Shooting Blanks at Russia
The war in Ukraine is dragging on with no victory in sight. Many fans are exiting the stadium – fewer Ukrainian flags on social media.
Even worse, our sanctions against Russia aren’t having the desired effects.
On February 25th, Spy Mindset painted a bleak picture for the war in Ukraine:
Russia will no doubt face sanctions and global condemnation, none of which will matter in the long run, but no matter how much this invasion horrifies our Western sensibilities, Putin will have achieved his objectives.
This wasn’t a popular conclusion then, or now, but let’s review some macro indicators to assess whether our sanctions against Russia are working. Developing a spy mindset means setting aside our emotions to assess the empirical evidence.
According to www.xe.com, on February 25th, the USD/RUB traded at 85.18 before spiking to 135.81 on March 10th. However, the USD/RUB has since collapsed to 58.13 on July 24th, making the Ruble one of the strongest currencies in the world during 2022. The reasons are complex, but the plan to damage the Ruble actually made it stronger.
The Ruble rally happened despite that fact that we froze $300 billion of Russia’s estimated $640 billion in gold and foreign exchange reserves. Initially, Russia was allowed to service its debts with these reserves, but the loophole was closed. This would normally trigger a technical default in which Russia has the money but is unable to pay. Russia has attempted to service its debts with Rubles and will be forced to improvise for the foreseeable future.
Freezing the reserves of foreign governments might seem like an effective policy tool but it will undoubtedly motivate other countries to park their reserves elsewhere or to retaliate, such as seizing American assets. Tit-for-tat is the most effective strategy in game theory.
Fair enough, but the sanctions against Russian oil have worked, right? The regression line for this chart has a negative slope, which is proof of success, right?
Not so fast. Our sanctions triggered supply issues, which triggered price increases with a stronger Ruble to boot, which means that Russia has had record profits by selling less oil. Who would have thought that Russia could find other customers for its carbon fuels?
The European Union (EU) is an anti-hero in this drama, opting to ignore mathematics by attempting to quit Russian gas cold turkey while pivoting to the magic of green energy. The smug German diplomats who laughed at President Trump’s warnings at the United Nations are the poster children for willful ignorance.
As the EU sabotages Dutch farmers, demands fewer showers from Germans, and closes nuclear power plants, all the while secretly firing up old coal power plants, our best option is to step aside and admire the implosion of Europe. Their failures should serve as a cautionary tale.
So, what are the take aways?
First, in a world of finite resources, Ukraine is not a vital national security interest. The enemy of my enemy might be my friend but getting sucked into another quagmire isn’t the answer. There’s too much corruption in Ukraine for a viable alliance.
Second, the too-little-too-late military half-measures will result in more innocent deaths and won’t change the battlespace. Absent U.S./NATO boots on the ground, which we should not consider, the EU will fold on Russian gas, and Russia will achieve at least some of its objectives.
Third, we should develop a better grasp of the conflict between fiat currencies and commodities. In a multipolar world with competing currencies, we need their commodities more than they need our dollars. The International North-South Transport Corridor (INSTC), the Shanghai Cooperation Organization (SCO), and the Belt and Road Initiative (BRI), among others, will slowly render the Bretton Woods System obsolete.
The intellectual challenge here is walking the fine line of condemning Russia’s horrible actions in Ukraine without being a default cheerleader for Ukraine or our failed policies. Being critical doesn’t make you “pro-Russia.” The world is gray, Jack!
The key to succeeding in this complex game of Checkers, Chess or Go, depending on your favorite game metaphor, is to grasp the second- and third- order effects of our policies (i.e., avoid wishful thinking) and to define how our various courses of action might benefit the American people.
P.S. On July 24th, Russian Foreign Minister Sergey Lavrov said that Moscow will help the Ukrainian people get rid of the regime in Kiev, perhaps in response to Zelensky’s photo shoot with Vogue. It’s high time for the smart people in the room to take the reins, or this quagmire risks turning into a disaster.