President Joe Biden almost hourly promises, “We are not going to war in Ukraine.” Why would he then not readily rule out NATO membership for Ukraine, which would require us to do something Biden himself says we Americans, for our own survival, should never do: go to war with Russia?—Pat Buchanan
In this issue
Year of the Tiger: The Outbreak of the Russia-Ukraine War; Imperial Game of Thrones and the New World Order
I. The Year of the Tiger It is: Russian Forces Invades Ukraine!
II. Imperial Game of Thrones: A War That Could Have Been Avoided
III. The Natural Limits of the Russian Offensive
IV. From a Limited Kinetic War to a Global Financial War; Will Sanctions Succeed?
V. No One Benefits from Wars; A New World Order
VI. Russia-Ukraine War: Inflationary Potentials From Economic Disruptions and Central Bank Liquidity Measures
Year of the Tiger: The Outbreak of the Russia-Ukraine War; Imperial Game of Thrones and the New World Order
I. The Year of the Tiger It is: Russian Forces Invades Ukraine!
The Year of the Tiger it is!
Remember this?
Aside from the eroding concerns over the pandemic, potential geopolitical flashpoints for a hot war may occur.
For instance, the US-Russian impasse over Ukraine (Russia’s vehement objection over the slippery slope of NATO’s expansion into her borders), China’s flexing of its military muscles over Taiwan (Figure 2, topmost pane) while simultaneously asserting its sphere of influence at the disputed territories of the South China Sea and the Senkaku Islands. There are also ongoing border disputes between China and India at the Himalayan Aksai Chin and the south of the McMahon Line and between India and Pakistan over Kashmir.
So yes, if diplomacy fails, the higher the risks that standoffs morph into a hot war.
The Year of Tiger has been no stranger to such events, historically.
At the onset of its annexation, Nazi Germany invaded Austria and Sudetenland, Czechoslovakia in 1938, which paved the way for World War II.
North Korean invasion of the South-controlled territories in June 1950 opened the 1950-1953 Korean War theatre.
1962 was also the year the world nearly tipped into World War III. Threats by the Soviet Union to install nuclear missiles in Cuba in response to the failed invasion by US CIA-led exiles of Cuba at the Bay of Pigs caused a 1-month and 4-day standoff with the US, known as the Cuban Missile Crisis.
…
Nota Bene: This author is agnostic on Feng-shui or zodiac signs. But the insights from these may not be from the zodiac signs but the cyclical episodes embedded in the evolution of the political economy.
What Surprise is in Store for the 2022 Year of the Water Tiger?, January 23, 2022
It is interesting to see how the world has pivoted from the seeming culmination of the COVID-19 pandemic into a hot war.
Figure 1
The world has jumped from one crisis (war against covid) to another (Russia-Ukraine war).
Importantly, if 1938, 1950, and 1962 served as a blueprint, 2022 could usher in a likely destabilizing period as imperial powers contest global domination.
II. Imperial Game of Thrones: A War That Could Have Been Avoided
2022 opened with the Putin-led Russian offensive against Ukraine.
But in contrast to popular wisdom, this episode has hardly been a product of impulse.
It signified an evolving geopolitical process grounded from the action-reaction feedback loops of the past years.
For instance, in 2018, we cited Mr. Putin’s repeated warnings of war.
Last December, “VLADIMIR Putin has hit out at the “aggressive”new US national security strategy and warned Moscow will react. The Russian president said the US missile defence sites in Romania containing interceptor missiles could also house ground-to-ground intermediate-range cruise missiles, which would be in violation of the 1987 Intermediate-range Nuclear Forces (INF) Treaty. He told the military officials that both the US and NATO have been "accelerating build-up of infrastructure in Europe" and emphasised that the deployment of NATO forces near Russia's borders had threatened its security. (Express.co.uk, Russia's Putin blasts 'AGGRESSIVE' US national security strategy as relations PLUMMET December 22, 2017)
Last November, “Vladimir Putin has warned Russian businesses they should be ready to switch to military production in preparation for war. The Russian President told defence ministry officials on Wednesday that the arms production industry - both private and state owned - needed to be prepared to step up manufacturing at a moment's notice.” (Sky News Vladimir Putin tells Russian arms firms to be ready for war, November 23, 2017)
See New Year Fireworks! Global Stocks and the Phisix Storm to Record Heights as Central Banks Tighten January 8, 2018
And in 2019, Mr. Putin warned of a modern day version of the Cuban Missile Crisis.
