Putin vs. the World Economy (and Ours)

The last two Democratic presidents, taking office in 2009 and 2021, inherited disasters from their Republican predecessors. Obama was much too easy on banks and bankers and didn’t do enough to help the victims of the financial collapse, but he restored some normality to our economy fairly quickly. Biden won’t be as successful in the short term.

His administration took serious measures to address the pandemic, unlike You Know Who’s, but right-wing insanity and the Omicron wave delayed getting back to normal. Supply chain disruptions,  corporate greed and the country going back to buying and selling have led to inflation (as in other countries). After four years getting what he wanted from his stooge in the White House (including criticism of NATO and the illegal interruption of military aid to Ukraine), Putin decided it was time to take Ukraine. That will increase inflation even more (and although Republicans want us to be “strong” and stop buying Russian gas, they’ll criticize Biden when gas prices go up). It appears that Republicans can sit back, not propose anything helpful, lie about Biden’s failures and simply wait for unhappy voters to reward them in November. 

Nevertheless, I think it’s worth knowing what’s going on with the economy. Paul Krugman offers his analysis:

When Vladimir Putin invaded Ukraine, I think it’s fair to say that most observers expected him to get away with it. Surely Russia’s huge military would take Kyiv and other major cities within a few days; surely the West would respond with its usual timidity, giving Russia no more than a minor slap on the wrist.

Instead, here we are, 13 days in, with Kyiv and Kharkiv still standing and invading forces bogged down by fierce Ukrainian resistance (helped by a rapid influx of Western weapons) and disastrous logistical problems. At the same time, Western sanctions on the Russian economy are clearly already having severe effects and may get even stronger.

Obviously all this could change: Russian forces could regroup and resume the offensive, weak-kneed Western governments could start lifting sanctions. For now, however, Putin is facing far worse consequences than he could have imagined.

Unfortunately, standing up to aggression doesn’t come free. Events in Ukraine and Russia will, in particular, impose serious costs on the world economy. The question is, how serious?

My tentative answer is that it will be bad, but not catastrophic. Specifically, the Putin shock seems unlikely to be nearly as bad as the oil shocks that roiled the world economy in the 1970s.

As in the 1970s, the blow to the world economy is coming from commodity prices. Russia is a major exporter of oil and natural gas; both Russia and Ukraine are — or were — major exporters of wheat. So the war is having a big impact on both energy and food prices.

Start with energy. So far, the sanctions being applied by Europe against Russia conspicuously don’t apply to oil and gas exports; the United States is banning oil imports from Russia, but this won’t matter that much, because America can buy and Russia can sell elsewhere. Markets are nonetheless reacting as if supplies are going to be disrupted, either by future sanctions or because global energy companies, fearing a public backlash, are “self-sanctioning” their purchases of Russian crude. Indeed, Shell, which bought Russian oil at a discount the other day, has apologized and says it won’t do it again.

As a result, the real, inflation-adjusted price of oil has shot up almost to the level it hit during the Iranian revolution in 1979:

Oil prices in 2022 dollars.

To be honest, I’m a bit puzzled by the size of this price spike. Yes, Russia is a major oil producer. But it accounts for only about 11 percent of world production, whereas Persian Gulf producers extracted a third of the world’s oil back in the 1970s. And Russia will probably find ways to sell a significant fraction of its oil despite Western sanctions.

Furthermore, the world economy is much less dependent on oil than it used to be. Oil “intensity” — the number of barrels of oil consumed per real dollar of gross domestic product — is half what it was in the 1970s.

What about natural gas? Europe depends on Russia for a lot of its supply. But gas consumption is strongly seasonal:

Winter is coming — but not for quite a while.

So the impact of Russian disruption won’t be that big until late this year, giving Europe time to take measures to make itself less vulnerable.

