In Retaliation for Sanctions Will Russia Push the U.S. Into Recession?

April 2014
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For the past several weeks the newspapers have been filled with articles by
economists opining on whether little pieces of the conflicting economic data show
the U.S. is coming out of the harsh winter doldrums and into a sustained burst of
growth or will the U.S. just continue its weak marginal growth
pattern. None of the economists seem to be looking beyond our
two oceans. There has been little comment on how the rest of the
world’s economies will affect us over the next 12 months.
Even more surprising is the lack of attention to what Russia could do to af-
fect the U.S. economy, if the Ukraine situation continues to deteriorate. The U.S.
has conceived of its leverage, in threatening Russia not to take the Ukraine, as the
our near-total control ofuse of
the world banking system to hurt
the Russian economy. The U.S.
assumption would appear to be
that this should scare the Rus-
sians and that they are powerless
to respond in kind. Perhaps, be-
fore threatening sanctions and
To go to Feature, press control and click on the topic.
1. In Retaliation for Sanctions Will Russia Push the U.S.
Into Recession?
2. Recent Cartoon
3. The Wise Old Owl

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April 2014
2
economic attacks, the U.S. should examine where the world economy stands and
what a long range, well thought-out fully developed strategy would entail. The
U.S. government draws great confidence from our application of economic lev-
erage against Iran in the effort to stop them from obtaining nuclear
weapons. The sanctions certainly crippled their economy and
brought them to the bargaining table. However, those sanctions’
success was partially a product of cooperation by the rest of the
world including Russia and Europe in particular.
Is Russia just another Iran? Russia is the world's biggest energy producer
with a multi-trillion economy, excellent scientists, and a first-strike nuclear arsenal.
Russia and its economy benefited from our restricting Iran’s energy sector through
sanctions. It was Russian energy products that permitted Europe to take a hard line
with Iran. The U.S. should not be surprised that Europe, and Germany in particu-
lar, are not rushing into a titanic economic struggle against the world's biggest en-
ergy producer.
Europe recognizes that Russia has a shrewd, tough, aggressive leader, not
afraid of confrontation. An economic clash with Russia
could do real damage to Europe’s struggling economy. Eu-
rope has substantial investments in Russia and has financed
a substantial portion of its energy development. These in-
vestments, loans, and financing arrangements mean that Eu-
ropean banks have great direct exposure to how the Russian economy does. If
Putin were to play hard ball, the European economy would be meaningfully affect-
ed by loss of investments, loan repayments, and business opportunities in Russia.
For example, Germany depends on Russia for around a
quarter of its energy consumption. French banks alone have a
very substantial portfolio of Russian loans. Austrian banks have
major subsidiaries in Russia, and Cyprus banks and business ven-

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April 2014
3
tures are one of the biggest offshore investment destinations for Russian oligarchs.
A real economic confrontation with Russia, created without thorough planning by
the U.S., could destroy the Cypriot economy and with it, do real damage to Austria
and Europe. Like Germany and France, even British bankers are at risk.
In recent weeks economists, in looking where our economy will be over the
next 12 months, have paid far too little attention to the economic impact a major
non-military confrontation with Russia could have on our economy. It is not just a
question of trade with Europe or Asia. Intelligence sources point out that Russian
oligarchs and the Russian mafia, with whom Putin has close re-
lations, have carefully positioned hidden funds in many parts of
the world’s banking and financial systems and strategic markets.
Russia, it is believed, could use these available funds to disrupt
or crash these systems and markets, affecting the U.S. economy in a direct and
substantial way.
Further, intelligence sources say that due to a fundamental belief that nations
now behave only in a gentlemanly way, over the past 5 years the U.S. has paid
very little, if any, attention to the potential for hostile cyber-attacks on
In 2010, U.S. spy chief, Mike McConnell, la-strategic U.S. targets.
mented that the U.S. “is simply the most dependent and most vulnera-
ble” world power to a cyber-strike.
On the other hand Russia has been preparing for such an even-
tuality for years. As recently as 2012, Leon Panetta, then U.S. De-
fense secretary, warned that a sophisticated enemy like Russia “could
shut down the power grid across large parts of the country, *** derail
passenger trains or, *** trains loaded with lethal chemicals, *** or
contaminate the water supply in major cities.”
Less dramatic, but well within Russia’s cyber ability, it could
shut down the U.S. banking system and the stock exchanges. These types of

