Markets are stable following Russia's February 24 invasion of Ukraine, as if bombs and arrows would not affect the global economy. But the economic war that accompanies the shooting war is getting hotter, requiring more attention than investors are likely to give.
Much of Russia's war analysis in Ukraine focuses on brutal world wars over territories as invading and defensive forces are fighting village and village in eastern and southern Ukraine. But most importantly international efforts to squeeze the Russian economy, by reducing the amount of energy that supports the Russian military and denying foreign technology Russia needs to maintain and replenish its weapons. Like tank battles and weapons, economic warfare is a war of attrition that anyone who stays longer can win.
The economic war is intensifying as the impossible begins to seem possible: Ukraine can win. President Biden plans to ask Congress for $ 33 billion in new aid to Ukraine, including $ 20 billion in weapons. That would be a huge increase, 10 times what Washington has provided so far. The US Secretary of Defense, Lloyd Austin, has begun talking about the US and NATO deliberately weakening Russia, on its way to Ukraine's victory. Heavy weapons, such as tanks and ammunition, the unified Ukrainian organizations that were reluctant to hand them over at the beginning of the war may flood into Ukraine.
In response, Russia has now stopped supplying natural gas to Poland and Bulgaria, its strongest move to punish countries that help Ukraine and a sign that Russia could tighten its taps or shut them down completely if it feels threatened. "All three warring factions, NATO, Russia and Ukraine, are on the rise," warns the Eurasia Group in an April 27 analysis.
Poland and Bulgaria are likely to survive without Russian gas. But Russia and its electricity customers are now beginning to "equip" the export of oil and gas, which is one of the shocking conditions that climate analysts say at the beginning of the war. If Russia stops gas exports to other European countries or to the rest of the continent, it could cause inflation in Europe and possibly lead to a recession there, which could jeopardize support for aid to Ukraine by raising costs for millions of European voters.
At the same time, European countries are considering a gradual boycott of Russian oil, which they can easily replace with other sources than Russian gas. However, a comprehensive Russian oil ban could raise global prices for everyone and add to inflation in Europe, the United States, and elsewhere. Strengthening the screws in the Russian economy is causing damage to the rest of many countries.
The sanctions on Russia's financial system have a target. But those sanctions still allow Russia to sell oil and gas, and Russia benefits from the high energy costs created in part by its invasion of Ukraine. Some analysts speculate that Russian President Vladimir Putin set a date for his invasion of Ukraine by the departure of former German Chancellor Angela Merkel in December, or the replacement of Joe Trump by Donald Trump as US president last January. But it is likely that high energy prices during the Russian invasion in Feb. 24 has made Putin confident that he will have a strong income, even the inevitable punishments.
Russia's energy revenues reached $ 76 billion in the fourth quarter of 2021, the highest level in 10 years, according to the Institute for International Finance. A team of researchers thinks that higher oil and gas prices could now boost Russia's energy revenues, or sanctions. That is why European countries and other sanctions now consider continuing to suspend oil purchases altogether or tightening financial sanctions in a way that could effectively prevent the funding needed to pass that transaction.
In the event of one of these things, the important thing is that big power buyers like China and India will buy more or all of the oil that Russia can sell elsewhere, which they can get at a big discount on world prices. If they do, it is clear that it could be a way of life for some kind of Putin's military support. The United States is leading an effort to cut off Russia, a campaign of repression that could restore international relations in the years to come. Military warfare within Ukraine is unlikely to enter the Third World War, but economic warfare may force telecoms to choose sides and face the consequences.
An opaque fight over technology
Global energy markets provide minute-by-minute calculations of how energy warfare can affect global prices and economics. The technological war found in Russia is not very clear. The United States and many other nations have announced the full ban on the sale of computer equipment and other items in Russia, in a bid to put pressure on Putin and the Russian economy. Some of those technologies include military programs that could directly affect the Russian invasion of Ukraine.
Russia has plenty of military equipment of the Soviet era, but its advanced arms stores are limited. British researchers examining the remnants of Russian weapons in Ukraine found great reliance on materials from the United States and other countries now helping Ukraine fight Russian forces. Russia's military capabilities include circuit boards made in the U.S. in Iskander-K's advanced missile, fiber-optic gyroscopes made in the U.S. a 9M949 rocket weapon and oscillator made in Britain on the TOR-M2 air defense system.
"Almost all modern Russian military weapons rely on sophisticated electronic devices from the U.S., UK, Germany, Netherlands, Japan, Israel, China and elsewhere," wrote Jack Watling and Nick Reynolds in a recent report by a team of researchers. RUSSIA.
The Pentagon says that Russia is beginning to experience "innovation problems" with precision-guided weapons and relies heavily on less accurate "silent bombs". It is difficult enough to build sophisticated weapons, and “here the Russian military industry is facing a crisis,” according to reports: “Russia's latest weapons are heavily dependent on key components produced abroad.”
Putin and his advisers are frustrated that they have planned an imminent military campaign to overthrow the elected Ukrainian government. That mistake has left Russia with a shocked army that has lost at least a quarter of its fighting power and a tough war that Russia could defeat.
Another result is that Russia is indeed moving to acquire the foreign components it needs to rebuild a large quantity of vital weapons. Russia does not need to buy that gear directly from the companies that make it, which in many cases violates sanctions by offering anything to Russia. Instead, Russia is probably looking for shares in foreign companies or a black market, or even theft. Western governments are probably trying to curb such censorship. While soldiers fought on the battlefields, supply chain warriors fought in the shadows.
No end in sight
A popular theme that Putin wants for some kind of victory is to propose Russia's "Victory Day" on May 9. But for almost all accounts, there is no chance of any strong outcome soon. In fact, the two world wars are likely to last for months, if not longer. Europe is beginning to plan for the total shortage or shortage of Russian power in the coming winter. The point of embargo separated from Russian oil would be to pinch Putin for weeks and months. Putin, in turn, has signaled that he is preparing for the Russian public motto, which may include recruiting new troops to help replace dead and wounded soldiers in Ukraine. Perhaps we will know the result on May 9, 2023.
The markets are almost unprepared for the growing economic war between Russia and much of the world. Energy prices rose and stocks plummeted after Russia struck on February 24, but markets have stabilized. In the United States, traders also pay more attention to inflation data and the Federal Reserve than to tropical countries.
The Institute for International Finance predicts that oil prices could reach as much as $ 200 a barrel if there is a complete and effective ban on Russian oil. The only time the U.S. oil prices are higher at that level, on the basis of inflation, was in 2008, as a result of the deep recession. Some factors are hurting the economy more than oil prices back then, but we have other problems now, too, including non-energy inflation and rapid pivot from recovery to stabilization. The recession is often caused by a combination of factors, rather than a single source, and there are still economic shocks that may have come from Russia's military prowess.
