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Follow the Money: How Russia Will Bypass Western Economic Warfare

Pepe Escobar wrote . . . . . . . . .

So a congregation of NATO’s top brass ensconced in their echo chambers target the Russian Central Bank with sanctions and expect what? Cookies?

What they got instead was Russia’s deterrence forces bumped up to “a special regime of duty” – which means the Northern and Pacific fleets, the Long-Range Aviation Command, strategic bombers and the entire Russian nuclear apparatus on maximum alert.

One Pentagon general very quickly did the basic math on that, and mere minutes later, a Ukrainian delegation was dispatched to conduct negotiations with Russia in an undisclosed location in Gomel, Belarus.

Meanwhile, in the vassal realms, the German government was busy “setting limits to warmongers like Putin” – quite a rich undertaking considering that Berlin never set any such limits for western warmongers who bombed Yugoslavia, invaded Iraq, or destroyed Libya in complete violation of international law.

While openly proclaiming their desire to “stop the development of Russian industry,” damage its economy, and “ruin Russia” – echoing American edicts on Iraq, Iran, Syria, Libya, Cuba, Venezuela and others in the Global South – the Germans could not possibly recognize a new categorical imperative.

They were finally liberated from their WWII culpability complex by none other than Russian President Vladimir Putin. Germany is finally free to support and weaponize neo-Nazis out in the open all over again – now of the Ukrainian Azov battalion variety.

To get the hang of how these NATO sanctions will “ruin Russia,” I asked for the succinct analysis of one of the most competent economic minds on the planet, Michael Hudson, author, among others, of a revised edition of the must-read Super-Imperialism: The Economic Strategy of American Empire.

Hudson remarked how he is “simply numbed over the near-atomic escalation of the US.” On the confiscation of Russian foreign reserves and cut-off from SWIFT, the main point is “it will take some time for Russia to put in a new system, with China. The result will end dollarization for good, as countries threatened with ‘democracy’ or displaying diplomatic independence will be afraid to use US banks.”

This, Hudson says, leads us to “the great question: whether Europe and the Dollar Bloc can buy Russian raw materials – cobalt, palladium, etc, and whether China will join Russia in a minerals boycott.”

Hudson is adamant that “Russia’s Central Bank, of course, has foreign bank assets in order to intervene in exchange markets to defend its currency from fluctuations. The ruble has plunged. There will be new exchange rates. Yet it’s up to Russia to decide whether to sell its wheat to West Asia, that needs it; or to stop selling gas to Europe via Ukraine, now that the US can grab it.”

About the possible introduction of a new Russia-China payment system bypassing SWIFT, and combining the Russian SPFS (System for Transfer of Financial Messages) with the Chinese CIPS (Cross-Border Interbank Payment System), Hudson has no doubts “the Russian-China system will be implemented. The Global South will seek to join and at the same time keep SWIFT – moving their reserves into the new system.”

I’m going to de-dollarize myself

So the US itself, in another massive strategic blunder, will speed up de-dollarization. As the managing director of Bocom International Hong Hao told the Global Times, with energy trade between Europe and Russia de-dollarized, “that will be the beginning of the disintegration of dollar hegemony.”

It’s a refrain the US administration was quietly hearing last week from some of its own largest multinational banks, including notables like JPMorgan and Citigroup.

A Bloomberg article sums up their collective fears:

“Booting Russia from the critical global system – which handles 42 million messages a day and serves as a lifeline to some of the world’s biggest financial institutions – could backfire, sending inflation higher, pushing Russia closer to China, and shielding financial transactions from scrutiny by the west. It might also encourage the development of a SWIFT alternative that could eventually damage the supremacy of the US dollar.”

Those with IQs over 50 in the European Union (EU) must have understood that Russia simply could not be totally excluded from SWIFT, but maybe only a few of its banks: after all, European traders depend on Russian energy.

From Moscow’s point of view, that’s a minor issue. A number of Russian banks are already connected to China’s CIPS system. For instance, if someone wants to buy Russian oil and gas with CIPS, payment must be in the Chinese yuan currency. CIPS is independent of SWIFT.

Additionally, Moscow already linked its SPFS payment system not only to China but also to India and member nations of the Eurasia Economic Union (EAEU). SPFS already links to approximately 400 banks.

