurred to me.
        I can’t remember if it was Milton Friedman but I remember a statistical method called Core Employment that leaves out those on the public pay-roll.
        In Ireland 300,000 work in the public sector.
        400,000 are officially recognised as jobseekers which they say is 12.5% of the workforce.
        So therefore 300,000 public workers is 9.5% of the workforce.
        So a broad jobless rate of 32% plus 9.5% public workers =41.5%, that leaves a Core Employment rate of 58.5% or rather a Core Unemployment rate of 41.5%.

        That’s worth repeating.
        Ireland has a Core Unemployment rate of 41.5%.

        • Adelaide

          Hi Michael, if my memory serves me right, Core Employment was called Positive Wealth Generation as opposed to Negative Wealth.

      • DB4545

        I take your point with some public service jobs but you’re painting with a very broad brush. The revenue service(I don’t work for them) is regarded as very efficient by International standards. The passport office is reputed to have 500 staff compared to 80 in Denmark (similar demographics but a different diaspora). Walk into any A&E and tell me if they’re overstaffed. There are armies of “admin” and “management” staff throughout the public service when IT and modern telecoms systems should have made most “admin” redundant.
        The gulf between the public and private sector probably needs to be examined in some detail. Public Sector workers pay taxes(for schools, hospitals and other public services),rent and(hopefully) buy a house, buy food, buy clothes, buy cars,buy insurance etc. In essence we contribute to the economy too. I’m a taxpayer too and I want an efficient public sector. Public sector salaries contribute to the economy. It might be time to assess what percentage of your customer base are public servants or are dependant on public servants for their income?

        • Adelaide

          I’m not anti-public sector, in my experience public workers on the whole work harder than those in the private sector, the waste in the private sector is staggering, how some private companies remain profitable is a mystery to me, but anyway Core Employment deals with those who generate their own income, yes it is superficial, but if correct would suggest that 2 in 5 Irish people do not generate their own income in a strictly economic black+white sense. If so, what would this mean for future tax revenue and the allocation of it to maintain our civic society, ie pension, welfare, public services etc? It can’t, unless the government borrow indefinitely, which it can’t. The situation is unsustainable. “Without tax you have no civilisation” Muriel Siebert

          • Tyler

            “Without GROWTH ,we don’t have a Future” Tyler

            … ” decline of employment due to automation…”


            God Bless us and Save us

            says Michael John Davis,

            They’re tryin’to pershuade us

            That herrin’,are fish.

            Sorry Lady Adelaide, but something smells ‘fishy’ in your post script [ and it ain’t salmon ]]

            You think,that is to say,you have a ‘notion’,an overall general impression maybe,that automation ,results in a decline of employment?

            Indoctrination,that hi-technology is ba-aa-aa-d,industrialisation is ba-aa-aa-d,notions ‘above your station’ of having as mankind’s focus – a Hamiltonian approach to our physical economies – is baa-aaa-aaa-aaa-aaaad?

            …..just more poisonous sophistries by empire,in this case, brainwashing us regarding the mar dhea DANGERS of industrialisation?

            What a shaaam !

          • Tyler

            With a Future-orientated mind,Hi-tech infrastructural projects,on a massive scale,is undeniably the way forward for mankind – in order to make the necessary leaps in orders of magnitude and Free ourselves from serfdom.

            Yes,liberate us and that’s exactly what empire do NOT want and will do everything in it’s bestial power in preventing such awareness of Truth

            C’mon everyone, policies of de-industrialisation is straight-jacket and handcuffs of the mind department,right?!

            At all costs,the .001% want to maintain this status quo,to keep some [totally unscientific] notional ‘balance’,the norm, the same ol’ same ol’….

            All an agenda to keep the serfs in thier snare,trapped ! ….to remain ‘dumbed-down’, programmed [pre-programmed from a v.young age] and to feed our visceral fear of CHANGE !

            let’s focus on the sleight of hand and empire’s siphoning our vast resources away from the Real economy,to wilfully and purposefully feed bankrupt DEAD casinos,and to hell with the 99%,the peasants!!!

            Believe that is Real!!!

            That academic paper reflects the sum total of the author’s True knowledge and Real understanding of economics,which btw is ZIP, nada,”not a rashers”- as DMW might say !!!

            On one hand, all the LIES

            On the other – the Truth of Alexander Hamilton

            Let us not be shee-ee-ee-p

            we have a choice

            seek Truth

            dump serfdom

          • Deco

            There is waste in the private sector.

            Mostly by people in positions of authority.

            All other forms of waste are “fixed”.

  7. With US agents stirring up trouble all over the Middle East and now Ukraine the threat is not from the East as your Headline suggests but from the West.
    The US Petro Dollar is losing its hold on the world economy and the function of reserve currency and the economic power residing with it.

