The Australian dollar fell sharply last night in response to new sanctions on Russia over its actions in Ukraine.
On the surface, the dollar’s fall was simply a reaction to the normal safe-haven money rush to the US that always sees a rise in the American currency.
But we need to understand that there are much deeper implications for Australia, which in time could affect our currency more dramatically.
We rely on the United States for a big part of our defence. In the Ukraine situation, the US’ actions have been similar to the Middle East -- tentative. To date, US sanctions have been much less severe than what has been imposed by Europe. Militarily, the failure of US-dominated NATO to back Ukraine means Russia is now in a position to win should it choose to fully exercise its power.
Its ‘peace’ settlement means Ukraine is once again at risk of becoming a Russian satellite state. Although the Middle East’s circumstances are different, the complete withdrawal of the US from Iraq played a big role in the rise of the Islamic state.
How reliable will the United States be in any Australian crisis? The current US policy stances look more like the US prior to the Japanese bombing of Pearl Harbor, which triggered America’s rise as an international military policeman.
The recent engine problems of the Joint Strike Fighter compound the JSF 'wrong shape' disaster I have documented many times. America (and Australia) is set to lose air power.
There are debates as to whether Russia simply sees Ukraine as an essential part of its security or whether the Ukraine thrust is a signal that Russia has much wider territorial ambitions.
The case for seeing Ukraine as a unique situation centres around the Russian defence base in Crimea, the defence manufacturing industries in Ukraine, and the fact that Ukraine is an important source of titanium metal, an essential mineral in high-technology applications.
But others see Russia's Ukraine push as akin to Germany in the 1930s. On that basis, Ukraine is just the first move. The people of Poland shiver because they remember 1939 and are alarmed that Russia has threatened the nuclear card on several occasions in this crisis.
I am afraid I do not know which scenario is right. I am not sure anyone outside Russian President Vladimir Putin really understands Russia’s long-term plan.
What does worry me is that if the West can’t resolve the situation, we are going to force the Russians into the arms of China, which will then nullify many of the sanctions imposed.
The worsening Ukraine situation has already caused Russia and China to come together on a massive gas supply deal. But if Russia is forced to turn its back on European and US trade via sanctions, then it will go to China. Russia, funded by China, will supply even greater amounts of gas and other minerals, making it tougher for Australia. Even more importantly, Russian technology could flow to China, creating the greatest military power the world has ever seen.
That is my fear. I have a high opinion of our Foreign Minister Julie Bishop and I am sure she is aware of the danger. I am also sure that currency markets have not looked that far ahead. But in time they will.