Reuters, February 21, 2019 (bold mine): Russian President Vladimir Putin said Russia is militarily ready for a Cuban Missile-style crisis if the United States wanted one and threatened to place hypersonic nuclear missiles on ships or submarines near U.S. territorial waters. The Cuban Missile Crisis erupted in 1962 when Moscow responded to a U.S. missile deployment in Turkey by sending ballistic missiles to Cuba, sparking a standoff that brought the world to the brink of nuclear war. More than five decades on, tensions are rising again over Russian fears that the United States might deploy intermediate-range nuclear missiles in Europe, as a landmark Cold War-era arms-control treaty unravels. Putin’s comments, made to Russian media late on Wednesday, follow his warning that Moscow will match any U.S. move to deploy new missiles closer to Russia by stationing its own missiles closer to the United States or by deploying faster missiles or both.
While these were writings on the proverbial wall, the US and her allies mindlessly ignored them.
Nonetheless, such alarming signals seemingly signify backlashes to the encirclement strategy employed by the US and Nato forces on Russia.
There are about 750 to 800 US military bases worldwide. Many of which have surrounded both Russia and China. (Figure 1, middle window)
Also, 21 of the 27 members of NATO are from the European Union. Despite the dissolution of the USSR in 1991, members of NATO expanded from 16 to 27.
So, despite the end of the USSR, the cold war has never vanished.
And because of this, through the Ukraine crisis, Mr. Putin brought forward the equivalent of the Cuban Missile Crisis of the 21st century.
But is Mr. Putin alone in this?
Speeches of the leaders of imperialism seem to provide a roadmap to the evolution of geopolitical affairs.
Chinese president Xi Jinping has likewise been signaling to the world that they are pushing back against the Monroe Doctrine, which states that any intervention by external powers in the politics of the Americas is a potentially hostile act against the US.
Here are the annual warnings of Mr. Xi of China from 2018 to the 2021: (all bold mine)
The Guardian, March 20, 2018: Chinese president Xi Jinping has delivered a nationalistic speech in which he vowed the nation would “take our due place in the world” and was ready “to fight bloody battles against our enemies”. Xi also promised “rejuvenation” and warned against attempts to erode China’s unity during a speech at the close of the annual session of the National People’s Congress, the country’s annual parliament often derided by experts as little more than a show that lacks serious policy debate.
Japan Times, January 6, 2019: Just days into the new year, Chinese President Xi Jinping has ordered his country’s military to improve its combat readiness and prepare for the possibility of war while also warning of “unprecedented risks and challenges” in 2019. Xi’s warning comes amid territorial disputes in the South and East China seas and rising tensions with the United States over issues ranging from trade to Taiwan. The Chinese president told a meeting Friday in Beijing of the Central Military Commission, the country’s top military authority, that the armed forces must devise strategies in the coming year and take on more responsibilities in readying for and waging war.
CNN, October 14, 2020: Chinese President Xi Jinping has called on troops to "put all (their) minds and energy on preparing for war" in a visit to a military base in the southern province of Guangdong on Tuesday, according to state news agency Xinhua.
Financial Times, November 11, 2021: Xi Jinping has warned Asia-Pacific leaders against joining Joe Biden’s plan to strengthen alliances to counter China’s economic and military rise. The Chinese president said on Thursday that attempts to “draw ideological lines” or to “form small circles on geopolitical grounds” were bound to fail. “The Asia-Pacific region cannot and should not relapse into the confrontation and division of the cold war era,” Xi told a virtual summit of the Asia-Pacific Economic Cooperation summit.
