The Economic War in Ukraine

• 16-Mar-22
• admin

It would be a platitude to say that the scenes of war in Ukraine show a great tragedy.  Whoever is at fault for starting the war, there is no doubt that the ordinary people of Ukraine are suffering unfathomable hardships trying to get out of it.    As we pay our respects to the Ukrainians who are facing a terrible fate, we should not forget the people of Afghanistan, Iraq or Yemen, and many other places in the world who have been victims of wars started by hegemons on the global stage, and who are suffering no less than the Ukrainians.   Worse still, these victims of war have been quickly forgotten.  Or ignored.

 

As we start this week’s commentary, let us all express our condolences to all these victims of wars.  

 

The ongoing crisis in Ukraine can be analyzed in three dimensions:

 

 

The military war (based on developments up to mid-day, Sunday, 6 March 2022)

 

There seems to be some clarity emerging from Ukraine, if you watch news that are nonWestern.   I am compelled to watch not just mainstream Western media (because they are so full of propaganda and untruths that they actually create, not dispel, the fog of war), but also a large number of analytical sources in different countries, particularly China, Taiwan, India and non-mainstream Western sources.   The most analytical information comes from Chinese media (PRC, Taiwanese and independent), which have demonstrated more objectivity, and seriously, far higher analytical capability than run-of-the-mill Western journalism.  And they are very well-informed.

 

Among English media sources, the British and American networks are absolutely the worst. 

The Arabic and European channels are more incisive and balanced.   I no longer regard what “journalists” say as reliable whether this is in print or on TV, which is largely biased and shallow in depth, making them in effect propagandists.   I listen to lectures by luminaries such as those at the University of Chicago (eg John Mearsheimer), the Watson Institute at Brown University, the Asia Society (eg Kevin Rudd), independents like Professor Richard Wolff and so on.    All these analysts are highly qualified and experienced and generally present a good picture on what has happened, what is happening and what is likely to happen.

 

The consensus from the above sources I trust is that east of the Dnieper River, the Russians are making significant advances.   The region, comprising about half of the country, is in a “cauldron”, a term used in WW2 Eastern Front campaigns to describe an encirclement.    Cities around the rim of this cauldron have been isolated (Kharkiv, Mariupol, Kherson…) if not taken, and even as the resistance continues, there is no doubt about the ultimate outcome.   

 

Within this cauldron, there is another smaller cauldron, in which 60,000 Ukrainian troops are also encircled.   This is north of the sea of Azov, and apparently (there is no confirmation) this force includes elements of the Azov Battalion, the Nazi force which Putin has said is a target of Russian military operations.    Apparently (I don’t know this for a fact, but there are multiple reports) that a Chechen formation is lined up against the Azov militants.     

 

Importantly, along the southern coast of the larger cauldron, Russian units supported by their navy seem to have taken control.  This may soon include the important port of Odessa.  One American ex-general keeps saying on CNN that the Russians would not be able to take the Black Sea coast, even as it is happening.   

 

In short, east of the Dnieper, which is more Russia-leaning than the rest of the country, the Russian campaign is putting the squeeze on the Ukrainian forces that were fighting the civil war against the Donbas provinces.   This is likely to end soon.

 

West of the Dnieper River, the focus is on the siege of Kiev.   The city seems to be surrounded by large armored forces that are being consolidated at supply checkpoints before a siege or a final assault.   

 

When they were moving south to Kiev, the armored column stretched 60 kilometers on the road there.     Strictly speaking, deployment of forces of this size should have been made under the strictest secrecy.   Instead, we all saw that this was boldly done, in the open.   Slowly, steadily, they built up their logistics along the way according to Russian battle doctrine (forget the heroics of the Ukrainian resistance holding up the tanks – that’s just a hope and a fairy tale).   Any army that advances at the pace of 20km a day is moving at good speed, given how tanks are operated.   It is 200 km from the border to Kiev, and we are almost ten days into the war.   

 

Of course, we would expect that this large column to be protected by all kinds of the latest air-to-air missiles, but this demonstration of total air superiority is almost like Putin brazenly daring the US and NATO to bring air attacks against it.   In Desert Storm, a similar Iraqi military column was completely destroyed by western air power in short order.   

