On 27 March the UN Security Council rejected a Russian motion to have a UN investigation into the sabotage of the Nordstream pipelines on 22 September 2022.
Interestingly there were 3 votes in favour, Brazil, Russia and China and 12 Abstentions. No votes against! The abstentions were from the US, UK, France, Gabon, Switzerland, Ghana, Ecuador, Malta, Japan, Albania and the United Arab Emirates. The reason mostly given for the abstentions was that there are already investigations going on by Germany, Denmark and Sweden.
China’s representative pointed out that the UN investigation could encompass and cooperate with all these, and that blocking the Council from launching and investigation only raises suspicions that ‘something is being hidden’. He tactfully did not say that any national investigation would have to be filtered through that country’s foreign policy considerations.
Of course, the elephant in the room was the report published on February 8 by renowned journalist Seymour Hersh which claims that U.S. President Joe Biden and his senior White House staff ordered the Pentagon to take out the natural gas pipeline that runs along the Baltic Sea bed from Russia to Germany.
The media is trumpeting how successful the doughty Ukrainians have been against the Russian aggressors, and the war crimes of the Russians assassinating civilians and destroying civilian facilities. There has been a lot of discussion about Russia’s lack of success; Putin’s surrounding himself by Yes-men and getting wrong information or having political insecurity or mental health problems. This is all somewhat hopeful. Russia is still immensely more powerful than the Ukraine and is likely to get control of the skies, which will give them an even greater advantage.
The West seemed surprised initially by the Russian invasion as they had assumed that if everyone was involved in trade and had increasing national incomes that there would be no war. Since 2000 Russia’s per capita income had risen much more rapidly than the European average since they had increased their fossil fuel exports.
The Social Democrats in Germany had been happy to buy Russian gas on the assumption of trade guaranteeing peace. Germany was also building the Nordstream gas pipeline under the Baltic Sea to make it easier to get Russian gas. Currently Europe overall gets 40% of its gas, 27% of its oil and 46% of its coal from Russia.
After the invasion, the West initially started sanctions in a very unified effort. The rouble fell dramatically from about 13 US cents to 7, but as European countries continued to buy the gas the Russian economy was seen to be less damaged. So the rouble has recovered to about 11, either because the Russian economy is holding up due to the continued income, or that peace is likely to be negotiated soon. Sadly, the former explanation is more likely.
Europe will take some time to make the infrastructure changes to replace Russian gas with liquefied US gas, as the methane gas has to be frozen to minus 160 degrees at atmospheric pressure before it liquefies (or minus 83 at 45 atmospheres of pressure) and then transported by ship at high pressure to ports that can distribute it. Europe currently takes 120 Billion cubic metres (Bcm) of Russian gas. Also production cannot be ramped up quickly. The US has said that it can produce and extra 15 Bcm by the end of the year and 50 by 2030. Australia and Qatar, the other big exporters do not have much uncontracted gas. Environmental limits on fracking have stopped Australia increasing production. Germany has cut its dependence on Russian gas from 55% to 40%, but major cuts would do a lot of harm to their economy. (SMH 28/3/22)
Russia will also try either to get control of Ukraine or to get some part of it, or demonstrate its power in other ways so that it can claim victory. There is a small eastern area of Moldova with a Russian separatist movement and there is a temptation for Russia to link them to Crimea by capturing Odessa and the Baltic coast of Ukraine. The idea that they are defeated may be very premature.
Here is a graph of the Rouble v. US dollar, which shows the Russian currency has largely recovered.
It is interesting that a recent (UK) Telegraph column by Ben Marlow quoted in the SMH 5/4/22 urges stronger sanctions are needed if they are to be successful.
The West must wage total economic war against Putin
By Ben Marlow
April 4, 2022 — 11.02am
Russia’s pledge to reduce military activity around Kyiv, as part of what it calls “de-escalation”, has rightly been met with scepticism in the West, though sadly not nearly enough.
The move has prompted talk at the highest levels about whether sanctions should be lifted if Russia retreats and commits to peace. The possibility of sanctions removal was first raised by Antony Blinken, US secretary of state, a fortnight ago, on the basis that Vladimir Putin agreed to an “irreversible” withdrawal from Ukraine.
