MOSCOW BLOG: Ukraine’s kinetic war in stalemate, but the economic war is escalating

MOSCOW BLOG: Ukraine’s kinetic war in stalemate, but the economic war is escalating
Putin is escalating the economic war with the West and he is starting to roll out his big guns: the Kremlin's control over the flow of commodities and its ability to switch these on and off. / bne IntelliNews
By Ben Aris in Berlin August 19, 2022

The kinetic war in Ukraine has ground to a halt. Meduza reports today that in the last 40 days since the last city in Donbas fell to Russia it hasn’t gained more than seven miles of new territory. At the same time, we are two months into the Ukrainian counteroffensive to retake Kherson, but although Kyiv has taken out the bridges across the Dnieper, making it hard for Russia to resupply the city, Ukraine has been unable to assault Kherson itself.

Russia doesn’t have the manpower to launch a counterpunch, and Ukraine, which has plenty of men, doesn’t have the weapons to take back Kherson. We have a report today saying the West has promised no new money or arms this month, as it appears that both Ukraine’s and Nato’s stocks of weapons have run out and the amount of money the West is willing to spend has reached some sort of limit.

Andriy Zagorodnyuk, a former defence minister of Ukraine, told the FT: “The US gives us enough to stop the Russians from advancing, to reverse some gains, to shape the operational direction, but absolutely, clearly, not enough for a major counteroffensive,”

Russia’s assault has been brought to stand still by the chaos the US M142 High Mobility Artillery Rocket Systems (HIMARS) have caused. Russia has been forced to totally rejig its logistics to supply the men in the field and that will take a lot of time. It’s still not clear if Russia will be able to resume its advance after this is done, as it was not exactly going fast before the HIMARS appeared.

The upshot is the kinetic war is now frozen for the meantime, but not so the economic war, which is just getting going. I did a feature that is a first pass at calculating some of the costs Putin’s war will inflict on the West.

According to the IMF, we have already spent just under $400bn, after global central bank reserves dropped 6% due to currency instability. Then there is the circa $70bn that the EU has already spent on LNG, ahead of the $12bn it usually spends. The EU reckon this winter’s energy crisis will cost $200bn, but I think that is on the low side, as that is just for gas, and I’m sure we will have a crisis with oil prices too before the end of the year. And all that is before you calculate the cost of rebuilding Ukraine, which will come in somewhere between $100bn and $1 trillion.

The EU launched the economic war on Russia with its “massive package” of sanctions only a few days after the Russian tanks crossed the border, but I increasingly think Brussels and Washington underestimated how well Russia could resist and how much damage it could do as it retaliates. As I have argued many times, the initial sanctions were more extreme than anything that was expected prior to the outbreak of hostilities, but they have all been “one way”: designed to hurt Russia, but inflict no pain on the West. Those sanctions have been exhausted and the West has proved extremely reluctant to impose “two-way” sanctions, as the oil price cap idea debacle shows, and all the exemptions that riddle the previous seven packages.

In the meantime, Russian President Vladimir Putin is starting to roll out his big guns, starting with cutting gas deliveries. But you can expect more of the same in other commodities as he turns the screw. Note, too, that actually there is plenty of gas at the moment, but it is the mere threat of a cut-off that has caused prices to decouple.

In the meantime, Russia has the best of all worlds: it’s still selling gas to the EU; it earns extraordinary profits; it puts Western leaders under huge pressure at home as gas bills soar; it divides the EU unity as some governments worry about their own economies; and all this from reducing part of its gas deliveries to Europe for two months. And with every degree the temperatures drop these weapons will only get more powerful.

The mounting energy crisis is not only unsettling consumers, worried over big bills; we are already starting to see a real-world impact. There are more and more reports of plants shutting down because they are no longer economically viable with energy prices up ten-fold. The latest is the Slovalco aluminium plant in Slovakia. Another is Chimcomplex, the largest chemical complex in Romania, which has stopped working this week. There will be a lot more. Even the German economy could be gutted from this problem, which is why German industrialists are freaking out.

This energy crisis is going to play havoc with everyone’s economies as the effects of super-high prices are already spilling out and causing serious problems. This will not just cost the man in the street money but will destroy local economies, as many towns rely on these factories for employment. The same goes for Russia, where the car-making cities like Nizhny Novgorod, Kazakh and Tolgiatti are all in deep trouble.

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