Category: Europe

6 March 2022

Putin had said that he would not invade, so clearly he was lying.

It may be true that Russia wants buffer states between it and Western Europe and this is why it demanded from the US that Ukraine never be allowed into NATO. 

It is also true that the US promised Russia as its empire collapsed in 1990 that the newly independent countries would not be allowed to join NATO and that NATO would not move eastward.

Of course the countries that had just escaped from the Soviet Union wanted a security guarantee by to joining NATO.   NATO did not have to approach them, and may have appeared cowardly not to offer them the protection that they sought.  Whether NATO could defend Estonia against a Russian land-based approach is another question.  It is likely that NATO would not have let Ukraine join, as being surrounded by Russia on three sides, it might have been considered indefensible.

From a Russian point of view, the presence of close US bases is very disturbing and they are now in Bulgaria and Kyrgyzstan.  One of Russia’s major demands was that there be a buffer zone between it and the West.  The history is relevant.  Russia has had the armies of Napoleon and Hitler sweep across their land where there are no natural barriers. By the same token, they swept the Germans back in WW2 and retained part of Germany and all of Poland Romania, Bulgaria, Moldova, Czechoslavakia and the Baltic States of Estonia, Latvia and Lithuania. They kept them, dropping the ‘Iron Curtain’ and engaging in the ‘Cold War’ until the inefficiency of their communist economy made it crumble, leading to the collapse of the USSR, Russia’s empire.

The Russian economy is now the 11^th in the world with GDP of $1.6 trillion, only two places ahead of Australia on $1.4, (with Spain in between).   They have however, the legacy of the immense military power and high military and space technology, and the memories of Empire that must be very important to Putin, the Cold War warrior who used to head the KGB.  Whether Putin is motivated by fear of the West, dreams of recreating the Russian Empire, difficulties in domestic politics or deluded foreign intelligence reports seems hard to say.  It is unlikely that just promising that the Ukraine would not be in NATO would probably not have stopped the invasion, but Russia was treated with a contempt that must have rankled.  The Eastern European Countries joined NATO, which must have seemed in danger of irrelevance if peace had reigned.   Russia’s worries about encirclement were ignored, presumably because it was assumed that there was nothing that they could do about it and they were economically weak.

It is interesting to look at Western assumptions since WW2. Because both world wars were over access to markets, the pressure at the Bretton Wood conference in 1944 was to have free markets so that if countries traded well they would rise, and if poorly they would fall, but either way, there was no world war. Germany and Japan rose in this system.  The US, which was responsible for 40% of world GDP in 1960 has been quietly sinking and is now only 24%. Much of their manufacturing has gone offshore so the arms industry has greater significance.  The US have had ownership of major companies, but as these have become global they are not under control or fully taxed by any country.  The US has been the only superpower since the collapse of the Soviet Union and has had an assumed superiority, which is helped by the fact that as the US Dollar is the world’s currency and since the Gold standard was abolished in 1980, they can simply print more money.

The key Western assumption after Bretton Woods was that major powers would trade and hence territorial wars would be unnecessary.  Just as the medieval folk assumed that God would fix everything, the West largely assumed that having the world a market would fix things.  Unsurprisingly this has proved too simplistic.  Unfair trade, national and corporate predatory behaviour and the ability of some to set prices better than others has led to some countries becoming poorer as their assets are stripped, like the losers in a Monopoly game that never ends.  The assumption that no countries wanted empires stood in ironic contrast to the behaviour of the US, which has had many little wars to further its interests, not to mention Russia and China.

Germany is worthy of mention here.  It was punished by the Treaty of Versailles at the end of WW1 and the resentment and economic hardship led to the rise of Hitler and WW2. After WW2 the Allies had learned their lesson and the US aid of the Marshall Plan poured in to stop communism.  Germany was rebuilt and joined its traditional enemy France to form the EU, which it then dominated.  Internal EU trade made war extremely unlikely, though there is a still significant friction in the Balkans. Germany went one step further, getting gas from Russia, which creates a mutual inter-dependency, which was assumed to make war less likely.

But when Russia collapsed in 1990 due to uncompetitive nature of its industries and it consequent foreign trade problems, it received no sympathy, and no aid. Predatory capitalism bought assets at rock bottom prices from those within the power structure who had power to sell them, and organised crime was significant.  Putin, an ex-KGB chief took the trouble to become personally rich, but moved in to control the oligarchs, lessen corruption, get foreign capital and industries and develop oil and gas.  His deal with the oligarchs was basically to control them somewhat, but let them keep their money as long as they did not get into politics.  Per capita GDP in Russia has risen 385% since 2000 as against the EU’s 162%, helped by high oil and gas prices in the early years. But Russian per capital income is still $US28,219 a year as opposed to the EU average of $US41, 539.  Russia has also had an inflation rate almost double the EU, which has somewhat taken the gloss off the wage rise.