Then in an interview last weekend, Britain’s foreign secretary Liz Truss said the West could relent if Moscow withdraws and commits to “no further aggression”. This is naive in the extreme and suggests America, Europe and Britain have learnt nothing about Russia’s psychotic regime. Have they forgotten what two decades of appeasement achieved?
Putin played the West for fools right up until the invasion. Even now, Emmanuel Macron continues to pander to Russia’s warmongering leader with zero to show for nearly 20 phone conversations and a little tête-à-tête in Moscow.
Indeed there is a strong argument for doing the opposite – instead of lifting sanctions, the international community should be preparing to hit the Kremlin with a new round of even more punishing measures, not least because the current ones are clearly losing their effectiveness.
The sanctions that were imposed on Russia at the end of February were unlike anything seen before in terms of speed, scale and Western collaboration. But they certainly couldn’t be called exhaustive and the impact has clearly waned.
The Russian economy has not been crushed despite all the excitable predictions from analysts and commentators. It suffered something akin to a financial heart attack and though a full recovery will take some time, it hasn’t proved fatal and there are signs it is already on the mend thanks to the decisive action of highly regarded central bank governor, Elvira Nabiullina.
The Russian stock market has reopened after a month-long deep freeze.
A temporary stop on equity sales by non-residents, along with a short-selling ban and a short trading window, was introduced. Although there are obviously questions about how sustainable such interventionary measures are, a crash was averted.
Russia’s banking system has stabilised. Measures such as capital controls and freezes on foreign exchange deposits have helped to prevent a run on the country’s banks.
The West needs to leap into action, pressing home its advantage with a new round of sanctions that completely devastate the Russian economy, starting with a full energy embargo. Without that sanctions will ultimately fail.
Helped by a doubling of interest rates and a ban on residents transferring money out of Russia, the rouble has staged a strong rally. After slumping as much as 33 per cent against the US dollar the day after Russia’s invasion, it is now close to pre-war levels of 85 to the dollar. It might have been a nice soundbite but the rouble has not been “turned to rubble” as Joe Biden declared last week in Poland.
Much of the recovery is artificial but as long as oil and gas receipts continue to flood into the country, Russia can keep rebuilding its hard currency reserves and weather the storm.
“Self-sanctioning” in the shipping industry has been a resounding failure. Oil tankers continue to arrive in Russian ports. Traffic in March has been only slightly lower than it was a year ago, and is higher than it was during the same month in 2016 and 2015, according to research from the Institute for International Finance. Even when the discount on Russian crude is factored in, oil revenues are near record levels, the IIF says.
That’s not to say that sanctions have been toothless. Goldman Sachs is forecasting a 10 per cent downturn in Russia this year, while Barclays predicts a 12.4 per cent slump. But while Barclays expects another 3.5 per cent decline in 2023, Goldman thinks growth will have returned already with GDP expanding by 2.4 per cent and has pencilled in a record current account surplus of $US200 billion by the end of the year.
The West needs to leap into action, pressing home its advantage with a new round of sanctions that completely devastate the Russian economy, starting with a full energy embargo. Without that sanctions will ultimately fail.
Germany could withstand the shock. Robert Habeck, its own economic minister, has admitted that it would at least be able to make it through the summer. It is just too afraid to inflict further hardship on the German people, but if Lithuania and Poland are prepared to then why shouldn’t Europe’s biggest economy? They are even more dependent on the Kremlin’s oil and gas.
It may not come to that, of course, if Putin follows through with a threat to turn off the taps because the West refuses to meet Russian demands to pay for gas in roubles.
There also needs to be a widening of the ban on Russian banks using the Swift payments system. Just seven have been cut off from using it, and of the five biggest, Sberbank is the only one that has been shut out.
What else can be done? Wally Adeyemo, the US deputy Treasury secretary, has talked about additional export controls – some experts advocate for a full commodities ban or at least a broader raw materials embargo – and Volodymyr Zelensky has called for a trade and shipping blockade, something Adeyemo has refused to rule out. There should also be punishment for Western companies that continue to do business in Russia.
But as things stand, if the price Putin was meant to pay for his invasion was the crippling of Russia’s economy, then sanctions have undoubtedly failed.
Putin had said that he would not invade, so clearly he was lying.
