The War in Ukraine Takes A Turn

• 08-Apr-22
• admin

Photo by Lara Jameson: https://www.pexels.com/photo/pointing-russia-in-a-world-map-8828627/

 

Last week, we thought the war in Ukraine was almost over.

 

Not quite.

 

It has flared up again, not so much in terms of the military stalemate that seems to have settled in on the battlefield, but in terms of the economic conflagration that looks like it will overwhelm nations and launch a complete revamp of the global economic system.

 

What do you expect?   We are talking about energy, food, and the international dollar system, all of which are critical to what human existence needs in the 21st Century.   All of them are being disrupted and there does not seem to be any humanitarian corridors out of the mess.

 

The war on the ground in Ukraine has shown who are the victors and who the vanquished.   Has it really?   There are huge information bubbles that prescribe the interpretation of the outcome of the ongoing war.  Allow me to review this in terms of the two major points of view:

 

The Western Bubble: Victor - Ukraine

The Western media, military observers and well-wishers of Ukraine cite the withdrawal of major forces from around Kyiv in the last few days as the result of the unexpected resistance of the Ukrainian forces to prevent a quick Russian takeover of the capital.   Casualties in the invading army have been high, some elements of that army refused to be deployed into battle, and so many armoured vehicles, the basis of Russian might, have been destroyed that up to 25-30 percent of the original invasion force has been destroyed.   Tens of thousands of Russian soldiers have become casualties, leading to the need for more conscription at home.

 

Also in Ukraine’s favour, more military aid is arriving for its beleaguered military.   More anti-tank weapons, more anti-aircraft missiles, more financial aid, more this and that, and the Americans are even hauling old Soviet era equipment from storage and bringing these to the front.  They even sent a couple of helicopters to bomb Belgorod, an oil production region inside Russia.   It is inexplicable why the Ukrainian foreign minister did not take credit for this successful strike, hailed by Ukrainian supporters as an indication that their military is far from being out of the fight.

The losses in men and materiel have led to a change of mind in the Russia high command.  Instead of a quick war to capture Kyiv, the objective has been abruptly changed to securing just the Donbas region.   In that sense, the Ukrainian side is on a roll to kick Russia’s butt.  And the Russians are reacting to the Ukrainian resistance by seeking an easy off-ramp.

 

There are two iron clad rules within this bubble.   The first is that no news favouring the Russians should be reported.   The second is that Ukrainian mistakes, including casualties, will never be reported.   This is so obvious that all you have to do is to tune in to some western talk show or read its media and you will see what I mean.

 

Things are therefore going well for Ukraine and its hero of the day, President Zellensky.

 

The pro-Russia Bubble : Vanquished - Ukraine

 

Here, people believe that Russia is winning hands down.   The Russian brass has already announced the successful conclusion of Phase 1 of its special military operation.   The action around Kyiv has been a feign to keep Ukraine from sending reinforcements to the Donbas and South Ukraine.   Now that they have control in the east, they want to move troops tied down around Kyiv to exert irreversible control of the Donbas and the Sea of Azov regions to consolidate their victories there.

 

The Russians have destroyed, systematically, Ukraine’s military infrastructure, including thousands of facilities including airfields, ammo dumps, radar sites and its tank force.  (where is that damned tank force of 2500 vehicles?  Does it still even exist?).  The country has been demilitarised and de-nazified so much that these are not longer terms that needed negotiation.  

 

They have total control of the skies, including the ability to shoot state-of-the-art missiles at hypersonic speed to every corner of Ukraine and probably beyond.   The said supplies of Western military equipment and encampment facilities have been targeted and some destroyed, including several large ones in Western Ukraine by Kinzal missiles, deployed for the first time in the world.   An initial Western mercenary army, all chest-thumping novices, were bombed, resulting in many killed and the rest sent scurrying back home.

 

Around the country, the Russians are moving to consolidate their gains, and some action seems to have been started against Odessa, a key port in the southwest.   If they lock this place down, Ukraine will be landlocked for the next fifty years.  

