War is a guilty, vicarious pleasure as long as you are not hunkered in a basement or trench praying that an artillery shell does not score a direct hit on your position. Rumbling tanks, screeching rockets and missiles and troops firing automatic weapons are the stuff that Hollywood trots out to entertain the masses that tune in to watch a war flick or, even better, live feeds from the front lines courtesy of intrepid reporters.
But the real damage from Russia’s invasion of Ukraine is economic and will determine the outcome of this war. It is not only wreaking havoc in Ukraine, it is causing real damage around the world. Some believe that the United States and NATO are using Ukraine as a lever to weaken Russia and get rid of Putin. Putin’s crime? He refused to be the prison bitch of the west. But there is a RAND report from January 2022 that suggests something darker, even diabolical. More about that later.
The economic sanctions were designed to hurt all Russians–not just Putin and his key leaders. You remember the heady days early in the war when Russian assets outside of Russia were being seized, Russian oligarchs, including those who opposed Putin, had their property confiscated, and artists and athletes were treated like lepers with active Ebola. The west effectively declared a non-shooting war on Russia and sat back waiting for the Russian economy to collapse.
But that backfired and did so in a big, unexpected way. Rather than fold like a cheap tent in a hurricane, the Russian economy continued to chug along with minimal inflation because the smart guys and gals in Washington, London and Berlin failed to do their homework. They did not realize that Russia’s position as a major exporter of oil, gas, fertilizer and other critical metals and rare earth minerals insulated Russia from the pain the west so desperately wanted to inflict. And Russia pivoted to forging stronger ties with China, whose economy was in trouble, and accelerated the development of an alternative international reserve currency that would enable Russia to trade with other nations outside the NATO club.
Now the chickens are coming home to roost and it is bad news, not for Russia, but for Europe. Maybe you missed these recent reports:
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The energy in crisis in Germany is turning into a manufacturing crisis, with an executive at the ArcelorMittal steel company saying that the German wing of the company can no longer compete due to soaring energy coasts.
“Production in Germany is currently no longer competitive,” said Reiner Blaschek, the CEO of ArcelorMittal Germany, which recently shut down two plants in the country. He is calling for quick political intervention, saying, “We need competitive energy prices for industry.”
Gas and electricity prices, which have soared in recent months due to sanctions and Russia’s decision to cut gas flows, have left many industrial companies with input costs too high to remain profitable, and many economic experts are forecasting further pain for Germany’s core industrial sector, which would have knock-on effects for the rest of the German economy.
Did you catch that? ArcelorMittal already has closed two plants in Germany. That means unemployed, skilled workers. And that unemployment reverberates to other parts of the German economy. Those workers no longer have extra cash to spend in restaurants and bars. They don’t have the dough to buy new homes or remodel their kitchens or bathrooms. All of this a result of “soaring energy prices” that is a direct consequence of idiotic green policies and German hostility towards Russia manifested via sanctions. The surge in the price of gas and oil is not going to abate in the near term and Russia has tightened the screws on Europe by cutting off the gas supply from Nordstream.
Sweden, who recently joined NATO, is getting an economic punch in the nose as well:
Swedish appliance maker Electrolux AB announced a cost reduction program after reporting a plunge in demand for its home appliances across Europe and the US.
The world’s second-largest home appliances manufacturer after Whirlpool said, “market demand for core appliances in Europe and the US so far in the third quarter is estimated to have decreased at a significantly accelerated pace compared with the second quarterdriven by the impact of high inflation on consumer durables purchases and low consumer confidence.”
The European Union also is struggling to deal with strong economic headwinds unleashed by the sanctions on Russia:
Friday’s meeting in Brussels capped a frenzied week of government activity across the 27-nation bloc in which it became clear just how complex it is to forge a common response to the energy crisis given the breadth of challenges. . . .
Russia upped the ante just over a week ago, when Gazprom PJSC cut off gas deliveries to Europe via the Nord Stream pipeline indefinitely.
That sparked another round of budget-straining measures as governments announced additional aid to help people pay their bills. They were also forced to deal with a new financial threat from the crisis. As soaring energy prices leave some businesses struggling to find enough cash to meet margin calls, countries announced billions of euros in funding funding.
Lurking behind the economic chaos in Europe is the unfolding economic disaster in Ukraine. Ukraine’s economy is not producing enough cash flow to sustain its military effort. It is now totally dependent on the largess of the United States and Europe. So here is the critical question–how long will the governments of Europe, facing growing domestic unrest, continue to write blank checks to Volodomyr Zelensky and deplete their own military stockpiles?
One more trip back to World War II. The Soviet Union suffered catastrophic losses during the first year of the war with Germany. As the Nazi armies flooded east, the Soviets hurriedly packed up factories and manufacturing plants and shipped them to the east of the Ural mountains. Do you think the United States, if it had been invaded, could disassemble their automobile and aircraft factories in Illinois and ship those plants to Alaska, reassemble them and have them back on line producing within a year? Because that is what the Soviets did. While they suffered unimaginable losses in men on the frontlines and had villages and cities razed to the ground, the Soviet Union continued to operate a manufacturing capability and rebuilt their armies with new recruits.
Ukraine is not doing any of that. Ukraine cannot safely bring recruits to camps in western Ukraine for basic training without risk of being hit my Russian precision missiles. A large portion of Ukraine’s manufacturing centers are now in the hands of Russia. Remember Mariupol? Without secure military training centers and active factories, Ukraine cannot pull off the economic miracle that the Soviets did in World War II.
As long as Russia’s economy remains intact and it can sell its essential products to other countries not on board with backing Ukraine, Russia will prevail. Let me conclude by giving analysts at Rand some kudos. Rand issued a prescient report in January that provides some alarming insight into a nefarious motive that explains why Washington is goading Berlin into backing Ukraine and cutting ties to Russia:
The present state of the US economy does not suggest that it can function without the financial and material support from external sources. The quantitive easing policy, which the Fed has resorted to regularly in recent years, as well as the uncontrolled issue of cash during the 2020 and 2021 Covid lockdowns, has led to a sharp increase in the external debt and an increase in the dollar supply.
The continuing deterioration of the economic situation is highly likely to lead to a loss in the position of the Democratic Party in Congress and the Senate in the forthcoming elections to be held in November 2022. The impeachment of the President cannot be ruled out under these circumstances. , which must be avoided at all costs. . . .
The current German economic model is based on two pillars. These are unlimited access to cheap Russian energy resources and to cheap French electric power, thanks to the operation of nuclear plants. The importance of the first factor is considerably higher. Halting Russian supplies can well create a systemic crisis that would be devastating for the German economy and, indirectly, for the entire European Union.