Overall, then, the Putin-made energy crisis will be serious but probably not catastrophic. My biggest concern for the United States, at least, is political. You mightn’t think that Republicans could simultaneously demand that we stop buying Russian oil and attack President Biden for high gasoline prices. That is, you mightn’t think that if you’d spent the past 25 years sleeping in a cave. In fact, that’s exactly what’s about to happen.

Politics aside, food may actually be a bigger issue than energy. Before Putin’s war, Russia and Ukraine combined accounted for more than a quarter of the world’s wheat exports. Now Russia is sanctioned and Ukraine is a war zone. Not surprisingly, wheat prices have shot up from less than $800 a bushel before Russia began massing its forces around Ukraine to around $1,300 now.

In wealthy regions like North America and Europe, this price surge will be painful but for the most part tolerable, simply because advanced-country consumers spend a relatively small percentage of their income on food. For poorer nations, where food is a huge fraction of family budgets, the shock will be much more severe.

Finally, what impact will the Ukraine war have on economic policy? Spiking oil and food prices will raise the rate of inflation, which is already uncomfortably high. Will the Federal Reserve respond by raising interest rates, hitting economic growth?

Probably not. The Fed has long focused not on “headline” inflation but on “core” inflation, which excludes volatile food and energy prices — a focus that has stood it in good stead in the past. So the Putin shock is exactly the kind of event that the Fed would normally ignore. And for what it’s worth, investors appear to believe that it will do just that: Market expectations of Fed policy over the next few months don’t seem to have changed at all.

Overall, the Russian shock to the world economy will be nasty, but probably not all that nasty. If Putin imagines that he can hold the world to ransom, well, that’s probably yet another fatal miscalculation.

The Truth about Their Oil and Ours

I try to avoid Republican nonsense, partly by avoiding TV, but some of it gets through. In what’s below, our congressman, Tom Malinowski, one of the smartest and most productive Democrats in the House of Representatives, demolishes some Republican talking points regarding Russia and oil:

Of course we should stop buying Russian oil.

But please stop pretending this is a silver bullet, or that we could somehow “replace” all the Russian oil by drilling in America.

Please follow along for a few facts . . .

Last year, the US bought $17 billion worth of oil from Russia. That’s not a huge number, and many US refiners are already ending their purchases anyway.

In comparison, Biden’s sanctions cost Russian energy companies over $190 billion just this week.

https://oilprice.com/Energy/Energy-General/Russian-Oil-Gas-Giants-Lose-95-of-Their-Market-Cap-On-London-Exchange.html

If we really wanted to deny Putin oil revenue, we’d try to stop all his oil and gas exports, not just the puny ones to the U.S.

But Russia is the world’s #2 oil exporter — second only to Saudi Arabia. Taking all that oil off the market overnight would explode gas prices.

Republicans have been arguing that we could make up for losing Russian energy by stopping “Biden’s war on oil” at home.

Huh?

In fact, there are 248 more active oil and gas rigs in the US today than when Biden took office, a 62% increase.

https://rigcount.bakerhughes.com/

Meanwhile, Biden is approving oil and gas drilling permits on public lands at a faster rate than T____, and has been criticized for it by environmental groups.

https://www.washingtonpost.com/politics/2021/12/06/biden-is-approving-more-oil-gas-drilling-permits-public-lands-than-trump-analysis-finds/washingtonpost.com/politics/2021/


If on top of all that, you also want to drill in the Arctic National Wildlife Refuge, know that it wouldn’t produce oil till 2031. The Keystone Pipeline also would take years to come online.

These projects would have no impact on gas prices today.

https://www.eia.gov/outlooks/aeo/anwr.php

If you want to shield American gas consumers from the impact of Russia’s war, your problem is not Biden; it’s Saudi Crown Prince MBS. This supposed US ally could produce more oil today but refuses, to protect a production agreement he made with Putin!

https://www.wilsoncenter.org/article/saudi-arabia-chooses-putin-over-biden-ukraine-keep-oil-prices-high

Back to politics: many Republicans privately admit we can’t “replace” all the Russian oil, but they want Biden to ban it all anyway, and then criticize him for the inevitable increase in gas prices.

