While not being glib about the horrors of the war in Europe, don’t feel guilty if you’re bored with what’s happening in Ukraine. You aren’t alone. The war has now been going on for more than 100 days and as a Financial Times columnist puts it, “tedium is beginning to creep in”. Boredom will only strengthen Vladimir Putin’s authoritarian resolve. And that authoritarian resolve means not just defeating Ukraine, but disrupting the settled international financial order.
The initial shock of the Russian invasion, the mass exodus of fleeing Ukrainian civilians, followed by panic about Putin maybe resorting to nuclear weapons, the media-fed euphoria about Russian setbacks, the revelations of Russian atrocities against civilians, the warm-bath feeling that swift and apparently blanket sanctions gave the West, for many have all melted into a kind of ‘Meh’.
The biggest test of Western resolve is perhaps revealed by the approval ratings for President Joe Biden, the Western leader who has seemed most resolute in his support for Ukraine – 40.8% of Americans polled this week think he is doing a good job, just 0.2% more than the previous week. Americans probably are more focused on the cost of living, where Biden has surely failed. It now costs around 30% more to pump gasoline into your vehicle than the day before Russia invaded Ukraine. How does billions of (unfunded) US tax Dollars being spent on howitzers for Donetsk play in Kansas, when the price of gas or steak is going through the roof?
As for the European Union (EU), it cannot even achieve unanimity on an embargo against Russian crude oil, two-thirds of which comes into the EU via tankers. The embargo on Russian crude oil imports by tanker will only take full effect by end-2022, and in any case the Czech Republic, Hungary, and Slovakia will be allowed to continue importing Russian crude via the Druzhba pipeline. Such is democracy – only as strong as its weakest link. Life in Putin’s Russia is no doubt awful, but at least he doesn’t have problems trying to herd cats.
The EU is much more reliant on Russian gas than crude oil but there’s no chance that a ban on Russian gas imports into the EU, which would be far more damaging for the Russian economy, is on the cards. The Austrian Chancellor Karl Nehammer said banning Russian gas, which covers a third of EU needs, was impossible. “Russian oil is much easier to compensate for… gas is completely different” he said. At the start of 2022 Russia was earning about $550 million a day from its gas an oil exports. It’s now taking around $720 million for gas alone, thanks to energy prices which have become weaponized.
Attrition – who can last longest?
Partly the tedium is a (reluctant, to be sure) acceptance that this conflict cannot be militarily won by Ukraine, no matter that it scored a moral victory from day one. Russia is obviously prepared for a lengthy war of attrition, reducing Ukraine’s strength through sustained attack. Russia has considerably more capacity to endure this attrition than Ukraine. But such is Ukrainian resistance and determination to remain independent that Russia’s greater ambitions will be thwarted – it may end up with more of Ukraine’s land (it currently has a fifth according to the Ukrainian President) but not all of it. And partly it’s simply war-fatigue, a Western sickness that infects fewer people the closer you get to NATO’s eastern border.
How does any of this matter to the world of currencies, the world of money? It matters because everything has been up-ended. Everything is now weaponized – everything from fiat currencies, to energy prices, to food supply has been turned into firepower.
The failure to exert maximum pressure on Russia’s gas has been matched by the failure to act on SWIFT, the system of international money transfer. Only now has the EU added Russia’s Sberbank to the list of banks excluded from the SWIFT. It’s a mystery why it wasn’t on the first sanctions’ list. The Russian state-controlled Gazprombank is even today not sanctioned, although 27 of its executives are under US sanctions. The special treatment accorded to Gazprombank is a reflection of the EU’s energy concerns. Katja Yafimava, senior research fellow at the Oxford Institute for Energy Studies, says Russia made it clear to “Europe that as long as Gazprombank is not sanctioned and payment is made to Gazprom’s account in Gazprombank, the gas will flow to Europe”. President Putin knows that EU member states are domestically and industrially too reliant on Russian gas to conduct an all-out sanctions’ war. Fossil fuels have become weaponized.
