Thread by @KellerZoe

Greater Russia is now a full-spectrum commodity superpower, less vulnerable to sanctions than Europe itself. The West’s pain threshold is about to be tested. Fortress Russia will endure this contest of self-reliance more stoically than Europe.

✍️🏼 AEP
telegraph.co.uk/business/2022/…

In a matter of hours, the world order has turned drastically less favourable for western democracies.
Putin’s seizure of Ukraine elevates Russia into a full-spectrum commodity superpower, adding leverage over global grain supply to existing strategic depth in energy and metals.

We wake up to the sobering reality that Russia is too pivotal for the global trading system to punish in any meaningful way. It influences or determines everything from bread in the shops, to gas for Europe, to supply chains for aerospace and car plants.

Almost 90% of Europe’s imports of rapeseed oil comes from Ukraine. Spain's jamon iberica depends on grain feed from the black earth belt of the Ukrainian steppe. Ukraine turns Putin’s empire into the Saudi Arabia of food: 30% of global wheat exports and 20% of corn exports.

It is not just Brent crude oil that has spiked violently, hitting an 8-year high of $102. Aluminium smashed all records on Thursday. Chicago wheat futures have hit $9.32 a bushel, the highest since the hunger riots before the Arab Spring.

Do not confuse this with inflation. Rocketing commodity prices are a transfer of wealth to exporters of raw materials. For Europeans at the sharp end, it acts like a tax, leaving less to spend elsewhere. It is deflationary. If it continues for long, we will slide into recession.

So while there is brave and condign talk of crippling sanctions against Russia, it is the West’s pain threshold that is about to be tested. My presumption is that Fortress Russia will endure this contest of self-reliance more stoically than Europe’s skittish elites.

Sanctions are of course imperative as a political statement. The West would be complicit if it did nothing. But the measures on the table do not change the equation.

The debate in HoC over hitting a few more oligarchs has bordered on parody: Brits talking to Brits in a surreal misunderstanding of geopolitics, as if Putin was going to give up his unrepeatable chance to snatch back Kievan Rus and shatter the post-Cold War dispensation of Europe

The German suspension of Nord Stream 2 doesn't change anything. The pipeline was never going to supply extra gas this decade. The Kremlin’s purpose was to reroute the same Siberian gas, depriving Kiev of self-defence leverage. Once Putin controls Ukraine, NS2 becomes irrelevant.

The cardinal error was made in June 2015 when Germany went ahead with the bilateral pipeline just a year after the annexation of Crimea, signalling that the first Anschluss of 21st Century Europe would go unpunished, or worse, that it would be rewarded with a strategic prize.

If you want to date the death of a sovereign democratic Ukraine, it was that Merkantilist decision. Royal Dutch Shell was an abettor. Putin got our measure.

The 36% fall in the MOEX index in Moscow on Thursday morning means that western investors with a Russian portfolio through pension funds or ETFs have lost money. It does not mean that Russia is being forced to its knees, as some would have it.

Nor does the modest decline in the rouble imply unmanageable economic stress. Russia’s exchange rate mechanism is designed to let the currency take the strain, cushioning the internal budget against shocks.

Russia is sitting on $635bn of foreign exchange reserves. It has a national debt of 18% of GDP, one of the lowest in the world. It has a fiscal surplus and does not rely on foreign investors to finance the state. US sanctions against issuance of Russian bonds are mere nuisance.

The Kremlin is enjoying a windfall gain from commodities. Gas futures contracts for March have hit extreme levels of €120 an MWh. Russia is earning $700m a day from sales of oil to Europe and US, which needs heavy Urals crude to replace sulphurous Venezuelan barrels.

Europe would spiral into crisis within weeks if flows of Russian gas were cut off. The short-term loss of revenue for the Kremlin would be a small fraction of Russian gold, euro, and dollar reserves: no symmetry. Whatever the rhetoric, energy business as usual will proceed.

US and Europe will enforce technology blockade, restricting Russia’s access to advanced semiconductor chips, in tandem with Taiwan and Korea. This will hurt but it will take time. Russia has stockpiled. It has its own producers able to make mid-level chips down to 28-nanometres.

China will not join Western sanctions. Nor will it stop Chinese companies from supplying chips to Russia through deniable middlemen. Putin can calculate that Western zeal for sustaining this hi-tech embargo will wane before it does irreversible damage to Russia.

EU has vetoed expulsion of Russia from the SWIFT for fear of the systemic blowback into its own banks, and because it would have made it hard to pay for Putin’s oil, gas, metals, and grains — leaving aside the risk that Russia might go all the way up the retaliation ladder.

The US itself is ambivalent over shutting down SWIFT because it would accelerate the de-dollarisation of global finance. If the US plays its trump card, it risks losing the card. China and Russia already have their own payment systems that could be linked for bilateral trade.

So one watches the Western pantomime over sanctions with a jaundiced eye, knowing that almost everything being discussed is largely beside the point, and that only military strength matters when push comes to a 200,000-man military shove.

The errors lie in years of European disarmament, they are the result of both wishful thinking by a complacent elite and fiscal austerity imposed by EU commissars during the eurozone crisis, with no regard for the larger strategic picture.

It is the fruit of periodic "resets" in relations with the Putin regime, invariably forgiving his sins, and dressing up commercial self-interest as if it were an attempt to lure him away from a Chinese axis of autocracies.

The final trigger was Joe Biden’s decision last July to override Congressional sanctions against Nord Stream 2, selling out Ukraine in a deal with Angela Merkel.

Biden thought he could "park" Russia on one side and focus on China. He appointed a Russophile as a key adviser. He neglected to appoint a US ambassador in Kiev, letting matters in the hands of a junior with a taste for the quiet life, toning down cables to the White House.

Putin drew the conclusion that this was his moment to strike. We can only pray for brave Ukrainians fighting without air cover. More Stinger and Javelin missiles would have helped enormously a few months ago but it is almost certainly too late now to change the outcome.

Kiev will be ringed with tanks within hours. To talk of protracted guerrilla warfare at this stage is to talk for the sake of talking. The West must fall back to the next line of defence, the NATO line from Estonia to Romania, and face the long task of military rearmament.

It would have been easier to stiffen Ukraine while we could. Now we face a reconstituted Russian empire in tooth claw, as far West as the Carpathians, with a stranglehold on the raw materials of our existence. None of this was inevitable: it's result of systematic policy failure.

Previous AEP articles on this crisis:
- 15.02.2022

https://twitter.com/KellerZoe/status/1493689580733743106

- 22.02.2022

https://twitter.com/KellerZoe/status/1496190064468058116