European stocks were gutted yesterday (Thursday) as banks took heavy losses in the face of more hawkish inflation comments from European Central Bank (ECB) President Jean-Claude Trichet that put pressure on already struggling financials.

The Dow Jones Stoxx 600 closed down 2.6% to 288.48, the worst finish for the Eurozone index since October 2005. The FTSEurofirst 300 had a 2.5% drop, to close at 1,197.02 points, its largest one-day percentage drop since mid-March, Reuters reported.

Regional indices faired the same, as the Paris-based CAC40, London’s FTSE 100, Madrid’s IBEX 35 and the Frankfurt-based DAX all posted declines.

"Overall, there is unprecedented confusion as investors seek to weigh up credit-led deflation against commodity-led inflation – with the unknown factor being how close we are to our commodity/infrastructure constraints to growth," analysts at Credit Suisse Group AG (ADR: CS) said, MarketWatch reported.

Adding to the sell-off was a report from Goldman Sachs Group Inc. (GS) analysts further downgrading the outlook for U.S. financials such as Citigroup Inc. (C).

The specter of higher interest rates and tighter credit markets shook European financial firms that are still struggling due to exposure to the troubled U.S. subprime mortgage market that has led to billions in write-downs at some of the European Union’s most well known names.

A $19 billion loss in the first quarter for Swiss bank UBS AG (ADR: UBS) led to the ouster of former Chairman of the Board Marcel Ospel.

More recently, Britain’s Barclays PLC (ADR: BCS) announced it would raise $8.9 billion in much-needed capital in order to prop up its weak balance sheet and try to maintain its dividend. Most of the emergency liquidity will be obtained through investments from foreign sovereign wealth funds.

And if a recent report from analysts at the Royal Bank of Scotland Group PLC (ADR: RBS) is correct, the worst is yet to come for global financial firms that have already taken almost $400 billion in write-downs thus far.

RBS analysts have warned clients to brace for a full-blown crash in the global stock-and-bond markets in the next three months, as the conflicting realities of slowing growth and rising inflation paralyze the world’s major central banks – causing "all the chickens [to] come home to roost," Great Britain’s Daily Telegraph newspaper reported.

But even while Europe’s markets staggering and financial firms still looking to regain traction, Eurozone inflation is grabbing the front-page headlines.

Trichet’s Tough Talk on E.U. Inflation

Trichet has signaled that the ECB will raise its key interest rate to 4.25% from its current level of 4.0% at its next monetary policy meeting scheduled for July 3. The ECB president has been quick to add that he has no further plans after the initial 25-basis-point hike and will wait to see how inflation plays out over the course of the year.

 "I didn’t say that we would envisage a series of increases," Trichet told the European Parliament earlier this week. "I didn’t say that. That being said, we never precommit."

While Trichet is playing his cards close to the vest about future monetary policy decisions, the market is already betting on a series of rate hikes.

Eonia (Euro Over Night Index Average) forwards contracts are being priced at 4.5% for December and 4.64% for March, Bloomberg News reported. 

"There is disagreement among ECB policy makers about the future course of monetary policy, but one increase will simply not be enough," Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Group PLC (ADR: RBS) in London told Bloomberg. "At the end of the day, inflation concerns will rule."

Year-over-year, the inflation rate was at a 3.7% in May for the 15-nation Eurozone, well above the ECB’s preferred target of 2.0%. Trichet has repeatedly said the central bank will act to fight inflation before dangerous secondary effects, such as higher wages, become entrenched in the European economy.

And the banks’ "primary mandate" is fighting inflation. Despite some economic softening in various E.U. member countries such as Spain, the ECB is being called upon to prove its hawkish stance is more than just talk.

"It would not be credible for the ECB to hike just the once and then expect inflation to fall back," Robert Robis, a fixed-income portfolio manager at OppenheimerFunds Inc. in New York, which manages $260 billion, told Bloomberg. "It has its hand forced by its own mandate."

If Trichet & Co. don’t come through with the rate increase that has been widely alluded to in the press, it’s likely that the ECB president will raise a harsh round of criticism, much like his U.S. counterpart, Federal Reserve Chairman Ben S. Bernanke.

