The Coming European Economic Apocalypse

Dr. Seshadri Kumar

by Dr. Seshadri Kumar [11-25-2022 published].

Executive Summary

At the start of the human tragedy that is the Ukraine war, I delved into the underlying causes of the conflict from the perspective of a historian and political scientist. That analysis, “Understanding The Great Game in Ukraine,” is available here. (This article has many excellent insights and is definitely worth reading. — RAD)

Events have progressed since then, and an important fallout of the war has been economic. In this article, I look at the role and situation of Europe from the perspective of an economist.

The European Union has taken a very definite political stance on the Russia-Ukraine conflict, aligned with the United States. It has applied 8 rounds of economic sanctions against Russia, and at the time of writing, is working on a 9th package.

What has the economic impact of these sanctions been - on Russia and on Europe itself? What will happen in the months to come? That is the focus of the present article. I conclude that

  • The war in Ukraine that started on February 24, 2022, is going to be the most consequential change in the world since the Second World War. It is going to fundamentally change power relationships in the world. The dominance of the Western world will end and be replaced by a multipolar world.
  • Europe’s prosperity of the past few centuries is likely to end because of short-sighted and poorly-thought-out decisions related to the Ukraine conflict, taken by European leaders with the full support of their people. These have to do primarily with the ill-considered economic sanctions that Europe has unilaterally applied on Russia, that have started to boomerang on Europe, with the high probability of things getting much worse in the coming months.

The analysis presented here is primarily an economic one, and mainly looks at the effect on the economies of Europe of prolonged sanctions (and, in the present context, “prolonged” could even mean another six months) imposed by the West on Russia.

I present evidence that makes the case that Western sanctions on Russia have hurt Europe a lot more than they have hurt Russia in the nine months since they were imposed, and in the coming months will continue to severely degrade Europe’s economies, while only marginally affecting Russia’s. The primary reason for this is that Russia is far more self-sufficient than Europe is. The only action that will save Europe is an unconditional revocation of its self-destructive sanctions and a peace agreement in Ukraine on Russia's terms.

The only major assumptions I have made in this analysis are that, in the next two to three months,

  1. The war in Ukraine does not end in complete defeat for Russia
  2. Ukraine and Russia do not reach a peace agreement, and
  3. Vladimir Putin is not ousted in a coup in Russia — and hence, the current economic and military policies of both Europe and Russia will continue for the foreseeable future.

Although Russia looks unlikely to be affected very significantly by Western sanctions, and is in a strong position on the battlefield, because of its high inherent economic and military strength (recent reported gains by Ukraine notwithstanding), I argue that in the unlikely case event that Russia were to appear likely to lose the war on the battlefield or on the economic front, China will do whatever it takes to prevent such outcomes, to secure its own future.

(Note: I have reorganized the following so that you can first focus on the takeaways of each chapter. You can then delve into the detailed analysis that Dr. Seshadri Kumar brings to each chapter to support his takeaways. — RAD)

This essay is organized in six chapters, followed by a summary and conclusions chapter:

CHAPTER I: BACKGROUND AND CURRENT STATUS

Chapter I details the background of the events that have happened since February 24, 2022, until today, especially the West’s economic sanctions as a response to Russia’s invasion, and highlights the fact that these sanctions, as well as the West’s military and economic aid to Ukraine, have not had the effect on Russia that the West had hoped for.

Chapter I Key Takeaways

  • The West imposed unprecedented sanctions on Russia after the start of the war
    • These sanctions have failed to crush the Russian economy or stop their war effort
    • Despite the sanctions, Russia has made huge profits on the sale of oil and gas because of skyrocketing prices
    • Russia continues to sell oil and gas to India and China
    • The non-Western world did not join in the sanctions
    • While the value of the Ruble temporarily dropped, it quickly recovered
    • The West has been incrementally adding more sanctions, with little to show for them
  • Russia today controls 15-20% of the former territory of Ukraine
  • The Nord Stream pipelines were sabotaged
    • They are now unusable and will not be usable for a long time
    • Based on motives, the US is the prime suspect behind the sabotage
  • The US and NATO have repeatedly ruled out getting directly involved in the war
  • China will not let Russia lose either the military or the economic war
  • The West is going to try to impose an oil price cap on Russia
  • Russia has said that it will stop selling oil to countries that participate in the cap

CHAPTER II: THE STRENGTH OF THE RUSSIAN ECONOMY

Chapter II discusses various indicators related to the Russian economy and concludes that it is in better health than many Western nations, especially in the context of the protracted economic war between Russia and Europe that has been initiated by Europe through the enforcement of Western sanctions on Russia.