With more Russian companies using SPFS and CIPS, even before they merge, and other maneuvers to bypass SWIFT, such as barter trade – largely used by sanctioned Iran – and agent banks, Russia could make up for at least 50 percent in trade losses.

The key fact is that the flight from the US-dominated western financial system is now irreversible across Eurasia – and that will proceed in tandem with the internationalization of the yuan.

Russia has its own bag of tricks

Meanwhile, we’re not even talking yet about Russian retaliation for these sanctions. Former President Dmitry Medvedev already gave a hint: everything, from exiting all nuclear arms deals with the US to freezing the assets of western companies in Russia, is on the table.

So what does the “Empire of Lies” want? (Putin terminology, on Monday’s meeting in Moscow to discuss the response to sanctions.)

In an essay published this morning, deliciously titled America Defeats Germany for the Third Time in a Century: the MIC, OGAM and FIRE conquer NATO, Michael Hudson makes a series of crucial points, starting with how “NATO has become Europe’s foreign policy-making body, even to the point of dominating domestic economic interests.”

He outlines the three oligarchies in control of US foreign policy:

First is the military-industrial complex, which Ray McGovern memorably coined as MICIMATT (military industrial Congressional intelligence media academia think tank).

Hudson defines their economy base as “monopoly rent, obtained above all from its arms sales to NATO, to West Asian oil exporters and to other countries with a balance-of-payments surplus.”

Second is the oil and gas sector, joined by mining (OGAM). Their aim is “to maximize the price of energy and raw materials so as to maximize natural resource rent. Monopolizing the Dollar Area’s oil market and isolating it from Russian oil and gas has been a major US priority for over a year now, as the Nord Stream 2 pipeline from Russia to Germany threatened to link the western European and Russian economies together.”

Third is the “symbiotic” Finance, Insurance and Real Estate (FIRE) sector, which Hudson defines as “the counterpart to Europe’s old post-feudal landed aristocracy living by land rents.”

As he describes these three rentier sectors that completely dominate post-industrial finance capitalism at the heart of the western system, Hudson notes how “Wall Street always has been closely merged with the oil and gas industry (namely, the Citigroup and Chase Manhattan banking conglomerates).”

Hudson shows how “the most pressing US strategic aim of NATO confrontation with Russia is soaring oil and gas prices. In addition to creating profits and stock market gains for US companies, higher energy prices will take much of the steam out of the German economy.”

He warns how food prices will rise “headed by wheat.” (Russia and Ukraine account for 25 percent of world wheat exports.) From a Global South perspective, that’s a disaster: “This will squeeze many West Asian and Global South food-deficient countries, worsening their balance of payments and threatening foreign debt defaults.”

As for blocking Russian raw materials exports, “this threatens to cause breaks in supply chains for key materials, including cobalt, palladium, nickel, aluminum.”

And that leads us, once again, to the heart of the matter: “The long-term dream of the US new Cold Warriors is to break up Russia, or at least to restore its managerial kleptocracy seeking to cash in their privatizations in western stock markets.”

That’s not going to happen. Hudson clearly sees how “the most enormous unintended consequence of US foreign policy has been to drive Russia and China together, along with Iran, Central Asia and countries along the Belt and Road initiative.”

Let’s confiscate some technology

Now compare all of the above with the perspective of a central European business tycoon with vast interests, east and west, and who treasures his discretion.

In an email exchange, the business tycoon posed serious questions about the Russian Central Bank support for its national currency, the ruble, “which according to US planning is being destroyed by the west through sanctions and currency wolf packs who are exposing themselves by selling rubles short. There is really almost no amount of money that can beat the dollar manipulators against the ruble. A 20 percent interest rate will kill the Russian economy unnecessarily.”

The businessman argues that the chief effect of the rate hike “would be to support imports that should not be imported. The fall of the ruble is thus favorable to Russia in terms of self-sufficiency. As import prices rise, these goods should start to be produced domestically. I would just let the ruble fall to find its own level which will for a while be lower than natural forces would permit as the US will be driving it lower through sanctions and short selling manipulation in this form of economic war against Russia.”

But that seems to tell only part of the story. Arguably, the lethal weapon in Russia’s arsenal of responses has been identified by the head of the Center for Economic Research of the Institute of Globalization and Social Movements (IGSO), Vasily Koltashov: the key is to confiscate technology – as in Russia ceasing to recognize US rights to patents.

