Putin’s war

“The economy of imaginary wealth is being inevitably replaced by the economy of real and hard assets”.

Vladimir Putin gave some insight, last week, into his strategy to force Europe to withdraw its support for Ukraine. It involves two steps:

  1. Use energy shortages to drive up inflation;
  2. Use inflation to undermine confidence in the Euro and Dollar.

Will Putin succeed?

There are plenty of signs that Europe is experiencing economic distress.

When asked whether he expected a wave of bankruptcies at the end of winter, Robert Habeck, the German Federal Minister for Economic Affairs and Climate Action, replied:

Robert Habeck

Belgian PM Alexander De Croo also did not pull his punches:

“A few weeks like this and the European economy will just go into a full stop. The risk of that is de-industrialization and severe risk of fundamental social unrest.” (Twitter)

Steel plants are shutting down blast furnaces as rising energy prices make the cost of steel prohibitive. This is likely to have a domino effect on heavy industry and auto-manufacturers.

Europe: Steel Production

Aluminium smelters face similar challenges from rising energy costs.

Europe: Aluminium

How is the West responding?

Europe is reverting to coal to generate base-load power.

German Coal

And increasing shipments of LNG. Germany is building regasification plants and has leased floating LNG terminals but there are still bottlenecks as the network is not designed around receiving gas from Russia in the East, not ports in the West.

Europe LNG

Also, extending the life of nuclear power plants which were scheduled to be mothballed.

The new British prime minister, Liz Truss, is going further by lifting the ban on fracking. But new gas fields and related infrastructure will take years to build.

The President of the EC, Ursula von der Leyen’s announcement of increased investment in renewables will also be of little help. It takes about 7 years to build an offshore wind farm and the infrastructure to connect it to the grid.

Energy subsidies announced are likely to maintain current demand for energy instead of reducing it. A form of government stimulus, subsidies are also expected to increase inflation.

Price cap

The G7 has also responded by announcing a price cap on Russian oil. The hope is that the Russians will be forced to keep pumping but at a reduced price, avoiding the shortages likely under a full embargo.

Vladimir Putin, however, will try to create an energy crisis in an attempt to break Western resolve.

Russian Oil

Putin responded to the price cap at the Asian Economic Forum, on Wednesday, in Vladivostok:

“Russia is coping with the economic, financial and technological aggression of the West. I’m talking about aggression. There’s no other word for it…….

We will not supply anything at all if it is contrary to our interests, in this case economic. No gas, no oil, no coal, no fuel oil, nothing.”

Ed Morse at Citi has expressed concerns about the price cap, calling it “a poor judgement call as to timing.” His concerns focus on the political implications of Winter hardship in Europe, especially with upcoming elections in Italy, the potential effect of lower flows out of Russia, and the impact increased demand for US oil would have on domestic prices.

The Dollar

Attempts to undermine the Dollar have so far failed, with the Dollar Index climbing steadily as the Fed hikes interest rates.

Dollar Index

While Gold has fallen.

Spot Gold


The West is engaged in an economic war with Russia, while China and India sit on the sidelines. War typically results in massive fiscal deficits and soaring government debt, followed by high inflation and suppression of bond yields.

We expect high inflation caused by (1) energy shortages; and (2) government actions to alleviate hardships which threaten political upheaval.

The Fed and ECB are hiking interest rates to protect their currencies but that is likely to aggravate economic hardship and increase the need for government spending to alleviate political blow-back.

We maintain our bullish long-term view on Gold. Apart from its status as a safe haven — especially when the Dollar and Euro are under attack — we expect negative real interest rates to boost demand for Gold as a hedge against inflation. In the short-term, breach of support at $1700 per ounce would be bearish, while recovery above the descending trendline (above) would signal that a base is forming. Follow-through above $1800 would signal another test of resistance at $2000.


Brookings Institution: Discussion on the Price Cap
FT Energy Source: How Putin held Europe hostage over energy
Alfonso Peccatiello: Putin vs Europe – The Long War
Andreas Steno Larsen: What on earth is going on in European electricity markets?

Optimism bias

As humans, we are programmed to assume our solutions will work. It is an important evolutionary trait. The military solution to this optimism bias is to assert deductive reasoning and the arrangement of a reserve capacity, to compensate when systems fail, resources run out, or solutions are exhausted…..

~ Rob Johnson

Comment: The equivalent for investors, to maintaining a reserve capacity, is position-sizing: never bet so much on any one trade that an adverse outcome, or string of adverse outcomes, would affect your ability to keep investing/trading.

