As Lawrence Freedman observes, there is now an economic war between NATO and Russia. This must be subject to just war tests. I discussed these and their application to proposals to sanction Zimbabwe in mid 2008 when Mugabe's conduct became intolerable: https://www.thinkingfaith.org/sites/default/files/20080701_1.pdf. The article sets out the principles to be applied succinctly. I did not think that the case was made then in the particular circumstances of Zimbabwe. The facts over Russia and Putin are different and the just war tests appear to be met.
Back in the 1980s, when Germany and the UUSR first planned a pipeline, it was was arguable that to be weighed against Germany becoming exposed to the risk of the USSR cutting off supplies the USSR would be at risk of losing hard currency from Germany. I can recall this being carefully analysed at Oxford.
The mischief is not that some import of gas from Russia was regarded then as beneficial but subsequently allowing such a large risk to build up through successive investments in importing gas from Russia and reducing investment in other sources (e.g. nuclear). In the longer term, if Putin or his successors withdraw Russian forces from Ukraine then the ending of economic war should be on the basis of careful and ongoing monitoring of risks and probably some NATO and/or EU institutional arrangements to coordinate national policies to ensure that commercial and security considerations are properly weighed.
This is not the last throw of the dice. We have just heard this morning that Putin will be importing millions of dollars worth of rockets and shells from North Korea. And we have yet to see how European solidarity will hold-up over the long, cold winter to come.
A country that has to resort to importing military equipment from that vast economic and military power, N Korea, is not one that is in a strong position, I would say.
I read the news item about buying equipment from North Korea. I think the significance of it is simply that this war has drained much of Russia's military assets as well as its ability to regenerate them quickly enough to sustain the war effort in a country about 20% of its size. This speaks volumes about the internal weakness of Russia and probably explains a good bit of the reason why Putin felt he had to externalize his problems by starting this war. All that said, it also shows that Russia still has plenty of money to prosecute this conflict and there will always be rogue nations hungry and amoral enough to take their money and feed it, North Korea case in point this time. I wish there were a way of intercepting these shipments because they could prolong this war for a long time to come.
It's debatable just how much longer he can sustain this war with those tactics. There aren't infinite numbers of rogue nations with inexhaustible military equipment. If it comes down to countries willing to sell to Russia vs the military equipment inventory of the West, I know which I would bet money on.
That's true - devil in the details - if we believe the reports, NK alone is sending millions of rockets and shells. Hard to imagine that number being correct, but even a much lesser number could help sustain this war for much longer than otherwise. As it drags on and certain countries become more affected and more desperate, Russia's access to funds and supplies could last quite a while. I see it as a troubling development.
Who are these "certain countries"? Outside the belligerents, the war affects Europe the most because Europe stupidly allowed itself to become dependent on Russian natural gas. You see Europe arming Russia?
And millions of shells get used up quickly in a war.
"stupidly allowed" I agree completely - this was to be avoided even without the benefit of hindsight. Who are the "certain countries" - remains to be seen - I'm only reflecting on the risk that the solidarity of the Western response may begin to fray as things get much tougher on local populations, not that they will start arming Russia.
This strikes me as a very cogent analysis: Putin has played his final ace. I hope Europe can "hold the line" through the difficult next seven months and the longer term transition off of Russian gas. Perhaps Europe and the U.S. now will look at providing Ukraine with more HIMARS and additional weapons systems, including longer range ones, in order to increase probability of/expedite collapse of Russian logistics that are sustaining their misbegotten invasion.
I know ships can't fully cover the volumes that come through pipelines but Australia needs to step up here and start using the Gas from the NW Shelf to fill the gap where they can. If possible there should be a convoy of ships rocking up to the north coast of Western Australia for the next few months
I have thought for many years that Germany was making two huge mistakes in the energy domain: moving away from nuclear power and increasing reliance on Russia.
Putin is forcing Germany to reverse both these mistakes.
Yes, but Germany needs to reverse faster. Too many Germans have this essentially religious* belief that nuclear is evil and Putin is not, despite all evidence to the contrary.
*I call it religious because neither can be explained by any cold examination of the facts.
You work with your gut feeling, not with hard numbers and you obviously do not understand the issue.