It may be true that Russia wants buffer states between it and Western Europe and this is why it demanded from the US that Ukraine never be allowed into NATO.
It is also true that the US promised Russia as its empire collapsed in 1990 that the newly independent countries would not be allowed to join NATO and that NATO would not move eastward.
Of course the countries that had just escaped from the Soviet Union wanted a security guarantee by to joining NATO. NATO did not have to approach them, and may have appeared cowardly not to offer them the protection that they sought. Whether NATO could defend Estonia against a Russian land-based approach is another question. It is likely that NATO would not have let Ukraine join, as being surrounded by Russia on three sides, it might have been considered indefensible.
From a Russian point of view, the presence of close US bases is very disturbing and they are now in Bulgaria and Kyrgyzstan. One of Russia’s major demands was that there be a buffer zone between it and the West. The history is relevant. Russia has had the armies of Napoleon and Hitler sweep across their land where there are no natural barriers. By the same token, they swept the Germans back in WW2 and retained part of Germany and all of Poland Romania, Bulgaria, Moldova, Czechoslavakia and the Baltic States of Estonia, Latvia and Lithuania. They kept them, dropping the ‘Iron Curtain’ and engaging in the ‘Cold War’ until the inefficiency of their communist economy made it crumble, leading to the collapse of the USSR, Russia’s empire.
The Russian economy is now the 11th in the world with GDP of $1.6 trillion, only two places ahead of Australia on $1.4, (with Spain in between). They have however, the legacy of the immense military power and high military and space technology, and the memories of Empire that must be very important to Putin, the Cold War warrior who used to head the KGB. Whether Putin is motivated by fear of the West, dreams of recreating the Russian Empire, difficulties in domestic politics or deluded foreign intelligence reports seems hard to say. It is unlikely that just promising that the Ukraine would not be in NATO would probably not have stopped the invasion, but Russia was treated with a contempt that must have rankled. The Eastern European Countries joined NATO, which must have seemed in danger of irrelevance if peace had reigned. Russia’s worries about encirclement were ignored, presumably because it was assumed that there was nothing that they could do about it and they were economically weak.
It is interesting to look at Western assumptions since WW2. Because both world wars were over access to markets, the pressure at the Bretton Wood conference in 1944 was to have free markets so that if countries traded well they would rise, and if poorly they would fall, but either way, there was no world war. Germany and Japan rose in this system. The US, which was responsible for 40% of world GDP in 1960 has been quietly sinking and is now only 24%. Much of their manufacturing has gone offshore so the arms industry has greater significance. The US have had ownership of major companies, but as these have become global they are not under control or fully taxed by any country. The US has been the only superpower since the collapse of the Soviet Union and has had an assumed superiority, which is helped by the fact that as the US Dollar is the world’s currency and since the Gold standard was abolished in 1980, they can simply print more money.
The key Western assumption after Bretton Woods was that major powers would trade and hence territorial wars would be unnecessary. Just as the medieval folk assumed that God would fix everything, the West largely assumed that having the world a market would fix things. Unsurprisingly this has proved too simplistic. Unfair trade, national and corporate predatory behaviour and the ability of some to set prices better than others has led to some countries becoming poorer as their assets are stripped, like the losers in a Monopoly game that never ends. The assumption that no countries wanted empires stood in ironic contrast to the behaviour of the US, which has had many little wars to further its interests, not to mention Russia and China.
Germany is worthy of mention here. It was punished by the Treaty of Versailles at the end of WW1 and the resentment and economic hardship led to the rise of Hitler and WW2. After WW2 the Allies had learned their lesson and the US aid of the Marshall Plan poured in to stop communism. Germany was rebuilt and joined its traditional enemy France to form the EU, which it then dominated. Internal EU trade made war extremely unlikely, though there is a still significant friction in the Balkans. Germany went one step further, getting gas from Russia, which creates a mutual inter-dependency, which was assumed to make war less likely.