Chapter II Key Takeaways

  • Russia has lived with sanctions since 2014
  • Russia’s economy has grown well even under these sanctions
    • Its average GDP growth rate is better than all Western countries
    • Average GDP growth rate, per capita, PPP, is better than all Western countries
    • Manufacturing is robust at 13% of GDP
  • Russia has a very low debt-to-GDP ratio (20%)
    • This makes it very independent
    • Russia is capable of absorbing economic shocks
    • The West, with much higher debt-to-GDP ratios (of the order of 100% or more) cannot handle more shocks
  • Russia has been making itself independent of the West
    • By divesting itself of US Treasury bonds
    • By reducing its US dollar holdings
    • By investing its wealth in gold
    • By forging a global partnership to de-dollarize
      • Other countries like China have also reduced their US Treasury holdings
  • Russia is a major arms manufacturer and exporter
    • Technologically independent of the West
    • Has a greater ability to continue war than Ukraine
    • Modern and competitive with the West, according to US assessment
    • Shown an ability to survive severe Western sanctions since 2014

CHAPTER III: RUSSIA’S INTERCONNECTEDNESS WITH THE WORLD

Chapter III talks about Russia’s interconnectedness with the rest of the world and, especially, with Europe, in terms of trade balances, and concludes that Russia is far more important to Europe than Europe is to Russia. It also concludes that an embargo of Russian goods would not fatally harm the Russian economy.

Chapter III Key Takeaways

  • Russia’s exports have grown at an annual CAGR of 4%, higher than any European country
  • Apart from fossil fuels, which forms 50% of exports, Russia exports a wide variety of goods, including precious metals, chemicals, agricultural products, machinery, wood products, foodstuffs, and plastics and rubbers
    • This makes Russia an indispensable trade partner for much of the world
  • Russia has very significant trade surpluses with the world as a whole
    • It has significant trade surpluses with many European nations
    • It has giant trade surpluses with African nations
    • With the exception of China, Russia has huge trade surpluses with all Asian nations
    • Because of this, Asian and African countries will not sanction Russia
  • China is a major trading partner for Russia
    • China comprises 35.5% of Russia’s total exports to Asia and 54.2% of its imports from Asia
    • China supplies more than $50 billion worth of goods to Russia
    • China can replace all the goods that Russia was importing from Europe
    • Russia can replace exports of oil to Europe with exports to China
    • China needs Russian oil to develop its West and South
  • The West’s total imports of oil, gas, and coal from Russia form only 24% of Russia’s exports
    • Gas imports by Europe amount to only 4% of Russia’s exports
    • Europe’s embargoes on Russian energy do not cripple Russia’s economy
  • In contrast, fossil fuels are a huge percentage of the import bill of European countries from Russia, amounting to as much as 80%
    • Essentially, Europe needs to buy Russian fossil fuels a lot more than Russia needs to sell them to Europe
  • Europe refusing to sell its goods to Russia can be a boon for the economies of Asia, as their production capacities increase to supply Russia’s needs
  • Russian gas helped Europe reduce its dependence on fossil fuels and move into renewables, and by sanctioning Russian energy, Europe is taking a huge step backward

CHAPTER IV. EUROPE’S ENERGY DEPENDENCE ON RUSSIA

Chapter IV talks specifically about Europe’s energy dependency on Russia, and shows that Europe’s energy crisis is not one of price but of supply — that the energy supplied by Russia cannot be replaced by any other source; that most European nations are critically dependent on irreplaceable Russian supplies of natural gas, crude and refined petroleum, and coal; that a European energy embargo on Russia will be devastating to European economies and cause the de-industrialization of Europe, while causing minimal and manageable losses to Russia.

