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TM, ®, Copyright © 2021 Piero Scaruffi All rights reserved.

TM, ®, Copyright © 2021 Piero Scaruffi All rights reserved.

Who's paying for the Western sanctions on Russia?
Thoughts on Russia's Invasion of Ukraine - Part II
Putin's invasions
What if there is a Secret Russia-China Pact?
Articles on Russia before 2022

  • (august 2022) Who's paying for the Western sanctions on Russia?
    Right-wing politicians and media in both Europe and the USA (e.g. Fox News commentators) keep repeating that the sanctions slapped on Russia by the USA, Britain and the European Union are mainly hurting the West while Russia is actually getting richer. Politically speaking, it is true that sanctions destabilize not Putin but the Western democracies. The reason is simple: there is no opposition in Russia. Sanctions have certainly compounded the economic problems of European countries like Italy (causing the downfall of its government of national unity and the rise of the right-wing parties), but at the same time the European countries should have changed their energy policies a long time ago: the pain was coming anyway, sooner or later. Economically speaking, however, right-wing politicians and right-wing media are simply repeating Putin's propaganda which greatly misrepresent the facts. Putin, not the data, is the source for all the Western commentators who argue that sanctions are hurting the West more than Russia.

    I called "econocide" (see Putin's invasions) the sanctions imposed by the West on Russia. The effects are already felt and will be felt for a long time. Putin cherry-picks statistics and hides many statistics: for the first time since the fall of the Soviet Union, the Russian government is no longer disclosing a whole series of economic indicators, notably data about foreign trade (exports and imports), about oil and gas production. and about capital inflows and outflows. Putin has replaced the chief of Rosstat with a politician of his choice (Sergei Galkin), which means that Rosstat has de facto become a branch of Putin's government, i.e. of his propaganda ministry. Rather than Putin, i would trust academic studies like the 118-page study compiled by Yale University in July 2022, which concludes: "sanctions are catastrophically crippling the Russian economy" and that "there is no path out of economic oblivion for Russia". Not exactly what you hear on Fox News and from right-wing European parties.

    On the other hand, the sanctions have little effect on the West: inflation was already there, caused by other global factors, and the only real problem is the dependency on Russian gas and oil by stubbornly antinuclear countries like Germany and Italy, and reducing that dependency will only be good in the long term for countries like Germany and especially Italy, so Germans and Italians should actually thank the sanctions that forced their governments to do what they postponed doing for too long.

    There is a lot of talk about Russia's exports of gas and oil, but little about its imports of technology, which is vital to the functioning of the Russian economy (and also for its military). Somehow the Western media (especially the right-wing media like Fox News in the USA) have painted the picture of Russia as a self-sufficient economic giant. In reality, the Russian economy is not only small (smaller than Italy's) but also the most corrupt in the world and totally dependent on western technology. Its great oil and gas industry and its mighty military simply won't work without western technology. China cannot replace western technology in some of the key areas of Russian economy. For example, China doesn't have a significant oil and gas industry, which means that it has not developed the technology to service that industry. Russia itself may have better technology than China when it comes to that industry. Russian's GDP is likely to contract for the simple fact that many things cannot be produced without parts imported from the West. Russia is also losing talents who are moving out because of the deteriorating atmosphere. We are probably witnessing the biggest exodus of brainpower in the history of Russia. The risk is in fact that Russia will resort massively to the black market and to making illegal copies of western products.

    A widely cited New York Times article claimed that oil exports generate revenues of $1 billion every day for Russia, but in reality Russia's oil and gas revenues dropped by more than half between April and May (source: Russia itself). The prices of most commodities (wheat, oil and most metals) have fallen below their level prior to the war. The idea that Russia can blackmail Europe with natural gas is a contradiction in terms: Russia exports most of its natural gas via pipelines, and the vast majority of those pipelines flow to Europe, not to Asia. Russia can stop selling gas and oil to Europe, but it cannot simply replace Europe with Asia: that gas would remain underground. On the other hand, Europe is rapidly switching from pipeline-delivered gas to ship-transported liquid gas that can come from anywhere. Europe receives half of its gas imports as liquid gas from other countries (mainly Norway, Qatar and Algeria) and produces some domestically (the giant Groningen gas field in the Netherlands). Now liquid gas will also arrive from the USA, Nigeria and Australia. Before the war, 83% of Russian natural gas exports was going to Europe through a network of pipelines. Even if Russia finds customers for that huge amount of gas, it simply cannot send it to customers in Asia if they are not connected by equivalent pipelines.