Only 15-20% of the NG goes into electricity generation in Germany, and most of it can be replaced with coal. Germany is still an exporter of electricity in winter when it actually matters. The problem is industry and space heating. Here NPPs obviously do not help.
And you are obviously clueless in respect to France which is in deep trouble because of her NPP fleet. France becomes an importer of electricity because of technical issues, Covid fallout and lack of water. The German NPPs are menat to supply electricity to Franec. But of course your opinion is more pleasuing for your ego than correct data. :-))))
And BTW: Why are the issues with electricity and industria production so severe in UK where 45% of the NG comes from domesric sources? Strange. Could it be that you miss some important aspects. :-)))))
The hard numbers are that Europe has to cut from 11% below historic usage to 15% below historic usage to get through the winter without Russian natural gas (Europe has been storing up a lot of natural gas). That’s tough but not exactly impossible to achieve.
It might be Putin's last throw of the dice to win in Ukraine, but he can still go for the Götterdämmerung solution and use his nukes. It will be game over for Russia,, but also for much of the planet. Numerous war gaming simulations have shown that escalation almost inevitably ends up using nuclear weapons (after all WWII ended in the Pacific this way, but fortunately there was no hope of a matching response).
A protracted embargo on gas to Europe that causes real suffering to the EU populations could well push NATO to engage more forcefully to end the war and push Russia out of Ukraine, and who knows what else. US weapons to do so would certainly help repair the trust the EU has with the US that was damaged by TFG. Putin might just play this last hand rather than be seen to be bluffing. If so, one can only hope that the Russian military proves more rational and refuses to obey that order.
OK, so how many Russians do you think want it to be game over for Russia? Do you think there are many Russians (including the peon who has to push the actual button) with a death wish? We aren't exactly dealing with religious fanatics who think heaven and 40 virgins await if they die.
Heck, Putin is too scared to even declare a full mobilization yet! That does not strike me as a man who is determined to die.
There are always some people who will do the "unthinkable", or obey the leader's orders whatever they are. We have just experienced this with Donald Trump's administration in the US. Not everyone believes that the use of nukes will either escalate or effectively end civilization. There may be a belief that a single or a few nuclear strikes will prove one-sided with no response due to shock, or the other side refusing to reciprocate. I doubt any dictator expects to die, even though many do as a result of their actions. We don't even know for sure that Putin has long to live.
Rational players will use a MiniMax strategy, but one cannot be sure that the adversary is doing the same.
You logic is entering woo-woo land. So explain why, if Putin isn't scared of death, etc., why he still hasn't called for a full mobilization in Russia yet.
Thanks for the analysis again. Very timely, and especially as Bloomberg subsequently published the summary of what is claimed to be (quite credibly it seems) an internal Russian government document showing how dire the economic situation will be absent a quick release:
Both show that we should be quite circumspect in digesting Russian government economic data “unchewed”. Those statistics are now a very important part of Russia’s war effort, and should be considered as unreliable as Russia’s other war-related statements (on Russian military successes (how many HIMARS now destroyed???), Ukrainian losses etc).
I appreciate your point on the exchange rate (so often missed) that the value is really a one-sided trade, plus all the capital controls now in place, and thus FX rate not a true indicator of condition in any way.
The economic war, I would argue goes beyond just NATO and Russia. Many important non-NATO states are involved, not least Japan, still one of the largest economies in the world with an important currency, and other states such as Australia, NZ, Switzerland (important for Russians for well known reasons), and non NATO European states. On the other hand Turkey and Hungary, both NATO members, are not supporting sanctions fully. China is clearly not supplying Russia with arms as Russia would like (North Korean Shells and Iranian drones instead).
I particularly like your conclusion. The logic on the western side now must be to end all future dependence on Russian energy (still can buy, but at much lower levels in terms of mix), move to Green as fast as possible, perhaps reconsider nuclear, retrofit homes away from gas to electricity asap (heat pumps and insulation). It must also be to hasten Russia’s defeat, as you rightly say, it will be politically impossible to go back to business as usual given Bucha, Mariupol, whatever has gone on in Kherson (assumed to be pretty terrible), deportations, child separations and deportations etc. presumably longer range HIMARS ammo and more systems should now be provided so Ukraine can do its strikes from anywhere. U.K. training programme continues with support from many countries.