 

This is of course also just an information bubble. 

What is the truth? 

 

We don’t really know, because with brain-washed people, you cannot give them correct information and expect them to process it properly.    As such, there is no point trying.

 

Be that as it may, there are certain facts which are indisputable.  If there is already an Ukrainian victory, or just confidence in the inevitability of one, there would not be a refugee crisis that the world is witnessing now.  The UN has estimated that ten million refugees are on the move, with four million of these outside the country (we actually estimated this number correctly after the first week of the war, when a couple of thousand refugees were just starting to leave the country).   Ten million people in just a little over five weeks, four out in Poland and beyond.   It tells me that people are really scared, totally brainwashed about the grass being greener westwards, and want to get out of the way of becoming collateral damage.   If the war is slowing down or being won, I would expect that some of these people will start to go home.   We are a long way from that.  The victory has not been won by either side.

 

Like I said early in March, Putin has weaponised refugees and turned a flood on Europe, which will burden the continent for the next twenty years.  The world is just beginning to recognise this.   The NYT carried an article over the weekend on the problems this crisis will bring.   Let’s just call it Putin’s Punitive Ploy on NATO. 

 

It seems to me that there are two battles being fought – the battle for Kyiv and that for eastern Ukraine.   The Western media focuses mostly on the first battle and there does seem to be a pause in the battle.   One can speculate that the Russians are being chased away.   They are thought to be leaving because they don’t want to sustain a heavier casualty count.  On the other hand, they could be preparing the ground to destroy the city by long range rockets and artillery and don’t want to expose their own forces to friendly fire.   After that, there may be an assault on the city, depending on how the negotiations go.    You can think whichever way you want.   We will find out soon enough.

             

In the battle for the east, the war is nearly over.   Mariopol, Kherson, even Kharkiv have been largely occupied and the two sides can send out conflicting news on whether those cities are 100 percent captured or just encircled.    One can also imagine that if the Russians have already taken over all these places in the east, then Putin will soon push very hard to negotiate for an end to the war.   

 

We will just have to wait for that.   When both sides agree to negotiate, we know that one side or the other would have gained the upper hand and the other side would have lost badly enough to not want to struggle on in vain.   That winner could be either of the warring parties.   

 

For the moment, the war is still pretty much shrouded in fog out there.

 

The economic war has had a much clearer outcome.  When the sanctions started a month ago, there were whoops of delights from all those who thought that the Russian economy would be dealt a fatal blow, Putin would be deposed and the war stopped.   After all, it was the equivalent of a nuclear first strike, by a united front of the USA and all the Western countries, plus some.   Who could have survived that?   And the unity of the west in this effort was unprecedented.

 

Lo and behold!  After a month, it looks like Putin is emerging from the smoke and dust, with a smirk on his face.   Instead of rolling over and die, he is now walking over the corpses of many of his foes that have launched the economic offensive.   Most of all, the European countries, critically dependent on Russia for energy, food and metals, is staring into an abyss of economic decline, caused largely by themselves.   Is this outcome just hype?

 

It was certainly not unexpected.  At least, this writer has been saying since it all began that the sanctions won’t work on Russia.  Hell, as a matter of fact, American sanctions have never ever worked on any country, not on N Korea, Iran or other smaller countries that have in the past pissed off the US even when the US was all powerful in the world economy before the last ten year rise of China.

 

So, why would they work on Russia, which has the largest geographic land area on the planet, blessed with all kind of natural resources?   They have oil and gas which everything with wheels and wings need.  With Ukraine, they control 40 percent of all the world’s wheat, the second most important grain in the world after, arguably, rice, as well as fertilizers needed for the next planting season as soon as the winter ends.   And it has metals which every car manufacturer cannot do without.   They control all the stuff that modern human beings need, to eat and to commute.   And you want to sanction them?