Chapter IV Key Takeaways

  • Fossil fuels have an impact on European economies that cannot be measured in terms of their monetary value.
  • Europe needs to import 22% of its total coal requirement, 38% of its total gas requirement, and 28% of its total oil requirement from Russia.
  • To replace the gas that Europe was importing from Russia would require the world to produce an extra 11% of the total world output of gas
    • There isn’t that much spare production capacity
    • Gas producing countries will only increase production if Europe commits to 20-25 year contracts
    • It will take at least one year to get the extra supplies of gas
  • To replace the oil that Europe was importing from Russia would require the world to produce an extra 6.2% of the total world output of oil
    • This amounts to asking for an extra 2.4 million barrels a day to be produced
      • OPEC+ has decided to cut production globally by 2 million barrels a day
  • Europe’s emergency stocks of oil will only last it for 45 days at the most
  • If Europe wishes to substitute coal for its shortage of gas and oil, it will require an additional 32% of the total world coal supply (excluding Russian coal)
    • This is impossible for Europe to obtain
  • Only five countries in Europe are less than 40% dependent on Russia for gas: Norway (0%), UK (5%), Portugal (10%), Spain (11%), and France (20%)
  • Only six countries in Europe are less than 30% dependent on Russia for oil: Portugal (8%), Spain (10%), Norway (10%), France (18%), Italy (20%), and UK (22%)
  • Only eight countries in Europe are less than 30% dependent on Russia for coal: Portugal (0%), Czechia (2%), Greece (11%), Hungary (11%), Poland (17%), Norway (19%), Sweden (22%), and Germany (23%)
  • Only five countries in Europe have a fossil energy shortfall less than 30%: Norway (8%), Portugal (8%), Spain (12%), UK (14%), and France (19%)
  • Only seven countries have an overall energy shortfall less than 30% (including all renewable sources of energy): Norway (4%), Portugal (6%), Spain (8%), France (9%), Sweden (11%), UK (12%), and Italy (28%)

CHAPTER V. THE DE-INDUSTRIALIZATION OF EUROPE

Chapter V talks about the de-industrialization of Europe which has started to happen because of the West’s sanctions on Russia that have resulted in depriving Europe’s economies, not only of Russian gas, oil, and coal, but potentially of food, fertilizer, and several valuable minerals that Russia is a dominant supplier of, and how this de-industrialization is going to intensify in the coming months and years. It also explains how this crisis is two years in the making, and that the war in Ukraine is just the last nail in Europe’s economic coffin. It also talks about the negative consequences on Europe of the impending oil price cap that it plans to impose on Russian oil exports.

Chapter V Key Takeaways

  • Because of sustained high natural gas prices in Europe, several industries are on the brink of collapse in Europe because they use gas for heat
    • Chemicals, Glass, Paper, Fertilizer, Cement, etc.
    • This may move production permanently to other global locations, like the US or China
  • High gas prices did not start with the war in Ukraine
    • They have been high for more than a year because of post-Covid demand
    • The gas crunch from the Ukraine war came on top of a pre-existing gas crisis
  • The real gas crisis is not the high price of spot gas, but the loss of a low-price contract with Russia for gas
    • Russian contract gas was priced at €15/MWh, whereas spot gas price was 6-7 times as high and went as high as 20 times during the peak
  • Spot gas prices have recently gone down due to two reasons
    • Low gas demand from China has mitigated the situation
    • Industry shutdown has caused demand in Europe to drop and lowered spot gas prices
    • But it is still much higher than the old contract rates
  • Gas prices have domino effects because gas is also used as a feedstock
    • Ammonia is made from gas
      • 70% of ammonia production is shut down
      • Carbon dioxide is a by-product of ammonia production
        • Carbon dioxide shortage is causing problems for food preservation, beer and soft drink production, decaffeination of coffee, and humane killing of animals
      • Fertilizer is made from ammonia
        • Fertilizer production in Europe has plummeted
        • In addition, Russia and Ukraine are major global fertilizer producers, causing a supply crisis
        • China stopped export of fertilizer for domestic consumption
          • Fertilizer shortage will cause a food crisis in Europe
  • Europe is planning an oil price cap on Russian oil to be implemented on December 5, 2022
    • Russia has said it will stop supplying crude oil
      • This will drastically affect transportation within Europe
        • Prevent goods from reaching plants from ports
        • Prevent goods from reaching markets
        • Prevent people from commuting to factories
      • This will affect the production of all plastic and polymer in Europe
        • Affect production and cause shortages of containers, paints, adhesives, tapes, spectacles, clothes, jackets, automotive parts, applicances, toys, packaging, wire sheaths, food packaging, etc.
        • Can cause loss of $109 billion to Europe’s chemical companies
        • Force European governments to spend more on importing essential plastic items
  • Commodity crisis and shortages in Europe because of commodities supplied by Russia
    • Wheat (18.8% of global output)
    • Sunflower oil (20.5%)
    • Ammonia (23%)
    • Urea (14%)
    • Processed Phosphates (10%)
    • Potash Fertilizers (21%)
    • Potash Fertilizers (21%)
    • Aluminum for car and airplane bodies, appliances, machinery (5.4%)
    • Magnesium for automotive and aircraft alloys (6.3%)
    • Nickel for stainless steelmaking, rechargeable batteries, and chemical catalysts (9.1%)
    • Sulfur for sulfuric acid, used for chemical and fertilizer production (9.4%)
    • Titanium for aircraft body alloys (13%)
    • Vanadium for high-strength alloys and catalysts (17.6%)
    • Tellurium for solar cells (12.1%)
    • Cobalt for gas turbines , wear-resistant tools, and chemical catalysts (4.6%)
    • Germanium for semiconductors, solar cells, and fibre optics (3.6%)
    • Tungsten for wear-resistant hardware (3%)
    • Neon gas for semiconductor manufacture (50%-70%)
    • Platinum (10.6%) and palladium (36.9%) for catalytic converters
  • US efforts to simultaneously treat China and Russia as adversaries is pushing China and Russia together and defeating American attempts to contain either of them
    • China has even more influence on world commodity prices
    • Along with Russia, China can choke the supply of vital minerals to the West if the West goes too far in its sanctions on either
      • Aluminium Metal (57.4% of world production)
      • Magnesium (84.5%)
      • Sulfur (21.3%)
      • Titanium (57.9%)
      • Vanadium (67.7%)
      • Tellurium (58.5%)
      • Germanium (67.9%)
      • Tungsten (83.3%)
      • Molybdenum (43.8%)
      • Rare Earths (60.6%)
      • Tin (30%)
      • Silicon (70.3%)
      • Lithium (13.4%)
      • Lime (72%)
      • Lead (46.6%)
      • Graphite (79%)
      • Fluorspar (63%)
      • Bauxite (22.1%)
      • Alumina (53.5%)
      • Gallium (95%)
  • The scarcity of oil and gas, combined with the scarcity of commodities, will lead to the De-Industrialization of Europe in short order

