The Economic War: Questions and Answers

The following question and answer session with myself, mainly on the economic war, was published in Russian in Eurasia Expert on 17 June. Here is the full interview in English:

Q: China and India reduce the effectiveness of Western sanctions against Moscow by increasing purchases of Russian energy resources. Is it likely that more and more countries will make “detours” in relation to sanctions?

Yes, I believe that the current economic situation makes this very likely. It has just been reported that Russia made 97 billion dollars in the first 100 days of the war against Ukraine by selling its energy to countries all over the world. According to the Centre for Research on Energy and Clean Air India, France, China, the United Arab Emirates and Saudi Arabia all increased imports, with India buying 18% of Russia’s crude oil exports, and France the largest buyer of discounted liquid natural gas and oil cargoes on the short-term market. The rises in energy prices could bring sales of Russian oil and gas to $285 billion this year, which is 20% higher than the country’s $235.6 billion takings from oil and gas in 2021, according to a Bloomberg Economics report in early June. As the volume of oil supply is decreasing on the worldwide market, prices are rising to Russia’s benefit. 

India is the world’s third largest consumer of oil and 80 per cent of its oil is imported. At the start of 2022 India was not importing any Russian crude but now it is its second largest supplier, after Iraq. India has availed of the discounts available as a consequence of Western sanctions on Russian energy. China buys approximately half (29 billion dollars) the amount of Russian energy that the EU (64 billion dollars) does and this is bound to increase. There is actually more money flowing into Russia under sanctions than there previously was, when Moscow was supplying more energy to Europe. Sanctions do not work for two main reasons. Firstly, because they have been anticipated and prepared for by the targeted country. Since 2014 Russia has made extensive preparations for a sanctions scenario and it has been investing heavily in expanding its capacity to export energy to China, in particular. The second factor involves having the economic means and strategic capability to survive embargoes through generating extra revenue within a surge in commodity prices and investment relations with neighbours. This is just what has happened particularly in relation to China. Since the imposition of Western sanctions oil prices have risen by more than a quarter and gas prices have nearly doubled and the outlook for both markets is not promising and likely to remain high and volatile.

More independently minded countries will certainly avail of the cheaper oil and gas made available in a time of rising costs, including those brought about by a tight labour market, and global supply shortages. Developing countries like Brazil, India, China and South Africa will protect their freedom to trade with a commodity superpower like Russia, seeing that they do not fall victim of a globalising West that wields its dominance against their basic economic needs and interests. This is reflected in the fact that by early April Russian oil exports, despite Western sanctions, had climbed back to pre-conflict in Ukraine levels and Russia’s current account surplus has more than tripled in the first four months of 2022 to over 96 billion dollars.

Q: European countries and the United States, feeling the economic crisis that has begun, are in search of compromises with Russia, William Moloney wrote in an article for The Hill. In his opinion, this is due to the fact that restrictions cause more harm to the West than to Moscow. How would you comment on this? Why did the rhetoric, the position of Western countries regarding Russia’s special operation in Ukraine begin to change?

Russia is not like other states that US sanctions have been directed at – Cuba, North Korea, Venezuela or Iran. It is a major food exporter and the leading net exporter of wheat. It is the world’s largest fertiliser exporter and is in the top five exporters of iron, steel and aluminium as well as other important industrial metals like palladium for catalytic converters and titanium for aircraft production. Many of these critical materials are critical to the West’s ambitions for Green energy transition. It is also the world’s largest natural gas exporter, second largest oil exporter and third largest coal exporter. In other words it is a vital component within the global market, inextricably linked to Western economies and their ability to produce competitive goods. There was bound to be blow-back, but this seems to have been under-estimated in Washington.

During the first three months of the conflict in Ukraine there was a totalitarian-like consensus right across the West in which politicians and the media presented completely pro-Ukrainian and anti-Russian information to their audiences. There was hardly any dissent, or dissenting voices allowed and little sign of objective reporting. In the last few weeks there has been, for the first time, some questioning of the West’s support for Kiev, most notably by the New York Times editorial team. I imagine two factors have brought this about: Firstly, the noticeable failure of the West’s economic war on Russia, whose effects can no longer be hidden from the public; and secondly, Ukraine’s reverses on the battlefield in Donbas. This has resulted in previous belligerent rhetoric by US and British foreign ministries setting out unrealisable war aims being partly retracted and signals that unlimited escalation of the war is not in the Western interest.