Faced with soaring food and energy prices, Bernanke and the other members of the Federal Open Market Committee (FOMC) voted to hold the Federal Funds rate steady at 2.0% on Wednesday, as downside threats to economic growth remain.

"When it comes to inflation, the Fed has clearly shown that it has no stomach for actual combat," Peter Schiff, president of Euro-Pacific Capital Inc., told The New York Post.

"If it did, it would have long ago followed the lead of the ECB and held the line on interest rates," Schiff said in reference to the most aggressive rate campaign in a generation. "In truth, Bernanke simply wants to preserve the expectation that he will act, even if it is the last thing on his mind."

News and Related Story Links:

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• Bloomberg News:
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• International Herald Tribune:
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The European Commission, the executive branch of the European Union, said yesterday (Monday) that Eurozone growth would continue to erode throughout 2008 and 2009.

But here’s the wild card: Inflation is actually expected to accelerate for the rest of this year and much of next  – even in the face of declining growth – until the pricing pressures recede in the last part of 2009.

The EC said the combined growth rate for the 15 countries that use the euro would slow to 1.7% this year and 1.5% next year. This marks the second time since November – when it was projecting growth of 2.2% – that the commission has reduced its growth estimate for the region.

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"The moderation in growth results from the persisting turmoil in the financial markets, the marked slowdown in the United States and soaring commodity prices, all of which are taking their toll on global activity," the commission said.

The commission noted that Europe was nowhere near a recession itself, but warned that an actual recession in the United States – along with a weak dollar and soaring commodity prices – would combine to hurt exports out of the Eurozone.

"The negative impact on euro-area exports is likely to be larger in the future than it has been in the recent past, due to the usual lags in the reaction of trade to exchange rate developments and cooling global growth," the commission concluded.

Just last week, for instance, Airbus S.A.S., the world’s largest commercial aircraft manufacturer, was forced to raise the price of several of its jetliners, including its A380 super jumbo. The chief culprits: The falling U.S. dollar and higher expenses for such key commodities as steel and aluminum.

Still, the commission remains more concerned with inflation, which it considers "the main problem that we have to face in the short term." According to the commission, inflation will climb to 3.2% this year, more than it previously forecast and well outside the group’s comfort zone of just under 2%. Inflation is expected to throttle back to the 2.2% level late in 2009.

According to the EC, nominal compensation per employee grew an average of 2.5% per year in the euro area over the past decade. By keeping inflation below 2%, the group wanted to ensure that some room was left for increases in real income.

"However, the recent sharp rises in food and energy prices have depressed households’ purchasing power and consumer spending in the last quarter of 2007 and are expected to continue to do so during most of 2008," the commission said.

An Uphill Battle for the ECB

The European Central Bank (ECB) has remained hawkish on inflation, holding its benchmark interest rate steady at 4.0% – despite an aggressive string of rate cuts that has left the U.S. Federal Funds Rate at 2.25%, and an expectation that American central bank policymakers will cut rates by an additional quarter point tomorrow (Wednesday). But so far, the ECB’s high-interest-rate policy seems to have had little effect on soaring prices.

Because they are priced in U.S. dollars, key commodities have been rising in response to the greenback’s slide. As a result, Eurozone inflation hit 3.6% in March -the highest reading for that measure since the founding of the European Union in 1997.

ECB president Jean-Claude Trichet recently described the current economic situation as "very challenging," but said he was convinced that Europe can "meet those challenges thanks to its stability-orientated monetary policy strategy."

However, French Economy Minister Christine Lagarde is one member of a growing constituency that thinks the gap between interest rates is too big.

"We are in a delicate situation where we have, on the one hand, an American Federal (Reserve) which has a policy of very low rates and a European Central Bank which has maintained high interest rates," Lagarde told LCI television and RTL radio. "The differential in interest between the two, it seems to me, is a little too big at the moment."

Of course, many analysts anticipate Fed Chairman Ben S. Bernanke will announce another quarter point cut rate cut after policymakers meet today (Tuesday) and tomorrow.

