Written By: Derek Jacobs
Putin Ukraine in an Awkward Position
For those that do not know, Russia has recently invaded the eastern section of the Ukraine, around the city of Donetsk and the current military conflict between Ukraine and Russia originated as an economic conflict. Russia claimed the Ukrainian government owed them money for unpaid bills and other debts. Heated negotiations have been constant and recently Russia has cut off the natural gas lines that run to the Ukraine and as of last week, launched an invasion. Considering how hard the global recession has hurt the Russian economy, cutting those gas lines is a huge gamble. The Russian gas company and the Russian government must have conducted a cost-benefit analysis to determine if the gained political benefits outweigh the losses in business. This natural gas line is worth millions of dollars of business every year, so it is interesting to see that the Russian government decided that to them, the increased political pressure that cutting the lines would apply is worth more than money they would make from selling the natural gas. By decreasing the amount of natural gas going to Ukraine, the supply within Russia itself has increased and prices have fallen, due to the laws of supply and demand. Also, invasions are extremely expensive. The soldiers, all of the guns and ammunition, the tanks, artillery, and planes. The invasion is most likely an attempt by the Russian goverment to recoup losses by force. Economists in Russia must have also conducted a marginal-cost analysis to determine if the cost of sending each additional soldier and piece of equipment was worth the rewards. In this case, the rewards would be portions of eastern Ukraine including the major city of Donetsk.
In Ukraine, economics haven’t been so kind. Since the Russians have shut off the supply of natural gas, the reservoirs have become increasingly depleted. They will probably only last a couple more months and prices are rising every day. Again, supply and demand. The supply is dwindling and the demand is always going to rise because winter is coming. Also, not surprisingly the government of the Ukraine has also reached the same conclusion that the contested region is worth fighting for. It is also clearly worth more to the Ukranians because even before the Russian invasion, Ukranian soldiers were fighting pro-russian rebels. Now clearly to them, this region must have some major economic value or it wouldn’t be worth fighting for. Pride and nationalism are also probably factors that are influencing the Ukrainian government, but this is an economics class, so pride and nationalism are negligible.
This conflict has also has some major international economic ramifications. Many nations, the U.S. included, have imposed new sanctions on Russia to express their condemnation of the Russian invasion. Tariffs are the most common sanctions being enacted. Considering that Russia has some of the world’s largest reserves of natural gas, oil, and coal, these sanctions could be quite risky for nations that do not have their own reserves, and these tariffs by nature increase the prices of imports, which can be a burden to citizens. 
The invasion has also had the negative externality of raising prices in Western Europe because many of the gas lines have either been shut off since the start of the conflict, or due to risk of damage during fighting, been shut down in recent months.
The invasion has also had the negative externality of raising prices in Western Europe because many of the gas lines have either been shut off since the start of the conflict, or due to risk of damage during fighting, been shut down in recent months.
In the end, the economics of the current war in Eastern Europe are extremely complicated with different aspects and consequences from each decision and those consequences have lasting impacts on the global economy.
"The World Factbook." Central Intelligence Agency. Central Intelligence Agency, n.d. Web. 22 Sept. 2014. <https://www.cia.gov/library/publications/the-world-factbook/index.html>.
Very informative post. I really am curious about how soon this will end. If it doesn't end by winter could many Ukrainian's freeze to death? I wish the map would show where the city of Donetsk is. Personally I think Russia is being stubborn and making this into something much bigger than it has to be. Is this really worth the money they are spending? Is Ukraine going to eventually pay back these "debts". So many questions but we'll have to wait and see how this turns out.
ReplyDeleteThe vocabulary you used to support your argument from class was very nicely placed, and in the context you can understand what those words mean if you didn’t know. Also, you go really in-depth for analysis which shows that you definitely did your research on the topic. And I have to comment on the title because it is probably one of the most clever puns I have seen in a while. I think that Russia is making a smart decision because at the end of the day, how can Ukraine right a war in their land when they cannot even heat or light the majority of their country? Russia might lose a bit of money for the time being, but there is almost no way that Ukraine will be able to hold on to the land without other significant losses. Nice job though, you sounded very informed.