In the Ways That Count, Liz Cheney Won | Frank Bruni

Liz Cheney

Extract from Frank Bruni’s piece in the New York Times:

I know what the numbers say. I can read the returns. By those hard, cold, simplistic measures, Liz Cheney was defeated overwhelmingly in her House Republican primary in Wyoming on Tuesday night, and her time in Congress is winding down.

But it’s impossible for me to say that she lost.

She got many, many fewer votes than her opponent, an unscrupulous shape shifter unfit to shine her shoes, because she chose the tough world of truth over Donald Trump’s underworld of lies. That’s a moral victory.

She was spurned by conservatives in Wyoming because she had the clear-eyed vision to see Trump for what he is and — unlike Mitch McConnell and Kevin McCarthy, whose titles perversely include the word “leader” — she wouldn’t don a blindfold. That makes her a champion in the ways that count most.

Come January, she will no longer be Representative Cheney because she represents steadfast principle in an era with a devastating deficit of it. History will smile on her for that. It will remember the likes of McConnell and McCarthy for different, darker reasons. You tell me who’s the winner in this crowd…..


We try to stay out of party politics but Liz Cheney’s stand is about principle — the preservation of American democracy — which should be above politics. Sadly, that is no longer the case.

Related articles

Retired Admiral James Stavridis | Setting fire to the Wells – November 19, 2020
George Orwell | The appeal of Fascism – November 11, 2020
The Threat to Global Democracy – August 18, 2022
Thomas Homer-Dixon: The American polity is cracked, and might collapse. Canada must prepare, The Globe & Mail – January 2, 2022

Funding both sides of the war | Thomas L Friedman

Our continued addiction to fossil fuels is bolstering Vladimir Putin’s petrodictatorship and creating a situation where we in the West are — yes, say it with me now — funding both sides of the war. We fund our military aid to Ukraine with our tax dollars and some of America’s allies fund Putin’s military with purchases of his oil and gas exports.

~ Thomas L Friedman, NY Times, May 17, 2022

War in Europe

If the West thought that the conflict would remain safely contained in Ukraine, they had better think again. There has long been signs that Putin’s ambitions cover more than just Ukraine.

Sweden & Finland

Twitter: Finland


Undersea fiber-optic cables to Svalbard Island were cut in two places.

Twitter: Norway

The Black Sea & Moldova

Twitter: Black Sea

Rostov, Russia

War is even spreading to within Russia itself, with Ukraine attacking a military airfield in Rostov Oblast (adjacent to the Donbas). Attacks on staging posts in Belarus are also likely.

Twitter: Rostov

NATO Article 5

Francois Heisbourg at the the International Institute for Strategic Studies (IISS) warns that Putin may test NATO directly.

Twitter: Francois Heisbourg

Twitter: Francois Heisbourg

Putin declares war on Europe

Vladimir Putin’s invasion of Ukraine is an effective declaration of war against Europe.

This will no more stop at Kyiv than Hitler stopped at the Sudetenland.

Tragic sites of refugees fleeing Russian bombing and helicopter-borne invasion forces occupying Hostomel Airport military airfield, 15 minutes outside the capital.




All of this could have been avoided if the West had shown more resolve.

Kicking the can down the road

The West has been kicking the can down the road for the past 15 years hoping that the problem would go away. Ever since Vladimir Putin laid out his agenda at the Munich security conference in 2007, the West has tried to buy him off with reset buttons and lucrative gas contracts, looking the other way as he embarked on his expansionist plans, starting with invasion of Georgia the following year.

From Ambassador Daniel Fried and Kurt Volker in Politico, seven days ago:

What is more surprising is how the U.S. and Europe, despite Putin’s obvious warning in Munich and Russia’s many actions over 15 years, have nonetheless clung to the notion that we can somehow work together with Putin’s Russia on a strategic level. It is finally time for the West to face facts. Whether or not Putin launches a major new invasion of Ukraine, he has rejected the post-Cold War European security architecture and means it. He is on a deliberate and dedicated path to build a greater Russia, an empire where the Soviet Union once stood…..

Following the speech, Putin matched his words with actions, dismantling the structures designed to keep peace in post-Cold War Europe. Russia formally announced in July 2007 that it would no longer adhere to the Conventional Armed Forces in Europe Treaty. It continued to reject the principle of host-nation consent for its troop presence in Georgia and Moldova, and began ignoring Vienna Convention limits on troop concentrations, exercises and transparency.

