In Time of War

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16 mins. to read
In Time of War

Yes, we are going to suffer now, the sky

Throbs like a feverish forehead; pain is real,

The groping searchlights suddenly reveal

The little natures that will make us cry

In Time of War, Part XIV, (1939), by WH Auden (1908-73)

Why did he do it?

Pretty much all the smart money was on Putin banging his ‘war drum’ fiercely and then extracting diplomatic concessions. That was roughly what I was telling readers last month.

Then, at 3:15am London time on 24 February, columns of Russian tanks crossed into Ukrainian territory and the shooting began. We were blindsided by a classic error of geopolitical analysis, often committed by intelligence agencies – thinking what we would do if we were Putin instead of focusing on what Putin would do.

If we want to understand where we are and where we are going next, we must put ourselves inside his head. And his head alone – there is growing evidence that he does not have the restraining influence of trusted colleagues. It’s all about him – and Russia, of course.

In a strange way, the old Soviet Union was predictable. Kremlinologists knew roughly how decisions were taken and how its ideology shaped policy. The Soviet Union had a politburo which even told Khrushchev it was time to retire in 1963. The Soviet Union maintained a huge buffer in the form of the Warsaw Pact countries of eastern Europe; but that was lost when the reign of communism fell in the late 1980s. The two superpowers managed to get through the Cold War without mutually assured destruction (‘MAD’) – although it came very close during the Cuban Missile Crisis. Understanding Putin is a lot more about doctrine than ideology. He wants that buffer back.

Putin set out the reasons for the “special military operation” in Ukraine in a comprehensive speech on 24 February (a transcript is available on Bloomberg). Much of it was about the “empire of lies” which Putin and others see when they look west. It is not the speech of someone who is insane.

Some commentators have described him in the past as “a chess player with a poker face” – a highly rational if ruthless operator. The Putin of 2022 is in the grip of a quasi-religious doctrine which requires the restoration of the territories of historic Rus to modern Russia. To be clear, he does not want, as is often asserted in western media, to recreate the Soviet Union. Rather, he seeks to resurrect the tsarist Russian Empire – which included Finland, Poland, the Baltic states and much of Central Asia. That makes him much less risk-averse and less influenced by external opinion.

We can engage in lengthy polemics about Russia’s need for “security” and the steady encroachment of NATO on its frontiers. Or whether NATO can truly be said to be a defensive alliance after its campaigns against Serbia (1999), Afghanistan (2001-21) and Iraq (2003-09) in pursuit of “regime change”. But NATO embraces the former countries of the Warsaw Pact precisely because, in the interests of their security, they requested to join.

History will probably judge that Putin invaded Ukraine when he did because the western alliance, exhausted by the pandemic, riven with arguments about identity politics, increasingly ashamed of its own history and led by an array of uninspiring leaders, looked decadent, weak and irresolute.

Has he miscalculated?

If he thinks he can get away with it, there are many reasons to suppose that Putin has miscalculated.

First, one week into the war Putin has succeeded in uniting NATO as never before. NATO’s raison d’être has been vindicated, as an alliance of democratic countries conceived to provide mutual defence against prospective Russian aggression. Even Sweden and Finland have made noises that they might want to join – much to Putin’s chagrin.

Germany has finally abandoned Frau Merkel’s ‘softly-softly’ approach to Russia and has faced up to the fact that it has become dangerously dependent on Russian gas. Even the German Greens are saying nice things about nuclear power. Chancellor Scholz has pledged to spend another €100bn on defence. The RAF is permitted, at last, to fly through German airspace.

Scepticism about NATO in the US – except on the radical, socially conservative right, where Putin is admired – has been allayed. The democracies of Europe and North America have reacted to the war in fundamentally similar ways – with a potent cocktail of horror, revulsion and visceral apprehension about the future.

Second, if Putin thinks that Ukraine is a “fake nation”, why are so many Ukrainians prepared to die for it? Putin may believe in “the essential unity of Russians and Ukrainians” but clearly most Ukrainians, who have enjoyed an independent existence for 30 years, do not. Putin has succeeded in solidifying a sense of Ukrainian national identity even amongst Russian speakers. In fact, most Ukrainians are bilingual anyway.