In today’s modern version of the game of thrones, nuclear-armed challengers to the US stranglehold of the iron throne of the Seven Kingdoms of Westeros have emerged.
Some have alluded to this as the "Thucydides's Trap," which was coined by American political scientist Graham T. Allison as exhibiting a "tendency towards war when an emerging power threatens to displace an existing great power as a regional or international hegemon."
Except that the popular reference for this rivalry is between the US and China.
However, before the outbreak of the Ukraine crisis, both President Xi of China and President Putin of Russia joined hands to call for a similar scaling down of US-NATO forces in Eastern Europe.
Guardian, February 4, 2022: China’s Xi Jinping and Vladimir Putin of Russia have signed a joint statement calling on the west to “abandon the ideologised approaches of the cold war”, as the two leaders showcased their warming relationship in Beijing at the start of the Winter Olympics. The politicans also said the bonds between the two countries had “no limits”. “[T]here are no ‘forbidden’ areas of cooperation’,” they declared. In the joint statement released by the Kremlin, Putin and Xi called on Nato to rule out expansion in eastern Europe, denounced the formation of security blocs in the Asia Pacific region, and criticised the Aukus trilateral security pact between the US, UK and Australia.
That was 20 days before the Russian offensive!
In short, the Thucydides' Trap may not be about US-China only but extends to its allies.
In this transition, the cold war has transmogrified into a proxy hot war.
And while the world fixates on the atrocities by the Russian government, other heinous activities to preserve its global hegemon continue to occur elsewhere in the world.
From Commondreams.org, February 25, 2022: Just before Russian President Vladimir Putin launched his full-scale military assault on Ukraine, which has drawn accusations of potential war crimes and received global condemnation, the United States hit Somalia with the latest drone attack in its 15-year war against the impoverished nation. In a statement released Wednesday, the U.S. Africa Command (AFRICOM) said its Tuesday airstrike targeted suspected al-Shabab militants "after they attacked partner forces in a remote location near Duduble." The first known U.S. airstrike in Somalia in 2022 was the fifth since the start of President Joe Biden's tenure in the White House. "Before him, Donald Trump escalated the U.S. war in Somalia like no one else had, bombing the country more in the first two years of his presidency than Barack Obama had in eight, all the way up to January 19, 2021," journalist and author Spencer Ackerman wrote Thursday on his Forever Wars blog. "George W. Bush plunged the U.S. into conflict in Somalia in the first place in 2006."
Remember, the feedback loops from these imperial game of thrones will persist.
III. The Natural Limits of the Russian Offensive
The US Biden Administration-NATO underestimated Putin’s tolerance.
And so, the new world order has ushered in on February 24, 2022.
In our humble opinion, it is doubtful that an invasion orgy is the objective of Putin's Russia.
First, this is not the 20th century. Mass armies, reflecting the industrial age, may be outdated.
The character of today's warfare will likely manifest the advances from the information age, where war consists of nuclear, cyber, and other electronic weapons, robots, drones, hypersonic armaments, space, and others. In this era, a prolonged military occupation may be an unviable option.
The second reason is economics. Russia’s economy is only about the size of New York or (smaller than) Italy, so it would be a puzzle how Putin can mount a so-called Napoleonic campaign.
The Russian economy is even smaller on a per capita basis. Economist Ryan McMaken of the Mises Institute writes, “When we consider both GDP and GDP per capita together, we notice that Russia's GDP total is driven largely by its large population. That is, at 145 million people, Russia is larger than any other European country. The next largest is Germany with 83 million people. In other words, even with its anemic GDP per capita, Russia's GDP seems relatively large thanks to the fact a large number of people—people with lackluster incomes and productivity—happen to live there. (Figure 1, lowest pane)
Figure 2
Third, related to the above, military spending almost reflects the size of the economy only differentiated by the % share.