    Economic power is moving East and the US is a wounded giant lashing out in all directions. It will devour its own. The danger is from/in the West.

  8. History tells us What is BAD for Germany in the Eurozone is always GOOD for Ireland ……those waves of Change in the Bosphorus Sea must be GOOD

    • StephenKenny

      That’s interesting – that wouldn’t have been my instinctive view. By the Eurozone, I assume you mean those countries that have the Euro? So Europe after about 1990. Would you explain this view a little further – why is it the case that what’s bad for Germany is good for Ireland?

      • Par Example :

        Aprés Unification Allemand Bank Interest rates were kept too low to assist the recovery of Uber Deutschland and Ireland was then a growing Celtic Tiger . This decision only made the Irish Economy gallop faster and reduced unemployment further.

  9. joe sod

    “When you look at things a bit closer, it reveals just how dependent Germany is on Russia for energy. An enormous 24 per cent of all Germany’s energy needs are met by Russia, compared to just six per cent of France’s needs.”

    This shows the stupidity of Germany’s energy policy compared to France’s. France’s decision to have most of its power supplied by nuclear has now been vindicated. France now has a major nuclear industry which the rest of Europe now needs and is returning to. Germany’s dalliance with wind energy and renewables has been a disaster and as a result it is now overly dependant on Russian energy. The UK is now also turning back to nuclear but needs France to build the new reactors. In Ireland the Irish governments plan to turn Ireland into Europes windmill has now backfired with the UK turnings its back on this ridiculous plan. So maybe we will thank Mr Putin in the future for saving the irish midlands from millions of tonnes of concrete and thousands of monster turbines.

  10. This from the North East?

    Daily Reckoning———–

    Russia Will Hit America Soon

    Russia Will Hit America Soon

    Russia to strike? James Rickards watches his financial war predictions unfold in real time…
    Paul Mampilly with today’s market notes — Pfizer’s blunder is your chance to pick up massive gains…
    Plus, Bill Bonner, looking for the pin that will pop the U.S. debt bubble. Could it be the U.S. sending troops into Ukraine? He sure hopes so… Read on to learn why…


    External Advertisement

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    This corner of the market will hit for 41 price doubles tomorrow. In fact, every single day Wall Street’s open it’ll happen. To lift your restrictions and access them all, click here before 9:30 AM…

    “Charm City,” Md.
    April 25, 2014

    Peter CoynePeter Coyne, wondering if the U.S. will send troops into Ukraine…

    Think back to The Godfather. “I don’t like violence,” said the drug mobster Sollozzo. “I’m a businessman, blood is a big expense.”

    Of course, he then made Swiss cheese out of Don Corleone… but either way, the insight is still relevant. War is costly. Well, kinetic war (guns, ships and bombs) is, anyway.

    That’s why the U.S. won’t send troops into the Ukraine. They’re too po’.

    It’s also why the ongoing U.S.-Russia conflict — what we call World War D — is a financial war fought on the digital battlefield. And the latest salvo’s been fired.

    New U.S. sanctions on Russia froze some of the assets of some of Putin’s “inner circle” as well as those of some specific Russian companies. One of those men, Igor Sechin, is the CEO of Rosneft, a state-owned Russian oil company — the country’s largest.

    Never heard of Igor? Neither had we.

    Luckily, our friend and author of The Death of Money, Jim Rickards, tweeted a helpful explanation this morning:

    Rickards Tweet

    Soon after, we found a Bloomberg report. It said:

    “U.S. officials and security specialists are warning that Russian hackers may respond to new sanctions by attacking the computer networks of U.S. banks and other companies.

    “U.S. officials involved in a White House review of the effects of further penalties on Russia didn’t respond to questions about whether the study explores the risk of cybercounterattacks. Even so, two people with knowledge of the review said it includes revisiting previous classified exercises in which small numbers of computer experts showed they were able to cripple the U.S. economy in a few days.”

    The article’s authors then highlighted the fact that Russian hackers are considered some of the world’s best — and that they’ve may have already placed malware on U.S. computers.

    Warns Rickards: “This is not a drill, soldier. U.S.-Russia financial war has begun.”

  11. North East, South or West, the threat is all around you.

    Oft described but never heeded.
    IT IS The Central banking Ponzi Scheme money system.
    It is heading for imminent collapse and will change the balance of power in the world for centuries. All we do is discussed inanities.

    buy, land, income producing property and gold and silver or live to rue the day.


  12. redriversix

    Morning All

    How are things ? I trust everything is magnificent…………..

    Politicians lie..that’s what they do..Russian, Ukrainian or Irish or American..

    its not about serving the People …its about serving those who will take care of you.

    War is Big Business.The greater the profit margin ..the more popular War becomes.