Putin himself is still a Cold War warrior, who resents Russia’s loss of power.  He has eliminated dissident voices in his immediate circle, and so the advice he gets may be quite distorted.  There were stories from the Communist period that Russian intelligence was skewed to favour a Kremlin faction who might reward the source of the intelligence.  The pro-Russian nature of the Donbas region provinces of Donetsk and Luhansk and of Crimea may have led Putin to believe that Ukrainians either wanted to join Russia, or would accept it relatively easily if it happened.   He had marched into Georgia, taken the countryside easily and the people had given little resistance.  The referenda in Donetsk and Luhansk in May 2021, which were highly controversial in their legitimacy and execution because of both separatist and Ukrainian army violence, may have also given him reason for his belief.

Russia has 146 million people Ukraine 44 million, so taking over the country and occupying it will be extremely difficult even if military victory is achieved.  Bombarding residential areas was done by the Russian in Syria and achieved victory there, but the Russians left the local Dictator, Assad, to deal with the consequences.  Assad’s humanitarian record is appalling, and there has been little publicity about the outcome.  But the Ukrainians are the same ethnic stock as Russia and such a traumatic victory is very unlikely to achieve a stable transition of government if Russia chooses to stay. 

The role of the US has been criticised. They have been keen for NATO to take a hard line, broke their word in NATO’s eastward extension, put bases in Bulgaria and Kyrgyzstan and dismissed Putin’s request for a promise not to offer Ukraine membership, saying it was a Ukrainian decision.  A harder line from NATO will help US arms sales, a disruption of oil and gas will favour their own industries, and after all they are separated from any problems by the Atlantic Ocean.

The Germans are having a major re-think on their priorities, as they rely on Russian gas for 15% of their generation. They were phasing out nuclear power since Fukushima in 2011, and like many other countries are a little delayed in the difficult switch to renewable power.  A power shortage is likely to affect their industrial competitiveness and they are now signing up to the US demand for 2% of national income to be spent on arms.

China is likely to help Russia as it can turn it into a vassal state.  The Chinese economy is $17 trillion, which is roughly ten times the Russian one, so the cost of bailing them out by buying their energy and wheat is really only small change. They will take a bit of criticism from the rest of the world, but it will be worth it.  They will continue to work with the Russians to lessen the power of the US dollar as the world’s currency.  They will see how much Russia has suffered financially and in reputation from the invasion, and may then ease up on Taiwan- after all they only have to wait until a pro-Beijing government gets power there, and if that takes 30 years, so be it- they can afford to wait.  They harbour historical resentments against the West as Russia does, so with an economy ten times the size of Russia and growing have a capacity that Russia lacks.  This remains a problem.  They have consolidated Tibet and the Xinjiang Uyghur Autonomous Region and are expanding the area they control in the South China Sea.  What they will conclude from Putin’s Ukraine adventure remains in the realm of speculation.

The rise in gas prices should help Australian producers, but it will take a long time to scale up to meet the demand, and shipping is a problem. The other problem that the Australian gas industry has is that they sold gas on the assumption that could frack large parts of Australia, and resistance from groups concerned about the effect of this on the water table and farming has made this gas less available, so they have already have trouble meeting their contracted obligations. 

So what are the effects of the Ukraine invasion likely to be?

Putin will be very reluctant to stop and is likely to kill a lot of civilians in his efforts to save face and win.  This is tragic for the people of Ukraine and will result in a lot of refugees.  If he tries to hold Ukraine against a widely supported insurgency there will be a large number of Russian casualties continuing.  The Afghan war led to the fall of the then Russian government and many believe that even with the worst repression Putin will not survive this folly, particularly as he has created a Europe much more united against him and sanctions that will be significant for the Russian people.  An assumption is that he cannot reactivate the Gulag system of Stalin in this day and age, but a number of our other assumptions seem to have been wrong.

As stated above Russian and China will become closer and China will redouble its efforts to undermine the US dollar as the world’s currency.  This will succeed eventually, but will be gradual and not necessarily a problem for us.

In the short-term we need to help the Ukrainians as much as reasonably possible.