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April 2014
4
cyber-strikes are hard to trace. The U.S. still has not taken any serious steps in the
last 5 years to protect against these types of cyber-attacks. In a serious economic
showdown with Russia, we remain highly vulnerable. Putin has not hesitated to
send thousands of agitators and troops into the Crimea. U.S. intelligence has veri-
fied that Russian agitators and troops have participated in seizing portions of east-
ern Ukraine.
One hundred thousand Russian military stand ready
to back up Putin’s demands on the Ukraine. There is eve-
ry indication that Russia intends to continue acting aggres-
sively toward the Ukraine. If Russia is willing to aggres-
sively use military force in the Ukraine, no one should dis-
count the possibility that if the U.S. moves aggressively
with sanctions or other means of economic force, Russia
may retaliate economically using strong counter measures. Putin may want to
teach a hard lesson, so that others would learn not to confront Russia economically.
Even by using mild forms of cyber and market intervention, Russia could push the
fragile U.S. economy into recession.
The U.S. economy is currently quite fractured with different segments in dif-
ferent phases of recovery or decline. In preparing for how your segment will per-
form over the next 12 months, you should have a plan for what the international
situation could bring as one of your scenarios. Only the U.S. government can an-
swer whether the U.S. should take strong economic action as the current crises in
Eastern Europe, Asia or the Middle East develop. But what businesses have to do
is be prepared for the economic consequences of such actions.
The economy may not feel the consequences until early to mid-2015. But
by then it will be too late for your business to react. The time to plan and monitor
the changing economic climate is now.

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April 2014
5
Our strategic partner, the Institute for Trend Research (“ITR”) empha-
sized this month that at this juncture in the business cycle, it would be a
mistake for businesses to use “linear forecasting” in thinking about how to
plan their next steps, where their industry segment is headed, or even where
the economy is headed.
With the economy so fractionated and weak, even slight unexpected oc-
currences can cause major course changes. That is why we focused on
alerting you to the possible outcome of even distant events like the Ukraine.
The current data continues to shows a positive direction for industrial
production led by utilities and mining, but with mixed results for manufactur-
ing. For example, the Philadelphia Federal Reserve’s gauge of manufacturing
activity rose substantially in April while New York Fed’s gauge of manufacturing activity fell.
Recent Cartoon
The Wise Old Owl
Tell the Russians,
we don’t behave
like that in this
century!

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April 2014
6
The numbers showed employment rising moderately. But like with industrial production,
the picture was actually very mixed. Manufacturing employment was little changed, while
temporary employment showed substantial gains. This reflects the fact that rather than hiring
new permanent employees, employers are increasingly using part time, temporary help, and
overtime hours to cover slowly rising needs for increased productivity.
The average work week remained well below 40 hours at 33.7 hours. At the same time
manufacturers were covering any increased production demand by increasing factory overtime
to 3.5 hours per week. Many manufacturers indicate they are not sure that demand will hold up
or may not be consistent, as reflected by the New York Fed’s figures. Also, the Affordable
Care Act costs have made employers cautious about hiring new full time employees.
Retail sales, excluding autos, showed a slight 0.7% increase, but the rate of rise is decel-
erating on an annualized basis. Even the business to business durable sales increase appeared to
reflect a push to increase efficiency and replace employees with computers and machines.
Real inflation also seems to be threatening a variety of business segments. For example,
in the meat industry it is not unusual for the wholesale cost of key cuts of choice and prime beef
to be up 30% over last year. For a meat processor providing portion controlled meat to
restaurants that means they may find that just to maintain the same inventory and sales as last
year, it will cost them 30% more dollars.
At the same time a successful meat processor that is a pass through entity for tax purpos-
es received a major federal tax increase to be paid in 2014. To generate the after tax income
necessary to cover both the tax increase and the inventory increase would require approximately
a 60% increase in pre-tax 2013 profits. As the stock market reflects, business is not seeing
those types of gains. In addition to increasing inventory costs meat processors are seeing other
cost increases as well. New hires come only when after tax profits meet all these other
increased costs.
It is no wonder that ITR is forecasting an impending business-to-business slowdown on
the horizon from all these factors. We can help you plan for what is coming in your segment.
Give us a call and put our experience to work for you.

In Retaliation for Sanctions Will Russia Push the U.S. Into Recession?

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