But when Russia collapsed in 1990 due to uncompetitive nature of its industries and it consequent foreign trade problems, it received no sympathy, and no aid. Predatory capitalism bought assets at rock bottom prices from those within the power structure who had power to sell them, and organised crime was significant. Putin, an ex-KGB chief took the trouble to become personally rich, but moved in to control the oligarchs, lessen corruption, get foreign capital and industries and develop oil and gas. His deal with the oligarchs was basically to control them somewhat, but let them keep their money as long as they did not get into politics. Per capita GDP in Russia has risen 385% since 2000 as against the EU’s 162%, helped by high oil and gas prices in the early years. But Russian per capital income is still $US28,219 a year as opposed to the EU average of $US41, 539. Russia has also had an inflation rate almost double the EU, which has somewhat taken the gloss off the wage rise.
Putin himself is still a Cold War warrior, who resents Russia’s loss of power. He has eliminated dissident voices in his immediate circle, and so the advice he gets may be quite distorted. There were stories from the Communist period that Russian intelligence was skewed to favour a Kremlin faction who might reward the source of the intelligence. The pro-Russian nature of the Donbas region provinces of Donetsk and Luhansk and of Crimea may have led Putin to believe that Ukrainians either wanted to join Russia, or would accept it relatively easily if it happened. He had marched into Georgia, taken the countryside easily and the people had given little resistance. The referenda in Donetsk and Luhansk in May 2021, which were highly controversial in their legitimacy and execution because of both separatist and Ukrainian army violence, may have also given him reason for his belief.
Russia has 146 million people Ukraine 44 million, so taking over the country and occupying it will be extremely difficult even if military victory is achieved. Bombarding residential areas was done by the Russian in Syria and achieved victory there, but the Russians left the local Dictator, Assad, to deal with the consequences. Assad’s humanitarian record is appalling, and there has been little publicity about the outcome. But the Ukrainians are the same ethnic stock as Russia and such a traumatic victory is very unlikely to achieve a stable transition of government if Russia chooses to stay.
The role of the US has been criticised. They have been keen for NATO to take a hard line, broke their word in NATO’s eastward extension, put bases in Bulgaria and Kyrgyzstan and dismissed Putin’s request for a promise not to offer Ukraine membership, saying it was a Ukrainian decision. A harder line from NATO will help US arms sales, a disruption of oil and gas will favour their own industries, and after all they are separated from any problems by the Atlantic Ocean.
The Germans are having a major re-think on their priorities, as they rely on Russian gas for 15% of their generation. They were phasing out nuclear power since Fukushima in 2011, and like many other countries are a little delayed in the difficult switch to renewable power. A power shortage is likely to affect their industrial competitiveness and they are now signing up to the US demand for 2% of national income to be spent on arms.
China is likely to help Russia as it can turn it into a vassal state. The Chinese economy is $17 trillion, which is roughly ten times the Russian one, so the cost of bailing them out by buying their energy and wheat is really only small change. They will take a bit of criticism from the rest of the world, but it will be worth it. They will continue to work with the Russians to lessen the power of the US dollar as the world’s currency. They will see how much Russia has suffered financially and in reputation from the invasion, and may then ease up on Taiwan- after all they only have to wait until a pro-Beijing government gets power there, and if that takes 30 years, so be it- they can afford to wait. They harbour historical resentments against the West as Russia does, so with an economy ten times the size of Russia and growing have a capacity that Russia lacks. This remains a problem. They have consolidated Tibet and the Xinjiang Uyghur Autonomous Region and are expanding the area they control in the South China Sea. What they will conclude from Putin’s Ukraine adventure remains in the realm of speculation.
The rise in gas prices should help Australian producers, but it will take a long time to scale up to meet the demand, and shipping is a problem. The other problem that the Australian gas industry has is that they sold gas on the assumption that could frack large parts of Australia, and resistance from groups concerned about the effect of this on the water table and farming has made this gas less available, so they have already have trouble meeting their contracted obligations.
So what are the effects of the Ukraine invasion likely to be?
Putin will be very reluctant to stop and is likely to kill a lot of civilians in his efforts to save face and win. This is tragic for the people of Ukraine and will result in a lot of refugees. If he tries to hold Ukraine against a widely supported insurgency there will be a large number of Russian casualties continuing. The Afghan war led to the fall of the then Russian government and many believe that even with the worst repression Putin will not survive this folly, particularly as he has created a Europe much more united against him and sanctions that will be significant for the Russian people. An assumption is that he cannot reactivate the Gulag system of Stalin in this day and age, but a number of our other assumptions seem to have been wrong.