Isn't the problem that Europe has to win series of dice rolls to keep going:
- that they will manage to contain prices
- that they will manage to secure enough supply/substitution
- that they will be manage to keep social unrest at manageable levels
and so on
while Putin only needs one serious defection to win?
European gas crunch can go on for years; it is certainly not going to be resolved by this winter, and it might conceivably not be resolved by next winter either.
These aren't exactly dice rolls. These are more engineering problems. Tough ones, to be sure, but easier than the problem that Putin will face of a failed war and slowly cratering economy (the exact situation the USSR faced, in fact; actually, the Russian Empire in WWI too; how did those turn out?). And how does one defection allow Russia to win? Unless the defector is the US, it's not like any other 1 country could prop up Russia or keep its economy from imploding.
USSR was facing dropping oil prices and still had to sell oil to import food; Russia is currently one of top food exporters and sees rising energy prices in outside world.
Noone with any clue seems to take Western "price controls" aspirations seriously. So to reverse current situation West would have to bring a lot more supply online after long time avoiding investing in new fields - not just "buy oil/gas/coal elsewhere". And that investment still doesn't seem to be coming. Germany even snubbed Qatar's 20 year offer (it had extra strings attached like no resale, sure, but still).
Lizz Truss at least said she'll lift fracking ban; we'll see how that will play out, but even in best case for UK that gas is still years away.
There is no magic "free market gas" that would allow to replace Russia. Every gas producer that EU came to for alternatives said so. Not getting Russian gas means supply crunch. Long-term supply crunch. It isn't going to be over in a year or two - what is projected to come online will be consumed by the rest of world growing (and was generally contracted beforehand to pay for expansion), it will not all come to Europe.
Oil is traded on global markets, and so far OPEC plays along with Russia too.
So it's hard to see Russia suffering financially; but it might in some tech areas.
--
As for defections, Germany defecting could conceivably crumple entire thing. "Machines for oil/gas" would be enough to offset probably more then a half of potential Russian problems.
Something like Italy or Greece defecting could allow to sell Russian oil to Europe and across the world as well, making current "denial of services" moot.
Russia can sell oil abroad right now. That isn't the issue. The issue is that Russia can't get parts/machinery imports to keep its industrial production from falling apart. You seem unaware of just how interconnected supply chains are these days. Actually, even the US wouldn't be able to prop Russia up.
BTW, have you looked at where the price of oil is trending recently?
How far can European industries go with reduced local production?
Without aluminium? (as European smelters close due to electricity costs)
Without Russian titanium parts? (specifically lobbied by Airbus to be excluded from sanction lists)
The problem with "Russia will be unable to produce as before" in oil is that you are setting up West for another supply crunch in the middle of ongoing energy crisis.
Which, again, requires West to somehow increase production elsewhere to compensate - otherwise just like with gas Russia will sell half the oil for double the price.
And lack of investment in previous years into that will remain huge problem for years to come regardless of any daily price movements.
Very theoretical discussion that isn’t terribly tied in to the reality on the ground. The reality is that Russia suffers far more than the West from this war. You seem to assume the West can’t withstand a pinprick while Russia can withstand getting an arm cut off.
Suffers in which area exactly? Prices in Russia are deflating for several months. Unemployment isn't rising either. Logistics slowly start to improve and overall imports keep growing.
Russia also doesn't announce multi-hundred of billions euro packages to control prices.
So far it looks like West will suffer disproportionately more - they are the ones cutting their arm right now while Russia "only" sacrifices one of potential futures; but that doesn't mean West will be unable to withstand it. It might.
As Lawrence Freedman observes, there is now an economic war between NATO and Russia. This must be subject to just war tests. I discussed these and their application to proposals to sanction Zimbabwe in mid 2008 when Mugabe's conduct became intolerable: https://www.thinkingfaith.org/sites/default/files/20080701_1.pdf. The article sets out the principles to be applied succinctly. I did not think that the case was made then in the particular circumstances of Zimbabwe. The facts over Russia and Putin are different and the just war tests appear to be met.
