You’re probably worried. Is this going to turn into World War III?
Let’s ask that question another way. Is the West’s strategy to contain Putin working?
Events are moving at lighting speed. Here’s what you should know about the war at this point. Today, the West collectively dropped the equivalent of a neutron bomb on Russia’s economy. No, not just the SWIFT sanctions — but the central banks sanctions. Don’t worry, I’m about to explain.
And despite that, Putin’s stance didn’t change one bit. If anything, he’s more intransigent than ever. He took Ukraine to the negotiating table — and while they were there, under that pretence, it seems he dropped a thermobaric bomb, which is prohibited by the Geneva Conventions. That is stunning bad faith. And it is a signal, too. It tells us that Putin is not backing down. He is in it for the long haul. This is likely to be a prolonged, bloody conflict — and Putin’s ambitions, which spill well beyond Ukraine’s borders, are not deterred. Not even by dropping the equivalent of a neutron bomb on the Russian economy.
If that sounds like bad news, that’s because it is.
Putin’s ambitions, as I’ve explained, as many have, are to reconstitute the Soviet Empire. But it’s deeper and different than that. Putin wants a Second World again — the First World being the free one, the Third World the poor one. Many of forgot about the “Second World” — in the Cold War, it was the Soviet Union. Putin’s imperial ambitions are to construct a kind of Third Reich for Russia — the first being Tsarist Russia, the second being the USSR. This Second World meets Third Reich has the goal to dominate the world’s resources. Ukraine is Europe’s breadbasket. Russia already controls significant amounts of the world’s oil and gas — and everything around us, from shoes to cars, is made of those.
Who controls the resources controls a dying planet. This is Putin’s game.
That’s already a lot. Really take it in until you understand it.
Let me say it again. He is not stopping here. Putin is not deterred even by his entire economy imploding around him. That is how big and grand this project is to him.
So now we know where he stands. The chances were slim that he’d back down — and true to form, like a good demagogue, who can never show weakness, or lose it all, Putin isn’t. He doesn’t intend or plan to.
That leaves us. And the questions: will the West’s plan to contain Putin’s — to restrain his ambitions to build a new empire which controls the world’s resources — work? It isn’t working so far, you might have surmised, by the news that the equivalent of nuking his economy hasn’t deterred him. But our game — the West’s game — is deeper than that, just as Putin’s game is deeper than some kind of Tsarist folly, but about hard resource control and domination.
What is our game, then?
The good news is that the West did something it hasn’t done for decades. Which many imagined it wasn’t even capable of anymore, divided, weakened, sclerotic. It unified, at light speed. And it changed, fast. It changed faster in days than it has in decades. The EU announced plans to invest in defense. Countries like Switzerland cast aside long-standing positions of neutrality. Even Sweden sent military aid to Ukraine. Western fighter jets now patrol Ukrainian skies.
That is nothing short of remarkable. The West unified. At astonishing speed, with superb resolve and courage. To fight a common enemy. Europe’s gentle social democrats — the German Greens, for example, led this charge. This is the single greatest change in global political economy in generations. The post-war world does not exist anymore. The EU is not merely a pacifist project breaking apart at the seams, but has regained its poise and purpose, a newfound sense of confidence and strength emanating from its every pore.
The West unified around a certain strategy to contain Putin. That strategy isn’t just about arming Ukraine. It goes much, much deeper than that.
The West’s strategy goes like this. Cripple Putin’s war machine so this war cannot keep going on, keep spreading beyond Ukraine’s borders. It is to unravel Putin economically, so he doesn’t have the capability to make this war for very long.
War is expensive. Incredibly so. It’s the most expensive thing a society can do, by a very, very long way. Putin’s war on Ukraine costs an estimated $20 billion a day. That’s a seriously large expenditure even for a large nation like Russia.
So the West’s plan is to cripple Russia’s economy, and therefore limit Putin’s ability to wage this war, hopefully before it goes nuclear. It’s a smart plan. A clever one. That is why we dropped the equivalent of a neutron bomb on Russia’s economy.
You’ve heard about the SWIFT sanctions, but the neutron bomb in the West’s plan isn’t those. It’s not even sanctions against oligarchs and seizing their yachts and so on — that’s good, and necessary, but hardly going to stop a major war. The neutron bomb here is sanctions against Russia’s central bank.
