Where finance and media intersect with reality

WW3 Watch: Are we facing mutual assured economic destruction?

I asked Kurt Volker, a former US ambassador to NATO and former US special representative for Ukraine, whether the West can handle the risk that sanctions blowback is worse for us than it is for Russia.
TBS Blog

On Tuesday I took part as an observer in an Intelligence Squared special debate between Kurt Douglas Volker, a former US ambassador to NATO and former US special representative for Ukraine, and Emma Ashford, a resident senior fellow with the New American Engagement Initiative in the Scowcroft Center for Strategy and Security.

The full debate will be published online by Intelligence Squared on Friday, but I’ve been given the okay to report on the debate beforehand.

It’s worth stressing that Volker’s insights should be framed in the context of his role in the infamous quid pro quo affair of 2019. It was Volker who provided the encrypted text messages that were said to reveal coordination between him, the State Department and Rudy Giuliani, with respect to extracting politically sensitive information from the Ukrainians for the purpose of informing Giuliani’s investigation into the Bidens. It was this affair which eventually led to the second impeachment of Donald Trump.

I asked a somewhat hawkish Volker about how sustainable the Western sanctions policy was given the fallout currently going on in financial markets (my emphasis):

Question: Obviously sanctions are a formidable tool that we have, but if the sanctions end up hurting us more than they do Putin, given the fact that Russia still has enough muscle memory from the last time they suffered an economic collapse, is it the case that we’re going to end up having to escalate through the sanctions into a hot war anyway?

Volker: Well, first off, I guess people are well aware of what’s happening in the markets. And we’re seeing it in all kinds of markets. So for energy and minerals and financial markets, and so forth. And that is part of the intent right now is to put the heavy, heavy sanctions onto Russia, to get them to stop the war. You are right, that this will have a blowback effect on Western economies, and that we’re facing the question of time, how long does Russia stand with these kinds of sanctions in place? And how long does it sustain a military effort with those kinds of sanctions in place? We have far more resilience than Russia does. At this stage. With these kinds of sanctions in place we can function in a global economy, Russia no longer can. In terms of the war effort, I do agree with one of the premises of your question, which is that Putin is not going to decide to end the war, based on sanctions alone. It’s going to take military defeat in Ukraine, which is happening already, it’s going slow and will be painful. And what we should be trying to do is to add to advance to accelerate those Russian balls in Ukraine to get them to the point that the Russians say they can’t do this anymore.

It’s interesting I think that Volker seems to have interpreted my question as potentially advocating in favour of action instead of sanctions. That was not my intention at all. The point I was trying to convey is that we may be under-estimating Western economic/financial fragility in the face of Russia as a combined economic force with China. Sanctions instead have been sold to the public as a sure-fire weapon that we uniquely hold against Putin. But what if they’re not?

If sanctions fail to stop Putin’s ambitions in the Ukraine because Russian society is (potentially) better positioned to withstand financial contagion and hardship than Western society, it seems to me the use of sanctions in the first place may have been a huge tactical mistake.

Rather than pressuring Russia to give up on Ukraine, they may simply have initiated a form of mutual assured economic destruction in which all of us lose and all of us get poorer.

Sanctions of this scale used against Russia directly, in other words, may prove more of a nuclear option than the deployment of tactical nukes themselves in a limited war in Ukraine.

The reason this is important (I think) is because the extremely emotional reaction to the invasion of Ukraine — in many cases calling for direct action too — seems to be clueless to the longer-term consequences such actions will have on domestic economies and lives.

Again, just like with Covid lockdown, the sanctions seem to have been sold on emotional and empathetic grounds rather than on cool headed analysis of the costs and benefits of the situation.

Is it really worth putting global livelihoods and lives at risk for the defence of a country most of the Western population couldn’t even identify on a map until this week?

Why are we, the West, suddenly prepared to risk mutually assured economic destruction for this proxy war but not for so many others?

Is it because the economy is so screwed after Covid that it’s probably going to fall apart anyway and this way we can blame it all on Putin, and vice versa?

Or is it because the real war isn’t for Ukraine but Russia itself? And Putin is just an inconvenient despot holding on to a power position that the two remaining super powers have decided has now expired (mostly because they both need the country’s resources to come out on top).

FYI – The Sun reports that Chelsea Football Club will be bankrupt within 81 days.

 

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7 Responses

  1. 20-30 years ago the West believed (just like Britain did regarding Germany in the 19th century) that liberal powers can (and indeed should) let authoritarian competitors grow their economies (largely thanks to trade and technology transfer with and from the West) because economic growth would inevitably lead to liberalisation and democratisation. Or rather, the logic was that at some point authoritarian regimes would face the dilemma: they could either allow more and more liberalisation or face stagnation.

    It turns out that logic was overly simplistic, assuming it was actually what the leaders truly believed in as opposed to being merely an excuse to pursue policies that offered short term benefits for the elites but not necessarily any long term strategic gains.

    These days it’s becoming increasingly clear that approach was at best naive. I suppose it’s possible some kind of economic decoupling from Putin’s regime was being increasingly seen as necessary and even desirable, despite the costs. You can tell this kind of thinking may indeed be driving policies this time because these policies are driven by core leadership of key economies.

    This is in quite a stark contrast to the whole Covid drama that was primarily driven by mob hysteira, blue tick twitter accounts (and a lot of rather suspicious social media agitation), quite often going against the advice and preferences of the political and economic establishment. Most governments around the world got bullied into lockdowns, not the other way around..

  2. You wrote: ” The reason this is important (I think) is because the extremely emotional reaction to the invasion of Ukraine — in many cases calling for direct action too — seems to be clueless to the longer-term consequences such actions will have on domestic economies and lives.

    Again, just like with Covid lockdown, the sanctions seem to have been sold on emotional and empathetic grounds rather than on cool headed analysis of the costs and benefits of the situation.”

    I’ve been thinking about this a lot. The whole media landscape seems to be nothing but emotional reactions these days, with very little in the way of rational analysis. Has it always been thus, or have things really changed a lot? I think this is a really big issue that is having a very negative impact on our societies, by leading us to suboptimal actions and behaviours.

    How did we get here, what is it doing to us, and what to do about it? I think this is a big, and potentially quite controversial topic.

  3. Agree, two things have also not been discussed much:
    1) What if Vlad wins, despite the obvious media hype? Even with the ineptness on both sides the Russians have more resources. The country Ukraine which is now at a total standstill can maybe hold out three weeks, but certainly not three months. I don’t see massive food and fuel shipments pouring in over the border from Poland.
    The result after a Russian victory (as in, cutting Ukraine in half along the Dniepr) would be a battle-hardened Russian army ready to go again. First targets? Certainly Moldova, perhaps part of Kazakhstan?

    2) Which population has the highest ability of absorbing and accepting the blow of sanctions – the Russians or the Europeans? It’s very possible that this will turn out to be a spectacular own goal, as the EU was fragile enough before. The answer to your question on why people accept this huge economic risk is that very few people understand it, and even fewer accept the logic of it.

  4. I think it is also worth considering where the damage falls in the west – massively on Europe that is, less so on the US. The US military industrial complex will also be cashing in on all the rearmament investments that are bound to happen.

    1. I agree. Europe will be first hit. But I don’t think America is as protected as people think. The issue for America isn’t a direct energy shortage. It’s the fallout from a collapse of Europe on a financial contagion basis.

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