Q: Many experts say that the US failed to rally the whole world around itself, leaving the Russian Federation isolated. Why did the US fail to achieve this goal?

It is certainly true that the US has failed to rally the world behind its sanctions regime against Russia. Of the world’s 195 or so countries, only 30 have officially gone along with the sanctions on Russia. These are largely white, European and former Imperialist countries, and those in Asia which have US troops stationed on their territories, like Japan and S. Korea. That means 165 nations with 80 per cent of the world’s population are not participating in anti-Russian sanctions. They have refused to be influenced or bullied by the US. I would say that most countries who have won their independence, do not want to be dictated to by Washington and would prefer a multi-polar world to one dominated by the US. Events like the destruction of Iraq, Syria, Libya and Afghanistan during the so-called “American Century” in which US military power was arbitrarily applied to various states has made the world reluctant to accept the hegemony of Washington. Economically many Asian countries are able to defy Washington these days in a way that they could not do during the Cold War. This is because the US has de-industrialised its own economy and outsourced its productive capacity to Asia. So now these countries possess, unlike the West, possess the critical mass to be largely self-sufficient in producing their own food, energy and raw materials and be able to exercise independence of action from Washington. They have also seen how the US is willing to arbitrarily seize the assets and reserves of a country and this has made many realise what the price of US world domination would mean for them. As a consequence countries, including Germany, have started removing their reserves from US banks and moving from the dollar liabilities into gold.

Q: Earlier, State Duma Speaker Vyacheslav Volodin said that Europe, not Russia, would suffer more from the sixth package of sanctions. According to the politician, the West’s spending on the purchase of energy resources will increase by €250 billion a year, while Moscow has a chance to “remain in the black.” By the way, some European countries are already recognizing the fact that the economies of these countries suffer heavy losses from sanctions against Russia. Russia has been tightly integrated into world trade, so the sanctions aimed at isolating its economy, in one way or another, have an impact on the countries that introduce them, and international companies that leave the Russian market are forced to suffer losses. How badly did the economies of European countries suffer from the sanctions imposed against Russia? (please provide facts and figures).

The EU depends on Russia for more than 40 per cent of its natural gas supply. It is increasingly apparent that Europe’s sacrifice will be even greater than any damage done to the intended target of Western sanctions, Russia. Europe is now suffering badly through the sanctions regime against Russia and what happens next Winter could be very bleak. Wolfgang Munchau of the Financial Times has come out to say that the sanctions, which he himself was a leading advocate in the FT, are proving an absolute disaster for the West, and it must find a way to get out of them. The FT, one of the leading anti-Russian organs, interestingly enough, didn’t carry this piece, which Munchau instead had published in Euro Intelligence on 22 May. In effect, the US has asked Europe to commit economic suicide, bringing on a depression, higher consumer prices and lower living standards for its people. And most European governments have complied with the order for sacrifice from Washington. Inflation is surging ahead, at levels unknown across Europe (and the US) for decades, of between 7 and 9 per cent at present. European investors are already transferring their savings and investments out of Europe and into the US to maximise capital gains with a consequent decline in the Euro and British Pound against the Dollar. Members of the Eurozone cannot run domestic budget deficits to cope with the inflationary depression resulting from the US sponsored sanctions, so Europe is bound to fragment. It is win-win for the US and lose-lose for Europe. As Dmitry Medvedev recently noted the “hellish sanctions” against Russia have actually boomeranged back against the West.” The EU has had to revise its growth forecasts sharply downward from 4 per cent to 2.7 per cent in only 3 months, since the oil and gas embargo. The UK is faring even worse with the OECD predicting there would be no growth at all in Britain in 2023.

The West, having outsourced its industrial and food production, and being highly dependent on other countries to supply it has therefore taken the main hit involved in the dislocation of the world economy brought about by economic sanctions. Meanwhile, while Russia is obviously suffering economically, it is weathering the storm more effectively, having made preparations for it and possessing a unity and historical resilience that the Western public does not possess. In fact, it has been provoked into a reconsideration of its economic relations which will diversify its customer base and make for greater stability in the future. Russia will become more self-reliant and further develop links with China integrating the Eurasian core and learning to live without the West – things that are the polar opposite of what Washington would like.

Q: The development of the port infrastructure of the EU states is now actively moving towards increasing the capacity for receiving liquefied natural gas (LNG) as a result of the desire to refuse the supply of Russian fuel through pipelines. Do you think European consumers can completely replace Russian gas with LNG supplies? Are these opportunities the same for European countries?