 

The first blow came when the united western alliance kicked the Russian rouble out of the US dollar SWIFT system, an international interbank messaging system without which no settlement in dollars can be made.   The rouble fell to 50 percent of its value in a couple of days.   At that time, Biden was able to boast in his State of the Union address that the rouble was worth less than a US penny, and the US Congress gave him a standing ovation.  Yay, the evil man is skewered and soon to be roasted.

 

By today, the Rouble has rebounded strongly and recovered nearly all its losses.   That’s right.   It snapped right back to the levels before the sanctions were imposed!!   

 

And this is not a zombie rouble…you know, the kind that is like the walking dead?  No, on the contrary, there is a good chance that it will become an international reserve currency.   

 

And all it took was for Putin to declare that all its exports will have to be paid for in roubles, starting with energy, then food, then metals and finally everything else that the rest of the world needs from Russia. 

 

The sceptic may say, so what?  We don’t have to comply.   Well, Putin has already decreed that gas to Western Europe will be cut off if rouble payment is not made.   In the next couple of weeks…   The Germans and the rest of the west are flustered, floundering around to look for a solution.  Scholtz called Putin.   And the nice man at the other end said, sure you can still pay in Euros, but pay that into Gazprom Bank, which is not sanctioned in transactions related to energy transactions, and Gazprom Bank will convert those Euros into Roubles, thereby rendering all the financial sanctions effectively meaningless.   

 

Pained silence…

 

This is just the start of the Russian counteroffensive.   Let’s see what other measures Putin will launch to nullify all the sanctions.   It’s a no brainer.   If you are critically dependent on Russia for something as important as food and fuel, you are essentially an economic colony.   Or essentially living under the same roof in the same house.   You don’t set the house on fire.

 

Last week, we wrote a long piece on the impossibility of most of the Western European countries and every country in Eastern Europe being weaned off Russian oil and gas in the short term, long term or any damned term, without their economies disintegrating and regressing back to the agricultural age.    

 

Joe Biden, who probably had it in his mind all along to break Germany away from dependence on Russia so that the latter would be in his camp forever, did not even think through his plan to destroy Putin.   He would be helping Ursula von der Leyen with 15 billion cu meters of gas a year, when the EU needs ten times as much.   And he will be sending them that gas in tiny little ships (compared to gas pipeline capacity) that carry the product in liquified form which incurs humongous cost to reverse before the product can be used.   It is a joke.   

 

The Germans are screwed.  Spain and Italy will become agricultural giants again. Austria, which is 100 percent dependent on Russian energy (yes, 100 percent) needs an Anschluss with Russia.    Poland, Rumania and the newer members of NATO?   They will need to recreate the Warsaw Pact one more time.  Hungary is the only sensible country that seeks an independent way around “cancel-Russia” attitudes to buy cheap energy.  Maybe only France will follow.

 

And the old man, in his once in a lifetime opportunity to do a JFK “Ich bin ein Berliner” gig at the most critical time for European survival in 50 years, would blunder going off script to shriek, my god, we’ve got to get rid of that man (Putin), reversing it just minutes later when the press pounced on him on whether he wanted regime change in Moscow.  What a complete embarrassment!   When will he similarly renege on his promises to Europe when it becomes clear that he cannot sell shit to the EU if they cost 10 times as much as Russia does.  

 

It is obvious, even now, just one month into the economic war, that the West Europeans will have to back down.  We are only facing the problem of “paying for the gas” in roubles.   We are not even at the problem of Russia selling all its gas to its friends east of the Urals.  When there is NO gas at ANY price, since China and India can offtake all of it, the Europeans will prefer to make peace with Putin if by doing so, they get to pay only double the current price rather than ten times to the Americans.  The farmers’ strike in Spain is a harbinger of things to come for the EU.   The economic war has an obvious end, despite protestations heard among European politicians.   These politicians will soon be gone, together with Biden.   Unlike the war in Ukraine, there is no fog of war here.  The outcome is pretty obvious.   

