'New Cold War' reflects global uncertainties

Pro-Ukrainian activists demonstrate a huge yellow-and-blue Ukrainian flag during a rally in support of Ukraine's territorial integrity in the eastern city of Kharkiv

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March 11, 2014 1:00 pm JST

YOICHI TAKITA, Nikkei senior staff writer

TOKYO -- The world has been restless since the beginning of the year. A series of political and economic tensions are spreading across the globe, and no one can anticipate how they will play out.

     Russia's de facto seizure of Crimea, in southern Ukraine, is an example. Pro-Russian forces on Feb. 27 took control of Crimea's parliament and administration buildings. U.S. President Barack Obama as well as the leaders of six of the seven other G-8 industrialized nations have condemned Russia's violation of Ukrainian sovereignty and threatened to not participate in a summit scheduled to take place June 4-5 in Sochi unless the situation is addressed. With all preparatory meetings leading up the event also up in the air, it remains unknown whether the G-8 leaders can peacefully meet in the Olympics-host city along the Black Sea.

     The G-8's membership -- Canada, France, Germany, Italy, Japan, the U.K., U.S. and Russia -- has remained the same since 1991. That is when the old Soviet Union joined the club. It and the U.S. had signed a statement declaring an end to the Cold War two years earlier.

     Now more than two decades later, Russia's intervention in Ukraine has provoked much criticism from the U.S. and Europe. News outlets are referring to it as a "New Cold War."

     Although Russian President Vladimir Putin was well aware that his Crimea actions would taint his reputation around the world, he had little choice but to take a hard-line approach. Ukraine is so deeply intertwined into Russia's national interests that it cannot be ignored.

     Putin, who is serving his third term in office, is committing himself to creating an Eurasian Union, a Russian version of the European Union, by expanding its customs alliance with Kazakhstan and Belarus -- members of the former Soviet Union -- into a huge, unified economic bloc that allows for the free movement of capital and people. He made the proposal in 2011 when he was prime minister.

     His ultimate goal is to combine his proposed Eurasian economic bloc with the EU to build a free trade sphere covering countries and regions from the Atlantic to the Pacific Ocean. Ukraine plays a key role in this vision. If Putin cannot get it on his side, the scheme will simply fall apart.

     Putin probably opted to play hardball over Ukraine after realizing the collapse of the country's pro-Russian government, led by Viktor Yanukovych, could end his Eurasian dream. The consequence is ironic. Eurasia is divided between Russia, which is resorting to military power, and the U.S. and Europe, which are trying to broaden their economic influence.

     Ukraine's new government, set up following the political upheaval, has said the country's external debt stands at $140 billion, or 80% of its nominal gross domestic product. It has also called for $35 billion in financial assistance over the next two years to rebuild its beleaguered economy, securing 11 billion euros ($15.28 billion) from the EU.

     Ukraine's debt problem could boomerang on Russia. Putin has admitted that Russian banks have extended $28 billion in loans to Ukraine. If the military tensions continue and Ukraine goes into default, Russian lenders and businesses with operations there will be in big trouble.

     Some international politics experts argue that China may take advantage of the rise of the New Cold War by extending a helping hand to Russia's isolated neighbor. But this is simply not viable. Pro-democracy protests and ethnic liberation movements can spread like wildfire, as they did when democratization waves engulfed Eastern Europe in 1989 and the Middle East in 2011. Beijing is probably growing wary of Ukraine; it has its own unhappy ethnic minorities.

     China has long managed to prevent sensitive domestic issues from coming to the fore by maintaining high economic growth. But a slowdown in the country's economy and the revelations of financial distortions through runaway shadow banking activities are beginning to cast a pall over the society.

     The world is also paying attention to China's snowballing military spending. In addition, it is looking at the People's Bank of China. The country's central bank conducted dollar-buying operations to keep the yuan artificially low just before the National People's Congress, a yearly parliamentary session, convened March 5. The move is fueling skepticism toward China and could be interpreted in several ways. Some see it as an attempt to contain speculators' yuan-buying; others say Beijing is trying to stimulate exports by devaluing its currency.

     The G-8 regime hit the skids when the global economy faltered in the wake of the 2008 global financial meltdown. To cope with a variety of issues, the G-20 framework was created. The larger club of nations came up with solutions for a while, but China and other emerging countries in the new system are now hitting a wall. 

     G-20 finance ministers agreed at a Sydney gathering last month to lift their combined gross domestic product by 2%, or $2 trillion, over the next five years. The commitment requires member countries to come up with sensible economic growth plans and carry them out in a stable fashion.

     But the problem is that major G-20 countries will hold national elections this year. The U.S., which will have midterm elections in November, is growing more inward-looking.

     President Obama on March 6 imposed temporary economic sanctions on Russia, but international affairs experts see the sanctions as a squirt-gun response.

     Russia will not be affected.