Europe has committed to ending its dependence on Russian energy as a result of political pressure from Washington and Kiev. But it is a tall order to achieve its aim of cutting dependency on Russian gas by two-thirds this year and completely by 2030. It has little chance of success if the laws of economics and physics have anything to do with it. Gas and oil are very difficult to substitute in the short run due to infrastructural logistics. 

Europe needs to replace 155 billion cubic metres of gas and there is not the flexibility in the global market to provide the incremental supply to being anything more than 30 Billion cubic metres. Also most global LNG production is locked into long-term contracts with Asian destination contracts, for use to supply Western markets. Transferring supply to the West would be legally difficult and economically damaging threatening supply chains. Only vastly increased production could make up the shortfall. The move toward Green alternatives, nuclear (in which Russia is predominant) and LNG is a long-term process. Doing it overnight would produce a full economic depression, rather than a mere recession. Europe will need to spend an estimated 5 trillion dollars to expand its port capacities for receiving LNG and these will not be functional for some time to come. While Europe has spare import capacity, particularly in Spain, it is not located in the countries to the east that really need to replace the Russian supply. Germany has no LNG terminals at present, for instance. Only around 15 per cent increase in supply is possible in the short term due to the necessity to build new and expand existing terminals. But storage will be an even harder problem to solve because we are not dealing with continuously supplying pipelines here. So European states will be forced to spend a huge amount of money replacing the Russian pipelines that are already built and supplying energy at comparatively low cost.  

Q: Russian sanctions against Gazprom Germania and its subsidiaries could cost gas consumers in Germany an additional €5 billion a year. It is reported by Welt am Sonntag with reference to its own independent experts. Welt am Sonntag says that switching to other gas suppliers will put a heavy strain on the German federal budget, “because there is an urgent need to purchase spare gas and additional costs arise.” It is clear that Germany and other European countries are refusing Russian energy resources under US pressure. I wonder why European countries put the interests of the United States above their national interests? Do all European countries share the US opinion regarding the complete rejection of Russian energy resources?

Germany’s economic success since re-unification was based on producing highly-tooled manufactures reliant on cheap energy from Russia. This offset the high labour costs of its well-paid workforce to make German industry competitive in a world where manufacture increasingly moved to low-cost Asian countries. Germany is the most powerful economy in Europe and its acceptance of trade and financial sanctions against Russia has paralysed its fertiliser production along with its car manufacturers which have suffered major supply cut-offs. Without this fertiliser agricultural productivity could reduce by 50 per cent. Germany was forced into abandoning Nord Stream II which means that instead of fuelling its industry through low-cost Russian energy it will have to pay as much as seven times more for its gas from US LNG supplies and spend billions on expanded port facilities to receive it. This increase in costs will make German products increasingly uncompetitive in the world market. Manfred Knof, CEO of Germany’s second largest private bank, has warned recently of a “tsunami of bankruptcies” battering Germany as “stagflation risks mount” as a result of the sanctions regime. This effectively ends Europe as an industrial rival to Asia because the Chinese Belt and Road initiative and other capital and infrastructure investment is creating a productive plant that is not only self-sufficient but is leaving Europe, without cheap Russian energy, without any industrially competitive power in the world market.

It is evident that not all European countries share the US opinion regarding the complete rejection of Russian energy resources. Hungary, whose leader, Viktor Orban, won a landslide election recently, has secured an opt out from the European embargo on Russian energy. There are signs of discontent also in Germany and Italy. Turkey, which looks after its own interests and is largely immune to moral pressure from the Europeans is also unlikely to follow the EU’s economic suicide pact.

Q: In your opinion, what consequences could Europe face if it completely abandons Russian gas and oil? Is there a possibility of such a failure?

