The west has found a stick, but what about carrot?

(Business New Europe – bne.eu – Tim Ash – March 7, 2014) Ok, so here is my quick fix for a solution herein. The West – or US – has just rediscovered the wheel almost by hitting on the idea of financial sanctions as a way to get Russia back to the negotiating table. This will have impact and even if the Europeans don’t join.

Remember that if the US tells US banks to comply, their operations globally, including in Europe will have to comply, and European banks with opps in the US will also have to comply. It could shut off the Russian banking system to capital and refinancing, and see many investors no longer able to hold US assets. Russian holders would also likely bail, and capital flight out of Russia would likely accelerate, putting downward pressure on the rouble and upward pressure on rates – all bad for growth.

Russian capital I guess coming out of Western banks will not be put back in Russian banks, but may head for Turkey, Asia or the Middle East – Dubai property might benefit.

Net- net this is still a powerful tool. The US authorities don’t even have to do very much, I guess they just have to tell US banks that they will have zero tolerance for any whiff of money laundering from the FSU and western banks will go into overdrive on KYC so as not to risk big fines and reputational risk issues.

Actually the West might prefer for European countries not to join in, as at least this will offset the risk of economic countermeasures from Russia, eg in the energy sector.

So that’s the stick – which is powerful. So what about the carrot? In the end Ukraine and the West have to try and negotiate and deal with Russia and offer Putin something in exchange.

What does he want? I think an easy win would be the sale of the GTS. Russia has long wanted to own the gas transit system. It would pay top dollar, and hence this could kill two birds with one stone, ie by providing a useful cash injection for Ukraine at a difficult time.

The Ukrainians always argue that it is strategic – but it remains on Ukrainian territory, so de facto Ukraine will always end up having some leverage, even if they don’t own it. And Russia might even increase transit thru ukraine by investing money in refitting the pipeline and building new capacity. The Europeans might have to compromise over existing committments to do with the European Energy Charter, but hey ho, we are trying to prevent a largescale war in the heart of Europe here. Penny for your thoughts.