As stated above Russian and China will become closer and China will redouble its efforts to undermine the US dollar as the world’s currency. This will succeed eventually, but will be gradual and not necessarily a problem for us.
In the short-term we need to help the Ukrainians as much as reasonably possible.
Probably not, but it is possible and they are likely to take some action.
The collapse of the Soviet Union in 1989 was largely due to their economy being unable to compete with more efficient market-based ones. But US Secretary of State James Baker in 1990 promised Mikhail Gorbachev of Russia that NATO would not expand eastwards.
The Eastern European countries were effectively given independence. Their attitudes varied. The Baltic countries, Lithuania, Latvia and Estonia were very keen to have protection. Poland, which was abolished as a nation in WW2, simply being divided in half and incorporated into Russia and Germany by the Molotov-Ribbentrop Pact of 1939 was also looking for protection.
NATO, led by the US has been joining up countries so that only the two closest to Russia, Belarus and Ukraine have not joined. Now the US is now loudly proclaiming Ukraine’s ‘right’ to join NATO if it chooses. The US has a lot of hubris, a tin ear, an arms lobby that needs sales and a recent history of doing what it likes. It has also installed military facilities in some of the countries closet to Russia. Those with long memories may recall the Cuban missile crisis of 1961 when Russia tried to station missiles there and there was a major confrontation. The US has bases all over the world encircling its rivals. The Russians do not, and when they tried to these was a major confrontation. One can also note that there are no natural barriers to military advances in Europe. Napoleon and Hitler swept across Russia and Russia swept them back.
Ukraine, the former ‘breadbasket’ of the Soviet Union is the closest big country to Russia and also could control Russian access to the Black Sea so has special significance. Internally it has quite a varied attitude to Russia. Those in the Eastern part of the country are very pro-Russia, while those in the West would like more integration with Western Europe. There is a succession movement in Donbass, an eastern province, and Russia is accused of helping the separatists. The capital, Kiev, is on the Dnieper river, which bisects the country from north to south, just downstream of Chernobyl. In 2014 there was a coup which was shown to be CIA-supported. The Parliament was invaded, much like the US on 6 Jan 2021, but in Ukraine’s case the President fled and new government was installed, highly favourable to the US. Russia responded by annexing the Crimean peninsula, which has their key naval base in the Black Sea. It might be noted that in a plebiscite a huge majority of Crimeans supported Russia against Ukraine.
In an interview on 7.30 on 1/2/22 Russian journalist Vladimir Pozner pointed out the US hypocrisy on NATO membership. He also pointed out that Russia does not want to invade. There would be Western sanctions, but Russia would also be stuck with a guerrilla war situation having to suppress part of what they occupied perhaps indefinitely. They cannot count on being welcomed even into eastern Ukraine. Invading armies usually are not. They would lose a lot of face internationally and there would be trouble on side or another in selling their gas to Western Europe.
It might be overlooked with all the US statements on Ukraine that Germany, France and Italy, surely the heavyweights of Europe, have been very silent. Germany has decommissioned its nuclear plants, cut down on coal and now gets a third of its energy from Russian gas. It cannot replace that amount of energy in the short-term. They are very aware of what a war in Europe means. Europe is more economically integrated and in general, this is good thing.
Russia will be supported by China if the sanctions start to bite, and the US dollar is gradually becoming less important as a world currency, a trend that the Chinese are working hard to accelerate.Even the Ukrainian President is now on record saying that the US must take much of the blame for the current situation.
It seems that the US arms industry, which has spent decades having little wars to keep itself at the centre of that fading economy is lost in its own hubris. It sees this merely as an opportunity to sell arms to the Ukrainians. It is a market, and an economic game. The Russians have existential concerns, not to mention the loss of face. They are likely to take some action. Diplomacy needs to work and the US has to be restrained. Finland has lived on the Russian border for many years as a democracy that minded its Ps and Qs. The Ukraine should probably do the same.
14 October 2017 There is an interesting book review in the SMH today entitled ‘Endgame for the Russian Revolution’ in the print version. The book is ‘Gorbachev: His Life and Times’ by William Taubman. It points out that Gorbachev was a hero in the West as the man who modernised the Soviet Union, but he […]