Yves here. We’ve pointed out that Russia has yet to deploy some significant economic sanctions against the West, presumably because Russia still hopes to negotiate a peace and have the US and Europe drop the choke chain….although even then, they would need to wait a bit until tempers have cooled and unwind them slowly. We’ve mentioned having Russia seize Western assets and break patents as possible countermeasures.
We need to remind readers that even hard core Tory and Russia hater Ambrose Evans-Pritchard said that Russia would eventually win any sanctions war, it had too large a position in too many essential commodities.
This article is a translation of an article describing the possibilities, by Olga Samofalova, translated and introduced by John Helmer.
By John Helmer, the longest continuously serving foreign correspondent in Russia, and the only western journalist to direct his own bureau independent of single national or commercial ties. Helmer has also been a professor of political science, and an advisor to government heads in Greece, the United States, and Asia. He is the first and only member of a US presidential administration (Jimmy Carter) to establish himself in Russia. Originally published at Dances with Bears
The ancient difference between the confiscation of your assets and a tax by force was the mandate of Heaven. This was the public announcement from God, transmitted through fellows wearing funny hats and costumes accompanied by drumbeats and whistles. When God wants to stick you up, they said, you’d better hand over your money or your life.
These days the rulers of the US, the European Union (EU) and Canada call this the “Rules Based Order”. That’s to say: I make the rules, you take my orders. The meaning is still the ancient one – your money or your life.
The Chinese empire has been famous for a dress-up ceremony in which those who made the rules received the agreement of those who took the orders. It was called the kowtow. Nine kowtow was the standard, plus expensive gifts. The Roman empire and most of its successors, called it tributum, tribute. Over the years, other names for it have been tax, protection money, and a gender specific form of kowtow popular in England and France called the ius primae noctis, droit de seigneur, or lord’s right.
The quaintness of the ceremony varies from place to place. The British empire demanded its colonial peoples wave a small Union Jack in the left-hand corner of their independence flag. They also required their subject children’s pilgrimage at least once in their lives to the fence of Buckingham Palace in London for at least one performance of the Changing of the Guard.
In keeping with the times since 1945, the US empire has been more straightforward. It doesn’t require pilgrimages to the White House fence for children of tender age. It does require you keep the US dollar in your pocket, or the local currency whose value is fixed in proportion, and whose state surpluses of taxation and pension funds must be stored in US Treasury notes, as well as the dollar.
In Russia, starting in 1991, Boris Yeltsin innovated on these measures by inviting US advisors to run the Russian economy, which Yeltsin paid for by imposing a 100% tax on ordinary Russians’ salaries. This started the system of oligarchs whom Yeltsin allowed to dispatch and store, tax free, in the US, UK and EU as much state capital and income as they could carry off. How that system has worked for the past thirty years, oligarch by oligarch, has been the subject of analysis here. The effort has not gone without recognition.
At this very moment, the oligarchs are facing a Christian tax, but it’s not the Russian one you might think they have earned. Instead, the 100% tax is being imposed in the form of confiscation statutes by the US, UK and EU. This is not economic warfare so much as the application of the principle that what the oligarchs have been doing to Russians should now be done to them, according to the Mandate of Heaven as recorded in the Gospel of Matthew 7:12, Luke 6:31.
The Mandate of Heaven can also be found on the bottom of the US dollar note. That’s the signature line where the Treasurer of the United States and the Secretary of the Treasury promise to pay “all debts public and private”. Like other US treaty signatures, this no longer applies to Russians, common ones, oligarchs, or the state, according to this novelty in the Rules Based Order. Russians must now sell everything in the country of value for US dollars – oil, gas, coal, uranium, aluminium, titanium, wheat, potash, urea, bank loan debts, airplane leases, etc. But those dollars cannot be used by Russians to buy anything else. That value has been confiscated.
The response is still being formulated in Moscow. Russian government officials, members of the State Duma, the Central Bank of Russia, the General Staff, the oligarchs and their lobbyists have yet to agree. The terms of the debate are still largely secret; here was an opening shot against the Central Bank by Sergei Glazyev.
To avoid the time-demanding task of reading through this website archive, here’s a 15-minute guide in pictures to the way the tributary system works, and the Chinese way of doing things. The ancient way, not the way of the partnership between President Vladimir Putin and President Xi Jinping.
To follow the current US dollar pricing of the Russian commodity exports which dominate the world, and whose prices are accelerating past previous record highs, according to the new Mandate of Heaven, click on Trading Economics for each commodity report and chart.