Back in the 1980s, when Germany and the UUSR first planned a pipeline, it was was arguable that to be weighed against Germany becoming exposed to the risk of the USSR cutting off supplies the USSR would be at risk of losing hard currency from Germany. I can recall this being carefully analysed at Oxford.
The mischief is not that some import of gas from Russia was regarded then as beneficial but subsequently allowing such a large risk to build up through successive investments in importing gas from Russia and reducing investment in other sources (e.g. nuclear). In the longer term, if Putin or his successors withdraw Russian forces from Ukraine then the ending of economic war should be on the basis of careful and ongoing monitoring of risks and probably some NATO and/or EU institutional arrangements to coordinate national policies to ensure that commercial and security considerations are properly weighed.
This is not the last throw of the dice. We have just heard this morning that Putin will be importing millions of dollars worth of rockets and shells from North Korea. And we have yet to see how European solidarity will hold-up over the long, cold winter to come.
A country that has to resort to importing military equipment from that vast economic and military power, N Korea, is not one that is in a strong position, I would say.
I read the news item about buying equipment from North Korea. I think the significance of it is simply that this war has drained much of Russia's military assets as well as its ability to regenerate them quickly enough to sustain the war effort in a country about 20% of its size. This speaks volumes about the internal weakness of Russia and probably explains a good bit of the reason why Putin felt he had to externalize his problems by starting this war. All that said, it also shows that Russia still has plenty of money to prosecute this conflict and there will always be rogue nations hungry and amoral enough to take their money and feed it, North Korea case in point this time. I wish there were a way of intercepting these shipments because they could prolong this war for a long time to come.
It's debatable just how much longer he can sustain this war with those tactics. There aren't infinite numbers of rogue nations with inexhaustible military equipment. If it comes down to countries willing to sell to Russia vs the military equipment inventory of the West, I know which I would bet money on.
That's true - devil in the details - if we believe the reports, NK alone is sending millions of rockets and shells. Hard to imagine that number being correct, but even a much lesser number could help sustain this war for much longer than otherwise. As it drags on and certain countries become more affected and more desperate, Russia's access to funds and supplies could last quite a while. I see it as a troubling development.
Who are these "certain countries"? Outside the belligerents, the war affects Europe the most because Europe stupidly allowed itself to become dependent on Russian natural gas. You see Europe arming Russia?
And millions of shells get used up quickly in a war.
"stupidly allowed" I agree completely - this was to be avoided even without the benefit of hindsight. Who are the "certain countries" - remains to be seen - I'm only reflecting on the risk that the solidarity of the Western response may begin to fray as things get much tougher on local populations, not that they will start arming Russia.
This strikes me as a very cogent analysis: Putin has played his final ace. I hope Europe can "hold the line" through the difficult next seven months and the longer term transition off of Russian gas. Perhaps Europe and the U.S. now will look at providing Ukraine with more HIMARS and additional weapons systems, including longer range ones, in order to increase probability of/expedite collapse of Russian logistics that are sustaining their misbegotten invasion.
I know ships can't fully cover the volumes that come through pipelines but Australia needs to step up here and start using the Gas from the NW Shelf to fill the gap where they can. If possible there should be a convoy of ships rocking up to the north coast of Western Australia for the next few months
Can Europe hold the line through difficult next several _years_ though?
The transition isn't going to be over next year.
The tough part is this coming winter. It's not as Europe is standing still and not working on other sources of energy.
I agree, which is why I wrote in my post "next seven months and longer term transition off of Russian gas".
I have thought for many years that Germany was making two huge mistakes in the energy domain: moving away from nuclear power and increasing reliance on Russia.
Putin is forcing Germany to reverse both these mistakes.
Yes, but Germany needs to reverse faster. Too many Germans have this essentially religious* belief that nuclear is evil and Putin is not, despite all evidence to the contrary.
*I call it religious because neither can be explained by any cold examination of the facts.
Religious, yes indeed. If we had one Chernobyl scale disaster per decade that would still be a lot less deadly than coal.
You work with your gut feeling, not with hard numbers and you obviously do not understand the issue.
