Ukraine: The Plots Thicken

by Hal Gershowitz and Stephen Porter on April 20, 2014

 

We use the plural advisedly.  Everyone with a dog in this fight is, and has been, plotting ever since Ukraine gained its independence (yet again) on August 24, 1991. It marks a time when the old Soviet Union was in total collapse and when all of the former Soviet Republics and the six Warsaw Pact countries in the West collectively made an absolutely historic dash to freedom.  To plot in this part of the world has been a national pastime for centuries on end.

To understand who is plotting what let’s re-examine where we are, and how we got to this point.  First, we would be enmeshed in the current crisis (yes, it is a crisis) regardless of who was President of the United States.  This is not a crisis of Obama’s making, or, really not entirely of Putin’s making.  What is happening today in Ukraine is remarkably consistent with a 1,000-year sweep of history, and no one (in either political party) sitting in Foggy Bottom or at 1600 Pennsylvania Avenue would have been able, over the long run, to greatly influence, let alone determine, the outcome of the events unfolding before us.

Perhaps, the simplest way to focus our thinking is to understand the very meaning of the name “Ukraine.” It literally means “borderland.”  And there have been few borders in history more important than that which Ukraine has, for hundreds of years, represented to Russia.

We will not get mired down in the long (and bloody) 1000+ year history of Ukraine. Let us just note that Tatars, Poles, Lithuanians, Russians, Turks, Swedes and Cossacks systematically and sequentially ravaged Ukraine. Ukraine was incorporated into Tsarist Russia in 1667, the year the Dutch traded hegemony over New York and New Jersey to England for Suriname (talk about a bad trade).

Ukraine has been the essential border between the vast European east (Russia) and the rest of Europe.  Ukraine coupled with the Baltics and the Central European countries that comprised the old Warsaw Pact, is what kept American-allied Europe at arms length from the heart of Russia.  Ukraine has, for most of history, been the heart of the buffer that Russia has depended upon for protection.

Mikhail Gorbachev opened the door to the west to let fresh ideas in, and his successor, Boris Yeltsin, left the door open and nothing has been the same since.  That’s because freedom is an idea that expands the mind and excites the senses like no other.  Suddenly, Ukraine, the Baltic’s and the old Warsaw Pact countries turned west, leaving Yeltsin’s successors with an aging, shrinking, bufferless nation to govern.

Enter Vladimir Putin.  

Putin came of age as a top KGB operative when that buffer, so essential to Russia’s history and security from the time of the Tsars, provided 775,000 square miles and tens of millions of people between Western Europe and Moscow.  Suddenly, that buffer had (in the eyes of Putin) been frittered away by the likes of Gorbachev and Yeltsin.  Nations of paupers were suddenly enjoying the promise of western prosperity.

Ukraine is also, in many respects, the cradle of Russian achievement boasting Tchaikovsky, Wozniak, Sikorsky, Warhol, Golda Meir, Wayne Gretsky, Armand Hammer, Bob Dylan, Herb Alpert, Leonid Brezhnev and endless pages more.  Its loss has been the bitterest of pills for the Kremlin to swallow.

Mikhail Gorbachev, when asked a few years after the Berlin Wall came down, what ended the Cold War, he answered in three words. “Reagan at Reykjavik.” Every American President since Ronald Reagan has nudged and nursed (and, yes plotted) these newly freed nations toward the West.  They have affiliated enthusiastically with the EU and most have joined the Nato defense pact. Once the Iron Curtain was lifted, and the Berlin Wall came down the nations that once constituted the old Russian defense buffer had effectively turned their backs on the East, and were welcomed and ushered into the EU and into Nato.

Enter Barack Obama.

President Obama, like President Bush before him, believed he could do business with Vladimir Putin.  Neither Bush nor Obama were entirely wrong, but nor were they entirely right.  Ultimately, every nation does what it perceives to be in its best interest.  Russia has certainly been willing to do business with the West and it has profited handsomely as trade (primarily oil and gas as an export) accelerated, and the stress of nuclear and conventional defense readiness diminished.