CHAPTER VI. EUROPE’S ENERGY OPTION

Chapter VI talks about what Europe can do in response to these challenges, by discussing the most commonly floated solutions: gas storage in Europe, LNG (Liquefied Natural Gas), and renewable energy; and shows how none of these options will be adequate to stave off the coming economic apocalypse for Europe.

Chapter VI Key Takeaways

  • Europe’s gas storage tanks do not provide any insurance against gas shortages because they were always needed in addition to regular supply of pipeline gas
  • Europe does not have enough LNG receiving terminals to import sufficient LNG
    • LNG terminals take a long time (about five years) to construct
    • Germany is leasing and installing mobile FSRUs to receive gas
    • Three of them are expected to be operational by early 2023
    • They could receive a maximum total of 17 bcm of gas, or roughly a third to a fourth of what Germany was getting from Russia
  • But the world does not have enough LNG spare capacity to supply Europe
    • US shale gas producers have said they cannot increase production to help Europe
    • Qatar has also said that it cannot compensate for Russian gas
    • Qatar wants Germany to sign a 20-year contract
  • Ramping up production with any technology, whether LNG or solar or wind, takes time
    • Supply chain needs to be built up for the whole value chain
    • This can take years
  • There is no quick, short-term solution to Europe’s energy shortage

SUMMARY AND CONCLUSIONS

Finally, a SUMMARY AND CONCLUSIONS chapter talks about the longer-term impact of the West’s sanctions on Russia, and how they will fundamentally change the power calculus in the twenty-first century.

"Not One Step Backward!"

On 22 June, 1941, Adolf Hitler, then at the height of his power, made a fateful decision by invading Russia. His decision was predicated on the belief that “one kick at the door and the whole rotten structure will come crumbling down,” referring to the Soviet State. Hitler was, of course, wrong about the weakness of the Soviet state, as history informs us. The USSR was far stronger, far more resourceful, and far more resilient than what not only Hitler, but the whole Western world believed.

By the beginning of December, 1941, Hitler’s generals knew that they had made a grievous error. They realized that while the Soviet army was giving up very easily in the early battles, leading to the loss of about 2 million troops killed or captured, their resolve had stiffened and they were now fighting hard. The German army realized that they were not adequately equipped to fight a war in the brutal Russian winter. The winter of 1941-42 resulted in the deaths of more than a million German soldiers in the frozen wastes of Russia outside Moscow.