 

Last week, nothing happened to this 60 km column.   There was not even a theatrical attempt to take this invasion force on.

 

Militarily, NATO resolve seems to have been totally discredited.   No government in the West wants to move, or send a plane or soldier into the fray.  The sight of Boris Johnson speechless in front of a frantic Ukrainian woman begging for air cover was stunning.  Even the noble (or feeble) attempts to set up volunteer armies to be sent into Ukraine to fight the aggressors have petered out in endless talking.   Even Japan had 70 volunteers which the government wisely put a stop to.  70.   In 1950, at the turning point of the Korean War, the volunteer army sent by China was 300,000, not quite volunteer, but NATO could have done the same.

 

“No Action, Talk Only”.   NATO has truly become an irrelevant organization, totally obsolete since the end of the Cold War.   What more is there to be said about that?  This is a military organization set up specifically to counter the Russians.   Well, the Russians are here.

 

Fine, NATO countries should not be expected to fight a formidable army like the Russians, putting their own citizens on the battlefield since it is, well, not their war.  But then why keep leading Zelensky on, not once, but many times, up the primrose garden?  Even in the course of the last eight days since hostilities started, Zelensky has begged openly and pitifully several times.  We all heard it, real-time.  Instead of helping, the western media just made him out to be a “hero”.   Empty words.   It’s unconscionable.   

 

The non-Western media seem to be agreed that the war can be over sooner if the US and NATO can just agree to ONE SINGLE condition – don’t expand eastwards.  Everyone observing this heart-breaking war, is asking why can’t they just do that?  It would not have started in the first place.

 

It is indeed a pertinent question.   The answer lies buried in the depths of global geopolitics, and I am neither qualified or motivated to comment on it.   I will later cite the experts I follow on how pathetic this has become.     

 

Finally, on the military aspects of the war, I would like to include key extracts from another writer who presents a poignant view of what is happening, a writer who has experience in another war, another place, another time.

 

“Child Soldiers Are Not A Good Sign For Ukraine

This is not the morale boost western media thinks it is

 

 

“Children learn how to use an AK-47 assault rifle during a civilians self-defence course in the outskirts of Lviv, western Ukraine, on March 4, 2022.”    AFP

The fog of war around Ukraine is positively hallucinogenic at this point. Western media is spinning stuff like child soldiers, arming grandmothers, and Molotov cocktails as some sign of victory, when this is usually the sign of impending defeat.

It brings to mind Hitler’s Volkssturm, the last ditch people’s defense of Germany. While they were certainly able to harry Russian tanks with one-shot Panzerfausts and even assemble a few functional units, they simply had no chance against conventional military formations.

As Mark Felton said about the Volkssturm:

The effectiveness of a gang of armed civilians against an aggressive military army is minimal… Simply arming people opens them up to categories that, under the rules of war, attract violent retribution.

He also said “World War II went so badly for some nations that they sought help from civilians.” In the fog of war this is somehow spun as a good thing, when in fact it is just a sign of things going badly.

Just look at these guys.

 

“18 year old Ukrainian volunteers off to war in Kyiv. Three days training and they will be on the front line.” - Jeremy Bowen (British state media)

The BBC’s Jeremy Bowen is a constant hype-man for what would be frowned on in the Middle East (his actual beat). He captions this “18 year old Ukrainian volunteers off to war in Kyiv. Three days training and they will be on the front line.”

These guys wearing carrying yoga mats are completely fucked. Three days training is not enough training. That fanny pack does not have enough ammunition. Knee pads are not helpful against armored tanks.

Then there’s this kid in Canada’s Globe and Mail:

 

 

Eighteen-year-old Yaroslav Hrytsiuk, left, is accompanied by Valery Kryvosheina, 17, to Toronto Pearson International Airport on March 1, 2022. Mr. Hrytsiuk, who has dual citizenship, plans to go back to Ukraine to help defend his home country following Russia’s invasion last week.

War is not just a bunch of people firing guns, it has to be coordinated. You can’t just fly into a country, walk to the front lines, and end up anything other than fucked.