We can’t afford that kind of cynical partisanship right now.

Democrats and Republicans need to lock arms and say: “As we sanction Russian oil, we must increase oil & gas production in the short run (including by pressuring the Saudis). But there will still be sacrifice at home, and we agree freedom and security are worth the price.”

And let’s agree that so long as we are dependent on oil, every country that influences its price can blackmail us.

Let’s become the world’s clean energy superpower, and tell Putin, MBS, and the leader of every other “gas station masquerading as a country” to go to hell.

Unquote.

This being a crazy timeline, Rep. Malinowski is expected to have a tough election in November, given that his opponent has nothing going for him except his ability to avoid answering questions about the previous president/unindicted co-conspirator D____ T____ and his having the same name as his dad, a moderate Republican who was a popular New Jersey governor.

Russia’s Plan A, Followed by B, C and D

I think this analysis of the war and what might come next is worth sharing. It’s by Sir Lawrence Freedman, Emeritus Professor of War Studies at King’s College, London. He’s been called “the dean of British strategic studies”: 

As the Russo-Ukrainian War takes a darker turn it is important to emphasise this essential point. This is a war that Vladimir Putin cannot win, however long it lasts and however cruel his methods.  

From the start the Russian campaign has been hampered by political objectives that cannot be translated into meaningful military objectives. Putin has described a mythical Ukraine, a product of a fevered imagination stimulated by cockeyed historical musings. His Ukraine appears as a wayward sibling to be rescued from the ‘drug addicts and Nazis’ (his phrase) that have led it astray. It is not a fantasy that Ukrainians recognise. They see it as an excuse to turn their country into a passive colony and this they will not allow. No Russian-backed government would have legitimacy and Russia lacks the capacity for an indefinite occupation to keep such a government in place. 

This underlying strategic folly has been reinforced by the tactical ineptitude with which the campaign has been prosecuted. A quick and relatively painless victory, with Kyiv in Russian hands and President Zelensky nowhere to be seen, might have allowed Putin to impose a victor’s peace of some sort, whether in promises of neutrality and demilitarisation, new constitutional arrangements, or even territorial concessions.

Instead, the Russian generals chose to show how smart they were by relying on speed and surprise to take key cities, using only a fraction of the assembled force, and not even bothering to gain control of the skies. The arrogance of the plan was shown in the move against the capital. This involved flying in regular units to the outskirts of the capital to meet up with special forces and sundry saboteurs already in its precincts. This ended as an operational shamble. 

The failure of Plan A hampered the switch to Plan B. The Ukrainians were able to slow the movement of incoming troops by harassing them and forcing them to follow roundabout routes, including by blowing up bridges. Advancing Russian forces were split up creating problems of coordination and enabling individual convoys to be ambushed up by the defenders. Problems of logistics grew as supply convoys, including those carrying essential fuel, were unable to keep up with the forward units. On 28 February a massive convoy was reported – 40 miles long – and said to be travelling towards Kyiv. In practice it turned out to be a series of smaller convoys, jammed together because the road is blocked by vehicles that have broken down or run out of fuel. The Ukrainians do not need to go to great lengths to interdict this offensive force: it has stopped itself.  

If only for reasons of prudence, and to avoid getting ahead of ourselves in the analysis, we must still assume that the Russians will be more successful in bringing the weight of their military strength to bear. We get far more sight on social media of Russian prisoners, along with their abandoned and destroyed vehicles, than we do of the travails of Ukrainian forces (although one suspects that Russian media would not have been slow to present images of miserable Ukrainian prisoners had they been available). In the South those forces moving in from Crimea continue to have more success, although even here progress has been less than expected.  If they are able to capture the Black Sea port city of Kherson that will be a blow to the Ukrainian war effort [Note: this may or may not have occurred today].

