Speaking at the European Parliament, European Union’s climate chief Frans Timmermans recently admitted that “the risk of a full gas disruption is now more real than ever before”, adding that “all this is part of Russia’s strategy to undermine our unity.”
Well, who would’ve thought that Russia would retaliate?
Europe’s economic powerhouse, Germany, is beside itself with worry. Vladimir Putin’s move to cut gas supplies to Europe has hit Germany — that had grown reliant on cheap Russian energy — the hardest. Germans across the board, from industrialists to politicians, are panicking that factories will be shuttered, industries will collapse, and the country’s growth engines will come to an abrupt halt. Europe is staring at a recession. Winter is coming. There is now a very real fear that it would be among the harshest in recent memory.
The German economy minister, Robert Habeck, is sounding outraged. “The curbing of gas supplies is an economic attack on us by Putin,” said Habeck, who is also the vice chancellor. “It is obviously Putin’s strategy to try to fuel insecurity, drive up prices and divide us as a society.” It is perplexing indeed. Why would Putin seek to harm German interests?
These are astonishing statements. Europe, along with the United States, has launched a proxy war against Russia. It is giving financial aid, exporting massive amounts of lethal weapons to Ukrainians, providing tactical intelligence, and has collectively imposed some of the toughest economic sanctions against Moscow for its invasion of Ukraine. The motivation to do so is understandable, though realists might point out that NATO enlargement has played a part in the crisis.
The West considers Putin’s war on Ukraine a moral perversion and an act of pure evil. While framing the issue in such stark terms makes it an easy-to-understand morality play of light versus darkness, and hence get public support on its side, the trouble is that actions have consequences.
Having taken some of the strongest, coordinated steps to degrade the Russian economy, sever it from the global financial network, pulling the plug on Nord Stream 2, imposing a rash of taxes and bans to prevent Russia from finding buyers for its commodities, cutting off (or attempting to) its oil exports, targeting its banks, financial institutions, individuals, businesses, and state-owned enterprises — Europeans now seem bewildered that Putin is taking countermeasures and appear unprepared for the repercussions.
For a continent that fought two world wars in the last century, this cluelessness is baffling. Europeans, whose economies are thoroughly entwined with Russia’s, jumped into punishing Putin in a frenzy of moral outrage and now seem unable to deal with his retaliatory steps. What did they expect? That Putin would go belly up and die out of shame at Europe’s moral outrage? Or meekly accept the sanctions as a ‘fair’ punishment for his transgressions?
This naivete points to a strange affliction in the NATO nations that have grown soft under America’s security umbrella. And with Joe Biden’s decision to ramp up military presence with the biggest American expansion in Europe since the Cold War — along with a permanent deployment in Poland — that affliction won’t be cured in a hurry. There’s little logic in allocating money for defence when the US is committed to shouldering the transatlantic security burden. While it makes perfect economic sense, it takes away Europe’s ability to balance Russia on its own.
As Tom Rogan writes in Washington Examiner, “eight years after NATO members pledged to move toward 2%-of-GDP defense spending, the vast majority remain far away from doing so” and the “only way to get these allies to do their fair share for NATO is to make them choose between unacceptable vulnerability and appropriate defense investment.”
Authored by the whiz kid Daleep Singh, Biden’s deputy national-security adviser who had apparently studied Putin’s vulnerabilities, Western economic sanctions were supposed to be so clever and lethal that they could “pierce” Putin’s ‘sanction-proof economy’. It was hoped that these sanctions would be enough to deter Putin, nullify his military objectives and may even inspire a Kremlin coup. A triumphant Biden had boasted in March that ruble is now “rubble” and Russian economy will be “cut in half”.
It turns out that the Russian economy is more resilient than was perceived and Putin, instead of being paralysed by western sanctions, is dragging on with the war and inflicting pain on the West in return by weaponizing commodities that lie at the heart of European economies. Singh has since left the White House.
Brahma Chellaney sums it up in The Hill where he writes, “the principal lesson from the Russian aggression is that President Biden’s threats to inflict severe economic punishment failed to deter Putin from launching an all-out invasion. And that the Western imposition of sanctions has had little effect on Russia’s war effort.”