Yet, defense spending by the US has been larger than the aggregate budgets of the next 11 biggest militaries. (Figure 2, topmost pane)
Fourth, while war financing is crucial, there are also limits to Russia's FX reserves. The Bank of Russia has diversified away from USD debt and the euro for its FX reserves. Instead, it has used gold and non-USD/EUR currencies such as the Chinese Yuan. (Figure 2, middle and lowest pane)
Figure 3
But the war has caused the Russian currency, the ruble, and her financial assets; stocks and bonds, to crash. (Figure 3, topmost window)
The odds of Russia’s credit default have even soared! (Figure 3, middle pane)
To defend the ruble, the Bank of Russia may likely use up a substantial chunk of this reserve that increases the risks of its depletion.
That is to say, the longer the war, the greater the odds that the Russian economy and her people will get hurt.
Or, economics will likely function as a natural limit to Russian aggression.
With a financial crisis, Mr. Putin will likely lose the political support in his home court.
Though the government suppresses grassroots protests, public outrage in Russia appears to be spreading. (Figure 3, lowest pane)
And this does not account for the economic and financial sanctions that US and her allies will slap on Russia.
Mr. Putin has shot himself in the foot!
IV. From a Limited Kinetic War to a Global Financial War; Will Sanctions Succeed?
Has World War 3 commenced?
The Russia-Ukraine crisis represents a military kinetic war.
But there is little appreciation that economic sanctions are an act of war, or as some as stated, "a tool for modern war."
Economic sanctions, such as trade restrictions and the freezing of assets, triggered Japan’s offensive in World War II.
Wrote Historian Robert Higgs,
Accordingly, the Roosevelt administration, while curtly dismissing Japanese diplomatic overtures to harmonize relations, imposed a series of increasingly stringent economic sanctions on Japan. In 1939 the United States terminated the 1911 commercial treaty with Japan. “On July 2, 1940, Roosevelt signed the Export Control Act, authorizing the President to license or prohibit the export of essential defense materials.” Under this authority, “[o]n July 31, exports of aviation motor fuels and lubricants and No. 1 heavy melting iron and steel scrap were restricted.” Next, in a move aimed at Japan, Roosevelt slapped an embargo, effective October 16, “on all exports of scrap iron and steel to destinations other than Britain and the nations of the Western Hemisphere.” Finally, on July 26, 1941, Roosevelt “froze Japanese assets in the United States, thus bringing commercial relations between the nations to an effective end. One week later Roosevelt embargoed the export of such grades of oil as still were in commercial flow to Japan.” The British and the Dutch followed suit, embargoing exports to Japan from their colonies in southeast Asia.
Roosevelt and his subordinates knew they were putting Japan in an untenable position and that the Japanese government might well try to escape the stranglehold by going to war.
Robert Higgs, How U.S. Economic Warfare Provoked Japan’s Attack on Pearl Harbor, Independent Institute, May 1, 2006
While the incumbent hegemon, the US, has gotten away with imposing sanctions on smaller and non-nuclear adversaries, with the exception of North Korea, the response may not be the same with Russia.
The economic sanctions that the US and her allies earlier slapped against Russia had been filled with "carved outs" or exemptions that historian Adam Tooze wrote, "These are sanctions designed not to sanction".
Tooze further noted, "Nor are the carve-outs limited to energy, they apply to Russia’s agricultural commodity exports too. So long as the transactions run through non-US non-sanctioned banks, the US Treasury raises no objections."
Strikingly, the litany of trade and commercial restrictions was to "take effect beginning at 12:01 a.m. eastern daylight time on March 26, 2022!" Or one month after.
It also froze the assets of several people, including Russian President Vladimir Putin.
Today, the US, EU, and the UK announced another set of financial restrictions intended to cripple the flow of financing of Russia. It announced the disconnection of Russian banks from the SWIFT platform, as well as the freezing of assets of Russia's central bank, the Bank of Russia.