Only 15-20% of the NG goes into electricity generation in Germany, and most of it can be replaced with coal. Germany is still an exporter of electricity in winter when it actually matters. The problem is industry and space heating. Here NPPs obviously do not help.
And you are obviously clueless in respect to France which is in deep trouble because of her NPP fleet. France becomes an importer of electricity because of technical issues, Covid fallout and lack of water. The German NPPs are menat to supply electricity to Franec. But of course your opinion is more pleasuing for your ego than correct data. :-))))
And BTW: Why are the issues with electricity and industria production so severe in UK where 45% of the NG comes from domesric sources? Strange. Could it be that you miss some important aspects. :-)))))
The hard numbers are that Europe has to cut from 11% below historic usage to 15% below historic usage to get through the winter without Russian natural gas (Europe has been storing up a lot of natural gas). That’s tough but not exactly impossible to achieve.
It might be Putin's last throw of the dice to win in Ukraine, but he can still go for the Götterdämmerung solution and use his nukes. It will be game over for Russia,, but also for much of the planet. Numerous war gaming simulations have shown that escalation almost inevitably ends up using nuclear weapons (after all WWII ended in the Pacific this way, but fortunately there was no hope of a matching response).
A protracted embargo on gas to Europe that causes real suffering to the EU populations could well push NATO to engage more forcefully to end the war and push Russia out of Ukraine, and who knows what else. US weapons to do so would certainly help repair the trust the EU has with the US that was damaged by TFG. Putin might just play this last hand rather than be seen to be bluffing. If so, one can only hope that the Russian military proves more rational and refuses to obey that order.
OK, so how many Russians do you think want it to be game over for Russia? Do you think there are many Russians (including the peon who has to push the actual button) with a death wish? We aren't exactly dealing with religious fanatics who think heaven and 40 virgins await if they die.
Heck, Putin is too scared to even declare a full mobilization yet! That does not strike me as a man who is determined to die.
There are always some people who will do the "unthinkable", or obey the leader's orders whatever they are. We have just experienced this with Donald Trump's administration in the US. Not everyone believes that the use of nukes will either escalate or effectively end civilization. There may be a belief that a single or a few nuclear strikes will prove one-sided with no response due to shock, or the other side refusing to reciprocate. I doubt any dictator expects to die, even though many do as a result of their actions. We don't even know for sure that Putin has long to live.
Rational players will use a MiniMax strategy, but one cannot be sure that the adversary is doing the same.
You logic is entering woo-woo land. So explain why, if Putin isn't scared of death, etc., why he still hasn't called for a full mobilization in Russia yet.
Excellent analysis - thank you!
No gas? No problem. You've got more than enough hot air for all of Europe's needs.
How can you stay in business if you stop selling to your best customer?
He can't. It's why that's a move of desperation.
Great analysis of the bigger picture, thank you so much!
Thanks for the analysis again. Very timely, and especially as Bloomberg subsequently published the summary of what is claimed to be (quite credibly it seems) an internal Russian government document showing how dire the economic situation will be absent a quick release:
https://www.bloomberg.com/news/articles/2022-09-05/russia-risks-bigger-longer-sanctions-hit-internal-report-warns
I wonder also if you took in the recent Yale study on the state of the Russian economy:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4167193
Both show that we should be quite circumspect in digesting Russian government economic data “unchewed”. Those statistics are now a very important part of Russia’s war effort, and should be considered as unreliable as Russia’s other war-related statements (on Russian military successes (how many HIMARS now destroyed???), Ukrainian losses etc).
I appreciate your point on the exchange rate (so often missed) that the value is really a one-sided trade, plus all the capital controls now in place, and thus FX rate not a true indicator of condition in any way.
The economic war, I would argue goes beyond just NATO and Russia. Many important non-NATO states are involved, not least Japan, still one of the largest economies in the world with an important currency, and other states such as Australia, NZ, Switzerland (important for Russians for well known reasons), and non NATO European states. On the other hand Turkey and Hungary, both NATO members, are not supporting sanctions fully. China is clearly not supplying Russia with arms as Russia would like (North Korean Shells and Iranian drones instead).
