High-level analysis of the War in Ukraine with detailed economic data
The EU will likely not completely transition to solar, wind, and alternative oil and gas sources for energy for at least another 7 to 10 years. It will take a significant amount of time to construct all of that infrastructure. In ten years, renewables will account for 30 percent of the world's electrical power generation and 80% in Europe. 50 percent from wind, solar, and hydropower and 25 percent from nuclear energy. The percentage of biomass will be around 5 percent.
Currently, Russia continues to sell energy to Europe. They are simply employing intermediaries who inflate the price and claim that the product originated from somewhere else. Private refiners such as Reliance Industries are gobbling up Russian oil and selling it to the EU. Soaring oil and gas prices have helped Russia more than triple its current account surplus to $96 billion, its largest in 28 years. Russia has a current account surplus of $95.8 billion in the first four months of 2022, central bank data shows. That's more than triple the $27.5 billion from the same span last year. Export volume has rebounded to levels seen before Russia invaded Ukraine. In April, Russian oil exports climbed by 620,000 barrels per day from the prior month to 8.1 million, back to their January and February average.
Russian oil export revenue is up 50% since the start of 2022. Kyiv has accused the EU of funding Putin's war machine by continuing to import Russian energy. The EU has spent approximately $58 billion on Russian energy since Putin announced the onset of Russia's so-called "special military operation" in Ukraine in late February, according to the Center for Research on Energy and Clean Air. Revenue from oil and gas sales — as well as Moscow's strict capital controls — has helped prop up Russia's ruble, which has become the world's top-performing currency against the dollar.
In the meantime, Ukraine's GDP has declined by around 40% in three months. Western Ukraine is neither industrially nor agriculturally productive. Expect them to be much poorer than they are now, as they will lose the industrial foundation of the East and maybe the agricultural base of the center, unless the EU is able to bring industries there after the conflict (I assume these regions will not be under any form of Russian influence).
Economy is a crucial part in warfare. If the economy of Ukraine crumbles. Its combat effectiveness will be substantially degraded. Economically, Ukraine is surviving, but only barely. The sanctions on Russia that are expected to cause a less than 7% contraction in GDP compare rather unfavorably to the 45-50% GDP collapse Ukraine is facing. The Black Sea blockade of Ukraine’s ports—Mariupol, Odesa, Kherson, and others—by Russia’s navy is preventing both the import of fuels to power the agricultural sector, and also the export of grain and other Ukrainian products. The inability to export is costing Ukraine’s economy $170 million per day. Meanwhile, Russia is targeting Ukrainian fuel storages, grain silos, and agricultural equipment warehouses, damaging already tattered supply chains. The power sector is facing default because so few Ukrainian citizens and companies are able to pay their electricity bills.
Not only is May a critical agricultural month, but it is when Naftogaz usually starts buying natural gas to store it for the cold Ukrainian winter. The state-owned energy giant was already in bad shape before the invasion, with the CEO asking the Ukrainian government for a $4.6 billion bailout in September 2021. With very tight gas markets and no funds, it is unclear how the country can prepare for winter, when temperatures can fall to below 20 degrees Fahrenheit. Adding to the prospect of a tragic 2022-2023 winter, most of Ukraine’s coal mines are in the Donbas, where Russia’s offensive continues.
Ukraine went into the war in good shape, with its economy growing at an annualized quarter-on-quarter pace of almost 7%; strong prices for its exports of grain, iron and steel; a well-regulated banking industry and a government deficit of less than 3% of GDP last year. Its debt stood at just under 50% of GDP, a number that many finance ministers can only dream of. An impressively digitized tax and benefits system means that revenues are still coming in smoothly from the parts of the economy that are still functioning. Pensions and government salaries are all still being paid, even in areas that are now under Russian occupation, thanks to resilient digital systems and a surprisingly unscathed internet. Most businesses, for now, are still paying their employees, even if they cannot operate as normal, or at all.
Recent reports that 25,000-30,000 are returning daily to Ukraine from abroad are encouraging, but Ukraine faced a brain drain problem before the invasion. The poorest country in Europe, many citizens were already trying to leave. Before the war, Ukrainians were the third largest immigrant population in the E.U., behind only Morocco and Turkey. Now, the International Labor Agency estimates that 4.8 million jobs have been lost in Ukraine, which will rise to seven million if the war continues. And after many months of war, children will have settled in new schools abroad, mothers will be integrating in their new worlds, and both will be waiting for their husbands and fathers to join them. Some will return to Ukraine, of course, but many will prioritize their family’s comfort and children’s opportunities over the calls of patriotism.
They are now losing more than 500 soldiers every day. Over a quarter of Ukraine's armed forces and an area larger than England have been lost. Russian soldiers are advancing from the territory surrounding the besieged city of Severodonetsk and crossing the few captured bridges.
Bottom line, Russia is going to be the leading global food power, along with the leading hydrocarbon energy power (largest producer of oil, gas and coal combined), for a few years. Look for the Ruble to climb in the 40 range vs the US$ by the end of the year, further appreciating by 25%-50% and solidifying its position as a "serious", commodities-backed stable currency. Russia is already the world's biggest wheat exporter. It's going to take over close to half of Ukraine's production, and in addition, Ukraine is also dependent on Russian fuel and fertilizer for its production, and is now deprived of access to Black Sea ports for its exports to Africa and Asia.