The prudent thing to do then would have been to consolidate Germany’s gains and abandon any plans to move deeper into the Soviet Union. But, having failed in his big gamble to take the USSR in a single summer campaign, Hitler, like Napoleon before him, believed that if he persisted long enough, he would prevail over the Soviets and total victory would eventually be his. He failed to defeat the USSR, and instead, Germany was totally destroyed. When his initial attack, the Blitzkrieg in June 1941, failed, he did not reconsider his original plan to conquer the USSR. He doubled down on his efforts, and perished.

The West is making mistakes of a similar nature. In March 2022, they unleashed what they truly believed to be a “nuclear option” in financial terms. They froze Russia’s funds, seizing more than $300 billion of its money, and blocked it from SWIFT, preventing it from buying anything using dollars or euros. Just like Hitler believed his military blitzkrieg would bring the Soviet Union to its knees in short order, the West believed that its financial blitzkrieg would bring Russia to its knees and force it to abandon its special military operation. US President Joe Biden even bragged about that possibility in a public speech on March 26, 2022. But that did not happen. Russians hardly felt much pain due to the West’s actions. Instead of reconsidering their course of action and starting negotiations with Russia, the West got into an ideological trap, just like Hitler did in 1941. When Hitler’s generals radioed him that the Soviets were overrunning their frostbitten troops and requested permission to withdraw, they got the one-line response: “Not one step backward!”

Today’s Western nations are being equally obstinate, and are saying that they will not take one step backward on their strategy to financially choke Russia — a strategy that has clearly failed and will continue to fail. In their ideological blindness, they don't even seem to have done a basic sanity check to find out if the measures they took and are now contemplating (such as the impending oil price cap) will truly deal a death blow to Russia’s finances.

The Sanity Check that Europe Should Have Done in March

This article is precisely the kind of sanity check that Europe should have done back in March before they went ahead with their ill-considered sanctions policy.

It has established clearly that:

  • Russia’s economic fundamentals are strong enough to help them withstand any economic sanctions
  • The countries of Asia and Africa will never support sanctions against Russia because of how dependent they are on Russia
  • China will never let Russia lose either the economic or the military war because of how valuable Russia is to China’s developmental plans
  • NATO will never enter the war directly
  • Russia was better prepared to fight a proxy war (both military and economic) than Ukraine or the West
  • Russia has a strong, technologically independent, modern, and advanced armaments industry that could continue to produce weapons to continue this war indefinitely, unlike the West
  • Russia had already made its economy sanctions-proof after enduring eight years of sanctions after 2014
  • Russia had been steadily dumping the dollar and US Treasury bonds since 2014, in order to free itself from Western financial control
  • Russia enjoyed a trade surplus with Europe, which meant that if Europe decided to boycott Russia, it would lose far more than Russia would
  • Russia held a crucial advantage relative to Europe in that it had oil and gas that Europe desperately needed
    • Not having these fuels would cripple Europe
  • The countries of Asia can easily supply Russia with everything they were getting from Europe in exchange for oil
  • But nobody other than Russia can supply Europe with the oil and gas Russia was providing them (at least in the short run, for a couple of years)
  • The absence of Russian oil and gas will lead to the de-industrialization of Europe, because what Europe has is a supply problem of fuel, not a price problem
  • The West cannot afford this supply crisis, so soon after the Covid crisis that had almost finished Western economies
  • Oil- and gas-producing nations cannot increase production enough to save Europe from its energy crisis
  • Most European nations are too dependent on Russia for energy to be able to sanction Russia without destroying themselves in the process
  • The lack of oil and gas will lead to the de-industrialization of Europe by forcing the closures of industry and causing them to move operations wholesale to America or China
  • Sanctioning Russia has led to the loss of cheap gas and oil at long-term contract rates, which are much lower than spot gas rates, and created an existential crisis for European industry
  • Oil and gas shortages have domino effects on economies, because they are used as feedstocks in the chemical industry
    • Gas is used to make ammonia, which is used to make fertilizer, which is needed to make foodgrains, vegetables, and fruits
    • The ammonia production process produces carbon dioxide, which is used in food preservation, beer and soft drink production, decaffeination of coffee, and humane killing of animals
    • Oil is used to make plastics and polymers - containers, paints, adhesives, tapes, spectacles, clothes, jackets, automotive parts, applicances, toys, packaging, wire sheaths, food packaging, pens, electronics housings, laminates, etc.
    • Without gas and oil, most consumer and industrial products in Europe cannot be manufactured
    • Lack of oil and gas will cause losses of hundreds of billions of dollars to European chemical companies and likely cause them to close
    • Lack of essential plastic items can further strain national budgets because they have to import them from outside the EU
  • If Russia (and China) decide to withhold supplies of other commodities in order to retaliate for Europe’s sanctions against them, the situation will be dire for the entire Western world, because of how China and Russia dominate the supply of so many essential commodities
    • Wheat, sunflower oil, diamonds, fertilizer, aluminium, magnesium, nickel, sulfur, titanium, vanadium, tellurium, cobalt, germanium, gallium, tungsten, neon, rare earth minerals, platinum, palladium, lime, lead, tin, molybdenum, silicon, lithium, graphite, fluorspar, alumina, and many more
  • Europe’s storage tanks do not provide any insurance against gas shortages
  • Europe does not have enough LNG terminals to import LNG to make up for the gas shortage
    • Germany’s attempts to install temporary FSRUs for LNG will at most provide a quarter to a third of their gas requirements, starting in 2023
  • The world does not have sufficient spare gas or oil capacity to supply Europe for the missing Russian oil and gas
  • Renewables cannot be ramped up quickly enough to solve Europe’s energy crisis
  • The US and Europe have needlessly alienated China at the same time it is trying to sanction Russia, thereby ensuring that the sanctions will have no significant effect on Russia while making both Russia and China more independent of the West
  • The West’s unprecedented move to ban Russia from SWIFT and freeze its US dollar reserves will spark a global move in the non-Western world to de-dollarize