    Incidentally, the widely feared gas industry of Russia is a highly corrupt and inefficient industry. One of the contractors of Gazprom built an entire palace for Gazprom's CEO Alexey Miller, which observers consider one of the biggest bribes ever paid in Russia. His son-in-law co-owns a penthouse worth almost a billion dollars. The oil sector is basically nationalized: Putin has removed oil oligarchs who were not loyal enough through a saga of intimidations, arrests, confiscations and even assassinations.

    The western sanctions offered China a golden opportunity to become Russia's main customer of natural resources (af of June, Russian has been offering oil to China and India at a $35 discount - good news for China, not for Russia), but, again, the problem is that there are very few ways to ship gas from Russia to China. The network of Asian pipelines is much smaller than the network of European networks. The first, and still the major, pipeline linking Siberia to China, the “Power of Siberia 1” pipeline, which China built in 2014, is designed to carry gas from the Kovykta and Chayanda fields in Eastern Siberia to China but only the latter is currently working. There is no pipeline connecting Russia’s Yamal and Western Siberian gas fields (the ones exporting to Europe) with the pipelines sending gas to China. For unknown reasons, China has never started construction of the Altai Trans-Siberian gas pipeline, which was planned to connect the two. One simple reason for China's low interest in the natural gas of western Siberia is that the Altai region is far from major Chinese cities, i.e. that pipeline would have to be augmented by China with domestic pipelines running through a high-altitude under-developed region. China can instead get gas from gas reserves in Xinjiang province. China has also a standing policy of moving away from fossil fuels towards renewables. China and India may also benefit from Russia's competitors in Central Asia: Kazakhstan's president Tokayev probably saw an opportunity when he recently offered to increase Kazakh energy output in order to “stabilize the situation in the world and European markets”. Uzbekistan's president Shavkat Mirziyoyev is opening up Uzbekistan to western investment while fostering increasingly close ties with China. Decades ago, these countries (republics of the Soviet Union) were de-facto colonies of Russia: now they are competitors of Russia.

    The withdrawal of western technology and know-how is also creating trouble for Russia to exploit its Arctic regions, which are seen as the natural replacement once the western Siberian fields run out of gas.

    Europeans fret over natural gas, which is imporant for heating, but in reality oil exports are more important than gas exports for Russia’s economy. In 2021 revenues from oil exports were three times the revenues from natural gas exports. Russia, the world’s third largest oil producer behind Saudi Arabia and the USA, exports about 50% to Europe and 20% to China. Russia's only possible replacement for Europe is China: every other economy cannot absorb so much oil.

    China has pledged "eternal friendship" to Russia but so far it has not helped Russia at all. Chinese exports to Russia have declined by 50% between January and April, and total exports to Russia are just $4 billion, which makes Russia a very minor destination of Chinese exports ($500 billion). The number one destination of Chinese goods remains the USA, even after the Taiwan crisis caused by Pelosi's visit to Taiwan.

    A PIIE study of July 2022 found that exports to Russia declined across the board: European exports to Russia declined by 60%, but exports to Russia by "neutral" countries (which include China, India, Africa, and so on) also declined by a sizeable 40%.

    When in 2007 Donald Trump (the "chimp") pulled the USA out of the Trans-Pacific Partnership, China was quick to fill the void left in Asia, but now that it has a golden opportunity to replace the West in trade with Russia it is not taking it. This is telling of what China perceives as strategic: free trade in Asia is strategic, helping Putin survive the sanctions doesn't appear to be as strategic.

    The argument against sactions is often that Russia is not going to go out of business because it has infinite natural resources. True, but Russia is a vast country and it has to export its resources over vast distances. Even extracting those resources requires some minimal technology. It is telling that the Soviet Union was not much of an exporter of natural resources: it was an exported of manufacturing goods (mainly to the communist satellites of Eastern Europe).

    The bottom line is that Europe will be able to find replacement suppliers for Russia's gas and oil while Putin will have trouble finding replacement customers for his gas and oil, and will even have trouble continuing to produce gas and oil without western technology.

    In any event, if China eventually manages to absorb all the Russian gas and oil that Europe doesn't buy, Russia will pay a price that might be even bigger: it will become a satellite of China, as i have written in Putin's invasions and Thoughts on Russia's Invasion of Ukraine - Part II. It would be a humiliating end for the Russian empire to be subjugated again by an Asian power, like in 1237 when the Mongols invaded Russia beginning 240 years of occupation. Ironically, if Russia becomes a satellite of China, it will be easier for the West to control Russia because the West will pressure China and China will have plenty of power to pressure Russia.

    It is true that the Russian rouble is currently one of the strongest currencies in the world (it soared to a seven-year high in June), but that's not an effect of supply and demand: it's an effect of Russia's ad-hoc fiscal and monetary policies to prop up the ruble: for example, by curbing exports of capital. For the first time in years, Russia's government has posted a budget deficit. Russia’s foreign-exchange reserves are huge ($630 billion) but not infinite: they have declined by $75 billion since the start of the war. At this rate, Russia would run out of foreign-exchange reserves in 8 years.