>>> Space for Time 

Yet even with such gains getting into a city is not the same as holding it. Contrary to the BBC’s map, territory in which the Russians move freely is not under their control. Control is a political and not a military concept. The Ukrainians have not tried to defend every inch of their land but instead have made their stands in the key cities, of which the two largest Kyiv and Kharkiv remain symbolically and politically the most important. They have traded space for time, and then used that time to strengthen their position.  

Most importantly, they have mobilised and organised a popular militia to help defend their cities. Zelensky found the words to motivate his people and gain international support. The Ukrainian narrative speaks of solidarity, heroism, and sacrifice, with no suggestion that the coming days and weeks will be anything other than tough. This forms a stark contrast to the Russian narrative of festering grievances and phony innocence, as Putin’s mouthpieces have been unable to provide convincing accounts of what Russian forces were doing and why, and left pointing to the unrelated crimes of others to justify their own.  

As a result of this the international community has been galvanised into action, promising to keep up arms supplies (assuming they can get through) and, crucially, imposing far more severe economic sanctions than most observers anticipated. Meanwhile, allies of Putin have kept their distance and, in some cases, have come out strongly against the Russia invasion. Hungary has fallen into line with its EU and NATO partners. China is not going to take the side of the West or impose sanctions, but it abstained in the UN Security Council vote and has insisted on the importance of Ukrainian sovereignty and protecting civilians. As Chinese citizens are in Ukraine it is alarmed by their vulnerability to Russian strikes. We know of other foreign nationals that have been killed, including from Greece, India, and Israel.

Apart from the odd exceptions such as the Assad regime in Syria, which owes its existence to Russian firepower, and Pakistan, which oddly took this moment to sign a new trade deal, Russia has minimal international support. Even Kazakhstan, where Russian troops were sent in January to help restore order, has refused to support Moscow. President Lukashenko of Belarus, Putin’s co-conspirator, provided a vital staging post for the Russian invasion, but even he may be dithering about the extent to which he wishes his own troops to be engaged, not least, one presumes, because this would add to his deep unpopularity.  

Lastly, though this has yet to be of value, the Russians accepted the possibility of a negotiated cease-fire, as opposed to an imposed peace, by agreeing to talks at the border with Belarus. It is worth noting that Putin prior to the war showed no interest in direct talks with the Ukrainian government, not least because this would confer upon them some legitimacy. Putin’s spokesman has acknowledged Zelensky as the true leader of Ukraine. In the past Putin proposed only that the Ukrainian government talked to the separatist leaders from the Donbas. A channel of sorts to the West is being kept up by President Macron’s conversations with Putin. China may now get engaged as a mediator. But in the end any deal has to be negotiated directly with the Ukrainians. It is not for others to decide on their behalf what they should accept.

>>> Plan C 

Putin has now been forced to move to Plan C. There are a number of elements, some of which are left over from Plans A and B. Because there is an improvised, ad hoc aspect to what is going on now, it would be unwise to be too definite about what is to come.  

On 27 February Putin highlighted Russia’s nuclear strength and announced that he had raised the alert status of his deterrent forces a notch, which is one still short of getting close to a war footing. There has been a lot of speculation about why he did this, which is normal these days when trying to understand any of his moves, and anxiety about where this might be heading, which is appropriate given his state of mind. The simplest explanation remains that in the face of growing material support from the West for Ukraine, and heightened sanctions against Russia, he wanted to reinforce the warning against foreign interference he made when announcing the invasion. He will be aware of proposals for NATO to announce a ‘No Fly Zone’. This would be tantamount to a declaration of war, as NATO aircraft took on Russian, and for that reason has been ruled out by NATO leaders. At any rate to fully protect Ukrainian cities a ‘No Artillery Zone’ would also be required.  

It is the strikes against cities that are the most alarming and upsetting aspect of this stage of the war. Their strategic effects remain difficult to gauge, but three points are worth noting. 