I’m not even saying that children can’t destroy a tank. They can. You just end up destroying far more children than tanks. Panzerfaust armed children in Berlin were able to destroy a lot of armor, but this merely annoyed the Red Army, it didn’t stop them.

I’m also not saying that guerrilla armies can’t stop conventional forces. They certainly can. But they sustain terrible losses, often over decades. They are tools of attritional warfare, and most of the attrition is on their side.

Finally, I’m not saying that militias can’t evolve into militaries. The LTTE did in Sri Lanka, Hitler’s beer-hall bodyguards became the SA, the SS and eventually the militarily competent Waffen SS. But this happened over many years.

What I am saying is that rag-tag forces like this cannot stop a conventional military advance. And they certainly cannot counter-attack. I have no fucking clue how this war will turn out, but whatever is happening now, throwing a bunch of teenagers at it won’t roll it back. Just look at a map.

 

 

Russian map of advances and an American one. Who knows what the reality is.

Russian troops have encircled Ukrainian military units, they have clear supply lines, and they’re a fucking army. They’re not kids with guns. While teenagers can certainly harry troops in close urban warfare, those troops can and do kill them eventually. These kids are literally cannon fodder. Yes you can hit people with these cannons, but the cannons are full of children.

This sort of ‘peoples’ storm’ is just a delaying tactic, and what are they delaying for? The Ukrainian ‘cavalry’ is already encircled. The West just sends them more weapons to kill themselves without putting any real troops in harm’s way.

The truth is that western media and people cheering child soldiers are just sick. If they’re serious, NATO would need to put boots on the ground and start World War III. Instead they’re asking young people to buy time for reinforcements that will never come.

But you know what? These are young people just like ours. Just people, not even able to decide or do anything. They’re decidedly brave, but the adults egging them on are craven fucking cowards. Child soldiers are not a good sign here or anywhere.

Calling in children to war means the adults have already fucked up. It means, at best, a commitment to generations of war. None of this is anything to crow about. None of this is inspirational. Child soldiers don’t win wars. They just lose childhoods. This is a most terrible and tragic loss.

The inevitable follow-up is what else would you do? The first point is that a person from Sri Lanka (this writer) doesn’t need to do anything about this and neither do you.

This infernal western meddling just makes everything worse. I don’t fucking know. I’ve lived through 30 years of war with child soldiers and it’s fucking hubris that these things are easily resolved. 

To me I see just two directions, either peace through Ukraine effectively surrendering and negotiating, or peace through World War III and a fucking land war in Asia. If you’re asking my opinion, I’d say peace now. These kids are dying for nothing.”

  By Indi Samarajva, is a writer living in Colombo, Sri Lanka

On Medium

 

 

The Media War

 

It is speculated, in most non-Western media, that because of the unambiguous inability of NATO to act against Russia in a military capacity, the media has been used to muster global support for the Ukrainians.   It seems to me that in all countries in which English is used, that effort has been very successful.   There is widespread condemnation of the Russian aggressor, which has indeed been an invader of the sovereign country of Ukraine.   According to that narrative, Putin is in the wrong (which I agree), and the world must condemn him.

 

In this effort, the western media has won its war.   There is universal empathy for the Ukrainians and condemnation of Putin.

 

Not so in the non-western world.   In this alternative universe, there is far deeper analysis of the causes of the war and the best way to end it as soon as possible.   The world of information is largely split in two.   In the other half of the world, Putin is cast in the light of the nationalist who has been pressed too long against the wall, backed into a corner, and he is fighting back with bared claws.   The sense is that anyone in his position would do the same.

 

I don’t intend to be a messenger for either side.   I can only report that there are two world views out there.    While the English language world view seems dominant for those who use only English, the tragedy that is the Ukrainian war has its roots in geopolitics which goes further than just who is holding the hatchet.    

 

In this alternative narrative, Ukraine is not at all important in the game that is being played out.   It is simply a pitiful, sacrificial lamb.   And it is being slaughtered and quartered by the geopolitics of the larger players.  