According to Wikipedia, The Society for Worldwide Interbank Financial Telecommunication (SWIFT), legally S.W.I.F.T. SC is a messaging network is a component of the global payments system. SWIFT acts as a carrier of the "messages containing the payment instructions between financial institutions involved in a transaction." However, the organization does not manage accounts on behalf of individuals or financial institutions, and it does not hold funds from third parties. It also does not perform clearing or settlement functions
The sanctions also included "restrictive measures that will prevent the Russian Central Bank from deploying its international reserves in ways that undermine the impact of our sanctions."
As the CBS noted, "Announcing the measures in Brussels, EU Commission President Ursula von der Leyen said would push the bloc also to "paralyze the assets of Russia's Central bank" so that its transactions would be frozen. Cutting several commercial banks from SWIFT "will ensure that these banks are disconnected from the international financial system and harm their ability to operate globally," she added."
The announcements were unclear whether or not these financial curbs included energy and agricultural carve-outs.
In retaliation to the sanctions, the Russian government threatened to nationalize properties of US and EU citizens.
The hope is that such punitive measures will prompt the Russian leadership to stand down. It is doubtful that this would happen.
Figure 4
Why?
First, the carve-outs or the loopholes demonstrate the weakness embedded in the economic interest in the US and its allies, specifically Europe.
Thanks to the global campaign to push Green Energy through the advancement of Environment, Social and Governance (ESG), unreliable renewable energy has only increased the dependence of Europe on Russian energy products. (Figure 4, middle pane)
And because of low investments, oil and natural gas prices continue to surge, benefiting Russia, which is among the top 3 largest oil and gas exporters. (Figure 4, topmost window)
In short, the Green agenda has played a substantial role in financing Russia’s invasion of Ukraine.
Worst, should Russia close their energy tap, Europe would be risking an energy crisis that could lead to a financial crisis.
Hence, it is the average Europeans who would suffer most!
Or, an all-out trade embargo would boomerang against Europe.
Europe would then have also shot itself on its foot!
Second, the Russians may have learned from experience and devised several workaround paths.
Will the SWIFT blackout and the freeze on Bank of Russia’s FX holdings be powerful enough to force a systemic bank run?
Wrote Alasdair Macleod of the Goldmoney Insights.
Putin has prepared his defences carefully. US politicians called for Russia to be cut out of SWIFT after the Crimean invasion. Since then, Russia has developed Mir, a payment system for electronic fund transfers, and a SWIFT equivalent known as SPFS — System for transfer of Financial Messages, with agreements linking SPFS to other payment systems in China, India, Iran, and member nations of the Eurasian Economic Union. The Central Bank of Russia has strengthened the commercial banking network. And it has also reduced its dollar exposure as much as possible by investing in gold and euros instead, which means less reserves are held as deposits in the US banking system and invested in US bonds.
From these actions, Putin has signalled that he is aware that the danger to Russia is more likely to be a financial war, rather than a physical one. As President Biden said, to have American troops on the ground fighting the Russians is a world war and will not happen. In that sense the Ukraine, over which Russia retains an energy stranglehold, is a virtual battleground for a proxy war.
The SWIFT, as pointed out above, is only a messenger network of the global banking system. With today's technology, the banking network may use the Russian alternative or devise other means to circumvent these.
Aside, the yuan will likely function as a financing medium in Russia’s increased trade with China. Russia may also use barter for its energy and agricultural trade with emerging markets. In addition, Russia may increasingly use cryptocurrencies in tandem with the yuan.
Further, the timing of the Russian invasion should be a wonder. As inflation roar globally, and where central banks are about to step on the monetary brakes, Russia’s invasion should add to the global supply constraints and possibly reduce central banks tightening measures, magnifying inflation risks. Needless to say, the Russian offensive comes at a time when the toolkits of global central banks have nearly been exhausted.
In short, a miscalculation from the sanctions could also backfire.
The West would then have shot itself on its foot!
