3 Questions You Should Ask about Flight MH-17

July 18 2014

Yesterday, Malaysia Airlines lost another of its Boeing 777s. After flight 370 it is now flight 17 that went down. It all happened when Obama was announcing he would expand the economic sanctions on Russia, again. With 298 fatalities, among whom 189 Dutch, the assault has stirred emotions worldwide. The US now blames Russia, Russia blames Ukraine, Ukraine blames the separatists, and the separ

3 Questions You Should Ask about Flight MH-17

Yesterday, Malaysia Airlines lost another of its Boeing 777s. After flight 370 it is now flight 17 that went down. It all happened when Obama was announcing he would expand the economic sanctions on Russia, again. With 298 fatalities, among whom 189 Dutch, the assault has stirred emotions worldwide. The US now blames Russia, Russia blames Ukraine, Ukraine blames the separatists, and the separatists blame Ukraine.

The gold price rallied to $1320/oz upon hearing the news, although it retraced on Friday to $1,310/oz. The real impact of the unfortunate events on July 17 on the gold price, however, will only become clear over time. It could very well be that Obama will use the incident to increase US presence in or near Ukraine, sparking fears of a new cold war. Yes, even though many questions still remain unanswered (primarily, who did it?), some world leaders seem eager to use the incident to their own advantage. Nevertheless, we will focus today on those unanswered questions.

Why Fly Over Donetsk?

It might raise some eyebrows that an airline would choose to fly over an area that has been in turmoil for many months. Even though the air zone above Donetsk was only ‘restricted’ — it was considered safe for planes that fly above 32,000 feet — many other airlines preferred to go around. Moreover, Russia already advised civilian airplanes to avoid crossing the area.

Due to the threatening situation in Ukraine, many airlines did pay serious attention to the militia when they said: “Our skies, our rules.” And it wasn’t merely a verbal threat. Many Ukrainian military aircrafts have been taken down by the separatists in recent months. Reason enough, it appears, to avoid flying over Donetsk.

The most likely answer is that Malaysia Airlines has been a money-losing operation for a long time. It has a consistent track record in wasting capital. As a formerly state-owned airline it had its fair share of misfortune. Plagued by bad management, corruption, and stifling labor unions, it has gone through four recovery plans and reorganizations and is overly indebted. Four years ago, the CEO promised to turn profitable this year, but that was utterly overoptimistic. Now, the route over Donetsk is by far the quickest one and with oil prices over 100 dollars a barrel (kerosene is distilled from gas oil), we can very well imagine Malaysia Airlines wants to save on fuel costs. Just in 2013 Malaysia Airlines already incurred a loss of 356 million dollars. Flying over Donetsk is simply the most economic route, and Malaysia Airlines was willing to take the risk.

Another reason that is touted on the blogosphere is that it might be a deliberate diversion by Ukrainian air control, but that seems rather unlikely given the above.

Who Owned the Buk Missile System?

The separatists are happy to trumpet the many Ukrainian military airplanes that they managed to shoot down. All these aircrafts were, however, taken down with shoulder-fired manpads. Manpads have very limited reach of just about 12,000 feet. Given that flight 17 was flying at 33,000 feet, it is evident that a missile system is responsible for the assault.

It is widely expected that a Buk missile system was used, which are still commonly used in the area being produced way back by the Soviets. That immediately raises the question who disposes of such missile systems. The militia claim to have no missile systems at all and Ukraine claims that there is no proof that any Ukrainian Buk was seized by the separatists. In case this is true, the Buk has to come from Russia.

At that point, the question arises whether the Russians voluntarily provided the separatists with a Buk or whether it was seized by force. That’s a big biggie. If this statement is anywhere near true, Obama would seize it with both hands in favor of his anti-Russia campaign.

This is, of course, if we assume that the separatists are to blame. Other possibilities include that Ukraine or the Russian themselves took the aircraft down.

Was It a Mistake?

So, if the separatists did it, were they aiming for a Ukrainian military airplane? This is the theory expounded by John McCain. “It has the earmarks of a tragic mistake,” he said on Thursday, adding that there would be “hell to pay” if the plane was shot down by the Russian military or separatists.

When using a Buk missile system you can hardly distinguish airplanes, fuelling the rumours that the separatists accidentally shot down a civilian aircraft.

If the separatists in the end did it, it remains quite unclear as to why they would deliberately aim for a civilian aircraft. Until now, they have only focused on Ukrainian military aircrafts and it doesn’t seem in their best interest to change their strategy. Now, with most media outlets blaming the separatists, Ukraine can count on additional leeway US to interfere and back up the Ukrainian government by blaming Russia and the militia .

US-Russia Relation Will Tense Up

If anything is conducive to higher gold prices at the moment, than it is a renewed cold war. Any indication of increasing tensions between the US and Russia will definitely have a significant impact on capital markets: stock markets might drop from their record highs and bond yields will move up in some parts of the world and down in others regarded as safe havens.

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