The euro hit a new all-time high of $1.6018 last week, after the dollar rebounded for much of the month.

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The euro failed to extend its run of record highs versus the U.S. dollar Tuesday, as policymakers in Europe voiced concern over the currency’s strength.

The euro has gained 3.5% on the dollar in the past week, reaching a new high of $1.5275 Monday. It has climbed 16% versus the dollar in the past year, leading some European policymakers to suggest the European Central Bank cut interest rates in the face of inflation that has soared to a 14-year high.

"The problem with the euro is that the European Central Bank, which does a good job controlling inflation, is ultra-powerful," Dominique Strauss-Kahn, head of the International Monetary Fund, told European news outlet Le Monde. "There is no political counterweight in the shape of a real European finance minister charged with growth."

Strauss-Kahn’s concerns were echoed Tuesday after a monthly meeting of E.U. finance ministers in Brussels. Representatives of member nations voiced their concern about the dollar’s weakness and the euro’s growing strength, even calling on the United States to tighten its monetary policy in a joint effort to rein the swelling discrepancy between currencies.

"What I wish is that we will see the U.S. authorities’ attitude strengthening" Belgian Finance Minister Didier Reynders told reporters after the meeting, adding that the euro’s strength "augurs a stronger collaboration" between U.S. and E.U. policy makers.

Treasury Secretary Henry Paulson reaffirmed the U.S. commitment to a strong dollar on Monday.

"A strong dollar is in our nation’s interest," he told Bloomberg Television. "The long-term [U.S. economic] fundamentals are very solid and they’re going to be reflected in our currency."

The euro’s rise has become a threat to the region’s exports, just as the United States teeters on the brink of recession. The European Commission on Feb. 21 cut its forecast for economic growth to 1.8%, down from the 2.2% pace predicted in November.

European consumer spending, which accounts for almost 60% of the economy, fell in the fourth quarter for the first time in six years, the E.U.’s statistics bureau in Luxemburg said Tuesday.

"In the present circumstances, I consider very important what has been affirmed and reaffirmed by the U.S. authorities, including the secretary of the Treasury and the president of the United States of America, according to whom a strong-dollar policy is in the interests of the United States," said ECB President Jean-Claude Trichet.

According to Jacques Cailloux, chief Eurozone economist at Royal Bank of Scotland Group PLC (RBS), Trichet was clearly responding to the currency overshooting, but his comments are not a signal that the ECB will act immediately or slash rates at its next meeting March 6.

"It’s not a signal for intervention or a clear sign for policy easing just yet, but it may fast track the debate on the ECB’s Governing Council about a rate-cut," he told Bloomberg.

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Free-market U.S. conservatives like to talk about "old Europe." They tell stories about the sclerotic EU bureaucracy, the intransigent French unions, and the rigid German banking system.

Problem is, they ignore the really interesting Europe. The Europe that is growing rapidly. The Europe with soaring productivity, low inflation, small public sectors, an excellent education system, and high foreign investment in factories that quickly learn to undercut their neighbors in Western European.

This new Europe – centered around Poland, the Czech Republic, Slovakia and Hungary – is difficult for the average U.S. investor to buy. But there are still some inbound pathways with solid profit potential. Let me explain…

The Productive Key to Growth

As my readers in the Money Map Report know, productivity growth is the key to long-term gains. The United States manages productivity growth of just over 2% a year, Western Europe a little less, and Latin America an abysmally low 1% per annum.

At the opposite end of the spectrum, wealthy Asian countries like South Korea and Taiwan enjoy productivity growth of more than 4% a year. This makes their companies more competitive year by year against their Western counterparts.

Poland, Hungary, the Czech Republic and Slovakia are all quite wealthy – much wealthier than their neighbors further east. Yet each of their productivity growth rates over the last five years are almost up to Asian standards: Poland (3.1%); the Czech Republic (3.3%); Hungary (3.4%); and Slovakia (4.9%).

Real economic growth was also good in 2006, clocking in at 6.1% in Poland, 6.4% in the Czech Republic, and 8.3% in Slovakia.  Only Hungary (3.9%) was a little slower. Inflation, budgets, and balance of payments are all in balance or, at worst, are in a modest deficit.

