Russia - Ukraine: Big Picture

We had a good reaction to the brief Sanctions post yesterday. I’ll be returning to that topic, since it’s such a big part of the war on Russia, but first let’s set the stage with excerpts from Moon of Alabama’s overview today—note that the WaPo reporting reflects the earlier post today. There’s much, much more at the link, but this serves well as an overview:

Is reality setting in? Is that why a Washington Post reporter, who has been on the frontline in Ukraine, was allowed to write this?

Ukrainian volunteer fighters in the east feel abandoned

[A]fter three months of war, this company of 120 men is down to 54 because of deaths, injuries and desertions.

The volunteers were civilians before Russia invaded on Feb. 24, and they never expected to be dispatched to one of the most dangerous front lines in eastern Ukraine. They quickly found themselves in the crosshairs of war, feeling abandoned by their military superiors and struggling to survive.

…

But the biggest part of the responsibility for the life of those men falls to the Biden administration. It tried to push Zelensky to invade Donbas in early 2021. Back then Russia started large scale maneuvers and made clear that they would intervene. Zelensky got cold feet and pulled back. ... After the 2021 attempt on Donbas had failed the U.S. immediately prepared for a new attempt to provoke Russia in Ukraine in spring 2022.

… The U.S. did not know of a 'Russian invasion'. What it knew was that Zelensky, pushed by the U.S., would make another attempt to invade the Donbas republics with overwhelming force and that Russia's leadership would have to react to such an assault on its compatriots.

The Ukrainian assault began on February 16 when over several days Ukrainian artillery increased its bombardment of Donbas by a factor of 40. Russia reacted to that and on February 24 preempted the planned ground assault.

The above part of Biden's plan to provoke Russia into a war as a means to strengthen the U.S. position in Europe has worked well.

But how long will the coalition of the 'west' hold when inflation, energy scarcity and hunger set in? European unity is already falling apart with each country scrambling to fulfill its own energy needs.

Everyone can now see that the Ukraine, and with it the U.S., is losing the war. Meanwhile Russia is doing much better than anyone had expected.

What is Biden's plan now as things fall apart? Escalating towards a wider war is an option but the risk of it is much higher than potential gains.

Yesterday at the Sanctions post Stephen McIntyre provided a link to his past tweets on sanctions generally—cued off the word “export”. These tweets go back as far as mid-2018 and provide a springboard for some fascinating historical comparisons. However, for our purposes here I’ll focus on the more current tweets which, like the Moon segment above, serve to provide an overview of the effects that sanctions are having. Hint—the sanctions are backfiring spectacularly. While the architects of this daft strategy may have envisioned short term pain for the West, the reality is turning into something much worse. Something that reality based planners should have recognized as a serious risk.

The first tweet, from November, 2021, sets the context for the latest escalation of sanctions, which seemed to presume that China would never recognize the threat to its own interests in the US assault on Russia:

Stephen McIntyre @ClimateAudit

@zd_wen Understood. Trade imbalance seems like madness tgo me. US imports from China are three times larger than its exports to China. How can this continue to persist?

A few months later in March, 2022:

everyone in west seems convinced that sanctions are going to cripple Russia and that war effort is being financed by exports. But in late 2021, Russia was running a very large current surplus of $27 billion/month with exports nearly double imports ($57 billion vs $30 billion)

in 2020 (and it will be significantly different in 2021), approximately half Russia's imports came from China and Belarus. I expect that most of the $2B/month of imports from Germany and $1B/month from US could be easily replaced from China.

in contrast, US is running a current account deficit of $80 billion per month and has international debt of $22.8 trillion (Russia: $0.48 trillion).

I haven't parsed details of trade - my main point was that Russia had a huge balance-of-trade surplus right now and would be in surplus even if exports cut in half. This surplus will make it easier to figure out import substitution of anything that bites.

the flip side is that we're learning is that some Russian exports - ones that are not necessarily enormous in aggregate value - are necessary for western European manufacturing processes.

I wonder how enthusiastic western Europeans will remain over this fatwa by US zealots and eastern European partisans.

Regarding zealots, I would add that it’s not just US Neocon zealots and Eastern European “partisans”. The UK is very much in the camp of the zealots, for its own reasons and is a very important part of the war on Russia. As for the Eastern Europeans, these are all countries that have had—in their views, but that’s what counts—unhappy histories with Russia and, especially, the USSR. Their reactions, while all too human, are frankly irrational and run very much counter to their interests. It strongly suggests that they’ve been suborned by the US.

