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War Escalations, Military Aid, Forced Defaults: How Might a Cornered Putin Respond?

Biden keeps ratcheting up pressure on Putin. Has anyone clearly thought this through? Are we inching towards direct military involvement?
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Escalations

Streamlined Military Aid

Ukraine Lend Lease Act

On Monday, Biden signed the Ukraine Democracy Defense Lend-Lease Act, a  law aimed at streamlining US military aid to Ukraine. 

The president is also asking Congress for $33 billion in aid for Ukraine. 

Realistically, military aid will prolong the war. And the more that gets destroyed, the more we can Build Back Better. 

Treasury Weighing Whether to Force Russia Into Defaulting

Russia makes debt payments via exemptions to sanctions. 

Janet Yellen says Treasury Weighing Whether to Let Kremlin Payment Exemption Expire

Ms. Yellen said the Treasury hasn't yet made a decision on whether the license should expire, but it was evaluating the risks and impact and would decide shortly. She made the remarks during a hearing at the Senate Banking Committee in response to questioning from Sen. Mike Rounds (R., S.D.)

“We want to make sure that we understand what the potential consequences and spillovers would be allowing the license to expire,” Ms. Yellen said.

Potential Consequences

Interestingly, the first consequence is Russia would keep more of its foreign reserves. The pain would fall on Russia's creditors, primarily in the EU. 

There are far more serious things that could happen, but first let's check up on what Germany and the EU are doing.

EU Weapons Delivery 

On April 28, DW reported German Lawmakers Overwhelmingly Approve Heavy Weapons Deliveries to Ukraine. 

Q: So are weapons now being sent?
A: No!

The vote was for show, not reality.

Germany Not Delivering Weapons After All 

Eurointelligence reported on May 6, Germany Not Delivering Weapons After All

Unsurprisingly, the German public is divided over weapons deliveries to Ukraine, with a small majority in favour. Olaf Scholz' political error has been, and continues to be, his attempt to straddle the two camps, ending up alienating both. His strategy is to be seen as supporting Ukraine in public while frustrating help in the background. It is unsurprising therefore that the Germans are thinking of him as a weak leader.

The latest news is that the last week’s policy U-turn on weapons deliveries is actually not happening. A report in Die Welt, which reads like a Kafka story, suggests that the German government wasn’t able to find the ammunition for the Gepard tanks. When confronted with this information, the chancellery refused to comment. They never comment on weapons deliveries. It’s top secret for a reason.

Orbán Threatens Veto

Meanwhile, in Hungary (also via Eurointelligence) Victor Orbán Threatens Veto.

Hungary's foreign minister has formally notified the EU that his country would veto oil sanctions against Russia. 

As of 2020, Hungary received about 60% of its oil imports from Russia, and as a landlocked country it has limited alternatives for receiving seaborne oil. 

Consider the statement Péter Szijjártó, Hungary’s foreign minister, made after Ursula von der Leyen’s meeting with Viktor Orbán, in which he said, of the country’s energy security, that, “As long as the European Commission does not offer a solution to these problems, Hungary will not be able to support the sanctions package, as in this form, without proposals for solutions, this package will amount to an atomic bomb dropped on the Hungarian economy.”

Sanctions in the EU require unanimous approval so one nation can block anything. Here, Germany is happy that Hungary is doing the dirty work. 

What About Gazprombank?

Germany, and other European countries willing to pay for oil in Rubles and refuse to sanction Gazprombank. 

Meanwhile, Reuters reported on Sunday U.S. imposes sanctions on 27 Gazprombank executives, Russian TV stations

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Note that the US sanctioned the executives and not the company so that the EU can keep paying Russia for natural gas. 

"This is not a full block. We're not freezing the assets of Gazprombank or prohibiting any transactions with Gazprombank," a senior Biden administration official told reporters. "What we're signaling is that Gazprombank is not a safe haven, and so we're sanctioning some of their top business executives ... to create a chilling effect."

Chilling?!

While the EU mostly sits on its ass, the US is doing the sanctions.

Q: Why is it the US is far more interested in sending weapons and sanctioning Russia than the EU? 
A: It's the gas stupid. 

How long before Russia has had enough of this game? 

Surely Russia can see the EU doing everything it can to reduce dependence on Russian energy.

What if Putin Cuts the Gas?

Eurointelligence founder Wolfgang Münchau asks What if Putin Cuts the Gas?

Good chess players calculate the moves of the opponents several moves head. When we Europeans draw up oil sanctions, we look at ourselves: at how much it hurts us, what exemptions we can agree on for the Hungarians, and whether the Germans need a bit more time. We calculate the economic effects based on current prices and the current level of trade. Our analysis is static.

But we are not asking the questions that matter the most: how will Vladimir Putin respond? Are we prepared? How will we respond after he has responded? 

Previously, I believed it would make no sense for him to cut off European gas supplies. As much as we are dependent on him for gas, he is dependent on us for his foreign exchange earnings, especially after we cut off his access to foreign exchange reserves. But this is too static a view. For as long as the west supplies unlimited amounts of arms to Ukraine, he is unlikely to win a conventional war against Ukraine. A gas embargo, or a threat of a gas embargo, might be his best option. Or his only option.

The German government has been very hesitant in its support for Ukraine. It is far from certain that the German public is willing to endure a cold winter and an economic depression for the sake of Ukraine, and for the sake of transatlantic unity.

Of all European countries, Germany and Austria are among the least ready. The estimates we have seen suggest that it would take at least until 2024 for those countries to wean themselves off Russian gas. In reality, even this is an optimistic calculation based on sanguine liquefied natural gas supply and infrastructure forecasts. It also does not account for the fact that the green energy transition requires an increase in absolute gas consumption, not just keeping it at current levels.

So what happens if he imposes a gas embargo? The short-term consequence would be stagflation, and in Germany possibly a depression. There are long-term structural consequences too, which would be far more important than a recession. It will no longer make sense for Germany to produce bulk chemicals, for example. Many production plants would have to close. Germany is not a particularly flexible economy. It will take time for the shift in resources to complete, much longer than it would take in the US, for example.

Elsewhere in Europe, fiscal deficits would explode. Sovereign debt crises would return to countries with weak fiscal systems. Financial instability and structural rigidities is where we are most vulnerable.

So I keep asking myself the question: have we really thought this through?

Have We Really Thought This Through?

That's an excellent question and I ask the same of Wolfgang Münchau.

Flashback, April 2, After Bucha by Wolfgang Münchau.

Germany and Italy are the financial sponsors of Russian war crimes. Gas deliveries have to end now.

Of course, the war won't stop the minute you stop the gas. But it is our purchases of Russian gas and oil in the past that has given Putin the resources to fund his war today. 

Limited Nuclear War

While the EU is hesitant to do anything, the US appears hell bent on goading Putin to do something radical. 

In arguably the most idiotic and irresponsible column in history on the WSJ, writer Seth Cropsey says The U.S. Should Show It Can Win a Nuclear War

Meanwhile, the EU, fearing a cutoff of gas, is busy hiding its head under the table pretending to impose sanctions. 

Weaponizing the US Dollar 

Finally, has the US really thought through weaponizing the dollar? 

On March 18, I asked What Does China Do With a Dollar That's No Longer Risk Free? Buy Gold?

For now, China has no good answer as a Deadly Embrace Complicates Matters. But smaller countries have more options.

This post originated at MishTalk.Com.

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