Third, Russia may have telegraphed its move on Ukraine to the Chinese authorities. Or, Russia may have arranged a workaround with China ahead. This assurance of access to financing and trade through China may have prompted Russia to invade.
By taking on a supposedly neutral stance, the Chinese may be watching how the West reacts to the Russian offensive of Ukraine, which it may use to calculate for potential actions on Taiwan and the South China Sea. The Xi government is the proverbial elephant in the room.
Because of the many loopholes, these sanctions appear fated to fail. Even if the West includes the Russian allies in their roster, these are most likely doomed too.
What happened to the various sanctions against North Korea? The North Korean despot launched another missile test even as the Ukraine war rages.
Lastly, should these sanctions work, the Japan 1941 paradigm would suddenly become an option for the rivals of the West. The theater of kinetic war expands globally.
These sanctions seem designed for popular political consumption than strike at the heart of the Russian economy.
For now, the Ukraine invasion has transitioned into an economic and financial war.
Yet, we don't know what the leadership of Putin, Xi, and Biden are thinking and how they would react to the chain of unfolding events.
V. No One Benefits from Wars; A New World Order
In any case, NO ONE benefits from the Ukraine war. (Except the military-industrial complex) Current developments only magnify the risks of a nuclear war.
One thing is sure: a new world order is taking shape.
The Ukraine war may be a symptom of the Thucydides' Trap dynamic or a sign of a transition from a unipolar world controlled by the US to a multipolar world shared by other nuclear powers.
The hegemons either learn to live with this arrangement or submit to destabilizing geopolitics characterized by kinetic wars.
Yet, it is incredible to see how war hawks have been agitating for increased military action against Russia, are they wishing for Armageddon? People seem to forget that Russia holds the most nuclear weapons! (Figure 4, lowest pane)
Is the diplomatic route totally out of the table? Has the world's tolerance level diminished?
At the onset of the US war against Iraq in 2003, a columnist at a business newspaper insisted that the war would end quickly. The writer published my rebuttal anonymously, where I wrote that the war may take longer and that the US may not benefit from it.
The occupation of Iraq lasted 8-years and was estimated to have cost the US economy at least USD 1 trillion.
Depending on the participants, wars may last years or weeks.
In 2008, Mr. Putin also waged a 12-day war against Georgia when the latter attacked a seceded province South Ossetia. Russian forces briefly occupied part of Georgia but departed later.
Given Russia’s limitations, she will attempt to end the war as quickly as possible. But this may account for the short-war illusion. The consensus also thought that World War I would end swiftly. The bloody war lasted over four years.
Unless one knows what the leaders of the opposing protagonist groups are thinking, no one really knows how this will last or its outcome.
VI. Russia-Ukraine War: Inflationary Potentials From Economic Disruptions and Central Bank Liquidity Measures
What is the impact of the Russian Ukraine War on the global and local economy?
Kinetic wars, like the war on the pandemic, are disruptions to the division of labor.
As noted above, supply networks have already been strained by lockdowns and vaccine mandates, leading to shipping and transit bottlenecks, material and labor shortages, and production shortfalls relative to amplified demand boosted by government transfers and massive central bank liquidity injections. Protectionism from the Trump era has also contributed to some of the supply issues.
The causal chain will signify the first order, second order, third to the nth order effects, and their overlaps, which statistics will hardly capture.
Figure 5
As a major supplier of many raw materials, including oil and energy, Russia has a significant share of global production. (Figure 5, upper and second highest pane)
Russia is also a leading supplier of fertilizer. (Figure 5, second to the lowest window)
Ukraine is also a commodity-rich country.
The economic sanctions are likely to rearrange Russia’s trade partners materially. (Figure 5, lowest pane) It may cause some losses in Europe’s banking system, eroding financial liquidity that may prompt the ECB to respond.
For example, world food prices may continue to soar or even lead to a crisis.
Everything else depends on how the war evolves and how the protagonists react. Everything is so fluid.
But wars tend to be inflationary.
Yours in liberty,
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