April 28, 2014
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