Where Do We Go From Here?

Things are extremely dire for Europe today. They have played their trump card (banning Russia from using SWIFT and seizing the assets of the Russian government and of Russian citizens worldwide) and failed to win the game. Things are just going from bad to worse. The winter is about to start, and Europe has giant shortages in oil and gas. Nord Stream has been blown up, and there is no way to start pumping gas through it tomorrow. Europe has banned coal imports from Russia (and they are 22% dependent on Russia for coal), they are not getting gas from Russia (they are 38% dependent on Russia for gas), and they are about to put in place a ban on December 5 that will result in no more oil flowing to Europe from Russia (and they are 28% dependent on Russia for their oil needs). There is no way in the short term (1-2 years) for Europe or even the medium term (5 years) to fill this giant hole in their energy requirements.

Europe is going to face an immediate catastrophe in a matter of weeks. Ukraine’s energy infrastructure has been destroyed by Russian missiles. Kiev says only 50% of the electricity grid is functioning. Much of Ukraine is dark. Without electricity, neither the water supply nor the sewage system will work. Most Ukrainians in cities live in high-rise apartments. With the bitter winter approaching, Ukrainians without heat, electricity, water, or sewage will start flooding Europe as refugees. Europe will be hit by a humanitarian catastrophe. No continent can handle tens of millions of refugees in a sudden wave. European economies, which are already on the brink, will be overwhelmed.

Europe continues to sanction Russia more and more, despite all evidence suggesting that these measures are not working. Russia’s response has been fairly measured so far. If it starts retaliating using its strength in commodities, things could get much worse for Europe.

Europe, the US, the UK, Canada and Oceania, along with Japan and South Korea (the “West”) have also been upset about China’s strong economic support for Europe. If the West feels that the only way to increase pressure on Russia would be to start sanctioning China, things will get much worse for the West because of China’s control of so many key commodities. Not only Europe, but the US, too, will come to a standstill without commodities from China. If the West decides to sanction China, it means that they have massively miscalculated on China, just as they have already miscalculated with Russia. Given the West’s track record, however, one should not rule it out, howsoever insane it sounds.

If Europe continues on their current path, they face widespread de-industrialization; mass unemployment; mass starvation; and deaths due to exposure from cold. This, in turn, could lead to mass emigration of the poorer Europeans from Europe, perhaps to North Africa. This article has shown how all this might happen by highlighting Europe’s enormous dependencies.

Europe has two choices. Either they understand that their gamble has failed, and that things are likely to get much worse unless they completely reverse direction on Russia, or they continue on the path to destruction.

How can Europe avoid the bleak future outlined above and go back to a path of prosperity?