    Humans are doomed to repeat the mistakes of the past over & over & over again..Why ? Because we don’t learn..short term memory..short attention span.whatever

    If you wish to hide something from a U.S President..put it in a History book , he’ll never find it

    The West & N.A.T.O & the E.U have lost the Morale High Ground , [ if "we" ever had it]

    The West & the Ukraine will have to accept the loss of Ukraine as A Sovereign nation or go to War.

    Or all parties go back to original Borders,Russians exiting Crimea etc and let Diplomatic talks begin..

    Which is where “we” will end up after Blowing the shit out of each other for 5/6 years so why not just start dialogue now ?

    Afghanistan = Taliban regaining Control

    Iraq = The people have a truly miserable existence now under ” Democracy”

    Putin has waited in the long grass for his time to “shine”

    N.A.T.O expanded up to Russia’s front door after U.S President[s] assured Gorbachev that they would not.

    Milton Friedman , his “Chicago boys” descended on Russia like a plaque of locusts, pillaging & stripping everything..I.M.F World Bank….Privatize everything ! Huge Companies sold for cents on the Dollar ..Millions lose jobs..millions drop below poverty line….

    Corporations now call the shots..the illusion of freedom..the Illusion of Elections ..the illusion of Democracy

    “War is big business baby & ya betta get on this quick or ya lose your chance”

    As for Ireland & us ?

    What about us ?

  13. michaelcoughlan

    What about us ?

    Take care of yourself Barry. Your still looking at the darkness. Look at the light.

    best regards,


  14. redriversix

    Hi Michael

    Thanks for that. .but I am fine..nicr & bright & looking towards the light every morning.

    family is good…I am well

    hope you are too ?


  15. Deco

    From an environmental perspective it is better that the world pays more for hyrdrocarbons. It ensures that the resources are used more carefully, and less wastefully.

    Try running an SUV in Europe, compared to Los Angelas for example.

    The entire premise of this engagement with Russia over the Ukraine – that we need to get cheaper hydrocarbons is dangerous, to us – even if we in the West get what we want.

    The Shale revolution, has a critical flaw. The flow rates decline precipitously, and quickly – much more so than from conventional hydrocarbon deposits.

    In five years, the Shale revolution, might have less impact than now.

    The entire US foreign policy objective of all oil being traded in USD is a scam being played out on the rest of humanity.

    • Tyler


      “It ensures that the resources are used more carefully, and less wastefully.”

      Jeeez Louise !

      it’s exactly this “less wastefully” of so-called ‘resources’ indoctrinating sleight of hand language of vile adulteration of Truth,that encourages FEAR,with by-products of steering humanity drastically off-course to greenie economics of extinction … a bloody cul-de-sac of our species !!

      A TRAP!!

      And MSM promotes,ad nauseum,this rotten and unscientific “limited resources” and “it’s gonna run out in 20years yunno, maybe soooooner” poisonous doctrine,that only serve the agenda of oligarchy.

      Psychological warfare,with such LIES on a daily basis for the serfs ,instilling FEAR,sometimes in a covert subliminal way,keeping us in-line,in the DARK & FORCED to RELY, helplessly ,on the 1%…that’s CONTROL !

      Wielding FEAR ! FEAR of change, YOU CANT DO IT ! , FEAR of what’s NEW , FEAR of tomorrow!!


      That’s empire!

      Drop Fear ! There are NO limits to growth! …only scientifically flawed ,inward looking ,Easter island belief systems !

      There is no spoon !


      The TRUTH,is that resources available to humanity are
      “finite, but unbounded!”

      • Tyler

        The resources available to humanity are “finite, but unbounded”….sounds like a bold statement,right? i thought so too.We are so brainwashed to ‘believe’ how precious they are and that there is no ‘viable’ alternatives!

        LIES !

        Please have a dekko at this,Deco ;)

        i rank this link,from EIR,as one of the best pieces i’ve read,ever …maybe check it out everyone ?
        ..your choice


      • Tyler

        While fear,even indoctrinated fear,can keep a young child safe from crossing a dangerous road alone,fear in an adult’s mind of the unknown and fear of the dangers of tomorrow,restricts future progress – exactly what the “insiders” .001% want – to stunt our growth,stealing our FUTURE [from our minds!]

        FEAR – “it will crawl into the soul of anyone who engages it” whispered Flint Sky – the tribe’s leader,who wanted to lead a Free people,sans fear

        What happens in this clip is during a declining period in the Mayan Civilisation…


        Maybe you haven’t seen this movie,but trust me,we don’t want to wake up one morning, to Zero Wolf and his savage henchmen!

  16. breltub

    Hi All,
    Here is a thought experiment post I just wrote:

    It may be of interest to some who hang out here in the macro-economic mosh pit!


  17. As we said above. The danger is in the west. US instigated coup in Ukraine and now wants to blame Russia

    Jim Rogers


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