In what he qualifies as “liberating American intellectual property,” Koltashov calls for passing a Russian law on “friendly and unfriendly states. If a country turns out to be on the unfriendly list, then we can start copying its technologies in pharmaceuticals, industry, manufacturing, electronics, medicine. It can be anything – from simple details to chemical compositions.” This would require amendments to the Russian constitution.

Koltashov maintains that “one of the foundations of success of American industry was copying of foreign patents for inventions.” Now, Russia could use “China’s extensive know-how with its latest technological production processes for copying western products: the release of American intellectual property will cause damage to the United States to the amount of $10 trillion, only in the first stage. It will be a disaster for them.”

As it stands, the strategic stupidity of the EU beggars belief. China is ready to grab all Russian natural resources – with Europe left as a pitiful hostage of the oceans and of wild speculators. It looks like a total EU-Russia split is ahead – with little trade left and zero diplomacy.

Now listen to the sound of champagne popping all across the MICIMATT.

Source : The Cradle

Economic War Is Better Than a Hot One

Bill Blain wrote . . . . . . . . .

“Alas, that these evil days should be mine…”

This Morning: Trying to strip out noise from facts has never been so complex! It’s time to resort to the rarest of all commodities; Common Sense – to work out how this will likely play out. There will be clear winners – and one massive loser – and significant economic pain before we get there.

At times like this its worth recalling two of my most overused market mantras:

  • The market has but one objective – to inflict the maximum amount of pain on the maximum number of participants, and
  • Things are never as bad as you fear – but never as good as you hope.

After that quick reminder of short, sharp and contradictory market common sense… what are markets telling us this morning?

There is so much noise, froth as the news for Ukraine whips up all kinds of confusing signals threatening to undermine the markets. It’s a good idea to Stop. Look. Listen. Think. Try to figure out the likely, unlikely and very unlikely consequences. There is an incredible amount of information, disinformation, news and views out there – the trick is understanding what is real, likely and possible and discounting what is not.

After thinking about it.. I find myself surprisingly bullish… even though we are, de-facto, engaged in economic war with Russia. To ensure it does not turn hot across the whole of Europe – we need to fight it just like real war, putting the West’s economies in full conflict mode and being prepared for economic pain inflicted back on us.

Short-term – Trade what the crowd is thinking – and bear in mind the news will whipsaw sentiment in coming days. In coming days, I am sure much of the news flow from the real war in Ukraine will be tragic.

Long-term – Figure out what the future looks like. It’s clear Russia’s invasion of Ukraine has crystallised what was already a gathering inflationary tsunami and will likely trigger recession as supply chains break again. How the West’s Central Banks and Politicians respond will be critical. The consequences will rock and challenge the West – but they don’t need to be disastrous. Central Banks can use what they’ve learnt over the last 12 years of monetary experimentation to address it, and don’t be put off by Jay Powell confirming US hikes are coming.

This is an economic war. It’s time to adopt a wartime economic stance. The West’s Paladins will be the Central Banks – they have substantial economic firepower they can and will bring to bear; delaying rate tightening, trading low rates against rising inflation to maintain growth and avoid market meltdown. They can continue to spend, at the cost of wracking up future debt.

That will have consequences – but there is no point dying of thirst to save water! Fiscal and Monetary Policy can and will keep the West economically functional.

The inevitable consequences of inflation on savings, prosperity and national wealth can be addressed via social policies. None of these things will be easy – they will trigger consequences – but we will do these things because they will be necessary and they will be difficult, to misquote an American president.

In an economic knife fight between the West and Russia – the West should not hesitate to pull out an economic blunderbuss, and use it.

For Russia? I don’t think they have clue what is coming.

One of my colleagues got through to the last man left on a commodities desk in Moscow yesterday – Russian TV is showing “peacekeeping” tanks being greeted with bread and salt, and only flowers being thrown at them. But, as Moscow will find out, this is not the 1930s. The Russians are not daft. They will figure it out. Runs on banks, protest and ferment will follow. Last night it was cut to Junk and is in technical default (as I predicted earlier this week). Their nation has become a pariah siege economy, and will shortly be hamstrung with Weimar-era inflation. All the West need’s do is increase the pressure – and wait.