The lower growth in Hungary illustrates the one remaining political problem in the region. Electorates in former Communist countries like to throw their governments out every few years. (I guess it’s partly the thrill of being able to do so after so many years under Communism.)

However, throwing one government out means putting another one in, and in all these countries, until now, the Socialists have been the replacement party. The Socialists are generally opposed to the free market, corrupt and full of survivors from the Communist regime.

That slows down economic progress, as it has in Hungary, where the Socialists have been back in power since 2002.

In Slovakia, the bad guys were in power until 1998, but were then succeeded by a wonderful reformist government under Mikulas Dzurinda that introduced a 19% flat tax and brought rapid economic growth. Alas, after the World Bank praised the Dzurinda government as the "best reformist government in the world," the Slovakian prime minister lost the 2006 election. So the country’s stellar growth in 2006 is likely to be the last such performance for some time to come.

Poland, at last, found a way around this progress blockade. In Sunday’s election, the ruling "social-conservative" Law-and-Justice government was thrown out – but wasn’t replaced by the Socialists, who got only 13% of the vote.

Instead, they were replaced by the "economic-conservative" Civic Platform. Since Law and Justice were themselves pretty competent economically, the Polish electorate can now enjoy the pleasure of throwing out its governments, while replacing them only with other governments equally committed to the free market and economic growth.

This is wonderful news for investors in Poland. And since these four countries tend to copy each other, it is likely to be wonderful news in the long run for investors in the other three countries, as well.

How to Play Emerging Europe

Since few stocks or American Depository Receipts (ADRs) are traded on the U.S. exchanges, the best bet for emerging Europe is the Spider Standard & Poor’s Emerging Europe (GUR) exchange-traded fund (ETF). It invests in the share indexes of the Czech Republic, Hungary, Poland, Russia and Turkey.

However this ETF was only founded in March, and currently has a market capitalization of only $39 million. That’s up from $29 million a month ago. Of the five countries I just listed, Turkey’s also a good bet (though it may hiccup from the Iraqi-Kurdistan problem). I would only be nervous of Russia.

There is also a closed-end fund, the $180 million Morgan Stanley Eastern Europe Fund (RNE), which trades at around net asset value. However, it has a high expense ratio of 1.6%, and invests mainly in Russia.

Mutual funds are usually for the risk averse. But in the case of the San Antonio, Tex.-based U.S. Global Investors Inc. (GROW), mutual funds are worth a look by conservative and aggressive investors alike. The reason: U.S. Global’s funds are almost always top performers. Their U.S. Global Accolade Eastern Europe Fund (EUROX) is no exception. You can invest in it with confidence.

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European Union finance ministers open two days of talks today (Monday) to discuss how key U.S. problems as a slowing economy, a super-weak dollar and a huge-and-growing trade deficit will affect the European Union, as well as the rest of the world economy.

The falling dollar has made U.S. exports cheaper versus European counterparts. Plus, Europe is feeling the pinch as its own key exports – French wine, Italian fashions and German sports cars – are being priced out of the affordability range of American consumers.

BusinessEurope, the employers federation, last week said that the euro has risen past the so-called "pain threshold" for European exporters by crossing the 1.40 to the dollar level. The group is also arguing that the euro is rising too fast against the Japanese Yen and the Chinese yuan.

With the United States problems, the EU has throttled back on its growth forecasts – from the prior 2.6% to the current projection of 2.5 growth for the months ahead.

The finance ministers of the 13 euro-zone nations will express their intense concern but will also contend that Europe is an "innocent victim" of others. They will say that the euro and that the euro-dollar exchange rate issue is part of a broader set of problems – China’s huge trade surplus and massive $1.33 trillion in foreign currency reserves and the United States’ huge runup in debt, both in its current account and fiscal budget deficits. Some sort of formalized plan is needed to undo, or at least mitigate, these problems and their impact on European businesses, as well as on the market as a whole.