Part of the reason why the sanctions seem to be backfiring is that these were driven by a sense of moral certitude. It led the West in committing to a series of ill-defined steps without thinking through the consequences. In their bid to make an example of Putin, trapped in a bubble of delusion that western priorities are a global consensus, the US and its European allies were certain that the rest of the world would join them in chorus of outrage against Russia and take part in sanctions — that has triggered massive inflation, global food crisis, energy crisis, supply chain disruption — at the cost of even going against their own interests.
It had completely escaped the West that for the rest of the world and emerging economies, the necessities of fighting soaring inflation and energy prices at home are an order of magnitude greater than teaching Putin a lesson. They regret the war, they wish Putin would respect international boundaries and the sanctity of territorial boundaries, they are outraged by the plight of Ukrainians, but they don’t frame the tragedy in “existential” terms.
It was only two years back in 2020 when Indian soldiers were killed at Galwan valley by Chinese troops and there was little beyond token sympathy on offer by the West. China faced no sanctions. In December 2020, Europe and China reached an agreement for a Comprehensive Agreement on Investment. The rules of the game didn’t apply then.
It appears as hypocrisy to the non-West that it is accused of moral transgression by Europeans and Americans for buying discounted Russian oil — because it undermines western sanctions — at a time when Europe is backsliding on coal and climate commitments while Biden is headed for Saudi Arabia to request the kingdom, whom he once denounced as ‘pariah’, to increase oil production.
India and China were singled out at Cop26 in Glasgow last year for replacing the word “phasing out” coal with “phasing down” in the final pact. They were accused of “diluting” the climate commitment, a charge that was morally specious and factually dubious.
It now turns out that faced with dwindling gas flows, Germany is now firing up coal-based power plants, Austria is restarting existing coal plants and the Netherlands has lifted production caps. Italy is also following suit. And in a stunning sleight of hand the European Parliament on Wednesday, in a landmark vote, “endorsed labeling some gas and nuclear energy projects as ‘green,’ allowing them access to hundreds of billions of euros in cheap loans and even state subsidies”, reports New York Times.
So, the fossil fuels that were till now being labelled ‘dirty’ at the blink of an eye have turned “green”. West’s ethical stances, therefore, appear perverse when it follows realpolitik but seeks to put pressure on the global south to take part in a morality play and sacrifice their interests for the values that the West preaches. As India’s foreign minister said at a European forum last month, “Europe has to grow out of the mindset that Europe’s problems are the world’s problems but the world’s problems are not Europe’s problems.”
In Financial Times, Edward Luce puts it in perspective. “To much of the world, Ukraine is just another humanitarian tragedy. The fact that the west sees it as existential is an irritation. Africans and Arabs and Latin Americans know that when there is a clash between US ideals and interests, the latter generally win.”
As the war turns into a long grind and a battle of attrition, the rhetoric in the West is slowly shifting from triumphalism to realism. Ukraine is still holding the line, but Russia is eking out crucial gains in the east and US assessment of the war is facing increasing questions. The narrative on sanctions in Western media is undergoing a concomitant shift from tubthumping to scepticism.
The sanctions were predicated on the belief that the Russian economy is small, can be ostracized, crushed and decoupling will carry some, but not significant blowback. This assessment is being steadily proved as egregiously wrong. Economic sanctions are not scalpels. These are blunt instruments that leave a lot of collateral damage. The US has historically been trigger-happy in wielding this economic weapon — riding on the global supremacy of US dollar — to achieve its geopolitical objectives but the success rate of sanctions has at best been mixed, and increasingly dismal.
Since Moscow has so far been able to evade the intended effects of West’s debilitating sanctions, frustration levels are increasing in Washington and other European capitals. When these leaders met for G7 and NATO summits last week, instead of a realist assessment we saw a doubling down on the very weaponry that has so far proven to be ineffective in bringing Putin to heel, but has led to a huge inflationary effect on global economy and mounting commodity prices that are, ironically enough, triggering economic and political instability at home for US and its European allies.
