Markets stabilized after Russia’s invasion of Ukraine on February 24, as if bombs and missiles would not derail the world economy. But the economic war that is going on in parallel with the war is getting hotter, which requires more attention than investors can devote.
Much of the analysis of the Russian war in Ukraine focuses on brutal ground battles, while invading and defending forces are fighting village by village in eastern and southern Ukraine. But equally important are multinational efforts to stifle the Russian economy by cutting energy revenues funded by the Russian military and denying foreign technology that Russia needs to maintain and replenish its weapons. Like tank and artillery battles, economic battle is a war of attrition in which the one who lasts the longest is likely to win.
The economic war is intensifying as the incredible begins to seem possible: Ukraine can win. The usually silent US Secretary of Defense Lloyd Austin has begun to talk about the US and NATO deliberately weakening Russia on the road to Ukrainian victory. Heavy weapons, such as tanks and artillery, which Western nations are reluctant to give Ukraine at the start of the war, are now being distributed more freely.
In response, Russia has already cut off natural gas supplies to Poland and Bulgaria, its strongest move so far to punish nations helping Ukraine and a signal that Russia could tighten taps or close them completely if it feels increasingly threatened. . “All three countries in the conflict, NATO, Russia and Ukraine, are escalating,” the Eurasia Group warned in an April 27 analysis. “Further escalation becomes more likely with increasing hostility.”
Poland and Bulgaria are likely to do without Russian gas. But Russia and its energy customers are now beginning to “arm” oil and gas supplies, one of the more alarming scenarios drawn by analysts at the start of the war. If Russia cuts off gas supplies to other European countries or the entire continent, it will lead to a sharp rise in prices in Europe and is likely to cause a recession there, which could undermine support for aid to Ukraine by raising the price of millions of European voters.
The story continues
At the same time, European nations are considering a phased boycott of Russian oil, which they can easily replace from other sources than Russian gas. However, a broader embargo on Russian oil would raise global prices for all and increase inflation in Europe, the United States and elsewhere. Tightening the screws of the Russian economy is causing concomitant damage in many other countries.
[Follow Rick Newman on Twitter, sign up for his newsletter or send in your thoughts.]
Sanctions against the Russian financial system have the intended effect. But those sanctions still allow Russia to sell oil and gas, and Russia is benefiting from high energy prices caused in part by its own invasion of Ukraine. Some analysts believe that Russian President Vladimir Putin set the time for his invasion of Ukraine with the departure of former German Chancellor Angela Merkel in December or even the replacement of Joe Biden by Donald Trump as US president last January. But high energy prices on the eve of Russia’s February 24 invasion are more likely to convince Putin that there will be a cushion of energy revenues, even with the inevitable sanctions.
Russian President Vladimir Putin and German Chancellor Angela Merkel enter the hall during a press conference after their talks in the Kremlin in Moscow, Russia, August 20, 2021. Alexander Zemlyanichenko / Pool through REUTERS
Russia’s energy revenues 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 higher oil and gas prices could now push Russia’s energy revenues even higher, even with sanctions. That is why European nations and others imposing sanctions are now considering going further, stopping oil purchases altogether or tightening financial sanctions in a way that would effectively ban the funding needed to carry out these transactions.
If any of these things happen, a key factor is whether large energy buyers like China and India will buy most or all of the oil that Russia will not be able to sell elsewhere, which they could get at a significant discount to world prices. . If they do, it would obviously be a lifeline for Putin’s military funding. The United States is leading efforts to disrupt Russia, a pressure campaign that could reshape global relations for years to come. The military battle in Ukraine is unlikely to metastasize World War III, but the economic battle could force the nations that care for the fence to choose a country and suffer the consequences.
Opaque battle for technology
Global energy markets provide minute-by-minute reports on how energy warfare can affect prices and the global economy. The battle for technology available to Russia is much more opaque. The United States and many other nations have adopted strict bans on the sale of computer equipment and many other items in Russia, in a broad attempt to hurt Putin and the Russian economy. Part of this technology has military applications that could directly affect Russia’s offensive in Ukraine.
Russia has vast stockpiles of Soviet-era military equipment, but its stockpiles of modern weapons are more limited. British researchers studying the remnants of Russian weapons in Ukraine have found that they rely heavily on components from the United States and other countries that are now helping Ukraine fight Russian forces. Russia’s warfare capabilities include U.S.-made circuit boards, the advanced Iskander-K cruise missile, U.S.-made 9M949 artillery missile optical gyroscopes, and a British oscillator in the TOR-M2 air defense system.
“Almost all modern Russian military hardware depends on sophisticated electronics imported from the United States, the United Kingdom, Germany, the Netherlands, Japan, Israel, China and beyond,” wrote Jack Watling and Nick Reynolds in a recent report by the research group. RUSSIAN.
The Pentagon says Russia is beginning to have “inventory problems” with precision-guided munitions and relies more on “blunt bombs” that are far less accurate. It is difficult enough to create sophisticated weapons, and “the Russian military industry is facing a problem here,” according to a RUSI report: “Russia’s latest weapons are highly dependent on critical specialized components produced abroad.”
Putin and his advisers are known to have miscalculated in planning a swift military campaign that will immediately overthrow Ukraine’s elected government. This mess has left Russia with a shell-shocked army that has lost at least a quarter of its fighting power and a heavy war that Russia could lose.
Another consequence is that Russia is certainly trying to find the foreign components it needs to replenish key weapons stockpiles. Russia does not need to buy this equipment directly from the companies that manufacture it, which in most cases would violate the sanctions by supplying anything to Russia. Instead, Russia is probably looking for components through third-party sources or the black market or even theft. Western governments are probably trying to thwart such acquisitions. As troops fight on the battlefield, supply chain warriors fight in the shadows.
The end is not in sight
A popular topic is that Putin wants a victory that he can highlight on Russia’s Victory Day on May 9. But according to almost all accounts, there is no chance of any decisive result soon. In fact, double military and economic wars are likely to last for months, if not longer. Europe is starting to plan for a shortage or complete shortage of Russian energy next winter. The purpose of the phased embargo on Russian oil would be to put pressure on Putin for weeks and months. Putin, for his part, has signaled that he is preparing the Russian public for a slogan that could include a new military service to help replace soldiers who are dying and wounded in Ukraine. Maybe we will understand the result by May 9, 2023.
Markets are probably unprepared for an escalating economic war between Russia and much of the rest of the world. Energy prices soared and stocks fell after Russia’s invasion on February 24th, but markets have stabilized since then. In the United States, traders are once again paying more attention to inflation and the Federal Reserve than to geopolitical hotspots.
The Institute of International Finance predicts that oil prices could reach $ 200 a barrel if there is a full and effective embargo on Russian oil. The only time oil prices in the United States were at this level, based on inflation adjustments, was in 2008, when a deep recession was forming. Other factors hurt the economy more than oil prices then, but now we have other problems, including non-energy inflation and the rapid transition from monetary easing to tightening. Recessions usually arise from a combination of factors rather than a single source, and there are still some economic shock waves that are likely to stem from Russia’s military barbarism.
Rick Newman is the author of four books, including Rebounders: How Winners Turn from Failure to Success. Follow him on Twitter: @rickjnewman. You can also send confidential tips.
Follow Yahoo Finance on Twitter, Instagram, YouTube, Facebook, Flipboard and LinkedIn
Add Comment