 

John Measheimer, a leading American academic at the University of Chicago, provides a narrative that is compelling.  I have provided two links to his thinking.   The first is to a presentation he gave in 2015 after the Crimea takeover (2014) and that predicted today’s war 8 years ago.   Nobody listened to Measheimer in spite of his stature.

https://youtu.be/JrMiSQAGOS4

 

The above lecture is compelling.   Please watch.

 

Prof Measheimer has updated his views just last week after the war started.  Here is the link:

https://youtu.be/rMzZ_lVHv_A

 

In the above, he presents the obvious solution to the war.   It is similar to what I wrote above.

 

The final thing I want to say in this section is that in the geopolitical contest, I think it is a strategic error for the West to push Russia into China’s camp.   Already, a somewhat careful dalliance between the two super powers on the Asian mainland has by necessity evolved into a marriage of convenience.     One has more extensive economic resources and the other has stronger military science.  The two countries together will make the most formidable and contiguous geographical alliance in the world since the Mongols in the 13th Century.  This makes for a complete power base which is less likely to seek compromise on contentious issues, a failure which must be laid at the feet of the Euro-American arms dealers. 

 

Most importantly, these two countries have demonstrated far greater resolve than the Washington political elite and its followers can muster.   Resolve is what makes winners.    

  

 

The Economic War

 

In the last week, Russia has been buried under a torrent of sanctions.   Even Russian cats can no longer compete in international competitions.   While that is tongue-in-cheek, the overall situation is not something to laugh at.  

 

Instead of creating the conditions for a lasting global peace, the arms dealers and empire builders reluctant to surrender their place at the head of an imaginary food chain have pushed compliant (and essentially corrupt) policy makers to waste infinitely more money on arms, armies and actual wars for a long time to come.   The world will be much poorer, literally, for it, as both sides seek boogeymen and ghosts around the world, instead of trying to improve humankind together.

 

Some of the sanctions will certainly bite the Russian economy.   But will the country survive?  There is no question about that.   Here are some key analytical points to support this contention:

 

1.  Russia is not a trading nation, and can in fact be self-sufficient.  It has lots of oil and gas, and is also a large agricultural country.   It exports these goods.    It is the largest (geographically) country in the world.   It has plenty of resources everybody else needs.   If the West does not buy from them, no problem.   Half the world have no sanctions on Russia.  That is half the world for the Russians to sell to.  Especially energy, food and minerals, all crucial to 21st century living.   

 

2.  Russia’s financial reserves have been frozen.   This is supposed to affect their ability to continue the war in Ukraine.   The war costs, by some estimates, about US$500 million to $2billion a day.  It is, according to some non-Western media (don’t know if this is true), planned to be a 15-day war in Ukraine.   They are looking at a cost of $30billion or so.   They have a lot more of just one component of reserves than this cost – gold, which is also increasing in value.   The Russians won’t need their dollar or Euro reserves.

 

3.  Even if the war ultimately costs the Russians $100billion, $200billion or whatever, the steep rise in the price of oil and gas, as well as basic food commodities will offset that cost in just a few years.   It is probably able to survive an economic war of attrition.

 

4.  The Swift ban is a joke.  Swift is just one of the several channels that is available for banks to move money around the world.  It’s the US dollar channel.  There are others, and the Russians can easily get around this.   Besides, the hypocrisy of the sanction is revealed in the fact that only some banks and some transactions are banned on Swift.   Anything related to energy and probably food is not.   And that’s where the Russians will be earning most of their foreign exchange.  

 

5.  All other sanctions are measures which most countries, companies and other economic entities are using to seem empathetic to Ukraine and supportive of the narrative that the bully must be punished.   Most of these will do business through backdoor channels and will likely resume business as usual, especially where there are competitors for the Russian market, as soon as hostilities die down.  Which may be in a couple of weeks, or at most, a few months from now…There are more hypocrites than there are true advocates of the Ukrainian cause.