    Russia's inflation is 16% (June 2022) compared with 8% in June 2021. Inflation in the EU was 9% and in the USA 8% (in the same month). The media talk about the effect of food prices on poor countries, but Russia is not rich either, and food prices have increased by 18% in Russia. Sectors that depend on international trade like technology are experiencing even higher inflation.

    Inflation will go down in Russia but for the very wrong reason: when an economy contracts, consumer demand also contracts, and prices go down.

    So it is not true that the sanctions are hurting the Western democracies more than they are hurting Putin's Russia. It is just that people are free to complain in Western democracies, whereas Putin's regime has made it clear that no such discussions are allowed on Russian media.

    What is certainly wrong is not the sanctions but the opposite of the sanctions: doing more business with Russia after Russia does something that we condemn. For example, Italy de facto rewarded Russia for invading Ukraine in 2014 in the sense that Italy's imports of gas and oil from Russia have increased since then.

    There are other arguments against sanctions which are more sensible. For example, this is a strange war: Russia uses weapons built with European money (the money that Europe pays for Russian oil and gas) and now Europe provides weapons to Ukraine to destroy those Russian weapons. It is European money that funds this war: part of the money goes to Russia to build weapons, part of the money goes to the European military-industrial complex to build weapons for Ukraine. (The USA too is sending weapons to Russia but Russia is not using US money to build its own weapons so at least there is no contradiction). It is also a strange war because the West has de facto forbidden Ukraine from striking Russia: Russia has bombed Ukraine, even its capital, but Ukraine is asked not to bomb Russian territory. Ukraine is asked to refrain from hitting Russia and to trust that Western sanctions will do the job. Imagine if, for example, Algeria invaded France and France were told "defend yourself but do not strike Algerian territory"...

    Another argument against sanctions is that it strengthens, rather that weakening, Putin: his popularity has increased, not decreased (at least according to official, Putin-controlled, polls - there are no independent media anymore). If the ultimate goal is "regime change", sanctions seem to be the wrong way to go. That is only partially true because what matters is the long term, not the short term, but i tend to agree that sanctions rarely result in regime change or any kind of meaningful reform: from Mussolini to the Iranian ayatollahs and to North Korea's funny dictators, sanctions have failed over and over again to bring about regime change. In Russian history, political reforms have often come as a result of military defeat: it was only after losing the Crimean War and the destruction of Russia's Black Sea fleet in 1856 that the czar abolished serfdom; it was only after the humiliating defeat against Japan and again the destruction of the Russian fleet at the battle of Tsushima in 1905 that the czar instituted Russia's first parliament and liberalized political parties; and it was only after the withdrawal from Afghanistan that Soviet leader Gorbachev launched the period of "perestroika" (liberalization). So it is not completely insane that, at the same time, NATO is arming Ukraine so Ukrainians keep attacking Russia in a sort of perpetual war: based on historical precedents, that's the real factor that could force Putin if not to resign at least to grant more freedom to the opposition.

    The fact that may hurt Putin in the short term is the simple fact that Russia already lost about 20,000 soldiers (Ukraine claims 43,000), including many generals. Putin obviously doesn't mention this in his speeches, and many Putin-friendly Western politicians and media do the same. (Wartime casualties are a state secret in Russia, and revealing them is punishable by up to seven years in prison). By comparison, the USA lost 5,000 soldiers in 20 years in Afghanistan. If we consider that the Soviet Union had double the population of today's Russia, Russia has already lost more soldiers per capita in six months in Ukraine than the Soviet Union lost in its entire ten-year Afghanistan war. Putin also omits to mention that most "Russian" soldiers are not ethnically Russian: most soldiers employed in Ukraine come from the periphery of the nation, not from the big urban centers of Moscow or St Petersburg, and certainly not from the families of oligarchs (see this BBC analysis). Russia is also relying massively on separatist militias, on mercenaries of the infamous Wagner group, and on the Rosgvardia (the national guard), but these are limited numbers of soldiers. Putin insists on calling it a "special military operation", not a "war", which doesn't create the same kind of nationalist fervor: there no lines of volunteers ready to enlist and go fight for the motherland. The main reason to join the army is that soldiers are paid good salaries and receive a lucrative sign-up bonus. What this means: casualties are a real problem for Russia because they are not readily replaced.

    Are sanctions useful to weaken Russia? In the long term yes, particularly if the goal is to deter Russia from invading other countries after Ukraine. Are sanctions useful to weaken Putin personally? No, most likely the only thing that would weaken him is a military defeat.