ReplyDeleteThis was a very interesting article to read, and I believe you brought up a very good point regarding the decision making process Putin and the rest of the Russian government had to go through in order to follow through with cutting gas lines leading through Ukraine. You brought many of the economic factors and effects this war is having on the world to light. It’s interesting to see how quickly and in what ways a skirmish between just two countries can have an effect on the rest of the world. The data you shared in this piece was very specific and detailed. Good job man!
ReplyDeleteSurprising. This is a perfect example of cause and effect. Ukraine invades Russia, therefore their natural gas lines have been cut off. This isn't an unjustified reaction, but I still can't wait to see how Ukraine will react. Will the gas cutoff force Ukrainians to starve? Will propane and other natural gas prices rise through to roof? Will Ukraine be able to rebound from such a crushing blow? For all we know, this could lead to the collapse of their nation. But I guess the sayings are true, no matter how hard we try, mankind is not a peaceful race.
ReplyDeleteThis is a very interesting and informative topic given the proper words (vocab terms) to express what is going on. It is interesting to hear about this sort of news and it will be interesting to see how it plays out. I do share wishes with Dan though, Donetsk probably should have been highlighted or pointed to on the map.
ReplyDeleteIn AP, we’re learning about elasticity of demand, which is the responsiveness of consumers to a change in price of a good. Goods that are elastic have a large change in quantity demanded compared to a relatively little change in price. Inelastic goods have a lower change in quantity demanded compared to a price change. Natural gas is viewed as an inelastic good because it is more of a necessity than it is a luxury, and there exist few substitutes for it. Accordingly, as the supply of natural gas in the Ukraine decreases and the price rises, there would be a small decrease in the quantity demanded. It will be interesting to see how high the price could go before people refuse to pay, which could lead to a price ceiling being enacted.
ReplyDeleteI've heard about this topic before and this has been going on for a while, getting more and more expensive. In my opinion, by the end of this conflict, the Russians would've spent more than what they would have received from Ukraine's debts. I think this was a bad move on Russia's part for the same reason. I believe that if Russia was more patient, Ukraine and Russia could work out a deal together to fix this debt crisis.
ReplyDeleteDerek,
ReplyDeleteI completely agree that Russia is taking a huge risk in cutting off the natural gas lines in order to help gain the advantage over the Ukraine. If the invasion lasts to long they could be facing serious repercussions occurring in their economy. This could easily lead to a crash in Russia's economy which would cripple the country and cause it to be in a much worse position than what they were in initially.
I haven’t heard much about this topic, but I did know about the invasion, and it was interesting to hear the economic impact of the invasion. You did a good job of helping us understand the opportunity cost of Russia cutting off their gas lines to Ukraine. Also, the negative impact on gas prices for Western countries as well. It definitely brings to light if the US should step in and why or why not, based on the economic impact it could have on our country.
ReplyDeleteThe economic impact of this was huge from the start. This war can affect all of Europe since they all rely on Russia for Natural gas (although some are now moving off of it). A war in the Ukraine threatens natural gas being cut off. Although Russia could never do this as their economic loss from the sales would be far greater than anything they could gain from the decision. Also no country has real motive to step in and those that do risk having no more natural gas. It's a very difficult situation for the world.
ReplyDeleteRussia is quite dumb to actually go ahead with turning off the gas lines. They made money off of that and by cutting them off they will lose a great amount. And why are they doing this? All because they want to get an advantage against Ukraine? Look at Russia, the biggest country in the World, they kind of have a great advantage over everyone already especially Ukraine, I don't know why they would go as far as to shut off their natural gas, I just think its plain stupid. If that's what they want to do then, I guess whatever let them do what they want, but I really don't think it will turn out good for them in the end.
ReplyDeleteFirstly, the name of the post is beautifully punny. Secondly you bring up good points regarding Russian expansionism and how it is effecting economics on a worldwide scale. I enjoyed reading your piece.
ReplyDelete