Here in the Middle East, where I am currently working on a project, there is a surprising level of sympathy for Russia – many believe Russia has a justified case the West reneged on promises not to expand NATO. But, even they admit Putin’s invasion is unjustified. What China thinks is critical – do they break with the West and embrace Russia, or let it take its course while ploughing their own fertile furrows. The latter is the more optimal course. But perhaps, President Xi may not see it that way.

As this immediate crisis hardens into a new investment landscape what is going to be the most significant shift?

To my mind it will be in Europe – suddenly the richest, but most fragmented continent has pulled itself together! After years of endlessly debating where to put the commas on 1000-page agreements on what kind of bananas they can sell to citizens, suddenly Europe has found common purpose uniting versus Putin.

To the great surprise of long-term Euro-sceptics – including myself – Europe has awoken. The complete reversal of years of Ost-political dumbf*ck*ry by Germany, tough talking by Brussels, and even the most peripheral bad Europeans understanding their future as part of a rich influential Europe is far better than cowering under the threat of renewed Russian expansionism. Europe suddenly gets it – and dimly glimpsed in our future are glorious uplands..

Well.. maybe. How long European unity lasts is open to debate… later this year the USA is likely to remove itself from the Western “coalition of the willing” when Biden is crushed at the mid-terms and the GOP chose isolationism ahead of Trump V2.1 or similar in 2025. European leaders need to decide if they can continue/risk the fight without a reliable partner in America.

Hold-fast I say! This could be the making of Europe! (Although, to be fair history is not on our side here – when confronted by external threats, the default European sovereign reaction was to wonder who would stab them in the back, and therefore who to stab first..)

I was talking with an influential UK broadcaster the other night (you would be surprised who subscribes to the Porridge), and knowing me he was frankly stunned by my unexpected bullishness on Europe. (I am seldom mistaken for a ray of sunshine when it comes to being bullish.) I see Europe having just had its Road to Damascus moment of St Paul, or maybe the bit in Lord of the Rings where King Theoden of Rohan wakes from his addled drug induced apathy. But, do recall, they both paid heavily for what they came to believe.

This vision of a prosperous, effective Europe is an intriguing and exciting one… could it withstand the demands and pressures its many tribes would place upon it? Who knows… but in the fires of conflict and all that tosh are the strongest of bonds forged….

We can’t just hope the Ukraine crisis goes away. War in Ukraine is already hammering at the doors of the West.

I heard yesterday One-World, the UK’s global telecoms/internet satellite constellation was denied a launch on Saturday unless it promises its’ birds are not used for military purposes and the UK government divests its stake. Western companies that haven’t fully exited Russia – like VW and Goldman – are being rightly castigated by the public. This is Economic War – and what we know about war is go in hard, heavy and like you mean it.

Meanwhile, the media fascinates me at present. Everyone is an expert.. but for what its worth I have some questions about Ukraine.

Why is it all the Russian troops Ukraine has captured and displayed on the media seem to be teenage conscripts or elderly reservists? Over the past 20 years the Russian armies have been substantially professionalised and only 20% are now conscripts. Might that mean the professional Russian forces are somewhere else? Remember – Maskirovka – the classic Russian tactic of making their enemy focus on one hand while stabbing them with the other.

Is Putin really mad? That’s just too easy. I do think he’s been caught by surprise at how vehemently Europe and the US have reacted. He has miscalculated the reaction. He expected Europe to be cowed by energy insecurity. Russia is maybe fighting badly, but is by its playbook: being predictably unpredictable, throwing subterfuge and as much distraction into the battle and noise as possible, and unsettling their enemies to the maximum extent. Putin’s threats to escalate right up to nuclear seem classic attempts to play the “mad dog”, ramping up fears he is deranged in order to make the West absolutely terrified. Its intimidation – pure and simple. Should the West call his bluff? Amateurs talk tactics. Professionals talk logistics – which is where sanctions will crush Russia.

I expect all-out sanctions will work – but I doubt swiftly enough to save Ukraine in the short-term. Stories the Russians have already run short on war materials, and Ukraine only has to hang-on seem unlikely. In the near term, the tougher the sanctions – no matter how painful for the west, the more likely they are to destabilise Putin’s regime.

Source : Morning Porridge