Now to understand what Russians propose to do, what form their kowtow will take, or not, here is what Vzglyad (“Viewpoint”), the leading Moscow source for security strategy and tactics, is reporting from Olga Samofalova. Her report has been translated and reproduced here without editing; the illustrations have been added. Click to read the original in Russian.
“What is Russia’s economic response that frightens the West — Russia has economic trump cards up its sleeve
By Olga Samofalova
The West’s tough sanctions war with Russia may lead to an equally tough economic response from Moscow. And in the form of an answer which six days ago seemed beyond belief. However, right now Russia’s refusal to pay Western debts and impose an embargo on the sale of oil and gas to Europe look like the scenarios that will work effectively. Notwithstanding, for the time being, Russian gas transit through Ukraine continues to move; the volume has even doubled.
So far, Russia has responded only to the part of the Western sanctions where it is easiest to do so. For example, in response to the EU ban on Russian aircraft flying, Moscow immediately banned flights to European carriers and added a ban on flying over Russian territory. This will make flights from Europe to Asia longer and more expensive.
With retaliatory sanctions, which are more difficult to decide on because they strike unpleasantly at Russian business, Moscow is in no hurry. It is better to calculate all the consequences once again.
For example, it is difficult to respond symmetrically to the ban on selling and servicing Airbus aircraft to Russia. ‘This actually deprives the Russian market of about 40% of passenger traffic. In response, it is possible to prohibit the supply of titanium to Europe, since titanium, which is needed in the production of airbuses, is of two-thirds Russian origin,’ says Exante analyst Vladimir Ananyev.
There has been no response to the sanctions against Russia’s largest banks and Russian reserves. Here Moscow has thrown all its efforts into mitigating the consequences on the economy and the ruble from the economic restrictions of the West. Also, it’s difficult to respond without hurting yourself.
Russia may refuse to pay its foreign debts, Oxford Economics admits. According to their estimates, payments by Russian borrowers on debt obligations in hard currency this year amount to about $55 billion, and sovereign bonds amount to $2.6 billion. If Russia is deprived of access to its accumulated foreign exchange reserves of $640 billion and to SWIFT payment systems, then Russia may well be unwilling to pay its debts.
‘The logic is this: why send money abroad if our assets are frozen there? Formally, this will mean the defaults of our issuers. Although in market conditions, without sanctions, nothing like this would have happened. But in such conflicts, economic logic no longer works. The confrontation can grow to the rupture of all economic ties with the West — the arrest of everything Russian abroad and the arrest of everything foreign in Russia,’ says Ananyev.
However, instead of such a drastic response, we can use the tactics of a graduated escalation of strikes. For example, Russia has export goods in its arsenal without which the European economy and the life of Europeans can deteriorate sharply. Among the relatively strong retaliatory measures may be a ban on Russia’s export of fertilizers to the EU.
‘Fertilizer prices are rising in the world. Therefore, the ban on their export will be a real gift for farmers and local consumers. It will restrain prices within the country, and on the other hand, it will sharply increase the costs of European agricultural companies. This will result in even greater food inflation in the European countries’, says Ananyev.
POTASH FERTILIZER PRICE IN USD PER METRIC TONNE, YEAR TO DATE
Europe also values Russian metals very much. And this means that it is possible to introduce a ban on the export of a particular metal step by step. ‘The ban on the export of palladium will hit the European automotive industry, as this metal is used in catalysts for cleaning exhaust gases. At the same time, the ban on the export of nickel and cobalt will negatively affect the already expensive production of electric vehicles,’ Ananyev notes.
Probably, according to this logic the authorities can come up with a number of similar bans on the export of goods important to Europeans from Russia.
Russia’s toughest response to Western sanctions may be the refusal to supply Russian hydrocarbons — oil, gas and coal. This is a powerful trump card up Moscow’s sleeve, which, in practice, is helping to restrain European politicians from total economic sanctions. Not all Russian banks fall under the restrictions, but not everyone is disconnected from SWIFT either. Export operations are becoming more complicated, but even with tough sanctions, Brussels is leaving a window of opportunity for quite normal mutual trade.
Now, generally speaking, Russian hydrocarbons have gone beyond the limits of the overall geopolitical situation. Brussels has limited itself, in fact, to the formal revocation of the certification of the Nord Stream–2 project on the first day of Russia’s special operation, and that’s it. But this gas pipeline has not been launched yet, so ‘stopping’ it is the easiest thing for Europe.