 

6.  The Russians are not likely to be held up in a long, debilitating war in Ukraine.  Actually, they have fought this one before – in 1941 to 1944.   Ukraine was the battleground where the German Wehrmacht went eastwards into the USSR in 1941, and where the Russians fought a successful defense all the way to Stalingrad, over much of the same ground as the war in Ukraine today.   And they then kicked the Nazis out between July 1943 and the fall of 1944, just a little over a year, in a massive war involving millions of heavily armed combatants starting from the battle of Kursk (just a short distance from today’s Donbas) through Operation Bagration in which the back of the German war machine was broken in just three months.   Today, it is a war between a force of 150,000 Russians equipped with some of the best hardware in the world, against a weak army (half of which is already surrounded) and a civilian (I hope not) militia.    The Russians know that ground.  It will be over soon enough.   The sanctions won’t have enough time to bite.

 

7.  If the Western governments, especially Washington, want to blame half of the planet for not joining in the sanctions, which will render the sanctions ineffective, they need to also tune in to what the rest of the world is saying about the state of global geopolitics.   It takes two hands to clap.

 

8.  The financial markets have already freaked out and most equities and the ruble have crashed (especially in Russia, of course, but does this really matter to an economically self-sufficient country?)  They will continue on their downward trend for some time.   

 

9.  The interest rate increases expected from the central banks will be moderated as economists weigh the effects of the war.   The Fed has already moderated from a 50 basis point interest rate hike to 25 basis points.  (As a matter of fact, I predict that the American government will find every reason not to raise interest rates because the size of the national debt cannot sustain high interest rates).   Lip service will be paid to keeping inflation down because that phenomenon reduces the real debt, which is exactly what the Washington politicians want.     For the moment, I will stick with the broad forecasts I have made on financial markets two weeks ago.  

 

10.  Finally, the big loser in the economic war is actually Western Europe.  It depends critically on Russia for oil (25 percent from Russia) and gas (40-45 percent) as well as wheat.  These prices have shot up to ten-year highs.   The US and Europe are already experiencing very high inflation just before the war.  With the huge price gains in essential commodities, inflation will worsen.   The result can be imagined.   Yes, they will still hate Putin, but they will want to have warm houses, cars that can still run, and food that does not cost an arm and a leg to buy.   The incentive to trade with Russia will be so strong that it will be talk one story, and do another.  

 

The cynic in me says that the Western countries, for self-preservation, will find ways to talk sanctions and not actually carrying them out.  

 

Finally, in terms of the economic war, there is the very sad story of the refugees.  Already in just one week of minimal fighting, 1.2-1.4 million Ukrainians, including all their oligarchs, have fled the country.  Even before the war, many of them were waiting to get out.  It is a failed state, led by inadequate politicians dealing with issues far above their pay grade.  With the excuse of the war and relaxed immigration in the west, they will all try to bail out.  

 

Some estimates put the ultimate refugee flow to be 4 million, about ten percent of the entire population.   I speculate that these refugees are ever going back.   When their husbands and sons are eventually allowed to leave to rejoin the women and children, the vanguard of the refugee flow, the refugee numbers will increase.  

 

The European countries now seem to be comfortable with the refugee flow as they have similar ethnic, religious and cultural backgrounds, different from earlier waves of refugees from Syria and Africa.   But it will not be a small number seeking safe haven.

 

They will settle into jobs everywhere in Europe like the East Europeans did in the UK and which created the circumstances for Brexit.   At that time, it won’t matter whether new job seekers are Poles or Ukrainians.   The local folks everywhere will object.    It will be disruptive.    

 

As such, in a geopolitical confrontation between the Americans and the Russians, whether one is an angel and the other the devil, depending on which narrative you favor, there is still going to be one very big loser – Western Europe.   They will face the prospect of putting more money, endless billions, which could have been better used, into an ineffective organization, NATO, shown to have no resolve whatsoever, to confront the very foe it was designed for – Russia.   

 

This is a geopolitical and economic disaster.    

         

In conclusion, I want to apologize to any reader who may find my points above contradictory to your own beliefs and sympathies.   I am not taking sides, because it is – frankly - not my war (as Indi above puts it), but I do recognize that there are two sides of the story.   As for the economic conclusions, I hope that I will be wrong.

 

 

Wai Cheong

Investment Committee

The writer has been in financial services for more than forty years. He graduated with First Class Honours in Economics and Statistics, winning a prize in 1976 for being top student for the whole university in his year. He also holds an MBA with Honors from the University of Chicago. He is a Chartered Financial Analyst.