Western sanctions have had many unintended consequences, perhaps the most globally disruptive being the creation of a food crisis, which might cause “starvation of up to 47 million people” says the US Atlantic Council. Fertiliser prices have more than doubled in the past year, according to the US Department of Agriculture, due in part to what is called in early March “a limited supply of the relevant minerals and high energy costs, high global demand and agricultural commodity prices, reliance on fertiliser imports, and lack of competition in the fertiliser industry”. Russia, which produces 13% of the world’s fertilizers, has historically been a major fertilizer exporter to the EU, Brazil, and the US – all important grains’ producers. Russia suspended its fertilizer exports on 4 March. President Putin told the Turkish President Recep Tayyip Erdogan at the end of May that Moscow was prepared to export significant volumes of fertilizers and food if the West’s sanctions against Moscow are lifted. Food has become weaponized.
The president of the African Union, which has 55 member states, said the banning of Russian banks from SWIFT means “that even if produce exists, payment for it becomes difficult or even impossible”.
Ukraine is a vital grains’ exporter; it produces about 86 million tonnes annually. It’s estimated that around 28 million tonnes are stuck in Ukrainian Black Sea ports because of the risks from mines sown by Russia, a Russian naval blockade, and the steep cost of shipping insurance since the war started. The main recipients of Ukraine’s wheat are Bangladesh, Egypt, Indonesia, Libya, Lebanon, Morocco, Pakistan, the Philippines, Tunisia, Turkey, and Yemen. Its corn is bought by China, Egypt, Iran, the Netherlands and Spain. Some of these saw food riots and social unrest in the aftermath of the 2008 financial crisis. As there is no sign of the Ukraine war easing, and thus the grains and vegetable oil shortfalls will get worse before improving, further price rises are inevitable. In the comfortable countries of the West, we probably will be able to pay these prices, or rely on our governments to provide hand-outs; in cash-strapped countries like Somalia or Chad, where droughts have already hit food supply, famine may result.
Sanctions certainly have begun to hurt Russia; its inflation was almost 18% in April, revenues from domestic value-added tax collapsed by more than half and from imported goods by a third in April compared to April 2021. Elvira Nabiullina, head of Russia’s central bank warned in April that problems were emerging “in all sectors, both in large and small companies”. Everything from buttons to white paper is in short supply. Flights to Europe have been cut and Russians are unable to use their bank cards overseas.
And yet Russia’s recent history teaches us that its capacity for taking blows is unparalleled; it should also have taught us that it conducts war in the most brutal manner possible. Stalingrad 1942 and Berlin 1945 are examples.
Thus the weaponization of the US Dollar – from the freezing of Russia’s overseas foreign exchange stash – has evoked from Russia a kind of tit-for-tat response; if you make the international reserve currency, the US Dollar, into a weapon for the West to extend the extraterritorial reach of its law and policy, then we (Russia) will use our advantages (in commodities) to counter-act your weapon. This is a dangerous game for both sides; the West could end up being the biggest loser. The Dollar is slowly losing its status as the international reserve currency, with its share of global payments dropping from 43.37% in April 2020 to 41.81% in April 2022.
The US still has what the then French minister of finance Valéry Giscard d’Estaing described in the 1960s as the “exorbitant privilege” of the US in having the Dollar as the world’s international reserve currency – it can finance its deficits easily because other countries want to hold it. He supported a return to a world monetary system based on what he called the ‘eternal’ role of gold, eliminating the reserve currency status of the dollar and sterling. Perhaps Putin has a touch of French in his ancestry – for Russia has progressively shifted its reserves out of Dollars, and is selling its oil in non-Dollar currencies. This war has barely started.
Alistair Milne, professor of financial economics at Loughborough University, in Britain, told the New Yorker magazine that there are three choices for Western leaders. The first is military action. The second is economic and financial action, on a far greater level than the limited SWIFT measures. “Or you do nothing”, he said. “And that is a huge blow to democracy. The flame of democracy will die”.
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