First, a lot depends on the reaction of the population. Although it is a cliché to assume that civilians under bombardment become more defiant and learn resilience that is not invariably the case. It depends on the extent of the bombing, the prior state of their morale, and the quality of their leaders. So far,  however, in this case the cliché appears to be true. Kharkiv, the city that has suffered the worst, remains defiant. This is supposedly one of the most Russophile cities in Ukraine, where the Russians hoped to trigger a popular counter-revolution to the EuroMaidan revolution of February 2014. No longer.

Second, it may be as the Russian claim that some strikes are directed against key military and government targets, but no serious effort has been made to avoid civilian death and destruction. Even if some of the targets have a tactical purpose, this may reflect another fallacy, that destroying administrative buildings or media towers really makes a big difference to a war at this stage.  Ukraine is being run from Kyiv’s Metro stations and underground passageways, and on zoom calls.

Third, to make a strategic difference these attacks need to be related to other military moves. Here we come to the big choices the Russian military must make. Artillery can be used, brutally, as an instrument of urban warfare, to demoralise the defenders, to remove defensive positions and create pathways for an offence. But we know, from Stalingrad to Grozny, that defenders can fight amongst the rubble. Even at that desperate stage, urban settings remain a challenge for invading force. Units can get lost and isolated, caught in city streets, with reliable intelligence difficult to acquire. If Russian commanders want to keep their casualties down this is an uncomfortable prospect.  

Furthermore, to emphasise an early point, and as we have seen in areas where Russians have moved in, presence is not the same as control. There are numerous images now of Russian troops being confronted by large crowds of angry, unarmed residents and unsure what to do. It is one thing to kill civilians from afar with artillery and missile strikes, but another to have to look ordinary people in the eye, who could be your relatives, in a street similar to your home town, and start to shoot them out of the way. Somehow if they wish to hold what they have taken, the occupying forces will have to introduce the numbers able to impose curfews and deal with protestors, while protecting themselves from ambushes.

The alternative might be to mount sieges. The population can be forced to spend their time in bunkers, while cities loses power, food and medicines becomes scarce, and the situation becomes progressively more distressing. This may end up being, by default, Plan C, especially if Russians continue to struggle with efforts to get more than footholds in the major cities.  Human beings can endure these conditions for some time but at some point this will lead to a humanitarian crisis. In this respect calls for corridors to allow civilians to escape or just efforts to get in extra supplies while the cities are not completely surrounded can be expected.

A siege is unlikely to bring results quickly enough for Putin. His people are not suffering in the same way but Russia’s economy is now under siege. He can cope with this for the moment, and clamp down on dissent and independent news outlets. But the human and economic costs of this war cannot be covered up for long. People discover what has happened to their sons and brothers, and how little their roubles can buy. Putin needs this war to be over sooner rather than later. He can’t afford to be too patient. Little about his demeanour has been reported, other than intense frustration.  

>>> Plan D 

If there was ever any possibility that this war would end with the complete subjugation of Ukraine by force of arms this has now gone. Nor will it end with Russian forces being chased out of the country. Most likely there will be a negotiated conclusion, probably at the cease-fire talks. Although it is possible to conjure up some document in which the Ukrainians promise not to do things that they would not have done anyway (like develop a nuclear arsenal or be Nazis), and might even make some major concessions, such as accept the loss of Crimea, they must emerge from this ordeal as a free and independent country with no Russian troops on their soil.

It is now as likely that there will be regime change in Moscow as in Kyiv. Machiavelli posed the question of whether it is better for a prince to be loved or feared. His answer was that it was best to be both, but if a choice must be made it had to be fear. ‘If the subjects fear the ruler, that fear guarantees support. They ask themselves: “What will he do to us, if we are disloyal?”’ Putin, who has isolated himself, in all senses of the word, risks now losing that aura of ruthless power that he has carefully cultivated. That aura meant that only the bravest of domestic opponents took him on and autocrats elsewhere embraced him as an exemplar to follow. We know that he still enjoys much popular support even though demonstrations against the war continue. What will matter most will be rumblings among the elite as they see the consequences of their leader’s recklessness. When we know more about how this war ends we will understand better how his regime ends.