The wise course of action for Europe would be

  • To push for a settlement with Russia
  • To agree to Russia’s terms regarding Ukraine
  • To drop all sanctions
  • To pay all outstanding dues to Moscow for past fuel purchases
  • To release back to Russia all Russian assets consfiscated by European governments
  • To return to Russian private citizens all assets (e.g., yachts) seized by European governments
  • To agree that Ukraine should cede territory and agree to become a neutral state with a new, Moscow-approved leadership
  • To ensure the removal of all NATO personnel and weapons from Ukraine, and allow Russian monitors and defence forces to remain in the country to ensure that the agreement is being adhered to
  • To agree to a joint investigation on the sabotage of the Nord Stream pipeline, involving the Russians in the investigating team, and agree to punish those involved
    • If European entities, such as the UK, were involved in the sabotage, ensure that those countries pay reparations to Russia for the damage caused
    • If non-European entities, such as the US, were involved, demand accountability from them, cut them off from ties with Europe, and impose sanctions on them
  • Disband NATO and instead create a new security alliance for Europe including Russia and limit membership only to Europeans

Needless to say, this will involve a loss of face for Europe, but it might just save European economies from complete annihilation.

Of course, Europe doesn’t have to do this. I am merely saying that this would be the wise course of action.

And why is that? Because if Europe does all this, then Russia will

  • Start pumping gas through the one Nord Stream line that they say is still intact
  • Start working on repairs to the other Nord Stream lines, so that in a year or so, Europe will start to receive 110 bcm of gas from Russia via both Nord Stream lines
  • Resume pumping gas through the Yamal, Brotherhood, and Turkstream lines
  • Resume supplying oil to Europe in time for the coming winter
  • Resume coal shipments to Europe
  • Start shipping fertilizer, wheat, and sunflower oil to Europe

People will point out that Europe cannot decide for Ukraine. They cannot decide that Ukraine should part with its territory or stop fighting Russia. This is certainly true. That is Ukraine’s decision to make. But Europe can stop supporting Ukraine, and that will go a long way in influencing Ukraine’s decision to continue fighting. As things stand, about half of Ukraine’s energy infrastructure has been destroyed. Without massive aid from Europe, Ukraine will freeze to death and starve this winter. It is hard to know how Europe can even help Ukraine, given that they themselves are reeling under giant energy shortages. The weapons flowing to Ukraine, even American ones, that help Ukraine continue fighting, have to flow through Europe. If Europe refuses to allow British or American weapons to transit through them, Ukraine will not get any more weapons from the US or the UK. That will shorten the war and end Europe’s suffering as well as the suffering of Ukrainians.

To be sure, if Europe decides to do this, it will be a giant loss of face for them. Ukraine will accuse them of betrayal and of selling them out. Europe’s problem has been made harder by the daily dose of propaganda, for the last nine months, with journalists hyperventilating on every Western channel about “Russia’s unprovoked war on Ukraine” and the nonstop propaganda references to “Russia’s terrorism,” “Russian human rights violations,” and the like. Europe has painted itself into a corner, and European leaders will have a hard time explaining an about-face position.

And so, the only way for things to change in Europe, as things rapidly get worse for their citizens, is social unrest and instability as citizens reel from energy and food shortages in the coming brutal winter. There will be rioting on the streets and coups that remove the current leaders from power, because the leaders in power today, such as Macron, Scholz, and Sunak, cannot credibly advocate for a about turn in their position on Russia. New leadership will be needed to change national policy.

The other interested party in this conflict is the US. It has already committed to providing more than $54 billion to Ukraine. This is not a small amount, and the only reason for the US to commit to spending so much money on Ukraine is that it expects this to be a very long war. The US will not be happy at the prospect of Europe capitulating to Russia’s demands and making peace with them, even if new leadership rises in Europe to oust Scholz, Macron, and the Conservatives in the UK, demanding the end of hostilities with Russia. The US will do all it can to prevent a peace in Ukraine. It is fully committed to war. The US has huge leverage over Europe. This conflict has huge geopolitical implications for the projection of American military power beyond its shores, and the military-industrial establishment that runs the US cannot afford to give up its posture of power projection in Europe. Agreeing to a peace treaty on Russia’s terms will mean giving up the dream of American hegemony, which is completely unpalatable to the American establishment.

What this means, in effect, is that if there is huge social unrest that threatens to upend the current establishment ruling Europe, the US will step up and intervene militarily to prevent regime change in Europe. The war must go on. Russia must be defeated.

