Washington, D.C.–Considering how expensive wars are, it’s incredible that Governments allow them to happen. For example, in the US it cost over $3 trillion to fight the Iraq War, and $2.3 trillion was spent on the Afghanistan War.
We are unlikely to commit a bunch of troops to the Ukraine War, so we won’t spend too much initially.
Don’t worry; we’ll still have a financial hand to get bitten in the deal as oil futures are already near $100 a barrel, which is higher than they’ve been since 2014, and it is predicted that they will rise to $125 or $150 soon.
And the rest of the world seems ready to chime in, but opinions appear to be mixed:
“Russia warned that Americans will fully feel the ‘consequences’ of U.S. sanctions on the Kremlin after it deployed troops into two pro-Moscow separatist regions of eastern Ukraine. The West is bracing for Russia to retaliate against the measures, which Moscow said would hurt global financial and energy markets.”-Washington Post.
“Australia, Canada and Japan said they would impose sanctions over the Ukraine crisis as more American allies add to efforts to punish Russia and its president, Vladimir Putin,” -New York Times
“Instead of a sweeping package that crippled top Russian banks, cut its financial transactions off from the global economy, or personally singled out Vladimir Putin — the U.S. and its allies settled on a modest ‘first tranche’ of penalties. Markets responded with a shrug, underwhelmed by the tit-for-tat approach.”-Bloomberg
It’s often argued that Russia is at its saber-rattling worst whenever Brent crude gets too expensive and that oil prices had already been rising over the past year. Prices spiked in 2013 just before Russia invaded Crimea, and in 2008 before Russia invaded Georgia, prices were absolutely out of control. Several people attribute the energy crisis to the Soviet invasion of Afghanistan in 1979, which happened at the same time as the energy crisis.
Russia’s economy was declining before all these interventions, which is why this theory isn’t valid. As a result, the country experienced a much worse Great Recession than the European Union, and a much shakier recovery through the mid-teens. Could it be that a declining economy bestirs the Russian bear? A 4.7 percent growth in GDP is expected for the Russian economy in 2021. In my opinion, Russia does not start wars because it is flush or broke. America also doesn’t start wars because it is flush or broke-although actually it could be argued that it jumps into conflicts because it thinks that it is ABOUT to become broke.
Rather, wars are started whenever someone feels like fighting. Economics doesn’t have a vote, but they do get to add up the costs later.
There will be a cost this time, as inflation worsens. After over a decade of running the presses at full throttle we can presume this was an eventuality, but it would need a trigger. Biden acknowledged that Tuesday when he said that this administration “is using every tool at our disposal to protect American businesses and consumers from rising prices at the pump … defending freedom will have costs.”
Russian state development corporation VEB is one of the two financial institutions targeted by the first round of U.S. sanctions. A number of Western capital markets will be blocked as well, including those of the United States and the European Union. In retaliation, Russia may limit its oil and gas exports to the European Union. If Russian forces press further into Ukraine, perhaps the EU will put its own limits on Russian energy imports.
They are responding to coordinated efforts by the United States, the European Union, and the United Kingdom to punish Russia for what President Biden called the start of an invasion of Ukraine.
In either scenario, the EU would be hit hard, since Russia provides a quarter of the EU’s oil imports and a third of its natural gas. Despite being less vulnerable, the United States imports more oil from Russia than any other country outside of North America. Since oil prices are set globally we might have a little insulation, but the country is the second-largest producer of oil in the world after Saudi Arabia, and the biggest producer of natural gas in the world.
That last might be a bit troubling, since Natural gas is a primary component in the manufacture of Urea-which is a major component for the manufacturing of fertilizers.
For now, Russian President Vladimir Putin has ignored the complication that Russia does not want oil prices to rise either. Nikolai Shulginov, the Russian oil minister, said Tuesday that the optimal price for oil would be $55-$70 per barrel, which is where it was a year ago. As he said, sounding vaguely American, Russia already has an 8 percent inflation rate, and a further rise in oil prices will push prices up in other sectors. Shulginov also said “high prices result in a slower growth in demand.”
A more consequential economy could insulate Russia’s prosperity from Putin’s belligerence, but it does not. President Barack Obama put it brutally in 2016: “Their economy doesn’t produce anything anybody wants to buy except oil and gas and arms. They don’t innovate.”
February 21, The New York Times’s Patricia Cohen and Jack Ewing put it even more brutally:“ Russia is a minor player in the global economy. Italy, with half the people and fewer natural resources, has an economy that is twice the size. Poland exports more goods to the European Union than Russia.” In short, they appear to be beneath notice.
“Russia is incredibly unimportant in the global economy except for oil and gas,” said Jason Furman, a Harvard economist who was an adviser to President Barack Obama. “It’s basically a big gas station.”
‘Except for oil and gas’. That sounds like a pretty good reason for a ‘gas station’ to decide to expand its product line. But at what cost?
All this makes it extremely foolish for Putin to pick a fight with the European Union and the United States. Our economy will be hurt, but Russia’s economy will be hurt more. This is before you consider the prohibitive cost of managing a foreign population, which finally persuaded the Western colonial powers to abandon the old imperial model after World War II.
Imperialism is expensive.
Russians aren’t invading Ukraine because they’ll prosper. It’s clear that they’re invading Ukraine despite the fact that it won’t work.
Perhaps President Putin should fire his generals and hire more economists with the money he saves.