 

There is only one thing similar between the military and the economic conflicts.   The information bubbles.   There is a huge denial about the outcomes in this battle in the west, whose leaders think in terms of a cavalry charging in from across the Atlantic to save them from the gas crisis.   As usual, the Americans are gaslighting about their capabilities, except this time, their leaders don’t even know they are bullshitting. 

 

Already, German economics minister Hanbeck is asking his nation to conserve energy, seeking the high moral ground with the rationale that every kilowatt hour saved to help Germany would also help Ukraine.   Ja, right!  45 percent of supplies cannot be replaced by conservation.   It’s simple economics, demand and supply shit kids learn at high school.   Despite brave words, the western politicians will capitulate, because their electorate will think in terms of how Ukraine, not even a NATO member, can be helped with their hearts but not with their Euros. 

 

Does it look like the Western leaders are panicking?  You bet.  They are pissing in their pants.

 

And surprisingly, there is indeed a cavalry in the midst of this economic war.   Not for the western countries, though, but for Russia.   Before the war began, Putin roped China into his camp, and already negotiated selling gas to its neighbour.   In retrospect, we now understand why the head of Gazprom was in attendance at the Putin-Xi talks at the Winter Olympics, and who signed a number of deals with his Chinese counterparts.   But that’s totally expected given that the Americans initiated this climatic battle with their largest peer competitors who obviously must react the way they did.  Who are these morons in the Washington Beltway who hate both the Russians and Chinese so much that they did ALL the things that would drive them together into a defensive alliance?  And then ask China a month later, please don’t help the Russians...We haven’t seen that level of incompetence in international politics since WW1 a century ago.   

 

But that’s not the shock and awe.  

 

That came from India.   From the very start of the economic war the west launched on Russia, India said, we are not taking part in this shit.   The reasons they gave need to be applauded.  

Russia has been a dear friend for so long, with Russia helping them at critical times in the past, and therefore, it is inconceivable for India to let them down in the latter’s hour of need.  That’s noble in an era of dog-eat-dog.   Then of course, since the bulk of their military equipment is supplied by Russia, their army is organized for the last 50 years on Russian doctrinal lines for a war with either Pakistan and China.   They cannot jeopardise operational readiness by pissing off Russia, or their tanks, planes and carriers will end up as scrap metal lacking spare parts.   

 

And since Russia has oil and gas to sell, why do they want to join an anti-Russia bloc to remove themselves from a source of the energy they need?  The western countries who asked India to take sides just have no grasp of the geopolitical realities other countries face.  The attitude that only their view matters and everybody else’s is irrelevant is the pinnacle of hubris.

 

And within the vast Asian continent, being with Russia also means that it is a bulwark against China.  The Three Kingdoms scenario again. 

 

Biden criticised India, for being “shaky”.   India commentators excoriated the man.   All the sins of America were recounted in recent days on Indian media.   India doesn’t seem so keen on Quad anymore.   Most importantly, they invited Chinese foreign minister Wang Yi to visit New Delhi, followed shortly by Sergei Lavarov, Russian foreign minister.   Yes, Liz Truss from the UK was also (separately) there, but I wonder if the Indians just invited her to attend some geography lessons, a subject she seems somewhat inadequate in.

 

And beyond the cordiality and the politics, the Indians wanted to buy oil from Russia in rupees.   And at a discount.   

 

This is shock and awe, in Economic WW3.   If China and India buy things from Russia in RMB and Rupees or in Roubles, this is a direct assault on the fortress of dollar hegemony.   And imagine, for the US which is trying so hard to preserve the status of the dollar, this sudden turn of events is something that is totally unexpected.   

 

All of our readers would probably have been inundated with a lot of commentary from every conceivable major newspaper and journal on the effects of “de-dollarisation”.   I have not much to add to all that wisdom, but to those who expect this to happen soon, I would say that it will still take another ten years or so before it finally happens.  And it should be a gradual process.