The US has already indicated that it will go to any lengths to achieve its goals. If things continue to worsen in Europe, there will be a trade war with China that will make Trump’s trade war with China look like child’s play. China will also be banned from SWIFT, and its nearly $1 trillion in US Treasury bonds will be seized by the US. China will retaliate by seizing the assets of American companies in China, by invading Taiwan in order to secure their semiconductor supply (which will give China control of 75% of the global semiconductor supply, including the most advanced nodes, once it gets control of TSMC), and by completely banning the sale of Chinese commodities to the US, ranging from lime, lead, tin, aluminium, magnesium, titanium, vanadium, tellurium, germanium, tungsten, molybdenum, silicon, graphite, fluorspar, alumina, and bauxite, to rare earths. Russia will join the trade war and stop selling platinum group metals, gold, sulfur, titanium, and most importantly wheat and sunflower oil to the West. And since Russia controls a significant part of Ukraine, it will prevent Ukrainian wheat and oilseeds from reaching the West as well. A trade war at this scale will have the following significant effects:

  • It will completely split the world into two camps: the American and non-American camps
  • The dollar will cease to be used outside the American camp
  • The rest of the world will move to a multipolar world order with a basket of non-dollar currencies
  • Every country in the world will have to choose a side
  • Since China has deep connections with most countries in Asia and Africa, thanks to their decade-long Belt and Road Initiative, most of them will join the Chinese-Russian axis
  • India will have a choice to make. It has been trying to walk a tightrope between the two sides, but that will no longer be possible
  • Another region that will have to make tough choices is Oceania. Australia and New Zealand are ideologically allied with the US, but they are geographically isolated and surrounded by Asia, especially by China. Australia and New Zealand will find the going very tough if they continue to be in the Western camp

Who will win this new Cold War? The answer is simple. The Eastern alliance has more natural resources and more people (for markets). The West relies on the people of the Global South to buy its products; otherwise it will collapse. A new Cold War will completely destroy Western industry. America may be the engine of innovation, but without people to buy its products, it cannot survive.

This is the choice for the West to make. End the war on Russia’s terms, or destroy the West.

I am not optimistic that the West will make the right choice.

Overall Conclusions

  • Europe and the US made a giant mistake in deciding to sanction Russia
  • The West mistakenly thought that their economic sanctions would cripple Russia
  • The West failed to understand Russia’s inherent economic resilience
  • The West failed to understand the extent to which Europe, in particular, depended on Russia
  • Europe is now at risk of de-industrialization and mass unemployment
  • The root cause of the West’s miscalculation has been the failure to understand that the monetary value of Russian fossil energy is not high and never was, but its practical utility to Europe was and is extremely high. This is why sanctions on Russian oil and gas are a huge mistake and have hurt only Europe and not Russia
  • There are no short-term solutions for Europe
  • The only thing that can save Europe is for it to end the Ukraine conflict on Russia’s terms
  • Any efforts to further intensify sanctions will deepen Europe’s crisis
  • Attempts to expand the trade conflict by sanctioning China for its help to Russia will utterly ruin the West
  • In a nutshell: Europe needs what Russia has (and what China has). It cannot do without those things. But Russia (and China) can do without what Europe has. They are self-sufficient. The financial impact of European sanctions on Russia is minimal. Therefore, economic sanctions against Russia (or China) will never work. But, because of the overwhelming dependence of Europe on Russian (and Chinese) goods, sanctions on Russia (or China) will utterly destroy Europe. The only hope for Europe to prevent a total economic catastrophe is to achieve an agreement with Russia that ends the current destructive sanctions as soon as possible, and at whatever political cost, including the abandonment of Ukraine and cession of Ukrainian territory to Russia. The longer this is postponed, the more extensive the permanent economic damage to Europe will be.

History is replete with trends and tipping points. Great shifts in power take place gradually and often imperceptibly, only bursting upon the public consciousness when dramatic events occur.

The Ukraine war will go down in history as one of those dramatic events that exposed a fundamental shift of power — from West to East.

A New World Order is taking birth before our eyes. The countries of the West, which have dominated the world in one form or another for the past three centuries, are receding in power. The civilisations of the East are regaining their autonomy.

The economic war over Ukraine will be as consequential as the military one in demonstrating to the world how decisively geopolitical and geo-economic power have shifted.

The biggest loser looks to be Europe. As I have shown here with detailed economic data from no less than Western sources, it is obvious that Europe has written its own epitaph with its ill-considered actions against a more powerful adversary that it grossly underestimated.

The sanctions on Russia will be seen in hindsight as Europe’s Stalingrad as well as its Waterloo.

Posted in China, Energy, Germany, NATO, Russia, Ukraine, United.Nations