Fran O'Sullivan on business

Business analysis and comment from Herald columnist Fran O'Sullivan

Fran O'Sullivan: Key makes right call over Ukraine

63 comments

Recalling Trade Minister Tim Groser from Moscow and putting free-trade talks on ice a sensible decision.

Russian President Vladimir Putin has shown he is not prepared to abide by the rules surrounding global security. Photo / AP
Russian President Vladimir Putin has shown he is not prepared to abide by the rules surrounding global security. Photo / AP

At a time when the world is famously flat and trade is inextricably bound up with global value chains, Vladimir Putin's decision to revert to 20th century-style brinksmanship could spark convulsions that go well beyond Russia and the Ukraine to envelope many economies.

There is a huge amount riding on just how the West deals with Putin's incursion, with the Ukraine merely a pawn in the Russian president's geopolitical chess game.

The Russian economy might be a paltry US$2.5 trillion ($3 trillion) compared with the US$30 trillion combined weight of the United States and European economies.

But the US economic sanctions - that were still pending a presidential order by Barack Obama when this column was penned - will have to be at the soft-pedal (read skirting at the edges) end if they are not to also throw a big economic spanner into the very nations that want to bring Russia to heel.

Right now Russia is the largest oil, gas, uranium and coal exporter to Europe. If Europe issues its own sanctions there will be consequences.

Germany - which stood behind the European basket-case economies after the global financial crisis - is Russia's biggest gas client. Much of that gas is piped across Ukrainian soil which adds to the tension.

The EU runs the risk that if it fashions its own sanctions this week Putin will simply turn the energy tap off.

The US has foreshadowed asset freezes and visa bans that will disturb the free-wheeling style of Russia's big investors and oligarchs that have been rapidly expanding outside their national borders - ironically, much of it since Putin first came to power in 2000. If sanctions are imposed on Russia's banks and the asset freeze extends to Russian public institutions and private investors, the Russian economy will be impacted.

The US will not suffer as much as Europe if a sanctions war breaks out. It does not have the same energy dependence. Ironically, it might even speed talks between the EU and the US on their own investment regime towards a fast conclusion.

But the wild card is China - which has yet to take a strong position.

While Europe provides a big market base for Russia, Putin executed his own pivot towards Asia two years ago.

At the Apec summit in Vladivostok in late 2012 - where he famously kept John Key cooling his heels for two hours while he talked up investment prospects in his country to visiting chief executives - he was lavish in his praise for Asia's rapidly growing economies.

Russia has increasingly turned its eyes to Asia - not the European countries that had performed so abysmally since the GFC. Chinese executives quizzed Putin on key issues. And Putin's body language showed he was deeply dismissive of Europe. He wanted his country to hitch its wagon to Asia, of which he declared Russia was an integral part.

China's relative silence on this security and economic threat is notable.

New Zealand - despite the decision to put the free trade talks with Russia on ice - will not face a direct economic impact. But this country is not immune from a global economic shakeout.

Like with China, there has been considerable capital flight from Russia with large net capital outflows - estimated at US$60 billion annually over the past couple of years. Some of that cash has found its way to New Zealand where Russian investors have bought farmland and apartments.

New Zealand will have to consider what its response will be if the US and Europe impose economic sanctions.

But John Key was right on the money when he recalled Trade Minister Tim Groser from Moscow this week. Groser had been in talks in the Russian capital that were designed to move the free trade discussions closer to finality.

Key's own proposal to visit Moscow has been deferred.

The FTA could be of great benefit to New Zealand. Russia currently imports more than US$30 billion in food annually.

The Russians had been low on negotiating strength to conclude the deal within its original timetable because their officials had been tied up managing Russia's debut into the World Trade Organisation.

They were also having to deal with fears that Russia's farmers would be disadvantaged by New Zealand's industrialised agriculture sector when markets were opened and subsidies reduced.

Much as with China, the free trade deal will position New Zealand as a favoured supplier - particularly of agricultural products - to Russia's fast-growing middle-class. Right now Russia is New Zealand's 28th-largest trading partner, importing about $230 million annually of mainly dairy products.

New Zealand - which initiated the free trade talks - initially spruiked the deal as a mechanism for Russia to demonstrate it was prepared to abide by the rules of global trade as it readied itself to join the World Trade Organisation.

With Putin now showing he is not prepared to abide by the rules surrounding global security, putting the FTA talks on ice was the only sensible and right thing to.

- NZ Herald

Have your say

We aim to have healthy debate. But we won't publish comments that abuse others. View commenting guidelines.

1200 characters left

Sort by
  • Oldest

© Copyright 2014, APN New Zealand Limited

Assembled by: (static) on red akl_n4 at 20 Sep 2014 07:20:36 Processing Time: 914ms