Even if the Russian army brutally crushes resistance and installs a puppet pro-Russian regime, a sense of a nation deprived of liberty will endure within and outside the country. President Volodymyr Zelensky, whom Putin calls a “Nazi” (despite his Jewish heritage) has emerged as a leader of courage and determination. When the Americans offered him safe passage, he responded: “I need ammunition, not a ride”.

Third, Putin and his supporters may portray the war as a legitimate attempt to guarantee Russian security by preventing Ukraine from joining the “empire of lies”. But to the outside world – even to those who don’t have a dog in this fight − this looks like an old-fashioned imperial war of conquest, of a kind we thought belonged to another age. Indeed, we can regard this as economic imperialism since Ukraine has two things Russia desperately needs: people and grain.

Even China has not been as supportive as Putin might have expected. China abstained on the resolution of condemnation put forward to the UN General Assembly on 2 March. There were only five votes against: Russia, Belarus, North Korea, Eritrea and Syria −a motley crew, if ever there was one. The Chinese diplomatic line is that there should be a negotiated settlement. Russia looks more isolated on this than at any time since Putin first came to power. The country is now being accused of war crimes and indictments are being drawn up at the International Criminal Court in The Hague.

Fourth, the extent of sanctions may have surpassed the Kremlin’s expectations. A swathe of nations has banned all Russian flights and indeed forbidden Russian travellers from visiting. So, no more après-ski in Courchevel. Russia has been excluded from all international sport, including this year’s World Cup. Most Russian banks will no longer get access to the SWIFT international payments system. The oligarchs are under pressure – though some of them have started to speak out against the war, including Oleg Deripaska and Mikhail Fridman (who was born in Lviv).

The US is banning all exports of technology including software. Russian companies will not be able to raise new finance in the international capital markets. Russian assets have become toxic – multinationals like BP, pension funds like the Universities Superannuation Scheme and even sovereign wealth funds like Norway’s are offloading them as fast as they can. But who will buy them? MSC and Maersk have suspended all cargo deliveries to Russia – not surprisingly, since cargo insurance has been withdrawn from goods shipped to and from Russian ports.

The rouble has collapsed and the Moscow stock exchange is closed. Russia’s banks are reeling as depositors queue up to withdraw their cash. They face a massive liquidity crunch. Russians are also being denied access to popular payment platforms such as Apple Pay. The Central Bank of the Russian Federation (CBR) has raised interest rates from 9.5 percent to 20 percent, yet inflation is already rampant. Professor Steve Hanke of Johns Hopkins University puts it at 55 percent. CBR is now restricted from accessing its $661bn of foreign reserves, about half of which are denominated in dollars and euros, though part of those will reside in China. US, UK, EU and Canadian banks are now prohibited from buying assets from Russia’s central bank. CBR has $200bn in gold reserves, but it would be hard pressed to raise cash from these.

Fifth – and this is perhaps the most illuminating aspect for western observers – the wave of demonstrations against the war that are taking place in Russia has shown that Putin may not be as popular as we thought. Unquestionably, many Russians think that this war is both unnecessary and wrong. It is difficult to know how many people have been arrested for demonstrating, but it certainly runs into thousands. The Russian public is being given a highly censored version of events by state-controlled media; but mobile phones are ubiquitous in Russia as elsewhere and some footage of the devastation is seeping through.

Sixth, the Russian military has failed to land a knockout blow in the first week of the war – the ‘Blitzkrieg’ has not yielded instant victory. The Russian army’s logistics have been found wanting – on Thursday we learnt it is running short of spare tyres for military vehicles. I’m told by an expert that the Russian military is using unencrypted BTR radio frequencies and sometimes civilian smartphones, which can be intercepted. The morale of young Russian conscripts is evidently low.