Both Germany and the EU have thrown themselves on the mercy of the US to make good with alternative sources of energy, materials and markets which the abandoning of economic integration with Russia and the East entails. Not only will European economies be seriously damaged but Germany and the EU have effectively subordinated themselves to the foreign and military policies of the US. This is because Europe has surrendered any independence it had built up over previous decades to become very reliant on the future goodwill of Washington. For a brief period Germany under Merkel, and as a consequence, the EU, began taking tentative steps toward asserting an independent line of development from the US through integration with the Russian energy supply. The European/Russian relationship existed for mutual benefit but this was intolerable for the US which wanted to control and subordinate European development and split it away from Russia. In December 2020 Europe signed a trade and banking agreement with China against the incoming President Biden’s wishes. Europe wanted the opportunity to trade and invest profitably with China, Russia and eventually Iran. It rejected ongoing US attempts to block the Nord Stream II gas pipeline. Prior to the sanctions there were substantial disputes between the EU on issues such as transatlantic trade terms, tariffs, food quality standards and relations with China. These issues will now be resolved, presumably, to the advantage of the US master of Europe. In short, the EU, if it is to survive, needs to disentangle itself from this dependence, brought about by the sacrificial unlimited support for Kiev and deal with the harsh realities of international power politics. If Brussels is unable to do this a disintegration of the European Union is very possible as member states make individual provision to save themselves. I have little confidence in the political leadership in the EU, particularly that of Ursula von der Leyen, who seems to be an anti-Russian ideologue incapable of realistic strategic decision making.

Q: We hear calls from Kyiv to Georgia to open a second front. What do such appeals mean from a government that is itself in a state of conflict?

Kiev seems to believe that it is owed unquestioning support from everyone, no matter how that support might damage a country’s relations with its neighbours. Zelensky, dissatisfied with Georgia recently recalled the Ukrainian Ambassador from Tbilisi. Georgia learned a hard lesson in 2008, when it took part in a previous NATO expansion attempt and over-reached itself with disastrous results. Ukraine did not learn from this and will probably lose territory as a result, and much more than Georgia. The current Georgian government seems to have adopted a low-risk strategy in relation to the conflict in Ukraine and refused to fully join in sanctions against Russia, even though it is claimed that they do by its President, among others. The government insists that imposing its own sanctions on Russia would be disastrous for the Georgian economy. However, there are elements in Georgia who are dissatisfied with the understandable restraint showed by Tbilisi and who are demanding a more anti-Russian/pro-Kiev policy. That, of course, is an invitation for trouble and destabilising of the state. All the countries of the Southern Caucasus face problems in one way or another in satisfying the demands of Washington and Kiev whilst maintaining good relations with their powerful Russian neighbour, whose interests they have to take account of. Armenia is having problems in this aspect too. It is Azerbaijan which has been most successful in maintaining a balance, probably due to the strength of its independence and the quality of statesmanship of its leadership.

Q: The United States may soon get rid of Ukrainian President Volodymyr Zelensky, Daily Express readers say. In their opinion, this will happen due to the fact that the politician not only did not live up to his expectations, but also behaves defiantly. How would you comment on this? Is it possible?

Zelensky, up until now, has been the perfect Ukrainian leader for Washington and NATO. He has offered up his country as the major battlefield in the West’s geopolitical war on Russia and his people as the willing canon-fodder. He has done this in return for hero status in the West. Having worked in the media he has been a great asset in the information war and has succeeded in overwhelming the Western world with moral argument that has seen it subordinate itself to Kiev’s needs and desires. He has chastised leaders and states who have proved reluctant to give full support to Kiev in whatever he demands of them. That has been an enormous achievement. However, there may soon be a point when Zelensky becomes a liability for the West. The Ukrainian leader has become too fulsome in his demands and criticism of his benefactors in recent weeks, as the war goes badly for Ukraine and desperation is becoming apparent. It is apparent that President Biden wants to confine the war to Ukraine and accept only limited liability for it, mainly in the financial and diplomatic fields. He has publicly chastised Zelensky recently by saying the US had warned him of Russian military intervention and he hadn’t listened. This is the first instance of a “blame game” emerging in which distance is put between allies as interests diverge under the impact of the fortunes of war. Washington will know that it can create the conditions necessary for the removal of Zelensky if it wants to. The conflict is basically driven by the West through its military and economic subventions to Kiev and it can be wound down any time Washington chooses, if it feels it has run its course for the US geopolitical interest. It it said in the Western media that Ukraine is fighting for its independence. But Kiev could only safeguard its independence and territorial integrity by balancing its relations with the West and Russia since, as Samuel Huntington noted, a civilisational cleft runs through its territory. Ukraine has since 2014 made itself completely and utterly dependent on Washington and although some Ukrainians may keep fighting in the absence of full Western backing, when things begin to fall apart, this would only lead to greater reverses threatening the existence of the Ukrainian state itself. The most important question now is what the West will do now that the war, economic and military, is failing. Will it escalate, with all the risks that entails, or de-escalate, on the basis that no more can be gained? On this decision, and his willingness and ability to implement Washington’s bidding, depends the future of Mr. Zelensky.

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