    TM, ®, Copyright © 2022 Piero Scaruffi All rights reserved.
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  • (may 2022) Thoughts on Russia's Invasion of Ukraine - Part II

    This article has moved here
  • (january 2022) What if there is a Secret Russia-China Pact?
    The Russian military buildup at the border with Ukraine is taking place at the same time that China has increased military incursions into Taiwan's air defence identification zone, or ADIZ, which could be a prelude to a full-scale invasion. It doesn't take a paranoid genius to wonder whether Putin and Xi secretly agreed to launch simultaneous attacks, so that the USA would have to split its attention and resources in two faraway regions, far from the USA and far from each other. It would be a smart move to overwhelm a declining and exhausted world power, the USA, that just lost a war against a far smaller enemy (the Taliban), a world power that is also divided along ideological lines and cannot find unity even on trivial matters. Nobody in the West has an appetite for war in the middle of the covid pandemic.

    China could be counting on the fact that the richest countries of East Asia are not military powers (Japan has a constitution that forbids rearmament, South Korea has a powerless army protected by the USA, Singapore is obviously no military power). Russia could be counting on the fact that Europe is even more divided than the USA, and there is no appetite in the strongest European countries for a real war in distant Ukraine. Germany has no real army, while France and Britain (the two military powers of Western Europe) are no longer in the same union and are sparring about just everything, from fishing rights to the Australian- British- USA pact. Russia also knows that Europe depends on Russia for oil and gas and Europe won't risk leaving its population in the cold. While there is a lot that Japan and the USA can do to harm the economy of China, there is very little that Europe and the USA can do to harm Russia's economy beyond the sanctions that are already in place.

    China has launched a transformation of its economy from an export-driven economy to a consumption-driven economy and may not care too much for sanctions. The only weapon that the USA has against China (short of military intervention) is to block the oil routes to the Middle East. However, a secret pact between Xi and Putin could mean that Russia has agreed to provide China all the oil it needs, perhaps in return for superior Chinese technology.

    Let's play this game and assume that Russia takes Ukraine and China takes Taiwan. (Personally i think that taking Russia is a lot easier than taking Taiwan - see Taiwan could be the Pearl Harbor of WWIII - but opinions differ). Then what? If China does take Taiwan, it will be relatively easy for China to quell any unrest there. The difficult part is to invade Taiwan. Once the invasion succeeds, the Chinese have plenty of experience in how to stop people from protesting and even just assembling. Within days there will be security cameras at every corner and drones surveilling even the countryside. The Taiwanese population has no gun culture, and Taiwan has strict gun laws, which means that most citizens have never had a gun outside of compulsory military service; not the readiest of populations to start a guerrilla war. So if China takes Taiwan, it just keeps it, the same way it keeps control over hostile populations in Xinjiang, Tibet and Hong Kong.

    Things might be slightly more difficult for Russia in Ukraine, a vast country, and a country where guns are much more common than the official statistics reveal, and a country that borders on Poland, Hungary and Romania, countries more than willing to let weapons be smuggled into Ukraine to covertly support an uprising. Chances of guerrilla warfare are much higher in Ukraine than in Taiwan. So the situation is asymmetrical: China's real problem would be the invasion, whereas Russia's real problem will be controlling the invaded country. After the fact, the world would look different in that Russia and China would be tightly coupled and mostly decoupled from their richer neighbors. This would certainly cause poverty in both China and Russia, and it's unknown whether those populations would feel that imperial pride was worth the decline in quality of life.

    Those richer neighbors would certainly decide to spend a lot more in weapons, notably Japan and Germany, both capable of developing nuclear weapons if they felt directly threatened by the Russia-China axis and lose faith in the USA's ability and willingness to defend its allies.

    What would the USA do? Probably bark very loud. The sad truth is that the USA would be the economic beneficiary of such a new world order, the country that would not suffer if Russia cuts oil and gas to Europe and if China is cut out of international trade. The USA has its own oil and its friends in the Middle East. The USA has a huge trade deficit with China. The USA is also the one that doesn't need to invest much more in defense: it already has the best defense in the world. Moscow and Beijing are very far. They represent no immediate threat. Mostly, the USA would become more paranoid about Latin America, just as it was during the Cold War, and it may find a pretext to "liberate" Cuba, Nicaragua and Venezuela, i.e. the weakest links in the chain.

    The rest of the world would split in two camps, just like it was during the Cold War: some countries would align with the West, some countries would align with China out of economic interest and some countries would nominally align with Russia to avoid being invaded too.

    Life would go on until Putin and Xi die or lose power. And then probably both empires would end the way all colonial empires have ended in the last 100 years.

    TM, ®, Copyright © 2021 Piero Scaruffi All rights reserved.
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  • Articles on Russia before 2022
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