Luxembourg’s prime minister, Jean-Claude Juncker, set the tone last week when he said the Europeans should not have to bear the consequences of other countries’ inaction.

Finance ministers from all 27 EU nations on Tuesday will lift a caution for London that was imposed when it ran a budget deficit above the EU’s recommended 3% of gross domestic product. The recent economic surge should allow Britain to cut that to 2.4% in the 2008-09 financial year – but only if it avoids a U.S.-like collapse of is super-heated housing sector, which some experts (including several here at Money Morning).

The Czech Republic will see its budget warning stepped up, as it is told to cut its deficit to zero within five years. This year, the deficit is likely to overrun a forecast of 3.3%, as it counts the cost of higher social welfare spending by the previous government. The country needs to get well below 3% to join the euro as Prague plans for 2012.

Since the euro was launched as a currency five years ago, Europe’s commission has tried to get the countries using the euro currency to work harder to slash budgets and to do more to coordinate economic activity. It says the euro has made the European market less vulnerable to outside shock, such as the big jump in oil and energy prices of the past year.

With the United States problems, the EU has throttled back on its growth forecasts – from the prior 2.6% to the current projection of 2.5 growth for the months ahead.

the possibilities of a worsening U.S. slowdown, higher oil prices and tighter borrowing conditions could all risk derailing Europe’s first bloom of growth after several years of stagnancy.

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The Associated Press:
Finance Ministers Discuss Dollar Woes.

The European Commission yesterday (Wednesday) introduced a plan calling for a massive restructuring of power grids throughout the continent.  The plan was designed to reduce the region’s vulnerability to the massive energy companies that control the production and transmission of gas and electricity.

Currently, large energy companies monopolize energy production and distribution, with little or no regulation from the EU.  These companies operate at the network, wholesale, and distribution levels, keeping competition at a distance and prices vague.

Jose Manuel Durao Barroso, president of the EC told The Associated Press that “energy is the driving force of our economy,” and added that a response is needed to “achieve greater energy security and provide abundant energy at a fair price for citizens.”

The report also pointed out that EU residents and businesses supply options and that there is too much incentive for current operators to freeze out any new competition.

The Commission offered two options to proceed with, what it called, “ownership unbundling.”  The first would force energy companies to sell off their transmission networks. The second would require companies to retain their respective transmission networks, but lease them to fully autonomous operators. The Commission also called for an independent EU energy agency to oversee national regulators.

The plan was specifically designed as a safeguard against Gazprom, the state owned Russian energy giant. Gazprom currently supplies 25% of Europe’s gas, and is aggressively seeking other European acquisitions.  It has repeatedly used supply lines as a means of political and financial gain.

Additionally, Moscow refuses to open its energy sector up to foreign investment, even though Gazprom has full access to European energy markets. This has long been a point of contention.

If the plan is put into effect, other key European energy players will no doubt suffer. France’s EdF and Germany’s Eon are among the companies that would be broken up. France and Germany oppose the measure along with six other nations.

Barroso said in Brussels that “an open and fair internal energy market is essential to ensure that the EU can rise to the challenges of climate change, increased import dependence, and global competitiveness,” The AP reported.

As it stands now, Britain, Denmark, Spain, Belgium, Finland, Romania, Sweden and the Netherlands are on his side. Though, the likelihood of the measure succeeding remains unclear.

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• Money Morning: Belarus Assuages EU Fears; Agrees To Pay Part of Gazprom Debt.
• Money Morning: The New “Cold” War: How Russia Has Turned Its Energy Exports Into Weapons of Diplomacy.

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Last week, (July 20) Chevron Corp. said it would challenge a $290 million back tax claim issued against the Caspian Pipeline Consortium by Russia’s Federal Tax Service.  This is yet another attempt by President Vladimir Putin to seize control over all aspects of energy production and transportation within Russia.

The Caspian Pipeline Consortium is a group of international interests who operate a pipeline that transports Kazakh crude through Russia to markets elsewhere. The pipeline runs 935 miles from the Tengiz field in Kazakhstan to Novorossisk on the Black Sea. Chevron Corp. owns a 15% stake in the venture while Exxon Mobil Corp. owns 7.5% and the governments of Kazakhstan and Oman own 19% and 7% respectively.  However, it is the Russian oil monopoly OAO Transneft, which owns the largest piece of the pie, a 24% stake acquired in June.