Biden’s proxy war in Ukraine has been handled with characteristic incompetence. All these sanctions will slowly crumble over the next few months as Western companies only care about money. Russia and China appear to have been planning for these events for some time and are responding swiftly. Libya is closing the majority of its oil fields. This means that Libya is producing virtually no oil, putting more pressure on an already strained oil market.
US authorities appear to believe that Russia's invasion of Ukraine was the trump card. This was meant to result in: Russia invades -> Russian military becomes bogged down -> Russian military repeats Afghanistan -> People become dissatisfied with Putin -> Putin undergoes a color revolution -> Putin is replaced by a hand-selected politician who dismantles Russia. Officials were originally impressed by the willingness of corporations such as BP Plc and McDonald's Corp. to suddenly "self-sanction" and sell assets at fire-sale rates. However, the government was caught off guard by the possible knock-on implications of the companies' departures, including supply chain bottlenecks and uninsurable grain shipments, according to individuals involved with internal deliberations.
As a result of the adverse consequences of sanctions, fuel and food prices are now rising for the rest of the world. Three months have passed since the West launched its economic war against Russia, and things are not going as planned. On the contrary, the situation is really dire. Russia has no trouble finding alternate markets for its energy, with oil and gas shipments to China increasing by more than 50 percent year-over-year. Russia maintains stockpiles of key products to maintain its economy, but they will be depleted over time.
The Russian president has played a long game from the beginning, waiting for the international alliance against him to disintegrate. The Kremlin believes that Russia has a higher economic pain threshold than the West, and it is likely correct. I have been saying this for some time. Much of our ruling elite are 3rd-4th generation brats. No one in charge of anything now got there due to their brilliance and competence as a leader.
It is only a matter of time before the United States suffers additional collateral damage from the sanctions. The path to $10/gallon gasoline will result in severe hardship in the United States. Gas prices are already so high that a police department in one Michigan county has "blown over their gasoline budget" and will no longer respond personally to every 911 call. Due to the Ruble's 5-year high versus the U.S. dollar and even greater strength versus the Euro, I believe Russians will be the least exposed to inflation of any country in the world lol
Putin believes that the next world order, which is currently taking shape, will be comprised of powerful independent states like in the past. Those who do not follow this road will continue to exist as colonies without rights. Putin also stated that modern sovereignty can not be restricted. Everything is in order; either you are sovereign over your judgments, or you are not. Putin once more called for the nationalization of Russian elites, forcing large industry to choose between staying with Russia or risking all in the West. He said the USA can steal other people's money at any moment when they don't like something. He also said Russia will not go for the closure of the economy and will not strive for complete autarky; cooperation with countries pursuing an independent policy will be increased. He says the key tasks are the preservation of political and economic sovereignty.
Russia will likely not be a major player in the future if they do not invest in their people. However, the fact that the world is closing in on them may provide some motivation. Additionally, they only have a decade's worth of energy resources to sell.
The embedded corruption is a huge problem in Russia that not even Putin can fix. Enterprises cannot rely on the rule of law to protect their transactions or prevent attempts to extort or bribe them. Approximately 19.2 million Russians live below the national poverty line. Putin’s supposedly transformative national spending projects worth an eye-watering $390bn have largely failed to materialize. His promises of economic modernization and raised living standards must be set against a consecutive five-year fall in real wages and cuts to state pensions. Mostly, this is a result of American sanctions in 2014 after they annexed Crimea from Ukraine.
The slow pace of progress in the implementation of the national projects led Putin to chew out deputies on live TV and has fueled tension between the various branches of government. The Kremlin has put a lot of stock in the national projects, which is the state's leading investment program, but critics say not enough attention has been paid to improving the business environment, and state-led investment by itself will not be enough to spur growth. The program may increase Russia’s economic potential by 0.5 percent, the International Monetary Fund said. As I have said before, Putin is increasingly leaving the apolitical parts of the economy to the state apparatus to run, where market forces and the rule of law are supposed to apply, but he keeps control over those parts of the economy where the state makes and spends the most money, and where only his personal rules of the game apply. His state capitalism alternative is probably founded on a belief that the rule of law is insufficient to stop corruption in Russia – or at least it can’t be put in place fast enough for him to use it as a way of transforming the country.
In times of globalist laissez-faire, it is easier for nations to be small and independent. They can import what they need and focus on one or two key exports, or become a tourist destination or tax haven with free commerce. As we near the end of free trade and enter a new period of embargoes, scarcity, and protectionism, it will become increasingly difficult for tiny nations to maintain their independence. To varying degrees, they will be swallowed by stronger nations that will not hesitate to expand their empire. As a result of resource scarcity, Canada was conquered by the United States and much of East Asia was annexed by China in the Fallout video game franchise.
Nigeria was slated to become the first nation to ground flights on Monday, as soaring aviation fuel prices have rendered the industry unprofitable. That, however, was abandoned at the eleventh hour. Dollar shortages in Nigeria and a weakening local currency have exacerbated the sector's issues, which are compounded by the countrywide problems of double-digit inflation, sluggish growth, and rising unemployment and insecurity.