Now we get to the nub:

Russia had huge export surplus. Sanctions ended up dramatically increasing prices of most of its exports. Russia will get same income even if volume substantially reduced, while US pays much more. Backfire??

thus far, US sanctions have 1) dramatically increased price of Russian exports, enabling Russia (already in large surplus) to get even more export earnings (or same with lower quantity). 2) dramatically reduced stock price of foreign holdings of Russian stocks, presumably facilitating repatriation of these assets; 3) imposed large price increases on US and European consumers, farmers and industries. Doesn't seem like a very effective plan so far.

Can someone explain to me how dramatic increase in prices of Russian commodity exports (oil, nickel, fertilizer etc) constitutes "punishment" to Russia? Looks to me like US is punishing itself, Africa and Europe. Shooting itself in the foot.

With that background, it’s interesting to look at what Vladimir Putin had to say yesterday to the leaders of former Soviet republics, as reported by Reuters:

Putin says 'Thank God' some foreign companies have left Russia

He wasn’t actually being totally flippant. His important point is that sanctions are opening doors for home grown Russian development—which is healthy. His overall assessment strikes me as realistic:

Putin said Russia still needed access to the advanced technologies of developed economies.

"We are not going to cut ourselves off from this - they want to squeeze us out a bit, but in the modern world this is simply unrealistic, impossible."

He did not elaborate on how Russia would find ways to maintain access to western components and software.

Putin promised that Western attempts to isolate Russia would fail, saying developed economies were grappling with an inflationary spiral, broken supply chains and a food crisis just as the centre of global economic power had moved to Asia.

Western sanctions have stoked Russian inflation while snarling supply chains, though Putin said the country is coping well and that Russia is turning away from the West in favour of China, India and other powers.

"Representatives of our businesses face problems, of course, especially in the field of supply chains and transport. But nevertheless, everything can be adjusted, everything can be built in a new way," Putin said.

"Not without losses at a certain stage, but it helps us in a way to become stronger. In any case, we are definitely acquiring new competencies, we are starting to concentrate our economic, financial and administrative resources on breakthrough areas.”

Will more developed economies actually find ways to continue cooperating with Russia? I think you can count on it, if the willingness of EU countries to do end runs on sanctions is any sign—which it is.

Finally, I want to recommend Pepe Escobar’s long article:

NATO vs Russia: what happens next

In Davos and beyond, NATO's upbeat narrative plays like a broken record, while on the ground, Russia is stacking up wins that could sink the Atlantic order.

I’ll only excerpt a very small portion, which includes Escobar’s acerbic take on the $40 billion “aid” package as well as his shrewd estimate of Putin’s likely game plan going forward.

First the “aid” pot of gold at the end of the rainbow (how woke!):

Ukraine is the Holy Grail of international corruption. That $40 billion can be a game-changer for only two classes of people: First, the US military-industrial complex, and second, a bunch of Ukrainian oligarchs and neo-connish NGOs, that will corner the black market for weapons and humanitarian aid, and then launder the profits in the Cayman Islands.

A quick breakdown of the $40 billion reveals $8.7 billion will go to replenish the US weapons stockpile (thus not going to Ukraine at all); $3.9 billion for USEUCOM (the ‘office’ that dictates military tactics to Kiev); $5 billion for a fuzzy, unspecified “global food supply chain”; $6 billion for actual weapons and “training” to Ukraine; $9 billion in “economic assistance” (which will disappear into selected pockets); and $0.9 billion for refugees.

That “training” line item looks juicy, doesn’t it? And you can bet that Escobar is right on the money regarding the “economic assistance”—it will assist the oligarchs and their Western sponsors, prominently including US politicians.

US risk agencies have downgraded Kiev to the dumpster of non-reimbursing-loan entities, so large American investment funds are ditching Ukraine, leaving the European Union (EU) and its member-states as the country’s only option.

In conclusion, Escobar addresses the pace of events. I think he’s got a real point. The longer this goes on, the more leverage Putin and Russia will have over the EU:

Zelensky will be fine. He’s protected by British and American special forces. The family is reportedly living in an $8 million mansion in Israel. He owns a $34 million villa in Miami Beach, and another in Tuscany. Average Ukrainians were lied to, robbed, and in many cases, murdered, by the Kiev gang he presides over – oligarchs, security service (SBU) fanatics, neo-Nazis. And those Ukrainians that remain (10 million have already fled) will continue to be treated as expendable.

Meanwhile, Russian President Vladimir “the new Hitler” Putin is in absolutely no hurry to end this larger than life drama that is ruining and rotting the already decaying west to its core. Why should he? He tried everything, since 2007, on the “why can’t we get along” front. Putin was totally rejected. So now it’s time to sit back, relax, and watch the Decline of the West.

Relax and watch, yes. But also take advantage of Russia’s hugely increased economic leverage. One way to pay for Russian energy is with rubles. Another way could be various forms of tech transfer. Did Putin hint at that in his video conference? I think he did.