Doing the same thing and expecting different results is hubris. That is exactly what was on offer when Biden and his allies announced that they will try to impose price caps on Russian oil and gas, ostensibly to limit Moscow’s ability to profit from selling these commodities. Since countries can’t be prevented from Russian oil altogether, the idea on paper is to create a buyer’s cartel that would purchase Russian crude at rock bottom prices to stem the flow of money going into Putin’s hands. What kind of money?
During the first two months of the war, according to research by Center for Research on Energy and Clean Air (CREA) released in April, Russia nearly doubled its revenue by selling fossil fuels worth 58 billion euros, 70% of which was shipped via pipelines to the EU. If we stretch the period to first 100 days, CREA report released in June says fossil fuels are continuing to fund Putin’s war chest with Russia earning 93 billion euros in revenue from exports in February 24 to June 3. The largest importers were China, Germany, Italy, Netherlands, Turkey, Poland, France and India. The report also reveals that despite offering a discount, Russia is still selling at 60% higher prices than last year.
The G7 plan is to intervene and twist the market so that Putin gets less money, but the success of this scheme depends mainly on China and India’s participation which, as Stormy-Annika Mildner, director of the Aspen Institute, Germany, points out, is far from certain in absence of incentives. There’s also the ‘little matter’ of Putin agreeing to sell his fuel at rock-bottom prices, and even in case he does, there could be a mad scramble for dirt cheap Russian energy at a time of sky-high global prices, making it even more attractive and defeating the very purpose of price cap.
As Politico points out in its report, the price-cap mechanism could lead “to a three-tier marketplace,” where “buyers would choose between the normal global benchmark price, a low authorized Russian crude price, and a ‘gray market’ price for illicit Russian barrels at an intermediate price, delivered and paid for using subterfuge tactics perfected by Iran and Venezuela.”
In short, the results are far from certain, and could even be counterproductive.
Curiously, the thwarting of western economic sanctions at the altar of geopolitical realities is not forcing a clear-eyed evaluation or a shift in strategies. Quite the opposite, in fact. As energy prices surge in the US and Europe, with gasoline prices touching new highs in America, Biden is thundering that Americans will have to bear with high gas prices “as long as it takes” to defeat Putin.
The US president’s bluster is driven more by a desperate need to show sanctions are working than a reflection of popular mood in the US, where mounting inflation, high energy prices have driven up the cost of food resulting in a political headache for Democrats ahead of midterm elections. As the US Federal Reserve looks to tame America’s highest inflation in four decades, talks of a recession in US economy are gaining traction and Biden is plumbing new depths in approval ratings.
Meanwhile, the public mood in the US is shifting. A University of Texas poll shows that ‘Ukraine fatigue’ is setting in. No less indicative is the fact that Americans are voting for leaders such as JD Vance, a Donald Trump-endorsed Senate candidate who recently won a primary in Ohio. Vance believes that “it’s ridiculous that we are focused on this border in Ukraine. I got to be honest with you, I don’t really care what happens to Ukraine one way or the other.”
Europe is tottering on the brink of recession after Putin slashed gas flows to Europe by about 60 per cent, and there are concerns that he may turn off the tap completely after Nord Stream 1 shuts down for maintenance for 10 days from 11 July. The Russian president has already cut off gas supplies to Poland, Finland, the Netherlands, and other European countries who have not complied with his demand for payment in rubles.
Shortage of natural gas has caused a 700 per cent jump in prices in Europe and together with gas cuts is pushing European economies into a slump. Japanese investment bank Nomura, according to a report in Guardian, says European economies may start contracting over the course of the second half of 2022 and the recession may continue until the summer of 2023, with a total decline of 1.7 per cent of GDP.
Germany is warning of a Lehmann-like contagion in its energy markets. German economy minister Habeck says “the whole (energy) market is in danger of collapsing at some point” while German union leaders are saying that entire aluminium, glass, and chemical industries are “in danger of permanently collapsing.” The situation, due to Putin’s gas cuts, is so dire in Germany that hot water may have to be rationed for cities, raising the prospect of a bitterly cold winter. Europe’s economic engine has slumped to its first monthly trade deficit in three decades as soaring inflation is taking its toll, reports Bloomberg.
