I have a several reader emails on Ukraine today, including one from Steen Jakobsen, chief economist of Saxo Bank on the impact of Ukraine on Germany.

Impact of Ukraine on Germany

A couple days ago, Steen pinged me with a few comments on Ukraine worthy of your consideration. Steen writes …

The Ukraine crisis will go on for much longer than anyone wants, everyone will lose and world growth will disappoint again, but the real issue behind the scenes is Europe’s lack of a coherent energy policy. The present green energy policy is a mess. Green energy is inefficient, tax burdening and nowhere near close to meeting rising energy demand from Europe.

Europe is energy deficient. EU dependency on imports is increasing for all fossil fuels. Oil imports reached 83.5 per cent in 2009 and 64.2 per cent for gas, according to the EU Commission.

The biggest loser will be Germany. There are more than 6,200 German companies engaged in business with Russia. The Economist states that 300,000 German jobs are at risk, German business investment into Russia exceeds €30bn, excluding financing from German banks, but more importantly Germany imports 70 per cent of its energy of which 25 per cent comes from Russia.

Angela Merkel and her government have been caught out by a failed energy policy, which has made electricity a luxury good for many German households. But even worse, she decided that she would rather be dependent on Mr Putin than on nuclear power.

The biggest consequence of the Ukraine conflict could be a revisiting of the 1970s energy crisis, including energy rationing. After close to 30 years of doing this job I am realizing that energy is everything in explaining growth, investment, sentiment and market returns.

Understand energy and its marginal price of production and its delivery and you have the keys to predicting the world. Sadly Europe and the US is stuck in using Sir David Frost’s definition of diplomacy: “Diplomacy is the art of letting somebody else have your way.”

Unvarnished Ukraine Update

Reader David writes …

Good Morning Mish

I just returned from a two-week tourist trip to Turkey, four days in Istanbul, and nine days along the Mediterranean coast.

The hotel/resort where I stayed on the coast was a favorite for Russian tourists, and the hotel TV had several stations delivering Russian channels, German and French stations too. Russian TV news was loaded with pictures and stories on Ukraine, essentially civil war and revolution. 

Small unorganized groups in eastern Ukraine are committed to doing whatever they can to resist the formal Ukrainian government. Here’s a picture: Three guys at a makeshift ‘roadblock’ on a country road, standing next to a stack of old tires and concrete blocks, saying they would do whatever they could to fight if the Ukrainian army came their way.

When a resistance fighter dies, thousands of people attend memorial services and political demonstrations.

In a French documentary on the coal mining industry in eastern Ukraine, a major industry there, I learned a) People in eastern Ukraine complain that their lives have become worse every year since breakup of USSR over 20 years ago. They viewed their lives as happy and stable before; b) Coal mining has almost no safety standards so hundreds of miners die every year; c) With no work alternatives, mining jobs are viewed as good jobs; d) With no real safety standards or oversight or clear authorities, people desperate for money illegally mine coal in abandoned shafts and sell (at a discount) for cash to larger mine owners. 

Good income in this region is viewed as 300 euros ($420) / month.  Given such economic prospects, why not stand at a makeshift roadblock and fight to die? 

These people also see what has happened in other former Soviet states, where Russian language speakers have been treated as outlaws. A ‘western friendly’ government in Ukraine only means things will get worse for ‘Russian friendly’ Ukrainians. French, German, and Russian TV news all had lots of stories and images that you do not see in the US.

Regarding Turkey, I was very impressed by the growth. Suburbs in Istanbul, already a city bigger than New York, have hundreds of new and under construction apartment blocks. I sensed a strong nationalist mood. 

One taxi driver complained about Syrian refugees, saying they were a big problem, especially along the coast. Refugees walk or drive across the border, find their way to some friend or relative, and with no money or income, street crime and car crime are rising.

Thanks again for your great work.

Comments from Jacob Dreizin

I forwarded David’s email to Jacob Dreizin, a US citizen who speaks Russian and reads Ukrainian. Jacob replied: “Thanks for that, Mish.  I’m not surprised that French TV is showing footage from the scene. A French reporter was wounded recently near Slaviasnk. On the same day, an Italian reporter lost his head to a mortar round in the same area. In contrast, U.S. media mostly reports out of their hotels in Kiev, relying on heavy doses of ‘Ministry of Truth’ press releases. It’s pathetic.”

House-to-House Searches

Earlier today Jacob reported …

Eyewitness reports in Krasnyi Liman continue to pour in, and they are not good. The Ukrainian National Guard and militias are going house-to-house, searching, interrogating, rounding people up and taking them away.

Some people are said to have been shot in their homes. For the most part, it’s hard to say what is rumor/hysteria, and what is fact.

One thing is certain: Kiev is responsible for the loss of lives in Lugansk, not errant rebel anti-aircraft missiles fired from the ground, as claimed by Kiev. Two hospital workers were killed in that attack, many more on the ground.

The Organization for Security and Cooperation (OSCE) in Europe made that claim in a press release.

Translating from my iPad: “In Luhansk the situation remained volatile. On 2 June, shortly after 15:00 hours, rockets hit the occupied regional administration building. Based on the SMM’s limited observation, these strikes were the result of non-guided rockets shot from an aircraft.”

“SMM” is the OSCE’s Special Monitoring Mission to Ukraine.

I received several nasty emails a few days ago in response to Ukrainian Warplanes Miss Targets, Hit Civilians.

Some people believed Kiev’s report that rebels caused the carnage.

Nope: Kiev did.

Surveillance Plane Shot Down

Jacob explains: “An An-30 surveillance plane, used as an artillery spotter, was shot down over Slaviansk today. It appears that at least some of the crew was able to parachute out.”

Mike “Mish” Shedlock