On 1 March, President Zelensky addressed a special session of the European Parliament via video link: so, for all their competence in cyberwarfare, the Russians have failed to take down the internet. Apparently, Elon Musk has made SpaceX’s Starlink network available to compensate for any damage to the terrestrial network.

Zelensky, a former comediani, has displayed a mastery of social media, winning admiring support from all over the world. His preferred platform is Telegram, which is popular in Russia. Russia’s troll factories (I have been attacked by one myself) look amateurish by comparison.

In military terms, most of the command-and-control centres of the Ukrainian military have continued to function. The Ukrainians claim that over 6,000 Russian soldiers have been killed – their bodies disposed of, reportedly, in mobile incinerators to avoid the spectacle of body bags returning to the motherland. The Russians admit to just 600 fatalities. Many Russian soldiers have been captured.

Of course, this is still early days and Putin thinks long term. The longer the war continues, the more likely it will be that Putin’s Russia may resort to lethal weaponry such as thermobaric bombs, and the uglier the conflict will become, as was the case in Syria. Things might look different in a few weeks’ time.

Like Lord Richards (a former chief of the defence staff) I think it is very unlikely that Putin’s forces will be forced to withdraw with their tails between their legs. Putin will just keep on escalating the war until Zelensky is on the run or until he is captured. The idea that the Ukrainians can win in the field is wildly optimistic; just as the idea that Putin will be toppled shortly is wishful thinking. And if we in NATO intervene directly – with a no-fly zone over Ukraine – there will most likely be nuclear war. But even if Russia succeeds in occupying Ukraine – what then? The country will never become a compliant vassal.

The impact of sanctions

The regime of sanctions on economic ties with Russia will have consequences. Even before the invasion the Bank of England had been expecting real incomes in the UK to fall by two percent this year. And it’s not just the price of hydrocarbons that is soaring − agricultural- commodity prices are rising as well. We are facing a ‘commodity shock’. US wheat futures earlier this week were at their highest since 2008.

The Europeans, particularly the Germans, have realised that they have become far too dependent on Russian gas – but too late in the day to remedy this. Nord Stream 2 has now been mothballed (as I predicted) but the Germans are still dependent on gas supplies which are routed across Ukraine, and which could be sabotaged if the Ukrainians are forced to adopt guerrilla tactics.

Sanctions will create unintended consequences for all those who trade with Russia. OneWeb, the satellite company which is majority-owned by the British government, has a contract with the Russian space agency Roscosmos to launch a further 36 satellites. Roscosmos is now holding these satellites and says it will not launch them unless the UK government provides assurances that they are not to be used for military purposes. Is this the sound of pigeons coming home to roost?

Two thirds of all Russian exports of crude oil are shipped by sea. Who will make up the shortfall? And if Putin turns off the gas completely out of spite, European reserves would soon run out, even given mild weather.

More than 11,000 banks worldwide use the SWIFT messaging system, allowing them to make cross-border payments securely and quickly using specialist codes. Iranian banks were ejected from the SWIFT network in 2012 with immediate consequences for the Iranian economy. The exclusion of key Russian banks from SWIFT, despite initial German reluctance, will not impede Russia’s trade with China, which is conducted on a different platform.

Without London or New York, Russian corporates might seek finance in Hong Kong or Shanghai. And remember that Russia is still exporting oil and gas – much of it to the West – at a rate of about $1bn a day, which is settled through the Russian banks which have not been excluded from SWIFT.

The threat of stagflation and its consequences

Wars are always inflationary, but sometimes they can re-ignite a flagging economy. The recession and then depression which first erupted in America in 1929 was only finally overcome by the massive fiscal stimulus of World War II. US car production did not return to 1929 levels until the early 1950s.

But this time is different. Russia is the world’s largest natural-gas exporter, second-largest oil exporter and third-largest coal exporter – and it has now been ejected from the US-dollar trading system at a moment when energy markets are already under stress. Russia also produces 35 percent of the world’s palladium and is a significant producer of rare earth and industrial metals, including platinum, aluminium and nickel. This shock comes just as the world economy was recovering from the setbacks of the pandemic.

