In an op-ed at the Washington Post Sebastian Mallaby stops just short of declaring victory in the economic war against Russia:
As the Ukraine war grinds on, the West continues to prevail on the economic battlefield. Its sanctions are punishing Russia’s economy. Russian attempts to counterattack appear likely to backfire. And the result is a psychological blow to China, whose state-capitalist system was already looking vulnerable.
Start with the sanctions. By freezing the bulk of Russia’s foreign-exchange reserves, the West disabled Moscow’s main tool for defending its currency. In the first two weeks of the war, the ruble lost nearly half its value against the dollar. Soaring import prices, panic buying by Russians and shortages induced by other sanctions combined to drive inflation up to 2 percent per week. If this rate were to be sustained, Russia’s annual inflation would come to a catastrophic 175 percent.
Russia’s leaders have scrambled to prop up the ruble, but this has caused new difficulties. The central bank has doubled its key interest rate, punishing businesses and households and causing forecasters to predict a deep recession. Authorities have slammed on capital controls, banning ordinary Russians from exchanging rubles for dollars and limiting their ability to get dollars out of their own bank accounts. Russians with marketable skills are fleeing the country. As many as 70,000 tech workers have reportedly left already.
I think we should be a little more cautious before we declare victory on the economic front. Let’s start by asking a question: who is paying for Russia’s invasion of Ukraine? The answer is we and the Germans are, Germany directly and we indirectly.
The Germans import about $50 billion worth of gas, oil, and coal from Russia annually, the Chinese four times that much. Even if the Germans manage to cut their imports in half by summer, far from a fait accompli, they’ll still be paying the Russian’s $25 billion a year. All by itself that will pay for a lot of war—Russia’s total military spending was around $62 billion last year. The Indians have shown a willingness to take up whatever slack in Russian oil and gas reduced German purchases may produce, particularly at a discount from the present market value. As I’ve pointed out, with higher oil prices Russia can ship less and still make more.
And our $350-400 billion annual trade deficit with China can pay for a lot of oil and gas. I honestly can’t think of any other war in which hostile non-belligerents (that’s our and Germany’s posture in this war) continued to buy from the enemy and those supporting them.
I’m neither a naysayer nor a defeatist. I’m a pragmatist. If we are to prevail on the economic front against Russia, we’re going to need to start imposing sanctions on China, India, and anybody else who buys from Russia, too. I’m not convinced we’re willing to do that. I’m actively skeptical the Germans will.
That’s quite a pickle. Hey, I’ve got an idea! Let’s do a warp speed for our own energy production to bring down world prices. And what an opportune time to put tariffs on Chinese goods, and start re-mining our own strategic materials.
Nah. AOC might get mad at Joe………
Among the impediments to that rarely recognized are expectations. Very few will invest in something that could take years to bear fruit unless they expect to be able to make a profit on it in a reasonable timeframe. If they’re convinced that the window will close in a year or so, they won’t invest at all.
One of the effects of sanctions is that American and European businesses lose markets immediately. In the case of China, Iran, and Russia, the sanctioned countries have gone on to build up replacement industries, and they have generally succeeded. This, of course, takes time, but local market is effectively a protected monopoly, so the required investments actually happen.
Russia and China have both developed medium range commercial airliners to replace Boeing and Airbus products, and they have the capacity to produce all the required parts, including engines and wing composites. China is now developing its own very high resolution computers chips and the software and lithographic machines in order to compete with TSMC.
This latest economic attack, which is based on seizing control of Russia foreign exchange, has opened a new front in the war on Russia. The seizures have demonstrated the folly of keeping one’s reserves in dollars or dollar-denominated assets. This marks the beginning of the end of the dollar as the only reserve currency. It also marks the end of the SWIFT monopoly on currency settlements. Neither SWIFT nor the dollar will disappear, at least in US/EU/Japan trade, but in the future countries like Saudi Arabia, China, India, Brazil will have alternatives.
As in typical of our Ruling Class, Mallaby unconsciously assumes some things:
1. The US has absolute military supremacy in all military fields;
2. The US has absolute technological supremacy in all fields;
3. The US has absolute economic supremacy, especially in financing;
4. It is impossible to replace the dollar in international trade and finance;
5 Our allies in Europe and Asia will support us in all things without demurring;
6. The US can do anything it wants with absolute impunity; every other countries will always obey to our orders.
These assumptions drive an extreme arrogance and disdain for others, and lead to risky decision making. The Russo-Ukraine war is an example of the results of American hubris and risk-taking. The US simply refused to acknowledge that Russia had a legitimate security concerns, and flatly refused to discuss them. The only way Russia could actually put its concerns on the table was to invade Ukraine, and Russia was angry enough to do it.
I think a Chinese invasion of Taiwan has become much more likely considering American intransigence on all issues.
In the long run, America’s current decisions will lead to the collapse of our alliance system. Note that Turkey, Hungary, Mexico, Brazil, and all the other Latin American countries, all of Africa, nearly all of Asia, especially India and Pakistan and China, have refused to sanction Russia. Many of these countries are active in setting up trading systems outside American control.
This is called shooting yourself in the foot.
Your point is spot on, and one I have made for years here in response to queries about lack of US investment. The old Inland Steel Company built its No. 7 blast furnace, an enormous investment, at precisely the wrong time. It became affectionately known as the “mistake on the lake,” and became Fred Jaiks legacy.
In addition to long lived energy production assets we have the growing issue of fertilizers and food production. Fertilizer production, like so many things, is energy intensive. The global warming crowd chased significant US based capacity for the Big 3: N, K, P, offshore. (As if the CO2 from Chinese or Russian fertilizer production stayed over there.) Fertilizer is just as strategic as energy or rare earth metals, at least if you are one of the versions of humans who need to eat……. Idiotic political games always come home to roost.
One more point: fertilizer production tends not to be labor intensive. The reason we don’t produce here is more due to environmental regulations and attendant disinclination to invest than any other factor. BTW here’s a chart of U. S. fertilizer production:
As should be apparent it peaked about 25 years ago. We should be producing more. And, yes, it’s a security issue.
If you’re wondering why the sudden decrease in production: heavy regulation following the Oklahoma City bombing.
“The reason we don’t produce here is more due to environmental regulations and attendant disinclination to invest than any other factor. “
I’m not so sure. I’m pretty sure it’s Putin’s fault. It’s been the most popular fault of the month.
Both Bob and Drew make cogent points that seemingly are ignored by the powerful in this country. Especially troubling is how we are pushing other countries into alternative currencies, ultimately weakening our ability to sustain the dollar as the reserve currency. Also, under the feeble, corrupt leadership of Biden, we have lost not only the respect of supposed allies but future alliances with countries such as India, which held palpable promise during the prior administration’s tenure.
Finally, the U.S. has been held down, destabilized, and constrained by the power- to-truth leg irons imposed on open debate and free speech, compliments of the big tech, corporate media, multinational corporations and out-of-control social progressive overlords, in overt efforts to support their favored political party – Democrats.