Nonetheless, Russia’s Western flank had receded to within a couple hundred miles of Moscow and that, in Putin’s calculus, had to be addressed whenever the opportunity presented itself.

President Obama’s leadership from behind in the Middle East and his disengagement from Europe has presented just such an opportunity, and it is apparent to our old allies and, as it turns out, our old nemesis as well.  Since presenting President Putin with our symbolic (but mangled) Reset Button the US has sent a number of inopportune signals.  We removed (as distinct from rotating) 10,000 US troops from Europe.  For the first time since the end of the Second World War we have no tanks available in Europe except for a few that are maintained for training in Germany.  Our navy is now the smallest since before World War Two and our Air Force is the smallest ever.   Concurrently, our European Allies have also decreased defense spending by 15% while Russia has increased its defense spending by 31% in the past five years. All Nato members are supposed to commit 2% of their GDP to defense.  Only the US, UK, Greece and Estonia do that.  The remaining 24 Nato members do not.

American foreign policy seems terribly out of sync with the pressures and dangers that lurk both in the Middle East and in Central and Eastern Europe.  We are disengaging at the very time Russia seems to be re-engaging.

Putin has every reason to assume that America won’t confront Russia militarily. After all, we’ve publicly announced that there will be no military option to the Ukrainian crisis. That’s rather like pouring blood in shark-infested water.  Putin, no doubt, sees an opportunity to bolster the eastern buffer it lost. Seventy-seven percent of Ukraine’s population is Ukrainian, but between 15 and 20 percent is Russian. While two thirds of the population speak Ukrainian, a third speak Russian. Many, if not most, of the Russian speaking Ukrainians have family in Russia. Only the Ukrainians in the East look to the West.

We do not fault President Obama for eschewing the use of military force in Central or Eastern Europe. Bluffing would be both ill advised and dangerous.  We are not going to fight in Europe and everyone knows it.  America and its European allies do, however, have the capacity to inflict serious pain on the Russian economy and everyone knows that too.

If our allies and we signal that we aren’t going to really do that either, than the temptation we dangle before Putin may be irresistible.  Over the long haul, America and Europe can inflict crippling sanctions on Russia.  In the short term, however, Russia can make life in Western Europe pretty miserable.  Russia can easily ravage the Ukrainian economy and materially curtail much needed economic growth in Europe.

The Russian economy, however, is ill equipped to take a serious hit, and that reality should inform the West’s strategy.  Whether our European allies and we are willing to play economic hardball remains to be seen.  If we are, Russia will almost have to back off. If we are not, tensions will, most assuredly, escalate for the foreseeable future. A new cold war is not likely. A prolonged and very uncomfortable chill, however, is.

 

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Wow! That means more than twice as many GM cars were recalled in the 1st quarter of 2014 (following the government’s GM stock sale in the 4th quarter of 2013) than were sold in the US during all of last year. In fact, 1st quarter losses almost equal all of the company’s 2013 profit of $1.9 billion.

Now, we’re asked to believe that no one in senior management at GM (or the government representative(s) at GM) knew about the problems leading to the recall (the major source of its losses) until shortly after the government’s sale of the last of its GM stock on December 9th 2013.

Call us skeptical.

Supposedly, General Motors delegates to two small groups of non-executives the absolute authority and responsibility for initiating recalls without requiring boardroom or senior executive approval.  That would make sense. It would insulate the recall decision makers from the suits in the executive suite who might be overly focused on the bottom line. It makes no sense, however, to also keep the company executives uninformed and in the dark about a serious investigation into faulty parts that may be causing deaths to drivers of various GM models.  After all, uninformed executives could, at any time, choose to sell some of their GM stock at a very inopportune and inappropriate time.  Then again, a cynic might argue that that’s a rather nifty benefit of having such a see no evil, hear no evil, do no evil policy. Delegating recall authority is one thing.  Perpetuating executive suite ignorance, for years on end, about the potential of a disastrous recall is quite another.