The most likely outcome of this war will be a sharp and sustained rise in the price of hydrocarbons. Higher energy prices entail higher production and distribution costs. As prices rise without a commensurate increase in wages and salaries, so aggregate demand is weakened. And as credit quality declines, so banks curtail lending. The result is stagflation – simultaneous economic stagnation (minimal or negative growth) with price inflation.

That is what happened in Europe and North America in the 1970s after the Oil Shock of 1973 further to the Yom Kippur War. There were consequent political convulsions across the western world. In 1974, almost every democratic leader was replaced, although admittedly, Georges Pompidou died in office and Richard Nixon was forced to resign over the Watergate scandal. It is true that the world is not as dependent on oil today as it was then, given the electrification and decarbonisation agendas. But much of the developing world is still entirely dependent on hydrocarbons. And higher energy prices feed through into higher food prices.

There is little that monetary policy can do to counter cost-push inflation. Should central banks respond to rising prices by raising rates, or should they respond to collapsing demand by lowering them? There is no easy answer. The most likely response is that the central banks will continue to raise rates incrementally while cranking down the quantitative-easing money presses.

On 3 March the price of oil eased from around $117 to £112 per barrel, much to the markets’ relief. And, for once, the UK is less sensitive to the isolation of the Russian economy than some of our peers. Prices are likely to ease at the top end of the London property market – but that is no bad thing.

If the CBR starts to sell gold on Putin’s instructions (respected CBR governor Elvira Nabiullina wore black this week) then we might expect the price of gold to crash. On the other hand, since they now know that their dollar assets could be frozen in a time of war, China, Pakistan and other emerging-market central banks will likely follow Russia’s lead and seek to build up their gold reserves – even if that means selling their stocks of US Treasuries at scale. And how the eurozone would cope in a period of stagflation – and how its banks might fare − is something I would like to consider shortly.

In the shadow of the mushroom cloud

In his speech on the morning of the invasion, Putin explicitly warned the US and its allies that if they attempted to intervene, they would “suffer consequences never encountered in history”. On 27 February, he put Russia’s nuclear arsenal on high alert. There is growing concern amongst analysts that not only does Russia have a formidable nuclear arsenal but an increasing willingness to use it. Putin stated in his 24 February speech:

“As for military affairs, even after the dissolution of the USSR and losing a considerable part of its capabilities, today’s Russia remains one of the most powerful nuclear states. Moreover, it has a certain advantage in several cutting-edge weapons. In this context, there should be no doubt for anyone that any potential aggressor will face defeat and ominous consequences should it directly attack our country.”

Any false move by the West which could be construed as a “direct attack” on Russia might very well provoke a nuclear strike. Russia probably has hypersonic missiles (that was the “advantage” Putin referred to in the above quotation) and these can be used pre-emptively. Putin might calculate that a nuclear war in which Russia strikes first would be winnable. It is possible that the Russians and their Chinese ‘partners’ have discussed how such a first strike might be coordinated. On the other hand, I think China devoutly wishes to avoid nuclear war from which it would have nothing to gain and much to lose. More on that soon.

We are therefore back in the state of existential dread which we thought we had left behind for good when the Cold War ended with the dissolution of the Soviet Union in 1991. Nuclear war could break out during the current conflict – and though we cannot know how widespread and sustained it would be, even a limited nuclear war would be devastating.

I cannot foresee any endgame scenario in which relations between the West and Russia could be restored to anything like normality, even if Putin is replaced. The post-Cold War world order of peaceful coexistence is over. One of the most peaceful periods of human history may have come to an end in a world where disputes are settled by brute force. Suddenly, we are living in a much more anguished world.

But then again, the invasion of Afghanistan (December 1979) turned out to be a fatal mistake for the Soviet Union, though it took more than a decade to manifest. In this season of Lent, 2022, there is much to pray for.

i Another of his claims to fame is that he is the Ukrainian voice of Paddington Bear.


