Russia Has Infected Itself With The Ukraine Crisis…

The Ukraine crisis made itself felt around the world last night. Stocks were down, gold and oil were up. But nothing was more dramatic than the fightin’ words that came out of certain American politicians’ mouths. We’ll get to that below. But first, what’s going to happen to Qantas?

The government debt guarantee is out. At least the explicit one. We all know what governments are like when it comes down to it. Nothing with a kangaroo on it would be allowed to fail. Virgins, on the other hand, our Catholic PM won’t save.

As we understand it, the Coalition’s plans for Qantas make no sense. They are repealing certain parts of a law that requires Qantas to run its business in a certain way. Great. However, if Qantas implements the obvious changes to make it competitive, it will fall afoul of a different set of laws that will not be repealed. So the company may have to split up into the part that complies with the laws that won’t be repealed, and the part that escapes the law by going overseas.

Aussie taxpayers and fliers get three guesses which part will offer cheaper flights, be more profitable and pay less tax all at the same time.

No wonder the company is struggling in the first place, though. With a regulatory environment like this, even Australia’s excessive labour costs can’t compete to ruin the place. The management team doesn’t run the company. It’s more like a compliance team trying to ensure the company doesn’t break any laws.

Qantas CEO Alan Joyce must feel like he’s in Takeshi’s Castle. One of the obstacles unfortunate Japanese adventurers have to pass in this game show is a wall. It has four covered holes to jump through. Some of the holes are covered in Styrofoam, so you can breach them if you jump through hard enough. But some of the holes are boarded shut. If you guess wrong, you run head first into a solid wall. If you guess right, you’re faced with another wall to pick a hole for…three times. Joyce may have breached a few walls with his skull intact, but he’s just come up against another one in the act that won’t be repealed.

The laws are designed to keep Qantas ‘stralian, as Queenslanders would say it. The nationalist story of maintaining ownership of car companies, airlines and the like never made any sense to us. Allowing foreigners to invest their money here is a great move for any patriotically minded person. If there is a conflict, confiscating vast amounts of foreign owned assets in Australia seems just the sort of thing that excites these people.

Before we forget, let’s zip through the economic indicators that came out overnight. Australia’s manufacturing PMI improved significantly in February to a still contracting 48.6. HSBC’s China PMI fell to 48.5 and Europe’s fell to 53.2. The US’s jumped to 57.1.

TD Securities’ inflation rate for Australia rose to 2.7%, which will get a mention at the RBA meeting today. But the board isn’t expected to make any changes to the official cash rate. It will stay at 2.5%, meaning Australia’s ‘real’ official interest rate is negative.

All the action, apart from Qantas, is over in Eastern Europe. Russia has infected itself with the Ukraine crisis. The Russian ruble fell to its weakest on record and the local stock market fell 11% in a day. The Russian central bank hiked rates from 5.5% to 7% to try and stabilise the currency by making its yield more attractive. Apparently the free market hasn’t quite mastered the price mechanism itself yet. Either that or central bankers have to look busy…

Apart from Russia’s economy taking a hit, there are more and more interesting angles emerging by the hour. Take Russia’s gas as an example.

Europe relies on Russia for 26% of its gas consumption. Much of it flows through the Ukraine and provides the Ukrainian government with crucial ‘transit fee’ funds. The Russians have turned off the gas spigot in the past to demonstrate their political clout. From memory, quite a few people in Eastern Europe froze to death.

But the key to the conflict remains in the Ukraine itself. The narrative is that some Ukrainians aren’t too comfy with the idea of a nationalistic pro-EU group staging a coup against a democratically elected pro-Russian government. So the parts of the country with large populations that identify as Russian are kicking up a fuss. Crimea is one of them.
Is Crimea even a part of the Ukraine? Any Russian will tell you ‘Nyet!’ It’s actually its own autonomous region with its own parliament, and it even used to have its own president. What’s more, the population has often voted for closer relations with Russia. Being given to Ukraine in 1954 still doesn’t suit the local Russians very well.

With nationalist Ukrainians taking over in Kiev by violent coup, the Crimean Russians started to get antsy. The secessionist movement there was already strong. But secessionist movements need powerful allies to defeat their country’s government. Enter Russian President Putin, the obvious local bully who isn’t afraid to get his hands di…err…take his shirt off. His military base in Crimea, currently leased from the Ukraine, has been there for hundreds of years. It might be endangered by an anti Russian government in power in the Ukraine. So Putin’s on board.

Right now the key to the story is whether Russian ships gave Ukrainian ships an ultimatum to surrender or not. The Russians say they made no such call. The Ukrainians say they did. It would be an act of war.

Yes, we’ve got ourselves a good old Mexican standoff in Sevastopol. Combined with a ‘He said’, ‘she said’ scenario. What could possibly make it worse?

Enter the indefatigable voices of American politicians. In perhaps his best worst gaffe yet, Secretary of State John Kerry came up with this absolute cracker while lecturing the Russians on invading Ukraine:

You just don’t in the 21st century behave in 19th-century fashion by invading another country on completely trumped-up pretext.’

Seriously? Commentator extraordinaire James Howard Kunstler unwittingly explained the ridiculousness of that comment to Kerry at his blog:

‘So, now we are threatening to start World War Three because Russia is trying to control the chaos in a failed state on its border…The last time I checked, there was a list of countries that the USA had sent troops, armed ships, and aircraft into recently, and for reasons similar to Russia’s in Crimea: the former Yugoslavia, Somalia, Afghanistan, Iraq, Libya, none of them even anywhere close to American soil. I don’t remember Russia threatening confrontations with the USA over these adventures.’

If only the Americans had elected Senator John McCain as their President years ago. We wouldn’t have these problems. We’d likely be dead. You see, McCain declared on Friday that ‘We are all Ukrainians‘ and called for missiles to be installed in the Czech Republic. Does anyone else feel a cold coming on? Or is it a war?

We’d like to join McCain and his Ukrainians. ‘Run out the guns!’, we say. The cannons in Portland, Warrnambool and Port Fairy kept the Russians from invading Victoria in the 1880s. Does anyone know if they are still there?

Meanwhile, everyone seems to have forgotten the ‘F*** the EU’ comment from US Assistant Secretary of State, Victoria Newland. Remember what that was all about?

John Kerry’s understudy was speaking to the American Ambassador to the Ukraine on the phone when the crisis in the Ukraine began back in December. And they decided who should be the president after Viktor Yanukovych, regardless of what the EU wanted. Well, believe it or not, surprise surprise, who’d’ve thought, they got their chosen man into power in the end. And the EU may be F***** when they get their gas bill.


Nick Hubble+
for Markets and Money

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Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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