Judge a tree by the fruit it bears

Europe continued to build a trade relationship with Russia, in the hope that prosperity would mellow Putin. Instead the Kremlin used its oil and gas profits to rearm and modernize its military while cracking down on political opposition and a free press. Deaths of journalists and opposition politicians climbed. Eastern NATO leaders who repeatedly warned the West about the need to confront Russia were dismissed as “warmongers”.

By this stage, the Kremlin had even taken its war against opposition figures abroad, with the murder of Alexander Litvinenko in 2006.

Alexander Litvinenko

In 1998, Litvinenko and several other FSB officers had publicly accused their superiors of ordering the assassination of the Russian oligarch Boris Berezovsky. Litvinenko was arrested the following year but acquitted before being re-arrested. The charges were again dismissed and Litvinenko fled with his family to London where they were granted asylum in the UK. He later wrote two books accusing the Russian secret services of staging the Russian apartment bombings in 1999 and other acts of terrorism in an effort to bring Putin to power. He also accused Putin of ordering the assassination of the Russian journalist Anna Politkovskaya in 2006. Litvinenko died of polonium-210 poisoning that same year, in London.

A UK public inquiry concluded in 2016 that Litvinenko’s murder was carried out by the two suspects and that they were “probably” acting under the direction of the FSB and with the approval of president Vladimir Putin and then FSB director Nikolai Patrushev.

The Obama Reset

On his election in 2009, Barack Obama sought to reset the relationship with Russia, as if the West was to blame for:

  • the attempted assassination of Ukrainian president Viktor Yushchenko during his 2004 election campaign — he was poisoned with a potent dioxin that disfigured him but later made a full recovery;
  • widespread denial-of-service cyber attacks on Estonia in 2007; and
  • invasion of Georgia in 2008.

The reset failed badly, with Russia annexing Crimea and invading the Donbas in 2014. Next was Syria in 2015. Responses by the West, including limited sanctions, proved ineffective.

The Salisbury poisonings

In 2018, Russia was the first state to employ chemical weapons against private citizens in a foreign country. In Salisbury, England, Sergei Skripal and his daughter Yulia, a Russian citizen, visiting him from Moscow, were poisoned with a Russian-developed Novichok nerve agent and admitted to hospital in a critical condition. UK Prime Minister Theresa May accused Russia of responsibility for the incident and announced the expulsion of 23 Russian diplomats in retaliation. A former Russian intelligence officer, Skripal had settled in the UK in 2010 after his conviction on espionage charges in Russia before being exchanged in a spy swap. Both Skripal and his daughter eventually recovered. Moscow refused to cooperate in the interrogation of the two prime suspects, identified by Bellingcat as Alexander Mishkin, a trained military doctor, working for the GRU, and decorated GRU Colonel Anatoliy Chepiga.

GRU Colonel Anatoliy Chepiga and Alexander Mishkin, a trained military doctor, working for the GRU


The signs have been evident for a long time but were largely ignored.

This was always going to end badly. The longer that the West delays, the worse the eventual toll in lives and human suffering.

Former Swedish PM Carl Bildt sums up the situation:

Carl Bildt

The Putin invasion of Ukraine that we now see unfolding is the worst outbreak of war that we have had since Hitler invaded Poland in September of 1939. The same motives, the same techniques, the same lies leading up to it. What will happen now remains to be seen. Sanctions will have to be imposed, although that particular deterrence has obviously failed, but it was good to try. We must help the fight in Ukraine. We must treat the Putin regime in the way that it deserves, in all respects. We are heading for bleak days when it comes to the security of Europe. Transatlantic security will be absolutely key.

What is information warfare?

The opening paragraph of Philosophy of Information Warfare (1998) by Russian military analyst Sergei P. Rastorguev:

“Once there was a fox that wanted to eat a turtle, but whenever he tried to, it withdrew into its shell. One day there appeared a television hanging in a tree, displaying images of flocks of happy, naked turtles—flying! The turtle was a bit skeptical and amazed at the same time. Meanwhile, fox continued to pay for more broadcasts advertising flying turtles. One morning, when the sky seemed bigger and brighter than usual, the turtle removed its shell.

The turtle didn’t know and never will, that information warfare — it is the purposeful training of an enemy to remove its own shell.”


Hat tip to Eto Buziashvili at Atlantic Council