“The


Comments (6)

  • Ian says:

    oh dear I am old enough to remember many similiar concerns. In the 1970s Russia fired nuclear missiles at Moscow and then shot then down to show it had defences – make believe it turned out. Iraq had one of the biggest tank armies in the world – the Gulf war would not be a walkover. Outdated technology meant it was. Whilst the risk of nuclear war should never be underestimated, does Putin want to be remembered as the man who ended the world, including Russia. Doesn’t he have children – would they survive a nuclear attack? Don’t panic

  • Tolle says:

    Interesting article. You need to watch BBC iPlayer documentary dancing with Putin to understand how Putin controls the media stream to the Russian people, so that they (in the majority) see a very different story.

    The Ukrainian president is a banger (to use the musical comparison). His leadership, and refusal to evacuate, is way up there. Bojo, so don’t even appear on the scale.

    The independent media in cccp are up there too. See dancing with Putin.

    The protesters against the war are youngsters. They are risking all of their futures to protest.

    All three give us hope. Not now, that will not happen, the X KGB officer (Putin) who saw the Berlin wall fall and could do nothing about it , who has seen his country collapse economically with majority of struggling and a few industry grabbing friends of Putin on the other side of the road, he will not stand back.

    He will continue with whatever is the end game in his head.

    But technology is (will?) Let youngsters see what is happening. Both in cccp and China. There will be change over time.

    I am not , by the way, saying that capitalism is the solution, but democracy goes the right way. At least if it goes “t*TS” up , you had a say in the experiment.

    I have housed and fed Croatians who fled during the break up of Jugoslavija , you would think they would hate their Serbian neighbors. No. As they said to me, Serbian, Croatian, slovenijan, Macedonian, Montenegrin, Kosovo families all want the same things for their families / children.

    Unfortunately, there are old people out there who can only keep powere and distract from the failure of their economies using the cloud of war ….

    In the meantime, pray for those from Ukraine who are families who just want a life for their children / families ….

    Bless them all … Hvala bog …

  • stephen baxter says:

    Thank you Victor for a masterly and succinct analysis of what the world faces because of the Russian invasion of Ukraine. I am new to Master investor and value this perspective

  • Lawman says:

    A realistic analysis, making it clear the consequences are for the long term.

    For Western society this could do good, bringing us together and, one hopes, leading to decline of the ‘culture wars’. The turnabout of Germany is welcome.

    Economically, the single aspect is oil & gas. If we can accelerate production of SMR Nuclear, and Hydrogen power, we can lose reliance on Russia, isolating it until the regime changes. This will need alternative sources of oil & gas for a decade: think North Sea oil re-opened and the Keystone Gulf pipeline used.

    Compared with the suffering of Ukrainians, we must not whine about some economic loss.

  • Barry Massey says:

    Massive consequences for who. We need to remember that the ground controlled by Russia was the result of the three power conferences at Yalta and Potsdam and Stalin’s whining for extra territory. Until the outbreak of the Second World War, Warsaw, Lvov, Prague, Budapest, Odessa, Bucharest, Sofia, Belgrade, Vilnius, Riga, Tallin and Berlin belonged in “our” western world and were taken over by the Red Army in moving into Germany and were never given back. With the exception of the four cities of Poland and the Baltic republics none of had been Russian territory. With regards to Poland and the Baltic republics, these were occupied by Russia but were very culturally different to Russia. Let’s not become bamboozled by Putin. These were not his territory and we don’t need to give them to him.

  • redsq says:

    If I were in Putin’s shoes, my plan would be the return of russian land, people and assets to russia. I’d draw the border at the the Dneiper. He’s already achieved his first objective, Kherson. The russian dam at kherson supplies hydro and water through the russian north crimea canal to crimea. The Ukraine attempted genocide by cutting off this water in response to the Crimean SSR reasserting its independance. All of Putin’s other actions are equally logical. The proximate cause of Putin’s mayhem is the attempt by the EU to colonise Russian East Ukraine, and cut off the Russian donbas industrial centre from the Ukranian donbas. Putin had no choice but to act. He’s not interested in Polish cities like Lvov.

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