Currently, decisions concerning the pipeline’s operation are reached by consensus, but state owned Transneft has attempted to persuade the pipeline’s other governing bodies to instead leave decision-making in the hands of a simple majority shareholder vote. This would give the company, and the Russian government, far more control over the pipeline. Failing in that effort, it now seems the country will resort to strong-arming the consortium members with its Federal Tax Service.

Russia, which is the world’s largest energy producer, has a history of using such tactics to manipulate foreign owned energy projects and usurp their authority.  The Federal Tax Service is the same agency that ran OAO Yukos Oil Co. formerly one of the world’s largest private oil companies, out of business after demanding more than $30 billion in back taxes.

Last year, OAO Gazprom, another state owned energy giant, agreed to buy 50% plus one share of Royal Dutch Shell Plc’s Sakhalin-2 oil and gas project for $7.45 billion. The deal was the culmination of a yearlong campaign in which the Russian government threatened to block Sakhalin-2’s investment plans and cancel building permits on environmental grounds.  This furthered President Vladimir Putin’s goal of gaining total control over Russia’s energy industry.

Last month, Russia put enough pressure on BP Plc. to convince the company to sell one of the World’s largest gas fields, the Kovytkta field, to Gazprom. BP’s local joint venture, TNK-BP, sold its 62.8% stake in the field after Russian authorities threatened to revoke the company’s license to develop it. 
Also as part of the deal, BP was “compensated” with inclusion in a $3 billion joint venture that will help take Gazprom worldwide. If the venture is successful TNK-BP could be rewarded with the opportunity to buy 25% of the Kovytkta field back.  Really, the arrangement is an attempt to coerce BP into helping Gazprom grow from a strictly Russian company into a global market giant. This will allow Russia, and Putin, to use its position as an energy provider as leverage in diplomatic negotiations.

Gazprom: Russia’s Ambassador to Europe

For evidence of just how heavily Russia relies on its state-owned energy corporations in foreign policy, look no further than a deal recently reached between Gazprom and France’s Total.  The company was chosen after five years of deliberation to help Gazprom develop a large offshore gas field in the Arctic. The project is estimated to cost $20 billion and is expansive enough to satisfy the entire world’s oil demand for an entire year. 

Together, Gazprom and Total will create a special-purpose company to organize the design, financing, construction, and operation of the Shtokman project’s phase one infrastructure. The company created will own this infrastructure for 25 years. Gazprom will maintain a 51% stake in the company and Total will be awarded 25% ownership. 

After the completion of phase one operations, Total will relinquish its share to Gazprom.  All of the reserves will belong to Gazprom as well.  Gazprom would just as soon do the entire job itself, but it is heavily reliant on foreign funding and lacks the expertise required to extract oil from a reserve located 984 feet below the surface of the Barents Sea, more than 370 miles off the coast of Murmansk. Additionally, the deal gives Russia another strategic foothold in European politics.

Of all the companies vying for Gazprom’s favor, Total was, by most accounts, the least likely champion. However, the decision was more political than practical. Russia, i.e. Putin, has a history of striking sweetheart energy deals with European countries with the end goal of turning their national energy companies into lobbyists for Moscow’s commercial and political agenda. This deal with Total is just the latest in a series of European joint venture deals that includes projects in Germany, Italy, and Great Britain.

The deal also comes at a time when France has recently elected a new president in Nicolas Sarkozy. Some have suggested that Sarkozy might take a harder line than his predecessor Jacques Chirac, but by offering a lucrative deal to Total, Putin has seized the opportunity to strike first and court France’s favor. 

Putin’s Foreign Policy Gets America’s Attention
Russia’s use of energy exports for diplomatic leverage as well as its intimidating arsenal nuclear weapons has, not surprisingly, rubbed Washington the wrong way.

Last week, Reuben Jeffery, the under-secretary at the state department for economic, energy, and agricultural affairs, traveled to Russia with the hopes of addressing some of these issues. 