Reviewing information that has now come to light, it seems incongruous that the issue never reached upper management. According to a timeline that GM filed with regulators the problem has been percolating since 2001.  GM first issued bulletins to dealers with suggested remedies for the faulty ignition switches in 2005. And, in fact, it seems that not all GM executives were kept in the dark about serious defects.  As we go to press, the House Energy and Commerce committee has released documents that make clear that executives were involved for years in discussions about faulty GM models.

In March 2007, officials of the National Highway Traffic Safety Administration met with GM employees to discuss a fatal Cobalt crash in July 2005. GM’s attorneys were, in fact, aware of the problem and had opened a file on the issue within two months of the crash.

By August 2011, a series of Cobalt and Pontiac crashes in which the airbags did not deploy, was brought to the attention of GM engineers, and the issue was, apparently, elevated to the two committees responsible for initiating recalls in 2013.

Here’s the way the recall system works. One small group is responsible for vetting incoming data and determining if a recall is warranted. It then makes a recommendation to an even smaller group in charge of approving the recall. If the second group approves a recall, the recommendation then goes to senior management.

Let’s face it, GM’s position that management just didn’t know that ignition switches could be inadvertently jostled out of position, causing power to cars to shut off and airbags to be disabled stretches credulity. People were, for over a decade, dying in crashes caused by these defects.  GM says it ordered a recall in February once it learned that the defective part had been linked to 31 crashes and 13 deaths over more than 10 years.

We now know from subpoenaed documents, including emails, that Mary Barra, when she was head of product development (she is now CEO), was aware back in October 2011 of power steering problems with the Saturn Ion that led to recalls nearly two years later.  While the power-steering issue is unrelated to the ignition switch defect, it certainly suggests that there is no Chinese wall keeping executives in the dark about major problems with the various models of GM cars. Barra, according to press reports, claims she didn’t know of the faulty ignition switch problem before last December (the month the government sold the last of its shares).

Our focus, at this time, is not about how GM handles it quality control problems, but rather about the plausibility of the government’s presumed ignorance of a huge problem that was about to erupt right after it sold the last of its stock in the company. Remember, The government’s relationship with GM was not exactly an arm’s length arrangement. Pursuant to the bailout, ten of GM’s 13 directors were placed there by the United States Treasury Department, while the Canadian government nominated one director.  Thus far, only two GM employees have been subject to any action by the company.  Both are engineers who were involved with the faulty ignition switch issue, and are now on paid leave.

This is not some academic point we’re discussing here.  Hundreds of millions of shares have traded in the sliding stock since the government’s sale (which was about at the stock’s high) and accumulated loses have been huge.

The government sold the last of its shares near the stock’s post-bankruptcy’s high of $41.85. The share-price decline began shortly thereafter, closing last Friday at 31.91, which is below its November 17, 2010 IPO price of $33.00 a share.

The timing of the December 9th sale is, arguably, a bit curious. On Jan. 18 of last year, the U.S. Treasury released a formal trading plan announcing its intention to sell, on the open market, its remaining 300 million shares of GM stock by March 2014.  In January 2013 the government sold approximately 5.4 million shares of GM stock between $27.61 and $29.16 a share during an eight-day period, netting $156.4 million. As the year progressed GM shares steadily improved.  By the beginning of the third quarter of last year the stock had advanced to over $36.00 a share and by year end the stock was selling over $41.00 a share.  Curiously, in October 2013, and in the midst of a steady increase in the price of the stock, the government announces that it plans to sell all of its remaining shares by the end of the year, three months earlier than the original outside date in had announced at the beginning of the year.

According to the SEC, any large sale of stock preceding a previously undisclosed event that has a material negative impact on a company is typical of cases that result in investigations of insider trades.  We assume the only reason the SEC appears disinterested in the massive sale of GM stock just before the faulty ignition-switch fiasco became public is because the seller was the US government.

Meanwhile, much has been made during the past year of the so-called new GM.  Frankly, the new GM appears to us to look remarkably similar to the old GM.

 

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