 

What does Dollar hegemony mean anyway?  And what about its end?

 

The US dollar has been the most widely used currency in the world for about a century.   When the British Empire started to falter at the end of WW1, sterling, then the world’s reserve currency, lost ground to the US Dollar, the rising industrial power of that era.   After WW2, the Bretton Woods agreement put the US currency at the center of global trade and finance.   And after a couple of setbacks, including Nixon’s cancellation of gold backing for US dollars, the currency maintained its status, when that same president also substituted gold backing with oil backing.   The agreement with Saudi Arabia, one of the largest oil producers, for all oil deals to be priced in dollars essentially made it possible for the “petrodollar” to become a commodity-backed reserve currency.  

 

The energy business is critical for the US dollar’s maintenance of its supremacy.  Everybody needs energy, especially in an industrializing world; and as such, everybody needs dollars. 

 

In short order, all of the world’s trade in everything else also became denominated in US dollars.   Today, 80-90 percent of world trade is in dollars.  Wherever and whenever anybody buys something, they have to buy dollars first to then settle their bill with the sellers.   The sellers in turn collect a lot of dollars and have to park it somewhere.   If the sellers spend their dollars, the currency will become the lubricant for world trade, a medium of exchange; if they save their dollars, the currency will be a store of value, held as national reserves in American banks. 

 

This gives the US a high degree of control over the world.   It is like there is a bandit armed to the teeth on the highway of trade, collecting a toll.   Everybody pays.  The bandit prospers.

 

That is the schematic behind the might and wealth of America.

 

On the other side of the ledger, the Americans find that since everybody needs their currency, this unlimited demand means that they can abuse the system.  Because they can issue an unlimited amount of dollars, they can print their way out of any problem they face.   And indeed, they have been doing it since 1998.

 

The first was a dry run for the game that is to follow over the next 20 plus years.  In the late 1990’s a massive hedge fund called Long Term Capital Management, fronted by Nobel Prize laureates, blew up.   And the US central bank did the first of many rescues to “save the system” from collapsing.   LTCM, the first of many “too big to fail” gamblers, was followed less than a decade later by the 2008 Global Financial Crisis in which the US government used the LTCM methods to rescue more gamblers who plunged the economy into crisis, but it was many times bigger.   The US government’s debts expanded exponentially.   

 

Next in 2020, Covid 19 struck.   Thinking that Covid would lead to a depression unseen in a century, the Americans made use of the fact that everybody wants dollars to issue basically an unlimited amount of their currency at zero interest rates.    The two big crises of the last two decades have dovetailed into each other, and it is now one long continuous easy panacea for politicians who know better than to be called out for messing up.  The way the US Government wants to solve its economic woes is to do so without any pain to the people who vote to keep them in power.   Absolutely no taxes, no cut in any expenses such as social handouts and fighting wars, including those that lasted twenty years in Iraq and Afghanistan.   Just pretend that it is not happening and use paper to paste over the cracks.  

 

That is perfectly fine as long as the rest of world continues to accept dollars for international exchange.   This is dollar hegemony.

 

But in just about one month, America shot itself in the foot.   Firstly, it cut an important oil exporter from using dollars.   If nobody needs Russian energy exports, that would be just fine.  Only Russia will be hurt.  But if the demand for Russian energy is insatiable, then the obvious way around it for Russia’s trade partners is to pay for what they want in other currencies both sides are willing to accept.   Such as roubles, RMB and rupees.   Before you know it, countries will want to pay for large deals in roubles, RMB, rupees, rials, rands and other non-dollar currencies.

 

What then happens?   If the US dollar is dethroned from its lofty position, the US cannot pay for its excesses back home by just turning on the printing press.  It actually has to make a living to counter those domestic economic weaknesses.   The US government has to actually earn money to pay for wars and its expensive military.   

