Ukraine's valiant resistance has provoked a moral scramble to be seen and counted in the melee
Source - Daily Telegraph - 27/02/22
On the third attempt, the West is at last grasping the nettle in Ukraine.
This weekend's draconian measures come too late to deter Vladimir Putin, but not too late to inflict real pain and perhaps to set in motion the destruction of his regime.
The market verdict on earlier, minimalist, lowest-denominator, attempts to sanction Russia was almost embarrassing. Moscow's MOEX equity index rocketed 20pc on Friday, with relief rallies for Russian bonds and the rouble. Oil prices settled down.
It was a collective judgment by hard-nosed traders that the West was not willing to go beyond symbolic gestures, and that business would carry on as usual even if a sovereign democratic Ukraine were wiped off the map.
Saturday evening was the moment that the Western democracies took a deep breath and began to use their crushing economic and financial power, all too aware of the coming blowback through a commodity shock and multiple channels of financial contagion.
The joint decision by the US, UK, the EU, and Canada to sanction Russia’s central bank will prevent Vladimir Putin from deploying a large part of his $635bn fighting fund of foreign exchange reserves.
It is believed that two-thirds are located at the New York Fed, or in London, Frankfurt, and other Western jurisdictions. The reserves can be frozen. Putin still has gold under his control, so brace for a crash in bullion prices as he dumps 400-ounce Soviet bars on the Dubai market, all the way down to final Tsarist bars with the imperial eagle.
If these estimates are correct – and it may not be as simple as that – Putin will no longer have the means to stabilise the rouble, or to help Russian companies cover some $330bn of external debt as repayment comes due.
This is how hyperinflation begins. A vicious circle sets in where devaluation turns manageable foreign liabilities into systemic insolvencies.
“Something really big has happened. It will be illegal for western banks to buy roubles, and the risk is that the currency will go into freefall. This has never happened before to a G20 country,” said Christof Rühl from the Center on Global Energy Policy at Columbia University.
Mr Rühl said the sanction is more significant than the ejection of Russia from ‘targeted’ areas of the Swift nexus of international payments. That in itself will not halt energy trade or Russian sales of oil, gas, coal, and grains.
“Brokerages will be set up and ways will be found around it. Costs will be higher but eventually trade will continue,” he told the GI Daily Energy Markets Brief.
Even a partial suspension of Swift will cause some havoc. How will Russian firms pay their outstanding debts to Swiss-based commodity traders such as Glencore and Vitol? How will BP collect earnings from its one fifth holding of Russia’s oil group Rosneft, even if Downing Street allows this arrangement to continue.
Adi Imsirovic from the Oxford Institute for Energy Studies says we should brace for an energy shock. “I am very surprised that oil is not trading at $115 or $120. The whole world is going to be affected by this in what is a very tight market,” he said
Mr Imsirovic said two-thirds of Russian oil exports are shipped by sea. This trade is already severely disrupted. Shippers are refusing to pick up Russian cargoes in the Black Sea. “Insurance premiums are going through the roof. Russian crude is trading at a discount of $11, the deepest I have ever seen,” he said.
It would be complacent to suppose that market convulsions will stop here. We must reckon with the real possibility that Putin will retaliate by cutting off gas flows to Europe entirely, bringing down the temple on all our heads.
It is widely supposed that Putin would never do this because he needs the revenue to fund his machine. But the real earner for the Kremlin is crude oil. Gas is a fraction of this, and some of it is sold to China by pipeline or shipped to East Asia as liquefied natural gas.
The income stream from Gazprom sales to Europe are not decisive in the overall commodity picture, at least in the short-run. Putin may be tempted to force an immediate European energy crisis, given that he no longer has any credibility left to uphold as a reliable supplier.
Mild weather and deliveries of LNG from the US have slowed the depletion rate of European gas stocks, but inventories are nevertheless at the bottom of their historic seasonal range.
“If all Russian gas is cut off, Europe would have no chance of coping,” said Kateryna Filippenko, European gas analyst at Wood MacKenzie.
“In the event of prolonged disruption, gas inventory couldn’t be rebuilt through the summer. We’d be facing a catastrophic situation of gas storage being close to zero for next winter. Prices would be sky high. Industries would need to shut down. Inflation would spiral. The European energy crisis could very well trigger a global recession,” she said.
To assume that Putin would not do this is to repeat the serial errors of the last eight months. At every stage the West has failed to think more than one move ahead on the chess board, only to be astounded by each of his escalating gambits.
But first what matters is the delivery of anti-tank weapons, Stinger ground-to-air missiles, combat drones, rifles, and plain ammo, and whether these weapons can be shipped to the front quickly enough without entangling NATO in a war with Russia.
The war matériel is arriving. The valiant resistance of the Ukrainian people in arms has precipitated a moral scramble to be seen and counted in the melee. It has changed the calculus in those capitals that invariably like to be on the winning side.
Germany’s decision to ship weapons to Ukraine is a strategic turning point in this crisis. In a single speech, Chancellor Olaf Scholz has dismantled decades of German Ostpolitik and embarked on breakneck military rearmament. No other country in Europe can hide behind Germany any longer.
The Western democracies can still retrieve this situation, turning what at first seemed to be a disastrous defeat into something closer to a triumph, breaking Putin’s mafia regime just as the Falklands War broke General Galtieri’s military junta in Argentina.
But let us be under no illusions. Yes, three days of war have shown that Russian tactics are pedestrian; the kit is mediocre, logistics and supply are deficient, and troop morale is poor. There is nothing special about Putin’s forces after all.
But nor should we jump to the other conclusion that the invasion has been halted. There are always logistical debacles when large armies are on the move. In 1939 it looked for a moment as if the Polish Poznan Army had turned the German flank and checked the Nazi invasion. That heroic action changed little.
It may take direct action by NATO forces to swing the balance decisively, much as Franklin Roosevelt ratcheted up the levels of intervention behind the screen of neutrality, becoming a de facto belligerent long before Pearl Harbour.
Moscow has already accused the US of deploying surveillance drones to help the Ukrainian navy against the Russian Black Sea fleet. It is denied, of course.
My presumption is that several NATO states are already more deeply engaged in combat support for the Ukrainian forces than admitted. The next surprise for markets may be the discovery that we are closer to war with Russia than anybody thought.
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