“It’s no secret there have been some adjustments to contractual terms of pre-existing energy production and development arrangements that are troubling and we want to have a dialogue on this topic.” Jeffery said in an interview with Financial Times.

The U.S. has repeatedly encouraged nations like Kazakhstan and Turkmenistan to build a pipeline west, across the Caspian Sea to Turkey, in the hopes of circumventing Russia and providing central Asia with access to the world’s gas markets.

The announcement that Russia, Turkmenistan, and Kazakhstan recently agreed to build a natural gas pipeline across central Asia to Russia, further tightening Putin’s grip over energy routes out of the region, came as a huge blow to that effort.

Jeffery commented on the failure of other nations in the region to work around Russia saying, “The objective as we talk about alternative routing systems is to create legitimate market-based competition, and to develop some redundancy in the system in the event of legitimate physical breakdown, or other political issues that might arise that might lead somebody to cut off supply.”

That someone in question is Vladimir Putin who through Gazprom cut off gas supply to the Ukraine after the nation refused to pay quadruple the amount it previously paid for Russian gas.  The rest of Europe, which relies heavily on Ukraine for the transit of Russian fuel, felt the effects of the 2006 dispute as well. 
Hungary, Poland, and Austria reported that gas piped to them from Russia through Ukraine slowed down as much as 40%. French Utility Gaz de France SA reported a decline of 25%-30%. This is exactly the kind of occurrence that has U.S. lawmakers riled up and determined to find solutions. 

What’s Next For U.S. – Russia Relations

In 2006, a bipartisan taskforce was created with the specific goal of addressing the current diplomatic relations with Russia.  The task force was sponsored by the Council on Foreign Relations, and chaired by former Vice Presidential nominees John Edwards and Jack Kemp.

The report, titled Russia’s Wrong Direction: What the United States Can and Should Do noted that, “The political balance sheet of the past five years is extremely negative. The practices and institutions that have developed over this period have become far less open, pluralistic, subject to the rule of law, and vulnerable to the criticism and counterbalancing of a vigorous opposition or independent media.”

The report also addressed specific areas of concern including:

• De-Democratization: The report refers to the country’s political institutions as “corrupt and brittle,” saying “Russia’s capacity to address security concerns of fundamental importance to the United States and its allies is reduced. And many kinds of cooperation – from securing nuclear materials to intelligence sharing – are undermined.”
• Energy Supplies: “Russia has used energy exports as a foreign policy weapon: intervening in Ukraine’s politics, putting pressure on its foreign policy choices, and curtailing supplies to the rest of Europe.  The reassertion of government control over the Russian energy sector increases the risk this weapon will be used again.”
• Diplomatic Relations: “A country that has, in the space of a single year, supported massive fraud in the elections of its largest European neighbor and then punished it for voting wrong by turning off its gas supply has to be at least on informal probation at a meeting of the world’s industrial democracies.”

Russia and its president have responded in kind, taking the opportunity to slam the U.S. and its foreign policy on three separate occasions since May.  Putin has accused the U.S. of “hegemonic behavior,” as well as “neo-imperialism,” and provoking an arms race.

Unfortunately, the United States could struggle to curtail Russia’s aggressive foreign policy and that may be part of the reason for its emergence. It’s possible that Putin senses a little bit of blood in the water and suspects that the America is, perhaps, stretched too thin. 

The U.S. is embroiled in conflict in the Middle East, going back and forth with Iran over the ambitions of its nuclear program and bogged down and seemingly out of solutions in Iraq.  Several flare-ups have occurred with China in recent months and countering its economic and political growth spurt looks to be a long-term venture. Meanwhile, the dollar is falling and some believe its status as the world’s main reserve currency is in jeopardy. 

Lost in the shuffling of U.S. foreign policy priorities could be an oil-rich nation whose GDP grew 6.7% in 2006 and whose economic growth rate hit a six-year high of 7.9% year over year in the first quarter of 2007.  With so much on the plate of the United States, the question the rest of the world is left with is “Who’s going to stand up to Russia?”