 

This is only one of the problems faced by the US government.   The other problem is that there are now so many US dollars in the global system that money is chasing goods, a process called inflation.   Oil and energy are the first products being so chased, with prices shooting through the roof because the world is on a trajectory of growth after two years of Covid and because people are rushing to buy the commodity (as well as others) on expectation of shortages triggered by the sanctions on Russia.

 

With inflation, the store of value functionality of US dollars will be diminished.   The desire to hold them will also become lukewarm.

 

Worse of all, the Biden Administration froze Russian financial assets held at American banks.   This is the last straw.  It amounts to robbery.   You don’t take away another person’s money just because you regard him as evil.    This is the same as a bank confiscating the money of a criminal.  It doesn’t matter if the account holder is a crook or the devil himself, but it is still his money.  The bank is not entitled to take it away.

 

But that is exactly what has been done.   Now, after this, who will ever trust the American banks and the US government again?   Or European institutions and the EU authorities?  The perennial question on everybody’s mind is: when will it be my turn to suffer sanctions and get robbed.   Over time, nobody will want to hold dollars.  Or Euros.  

 

The end result of all these factors, plus an unwillingness to come to terms with a rising China which makes goods cheaper than America can, thereby controlling prices, will be such a bout of hyperinflation that the current generation of American politicians will be remembered like the Weimar Republic of 1920’s Germany.    Short on ability, long on hubris and totally incapable of solving the problems that they have created for themselves and their electorate.

 

Instead of “in god we trust”, the question becomes if they can ever trust any American president and his cohort of advisors ever again.    The sanction against Russia is a symptom of American overconfidence that they can overpower all opponents just by exercising paper weapons.   

 

The end of US dollar hegemony is in sight.   The events of the last three weeks will one day be recorded in history as how one senile president, unfamiliar with the economic situation of his own country, fired the first shots in an economic war that will spiral out of control against himself.   And in that process, he will end his presidency worse off than his predecessor, Trump who while a stupid man, at least knew when to stop.  Biden is on a train careening to a crash, and it has no brakes.   

 

When US dollar hegemony ends, what will be there to take its place?  

 

Actually nothing.  Like the unipolar political system is inexorably becoming a multipolar one, the same will be true of international finance.   Up to now, the US dollar is king; but as the dollar is undermined by its own leaders, the currencies that will supplant it will include the RMB and other commodity-based currencies in a world of rampant inflation.   

 

Instead of being a pariah currency, as intended by the west, the Russian rouble will become a hard currency, as long as there is demand for its commodities.   The RMB will emerge from its two percent of world trade to maybe twenty percent over the rest of the decade.   The dollar will not fall to zero, of course, but its share of the payments system may drop from 80 percent to perhaps 50-60 percent, still prominent but not dominant.  Sanctions will die a natural death.

 

The other currencies that will lose ground in the short term (up to five years) will be the Euro

and the Yen.  Both will weaken.   Why?   Firstly, the Euro will be guilty of all the transgressions as the dollar against Russia.  There will be a loss of faith.   The Euro was created in Year 2000 to enable it to become a second reserve currency for the world, but it has struggled as the EU has been beset with internal problems, including the Greek crisis and Brexit that it has never become an important facilitator of world trade.   Now it will never succeed.

 

More importantly, the industrial European countries will lose competitiveness, if it sticks to its ideological position that Russia needs to be countered within the continent (more like a house, really) it is sharing living space with.  Germany in particular will be unable to handle hyperinflation.   Yen will collapse even faster because it is all industrialized, and will become a victim of all the inflation in prices of every commodity its industrial sector needs.

 

If you are hedging your bets, you should know what to do.   Borrow in yen and the Euro and close those deals only when the Europeans and the Japanese pursue policies independent of the Americans, just as Hungary’s President Orban has decided to do.  

 

President Xi Jinping of China also suggested to the EU the same thing in their teleconference a couple of days ago.   Be independent of Washington DC.

 

That, if you ask me, is actually sound advice.     

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.