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Russia is regressing toward North Korea or the Stalin-era. In Russia, saying a war is underway is now illegal. A joke circulating Moscow is that War and Peace will be renamed “Special Operation and Peace.” To disrupt Russia, the West is dropping financial bombs and providing weapons to Ukraine. Ukraine may not be able to get a no-fly zone, but it does have a virtually blank check for arms. Russia, on the other hand, faces financial constraints. How much Russia’s money spigot tightens mostly depends on both to whom and at what price Russia sells energy. A rough calculation suggests Russia’s military expenses will become problematic in coming weeks. If sanctions do dislodge Putin, there is no guarantee he will be replaced by someone to the West’s liking. What we are in is scary and what comes next could be scary in a different way.
Photo: from the Telegram feed of Andriy Tsaplienko, Irpin. 3/8/22.
Russia Fun-House Mirrors
While many countries (China, Germany, Brazil, Hungary, Turkey) have experienced a cult of personality—like Trumpism—Russia has experienced a disproportionate share. For about half of the last 100 years Russians have been under the sway of a cult of personality leader. This is both a reason and a reflection of the fact that the West and Russia think differently.
European countries began limiting the power of a King 800 years ago. In Russia, the Czar was head of the Orthodox Church and held to be appointed by God. That system was in place for hundreds of years and only ended in 1917, just a little over 100 years ago!
Putin has been in charge for 22 years, Stalin ruled for 30. Sergei Loznitsa captured the days after Stalin’s 1953 death in the documentary State Funeral. People from Leningrad to Vladivlastock wept at the passing of a guy who killed a significant percent of the population. Weeping for a murderer is odd and hints at how hard it will be to shake confidence in Putin.
“No one cares,” said one of my contacts. “Russians are cut off from information.” Russian State-TV says, again and again, that Ukraine is a “de-Nazification” operation. For many, particularly less educated older Russians, this is persuasive. Mounting casualties may undermine that confidence. A money problem will be an accelerant.
Financing War
First-round sanctions focussed on banking, credit and trade. They will hurt. For instance, many dental products and prosthetics are imported, which is hard to do without an international payments system. New software will be constrained.1 It’s almost impossible to fly in or out of Russia.
Now sanctions are targeting Russia’s income, which is mostly oil and gas. Tuesday, the US announced they would no longer buy Russian oil. But, as the chart below shows, US consumption (the dark blue slice) barely registers.
The key question is if Europe and China buy Russian energy and, if so, at what price. Russia’s oil is already trading at a discount to other blends. To get off Russian energy, Europe could fast-track construction of liquid natural gas facilities, increase coal consumption and possibly (in Germany) turn nuclear back on. They can also ration.
Less income equals less government spending. Yes, Russia could theoretically pull emergency levers, like issue war bonds or sell their gold, but potential bullion buyers may be accused of financing war crimes. A conservative, rough estimate is that this war is costing Russia $1 billion a day.2 Below, with help from the people at Rose Technology, I show what happens as Russia’s economy contracts and war spending remains constant. War spending will burn through Russia’s budget allocation in the next few weeks.
The table below shows is geeky but important. In calculating the value of Russian exports, you need to look at volume and price. Because prices have skyrocketed, the hit to Russia if the West stops buying is massive, bigger than it was two years ago.
China’s Role & A Post-Putin World
As both an energy consumer and Russia ally, China could play a critical role in ending this conflict. If China intervened in a way that brought a cessation of hostilities it would be a massive boost to Beijing’s prestige and further re-align of the world order. But intervening to stop Putin in Ukraine would have implications for Xi’s interest in Taiwan and is thus unlikely.
That suggests China’s slice of Russian energy production grows even as Europe shrinks. China’s demand is what keeps North Korea alive and it looks like they could do this for Russia as well. In recent years, Russia has built up pipelines that go direct to China.3
Even without China, the sanctions plus a bad war outcome may be enough to dislodge Putin. Then what? When a Czar or an Emperor leaves power (or dies) who takes over is never clear. That’s the weakness of such systems. After Mao died, it took two years before a reformer, Deng, finally secured power. Stalin’s circle murdered Beria, the chief of the secret police, to prevent him from taking charge after Stalin’s death. Imagine such a struggle today in the Kremlin amid a collapsed economy with nuclear weapons.
Past Russia Posts
For those of you new to this Substack, below are links to previous posts on Russia. I won’t get everything right, but on Russia, I got worried early. Below are the posts.
Ukraine Update # 1, #2, #3, #4 - Feb/March 2022.
Tightening and War - Jan 2022
Money Bad - November 2021
The Talent Skedaddle - August 2021
Playing Chess with Putin - April 2021
The Cost of Conflict - March 2021
Podcast with Andrew Weiss - Russia podcast, Jan. 2021
The Investment Risks of Regime Shifts - Jan. 2021
Typically, I publish Sundays. I am not planning on doing so this week.
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