It isn’t just Germany. Twelve EU member states are facing gas shortages, 10 have issued warnings, the euro has slumped to a 20-year low.
While the US and Europe are being rocked by upheavals, how has Russia been faring? According to Bloomberg’s calculations, Russian imports from five top trading countries have picked up in May after a slump in March and April, though it remains below pre-war levels. Bloomberg says the Russian economy “showed signs of stabilizing.”
That assessment is backed by other estimates. According to a report in Market Insider, that quotes JP Morgan, Russian economy is “faring much better than expected despite Western sanctions” and it seems GDP “would shrink just 3.5% in 2022, compared to a Wall Street consensus of 9.6%.” JP Morgan economists further say, according to the report, that May economic data has exceeded estimates, labour market is stable and unemployment dipped to 3.9% in May from 4% in April.
Russian ruble is already the strongest currency this year, though that strength derives a lot from Russia’s current account surplus due to sanctions on trade. All pointers indicate, however, that sanctions have hit Russian economy, but the effect is milder than expected. The West in all probability has underestimated the resilience of Russian economy.
The situation also indicates that while the West was obsessed with imposing pain on Putin, it didn’t take into account the leverage that Putin holds over European economies, or the possibility that he may weaponize commodities such as energy, fertilizers, metals, grain to impose counter-pressure.
On the war front, the early optimism of the West is giving way to a grudging acceptance that it may last even years. In that scenario, the outcome becomes uncertain. Till now Ukraine’s ability to fight is directly proportional to the backing that a united West has been able to provide, but as the war’s impact destabilizes and ravages economies, gives rise to political instability, it remains to be seen how long the West, especially Europe, manages to hold that unity.
With the Russian army recently chalking up grinding wins in two key regions in eastern Ukraine — Severodonetsk and Lysychansk — Russia now claims to have seized the entire Luhansk region. It is being called “a significant military achievement” since it gives Putin much better chance at seizing Donbas, the industrial belt of eastern Ukraine. It has taken Putin four months, his army has suffered heavy losses, in manpower, ammo and reputation, but in a war of attrition the greater power usually prevails.
Ukrainians have also suffered heavy casualties with Washington Post quoting “independent estimates” to report that each side has seen “tens of thousands of soldiers killed and wounded. The Pentagon has largely declined to publicly discuss its assessments of those figures.”
Despite Ukraine’s brave fight, the “baseline scenario,” as Anusar Farooqui writes in Unherd, remains a Russian victory despite the “botched invasion plan”. Rosy expectations of Ukrainian victory are slowly getting crushed under the wheels of geopolitical realities of the war.
This estimate fits with the assessment of other observers, such as Ray Dalio, founder of the world’s largest hedge fund, who wrote recently on LinkedIn that considering Putin’s “staying power”, thus far it appears that Russia will emerge a relative winner because the devastation of Ukraine will be greater. He also notes that so far US-led sanctions have failed to force Putin to abandon his goals, and the rising costs will increasingly put question marks on support within NATO countries.
This is not an unreasonable evaluation, and it must lead to the only question that matters. What would be the war’s endgame, and shouldn’t it be a priority of the West in finding a solution than fighting a proxy war against Russia that may, at best, deliver a pyrrhic victory at the cost of the last Ukrainian? And that outcome, too, is looking increasingly unlikely with the momentum of the war perceptibly shifting to Russia’s advantage.
As Georgetown University professor Charles Kupchan writes in Foreign Affairs, “continuing the war may well mean more loss of life and territory, not battlefield gains for Kyiv. And the longer the war goes on, the higher the risk of escalation, whether by design or by accident, and the more prolonged and severe its disruptions to the global economy and food supply.”
At some point, the West must set aside its hubris, arrogance and moral certitude to bring Ukraine to the negotiating table, if only to cut its own losses from the war’s economic spillover that will sooner than later drive a wedge through NATO unity. Helping Ukraine beat marauding Russia is not the only morality at play. Condemning the rest of the world to economic, food and energy crisis over a war in which they have no stake, with some emerging economies such as Sri Lanka gasping for breath, is equally immoral.