Those have never been used before at this scale. I will be writing a separate post explaining precisely how they work, if you’re interested in the details. If you’re not, the short version goes like this. Russia built up over $600 billion of reserves. Those are its war chest. Reserves are surpluses that central banks hold. This $600 billion of reserves is the surplus which funds Putin’s war.
How did we sanction those? Why is this unprecedented? Don’t let your eyes glaze over. You should understand this, because it matters to your future, too. Central banks hold their reserves in different currencies — not their own, but in reserve currencies. Russia’s reserves are held in dollars, euros, yen, and gold. They’re held, crucially, to a large degree, maybe 40% or so, in the West. So sanctioning those reserves just means that the Russian central bank can’t withdraw those funds. Just like if we sanctioned you, you wouldn’t be able to use your bank account.
Simple enough, right?
Here’s the wrinkle. We didn’t sanction all of Russia’s reserves. Some are held in Chinese renminbi. And crucially, a significant amount are held in gold. Russia might not be able withdraw the dollars and euros its central bank has piled up — but it can still trade the gold. For arms, for supplies, for mercenaries.
Russia can still access about 40% of that $600 billion. Let’s call it 50% just for accuracy’s sake, because it’s surely got hidden funds, too. That is still a big war chest. But is it enough to fund a war on the scale of Putin’s ambitions?
Now we come to wrinkle number two. Russia doesn’t just have reserves. It has what’s called a “current account surplus” — that just means that more money flows into its economy than leaves, in a given time, a month or year. It has a surplus for a very, very simple reason. It sells energy to the world. Even to Russia. Just before the West sanctioned Russia, Europe bought a large amount of Russian gas. It had to — no choice. Either that, or the heat and stoves of Europe suddenly turn off. So Russia still has us over a barrel. It can use this surplus to fund its war.
That is probably why Putin isn’t backing down.
That surplus isn’t going to vanish overnight. The West is taking steps, fast. Canada, for example, just embargoed Russian oil and gas. That’s good, but it’s easy for Canada, which, like Russia, is a net exporter of these resources. It’s harder for countries which are historically importers of these resources.
Now you know why Putin isn’t throwing in the towel. Unfortunately for us, even crippling his economy isn’t going to be enough to stop his war machine. At least not fast enough to prevent World War III. He knows it, and you should know it, too.
That’s not to say the West’s strategy is a bad one. It’s not. It is a very good one. But it will take time to really take effect. And as it takes effect, its consequences will proceed like this. You can see that the ruble has already cratered. The stock market didn’t open today, and won’t again tomorrow. That’s because stocks will crash. There will be banks runs, which will become bank failures — would you want to hold rubles, or dollars, if you were Russian? The economy will implode — for the average person. Unfortunately, Russia still has enough of an income as a nation to fund its war machine for the time being — easily long enough for this conflict to go nuclear.
Now. All of that raises a question. What are the possible downsides of the West’s strategy? Well, this is a jarring moment in world history for a reason that you probably haven’t heard about. Wars are usually by debtor nations. That is what Nazi Germany was, for example, in the 1930s. The reason is simple: debtor nations grow poor, desperate, and after a time, enraged and angry and violent. Sometimes, their debts are too great to be repaid, or too onerous, and people feel a sense of injustice. Demagogues arise, who blame it on scapegoats, and bang — war.
Wars are usually started by debtor nations. If you want to be a super leftist, you can even note America’s a debtor nation, and has been. It’s debtor nations who tend to violate rules of peace and order, to try and desperately seize resources from neighbours, resources they can no longer afford.
Putin’s war isn’t like that. Russia’s a net creditor nation. That means the rest of the world owes it money. To emphasise how unusual that is, there are only about 20 such nations in the world. It is deeply abnormal to see a creditor nation wage war. For a political economist like me, it violates many of the rules of why wars happen, and how they arise. Eminent economist Simon Johnson has estimated that the West is sending Putin $500 million a day. That’s still enough to fund a war machine that could easily turn around and destabilise the West.