I particularly like your conclusion. The logic on the western side now must be to end all future dependence on Russian energy (still can buy, but at much lower levels in terms of mix), move to Green as fast as possible, perhaps reconsider nuclear, retrofit homes away from gas to electricity asap (heat pumps and insulation). It must also be to hasten Russia’s defeat, as you rightly say, it will be politically impossible to go back to business as usual given Bucha, Mariupol, whatever has gone on in Kherson (assumed to be pretty terrible), deportations, child separations and deportations etc. presumably longer range HIMARS ammo and more systems should now be provided so Ukraine can do its strikes from anywhere. U.K. training programme continues with support from many countries.
Isn't the problem that Europe has to win series of dice rolls to keep going:
- that they will manage to contain prices
- that they will manage to secure enough supply/substitution
- that they will be manage to keep social unrest at manageable levels
and so on
while Putin only needs one serious defection to win?
European gas crunch can go on for years; it is certainly not going to be resolved by this winter, and it might conceivably not be resolved by next winter either.
These aren't exactly dice rolls. These are more engineering problems. Tough ones, to be sure, but easier than the problem that Putin will face of a failed war and slowly cratering economy (the exact situation the USSR faced, in fact; actually, the Russian Empire in WWI too; how did those turn out?). And how does one defection allow Russia to win? Unless the defector is the US, it's not like any other 1 country could prop up Russia or keep its economy from imploding.
USSR was facing dropping oil prices and still had to sell oil to import food; Russia is currently one of top food exporters and sees rising energy prices in outside world.
Noone with any clue seems to take Western "price controls" aspirations seriously. So to reverse current situation West would have to bring a lot more supply online after long time avoiding investing in new fields - not just "buy oil/gas/coal elsewhere". And that investment still doesn't seem to be coming. Germany even snubbed Qatar's 20 year offer (it had extra strings attached like no resale, sure, but still).
Lizz Truss at least said she'll lift fracking ban; we'll see how that will play out, but even in best case for UK that gas is still years away.
There is no magic "free market gas" that would allow to replace Russia. Every gas producer that EU came to for alternatives said so. Not getting Russian gas means supply crunch. Long-term supply crunch. It isn't going to be over in a year or two - what is projected to come online will be consumed by the rest of world growing (and was generally contracted beforehand to pay for expansion), it will not all come to Europe.
Oil is traded on global markets, and so far OPEC plays along with Russia too.
So it's hard to see Russia suffering financially; but it might in some tech areas.
--
As for defections, Germany defecting could conceivably crumple entire thing. "Machines for oil/gas" would be enough to offset probably more then a half of potential Russian problems.
Something like Italy or Greece defecting could allow to sell Russian oil to Europe and across the world as well, making current "denial of services" moot.
Russia can sell oil abroad right now. That isn't the issue. The issue is that Russia can't get parts/machinery imports to keep its industrial production from falling apart. You seem unaware of just how interconnected supply chains are these days. Actually, even the US wouldn't be able to prop Russia up.
BTW, have you looked at where the price of oil is trending recently?
Everything is interconnected in modern world.
How far can European industries go with reduced local production?
Without aluminium? (as European smelters close due to electricity costs)
Without Russian titanium parts? (specifically lobbied by Airbus to be excluded from sanction lists)
The problem with "Russia will be unable to produce as before" in oil is that you are setting up West for another supply crunch in the middle of ongoing energy crisis.
Which, again, requires West to somehow increase production elsewhere to compensate - otherwise just like with gas Russia will sell half the oil for double the price.
And lack of investment in previous years into that will remain huge problem for years to come regardless of any daily price movements.
Very theoretical discussion that isn’t terribly tied in to the reality on the ground. The reality is that Russia suffers far more than the West from this war. You seem to assume the West can’t withstand a pinprick while Russia can withstand getting an arm cut off.
Suffers in which area exactly? Prices in Russia are deflating for several months. Unemployment isn't rising either. Logistics slowly start to improve and overall imports keep growing.
Russia also doesn't announce multi-hundred of billions euro packages to control prices.
So far it looks like West will suffer disproportionately more - they are the ones cutting their arm right now while Russia "only" sacrifices one of potential futures; but that doesn't mean West will be unable to withstand it. It might.