May 23, 2022

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The economic war against Russia is heating up

The economic war against Russia is heating up

Markets stabilized in the wake of Russia’s invasion of Ukraine on February 24, as if bombs and missiles wouldn’t disrupt the global economy. But the economic war that is taking place in parallel with the shooting war is getting hotter, which calls for more attention than investors might devote.

Much analysis of the Russian war in Ukraine focuses on Fierce battles on the ground for terrain The invading and defensive forces are fighting village after village in eastern and southern Ukraine. But the multinational effort is just as important as stifling the Russian economy, by slashing the energy revenues that fund the Russian military and denying the foreign technology Russia needs to maintain and renew its weapons. Like tank and artillery battles, economic combat is a war of attrition that whoever lasts the longest is more likely to win.

The economic war escalates as potential improbable beginnings emerge: Ukraine can win. The usually taciturn American Secretary of Defense, Lloyd Austin, began talking about the intentional US and NATO weakening of Russia, on its way to Ukrainian victory. Heavy weapons, such as tanks and artillery, which Western countries were reluctant to give Ukraine at the beginning of the war now flow more freely.

In response, Russia now has Stopping the supply of natural gas to Poland and BulgariaIt is its strongest move yet to punish countries aiding Ukraine and a sign that Russia could turn the taps on or turn them off entirely if it feels increasingly threatened. “All three parties to the conflict, NATO, Russia and Ukraine, are escalating,” Eurasia Group warned in an analysis on April 27. “The potential for further escalation increases as hostility escalates.”

Poland and Bulgaria can you might get it Without Russian gas. But Russia and its energy clients are now beginning to “weapon” oil and gas shipments, one of the more troubling scenarios that analysts plotted at the start of the war. If Russia stops gas shipments to other European countries or the entire continent, it will cause prices to rise in Europe and possibly cause a recession there, potentially undermining aid support for Ukraine by increasing the cost to millions of European voters.

At the same time, European countries are studying a Interim boycott of Russian oilWhich they can replace from other sources more easily than Russian gas. However, a broader ban on Russian oil would raise global prices for everyone and increase inflation in Europe, the United States and elsewhere. The tightening of the screws on the Russian economy is causing collateral damage in many other countries.

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Sanctions on the Russian financial system are having the desired effect. But these sanctions still allow Russia to sell oil and gas, and Russia just so happens to be benefiting from higher energy prices caused in part by its invasion of Ukraine. Some analysts believe that Russian President Vladimir Putin timed his invasion of Ukraine at the departure of former German Chancellor Angela Merkel in December, or even Joe Biden’s replacement of Donald Trump as US president last January. But high energy prices in the run-up to Russia’s February 24 invasion likely convinced Putin that he would have a reserve of energy revenue, even with the inevitable sanctions.

Russian President Vladimir Putin and German Chancellor Angela Merkel enter a hall during a press conference following their talks at the Kremlin in Moscow, Russia, August 20, 2021. Alexander Zemlianchenko/Paul via Reuters

Russian energy revenue reached $76 billion in the fourth quarter of 2021, the highest level in 10 years, according to the Institute of International Finance. The research group believes that now higher oil and gas prices could push Russia’s energy revenues higher, even with sanctions. This is why European and other sanctioning nations are now considering moving forward by halting oil purchases altogether or tightening financial sanctions in a way that would effectively block the funding required for these transactions.

If either of those things happen, the key factor is whether big energy buyers like China and India will buy most or all of the oil that Russia won’t be able to sell elsewhere, and which they might get at a huge discount at world prices. If they did, it would obviously be a lifeline of sorts for Putin’s military financing. The United States is leading the effort to isolate Russia, a pressure campaign that could reshape global relations for years to come. Military battle inside Ukraine It may not spread in World War IIIBut the economic battle could force countries living on the fence to take one side and bear the consequences.

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An opaque battle over technology

Global energy markets provide a minute-by-minute accounting of how the energy war will affect prices and the global economy. The battle over the technology available to Russia is much more mysterious. The United States and several other countries have passed a blanket ban on sales of computers and many other items to Russia, in a broad attempt to impose pain on Putin and the Russian economy. Some of this technology has military applications that could directly affect the Russian offensive in Ukraine.

Russia has vast stocks of Soviet-era military equipment, but its advanced weapons stores are even more limited. British researchers examining remnants of Russian weapons in Ukraine have found a heavy reliance on components from the United States and other countries that are now helping Ukraine fight Russian forces. Russia’s war-making capabilities include US-made circuit boards in the advanced Iskander-K cruise missile, US-made fiber-optic gyroscopes in the 9M949 artillery missile and a British-made oscillator in the TOR-M2 air defense system.

Jack Watling and Nick Reynolds wrote in a statement: “Almost all modern Russian military equipment is based on complex electronics imported from the United States, the United Kingdom, Germany, the Netherlands, Japan, Israel, China, and others. The latest report of the RUSI research group.

The Pentagon says Russia Began to get “inventory issues” with precision-guided munitions It relies more on much less accurate “dumb bombs”. It’s hard enough to make advanced weapons, and “this is where Russia’s military industries face a problem,” according to a RUSI report: “Russia’s latest weapons are highly dependent on vital specialized components manufactured abroad.”

Putin and his advisers famously miscalculated by plotting a swift military campaign that would immediately remove Ukraine’s elected government. This sensitivity has left Russia a shell in shock for an army that has lost at least a quarter of its combat power and a crushing war that Russia could already lose.

Another consequence is that Russia is certainly struggling to find the foreign components it needs to rebuild major arms stockpiles. Russia does not need to buy this equipment directly from the companies that manufacture it, which in most cases violate sanctions by supplying anything to Russia. Instead, Russia is likely to seek components through external sources or the black market, or even through theft. Western governments will likely try to thwart these acquisitions. While troops fight on the battlefields, supply chain warriors fight in the shadows.

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No end in sight

A common theme is that Putin wants some A kind of victory that can be promoted by Russia’s “Victory Day” on May 9. But according to almost all accounts, there is no chance of any decisive outcome in the near future. In fact, military and economic dual wars are likely to last for months, if not longer. Europe is beginning to plan for a shortage or complete shortage of Russian energy for the coming winter. The goal of a temporary embargo on Russian oil is to put pressure on Putin for weeks and months. For his part, Putin has given signals that he is preparing the Russian public to make his way, which may include new conscription to help replace soldiers who are dying and injured in Ukraine. Perhaps we will know the outcome by May 9, 2023.

It is possible that the markets are not ready for an escalating economic war between Russia and much of the rest of the world. Energy prices rose and stocks tumbled after Russia invaded on February 24, but markets have since stabilised. In the US, traders are once again paying more attention to inflation data and the Federal Reserve than to geopolitical hotspots.

The Institute of International Finance expects oil prices to reach $200 a barrel if there is a complete and effective embargo on Russian oil. The only time oil prices in the US were at this level, based on the rate of inflation, was in 2008, when a deep recession was forming. Other factors hurt the economy more than oil prices at the time, but we have other problems now as well, including non-energy inflation and a rapid shift from monetary easing to tightening. Recessions usually stem from a combination of factors, not a single source, and there are still some economic shock waves likely to stem from Russian military barbarism.

Rick Newman is the author of four books, including “Rebounders: How winners pivot from setback to success.Follow him on Twitter: Tweet embed. You can also Send secret tips.

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