"This is genius… So Putin is now saying it’s independent — a large section of Ukraine. I said, how smart is that? And he’s gonna go in and be a peacekeeper. We could use that on our southern border. That’s the strongest peace force I’ve ever seen. There were more army tanks than I’ve ever seen. They’re gonna keep peace, all right."
Donald Trump reacting to Putin’s move on Ukraine (February 22nd)
We’re in a new kind of war with real victims that could easily break out into a full-on shooting war involving Western troops. But the ability to withstand sanctions and the expected retaliation may be determinative of the future of Russian expansionism, the fulfillment of the Russian President’s unambiguous efforts to pull the old countries of the Soviet Union, which dissolved into separate nations in 1991 – back into either the previous borders or at least into a unified political bloc of nations with Russia as the puppet master.
In his address to the Russian Parliament (the Duma) in 2005, President Vladimir Putin described the collapse of the Soviet Union as "the greatest geopolitical catastrophe" of the 20th century. His speech on February 21st, justifying his recognition recognizing the two eastern Ukrainian rebel-held territories as independent nations – calling themselves Donetsk People’s Republic (DPR) and Luhansk People’s Republic (LPR) – after a rubber-stamp vote from his parliament, enabling Russian forces to cross the border en masse, made it very clear that he did not consider the current Ukrainian state as legitimate or acceptable. He also suggested that further territorial incursions were on the table, even as President Biden stated that he would move US troops into the NATO’s neighboring Baltic states.
But we know all that (or should). What we may not be aware of is what sanctions are likely to be applied, how Putin has prepared Russia to withstand them and what we can expect in retaliation. In his address to the world on February 21st, Putin explained to his people that he believed the West was going to impose severe sanctions no matter what course Russia chose. So what, he noted. And as a dictator of virtually the entire Russian empire, including subject states like Belarus, Putin does not face the factionalism within the Western allies and has never been concerned with the suffering of his people. Still under what have been fairly ineffective Western sanctions applied in 2014 after Russia’s unlawful annexation of Crimea (then also part of Ukraine), Putin seems clearly able to hold his people in line regardless of the harshness of the expected litany of sanctions from his latest military incursion into Ukraine.
The first reality for the West is that since 2014 Putin has expected sanctions to expand as he moved to annex or dominate more neighboring territory. So, he prepared. Big time. For the past few years, he has been building “rainy day” surpluses, including a $3 billion kitty to soften the blows he expected the West to apply to his oligarchs. His massive funding built up additional reserves as he anticipated that Russia would be denied credit in major financial markets, controlled by the West. He expected a cutback on natural gas and petroleum, even in underpowered and very desperate Germany. Germany had backed itself into a power deficiency corner by shutting down its very unpopular nuclear power generation capacity, finding itself too reliant on pipeline-delivered Russian natural gas. See my February 15th Frozen Diplomacy by Other Means blog for a detailed review of the dependency cycle.
At a news conference on February 22nd, President Joe Biden presented what he described as an initial round of new sanctions based on Russia’s moves to support DPR and LPR with a military guarantee: Denying Russia western access for national debt, taking away the ability of two mega-business/investment banks to link with corresponding Western banks to transact business, ordering US-based assets of named oligarchs to be frozen, and Germany’s shutting down the prospects for the new mega-pipeline between Russia and Europe (Nord Stream 2). UK P.M. Boris Johnson added five additional Russian banks, with a strong London presence, to the list and named additional oligarchs subject to having their assets frozen. According to the February 22nd BBC.com, “the anti-corruption group Transparency International says there is about £1.5bn [$2.4bn] of Russian money invested in London property alone, much of it from funds held in offshore havens.”
However, as noted, Russia has created a surplus to avoid needing to sell bonds internationally, and the sanctioned banks are mainly involved in corporate and government transactions, much less likely to impact the day-to-day financial activities of ordinary Russians and smaller businesses. Since 2014, Putin has slowly weaned Russia from carrying its foreign currency reserves in dollars, “trying to sanction-proof the Russian economy… By January this year, the [Russian] government's international reserves, in foreign exchange and gold, were at record levels - worth more than $630bn (£464bn).
“That is the fourth highest amount of such reserves in the world - and it could be used to help prop up Russia's currency, the rouble, for some considerable time… Notably only about 16% of Russia's foreign exchange is now actually held in dollars, down from 40% five years ago. About 13% is now held in Chinese renminbi.” Chris Morris, the BBC’s Global Trade Correspondent, writing for the January 22nd BBC.com. And if you have been reading the news, you may have noticed that Putin and China’s President Xi Jinping have reached a new, anti-Western accord, that will significantly soften the impact of Western sanctions. China’s banks and markets remain wide open to Russian transactions.
The West’s cutting off natural gas orders from Russia to Europe is obviously easier for some countries than it is for others. “The EU, for example, gets 40% of its natural gas supplies from Russia. The UK gets about 3%... Germany's decision to put the Nord Stream 2 gas pipeline on hold, therefore, is damaging for Russia but will have a direct impact on energy prices in western Europe as well.” Chris Morris. As sanctions escalate, if required (probably), Russian banks would all be frozen out of the international financial exchanges (a business crusher), and boycotts of Russian fossil fuel would mount. That would include isolating Russia from the Swift interbank exchange/messaging system, but Russia is already creating its own alternative system of international payments, possibly through China.
Sanctions will hurt over time; they will impact travel and daily life for Russian citizens, but “sacrificing for the motherland” is a Russian tradition. For those who say we should find those massive secret bank accounts where Putin, possibly the richest man on earth, has parked his billions, President Putin doesn't hold money and other assets abroad in his own name for obvious reasons. That network of ultra-rich oligarchs do it for him. That’s why coming down on these individuals (even with “insurance” from Moscow’s special reserves) becomes so important. Russia enjoyed Trump’s close relationship during the latter’s tenure, unquestioning Russian desires to annex more territory and are now enjoying the extreme polarization that Trump has caused even since his departure. You can bet that Putin will amp up his election interference, attempting to put Trump-controlled politicians back on top, from disinformation direct voter manipulation to finding ways to fund GOP campaigns everywhere with hard-to-trace dark money.
Putin has been ignored in major global policymaking, eclipsed by his newfound buddy in China. With Trump gone, there is now an antagonist in the White House. And when it comes to economic power, Russia is very much a global also-ran. Remember, Russia doesn’t really have much in the way of meaningful exports. Except for munitions, oil and gas – and vodka – they really don’t have much to offer the world. Their total economy is literally half of that of California. Yet Putin is in control of his side. To date, however, Western nations are surprisingly uniform in their initial reaction against Putin’s unlawful aggression, but really, how long will that lockstep approach hold together?
America’s vulnerabilities are obvious, concerns carried into various other Western allies as well. Inflation fears dominate the news, particularly in the United States. After the above announcement, accelerated by Biden’s statement that “freedom has a cost,” stock markets tanked, fossil fuel costs everywhere skyrocketed, and Biden’s popularity dropped further. Putin believes he can outlast the West in tolerating financial pain, that he has prepared for most of the worst, and has so many ways to further destabilize his foes. The potential for cyberattacks against our Internet-driven economy, perhaps against our power grids and even ransomware to debilitate local governments and hospitals across the Western world… even with reciprocal attacks… are dramatically obvious. Like it or not, this is war.
I’m Peter Dekom, and about the only thing you can predict in this bizarre form of warfare is that nothing is certain, and anything can happen.
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