And it puts the West in a very difficult position. If Russia is a creditor nation, that means that it doesn’t just have a “war chest” — reserves, which you can think of as a nation’s savings. It has an income. Take America as the counter-example. It’s still a debtor nation, in hock to China among others. Russia doesn’t just have a domestic income — taxes. It has a foreign income — inflows of debt being repaid. And Russia is a creditor nation precisely because it controls so many of the resources on which our ageing industrial economies depend — from oil and gas to fertilisers to grain to iron and steel.
That is a very, very bad position for us to be in.
This is why Putin isn’t backing down. We’ve nuked his economy, yes. But think of an economy like a building. We’ve blown out the windows. People in the building will suffer, terribly. They’re impoverished and exposed to the elements now, meaning the average Russian will lose their life savings and assets. But the building still stands. And it can still be used to launch missiles from the top, metaphorically. That’s a bit tortured for a metaphor, but maybe you see the point.
Let me try and express it differently. The average Russian will lose everything. The oligarchs will lose everything they value — life in the West, shopping trips to Harrods, sending their kids to the Ivy League and the Sorbonne and whatnot.
But despite all that, Russia still enjoys the economic high ground. It’s a creditor nation, meaning it has the power to fund not just “a” war, but a war campaign. Even if the West embargoes all Russian oil and gas — which hasn’t happened yet — Russia will still have an income as a nation by selling that and its other resources to the rest of the world, particularly China.
And who’s in hock to China? You guessed it, America. Follow the money. America’s indebted to China for all the cheap junk sold on Amazon and at Walmart and so forth. China uses that money to buy resources from Russia. Who ends up with the money to fund a war machine? Exactly. Putin.
That’s why he’s not backing down. And that little path of interaction is just one example — America indebted to China which trades with Russia. There are plenty more examples like that.
Together, Russia and China hope to hit about $200 billion of trade in the next year or two. Russia is China’s largest source of electricity and its second or third for crude oil and coal. That trade alone is easily enough to fund a war machine of serious proportions.
Am I saying that we should be careful of a Russia China axis developing? Sure I am. But I’m also saying something deeper. Russia supplies China with electricity and oil and coal and gas and food. The very resources it uses to make…the cheap stuff that America buys from it. With debt. The money flows from America to China right back to China, gadgets and household goods traded for money that China uses to purchase oil and gas and food and coal and electricity necessary to make them. See this tangled web of a broken economy?
It’s not just that we’re going to have to kick our Western addiction to cheap Russian energy or dirty Russian money. But also to Chinese stuff, in the end, probably, if we really want to break Russia’s war machine. This triangular trade — we buy household stuff from China, with debt, China buys resources from Russia, who’s a net creditor — who does it benefit?
Putin. This is what his game is about. Global domination of resources. Our Western addictions — cheap energy, dirty money, cheap stuff. He is using it against us. And it is going to be very, very hard for us to kick those habits, to undo the triangular trade that is fast becoming our own undoing. Do we have the will to do all that? That is the West’s real challenge. It is how we really defeat Putin in the end.
The West’s strategy is a good one. But it’s not good enough. Not yet. Putin knows it. That’s why he’s not backing down. But doubling down. Why he invited the Ukrainians to the negotiating table — and then, in a loud and flamboyant message of bad faith that was impossible not to hear, he allegedly dropped a thermobaric bomb.
You don’t do that unless you want to send a message. I’m not scared of you. I can take you on. I will keep on fighting this war, and expanding it, until you submit.
The West unified to stop Putin, and that was good, long overdue. It’s strategy to contain him, which emerged at lightning speed too, was clever and smart and far far more adept than anyone would’ve guessed the West was capable of just a few weeks ago. All this is progress. It is a good thing, not a bad one. And yet the West will need to do much, much more — if it really wants to avoid something like another World War.
Putin is telling us as loudly as he can he won’t stop here. Even despite what we have done so far, up to and including dropping a neutron bomb on his economy. There are very good reasons he’s not stopping. He occupies the economic high ground right now. He will do just what he has said out loud — try to reconstitute an empire, to control the resources of the world, which is what has given him the power to already wage this war. He is defiant and intransigent even in the face of everything we’ve thrown at him, which is already unprecedented in modern history. Therefore, we are going to need to do much, much more, and be even smarter.
Putin is telling us he won’t back down. Not yet. Not even close. You don’t cluster bomb a city while you’re pretending to negotiate unless you want to give the other side the middle finger. The question for us is: are we listening?