Other gas pipelines continue to operate and pump gas to Europe. Moreover, Russian gas continues to flow through the Ukrainian gas transmission system without interruptions, as has been reported by the Ukrainian GTS operator itself.
‘The supply of Russian Urals oil is also going on as if nothing has happened. The publications of foreign media that allegedly the markets are already afraid to buy Russian oil (in particular, China) do not correspond to reality. It has been speculation that they were just afraid that the money for the goods would get stuck because of the sanctions. But the fears have quickly passed. Statistics show that both yesterday and today purchases of Russian oil have even increased. Oil shipments are proceeding on a normal schedule both through the ESPO [Eastern Siberia Pacific Ocean] pipeline and through the [Pacific] port of Kozmino, and through Novorossiysk [Black Sea], and through Ust-Luga [Baltic],’ says Igor Yushkov, an expert at the Financial University under the Government of the Russian Federation [FNEB] and the National Energy Security Fund.
Gas supplies to Europe are not just going through the Ukrainian pipeline, they have also grown. The Europeans have increased their supply requests, and Gazprom has begun pumping through the Ukrainian pipeline instead of 50 million cubic meters of gas per day, as it was before the start of Russia’s special operation in Ukraine, all 109 million cubic meters of gas per day, an increase of two times, the expert notes. This is the mandatory maximum which is fixed in the contract.
‘Europe has started to buy more imported gas for economic reasons. Their underground storage facilities have been depleted, there is almost nothing there. Therefore, Europeans are switching to current imports. The Europeans are trying to take the supply of hydrocarbons beyond the curbs of the sanctions,” the expert of the FNEB believes.
But Russia can stop the supply of hydrocarbons as a retaliatory measure if it considers Western sanctions to be catastrophic for the Russian economy, Yushkov warns. ‘If earlier this measure looked fantastic and delusional, now this option can be considered as a working one, but still as a last resort,’ the expert says.
‘Already the game is going on without rules. The most pessimistic scenario of the conflict is the seizure by the West of all accounts and property of all Russian residents. Then the response can be absolutely anything, up to the refusal to supply energy resources. The logic is this: why sell oil and gas if the currency earned for them is frozen on the accounts?’ says Ananyev. This is certainly the most extreme step that Moscow might take. Because it seriously hits not only Europe and the global economy, but also Russia itself.
After Western sanctions against Russian reserves, the Central Bank of Russia partially loses its role as a supplier of currency to the domestic market. Instead, export companies should now saturate the Russian market with currency and, in fact, be responsible for the ruble exchange rate. To do this, they have been required to sell 80% of their foreign exchange earnings [to the Central Bank].
‘Hydrocarbon exporters are becoming currency donors to the Russian market. This currency will then be bought by companies which will purchase goods for import. This fact also indicates that the scenario of stopping the export of hydrocarbons is not considered as the main one,”’ Yushkov believes.
However, if that is implemented, then Armageddon will happen. Not only Russia and Europe will suffer, but also the entire world economy. But as in any confrontation, there will be those who will earn good money on this.
‘Stopping oil supplies to the United States and the European Union in the first stage will cause a global shortage of black gold. Then the global restructuring of the market will begin. Russia will send all its oil to Asian markets in order to maintain export volumes. And those suppliers which were on the Asian market will send their oil to the European and American markets to replace Russian raw materials.
But while this redistribution of oil and supplies is happening, there will be a shock on the world market and gas prices will soar to $150-$200 per thousand cubic meters’, says Yushkov.
This will affect not only the global energy sector, but also the entire global economy. ‘With such oil and gas prices, it will become generally unprofitable to transport many goods by sea or over long distances, because the cost of delivery will seriously increase, the freight rate for tankers will become more expensive,’ the expert of the National Oil and Gas Company notes.
The problems with supply disruptions and rising food prices which the world has faced during the pandemic may not seem like problems at all compared to what might come next in the world.
Stopping gas supplies to Europe is even more disastrous in terms of consequences for both sides. Russia will not be able to transfer West Siberian gas, which goes through pipelines to Europe, to other markets. There is no gas pipeline for such a volume to China or other Asian countries. To send gas by sea by tankers, it needs to be liquefied, but Russia does not have so many LNG plants for this, or gas carriers too. This means that Russia will have to stop production. ‘In the western direction, if without Turkey, there is about 150 billion cubic meters of gas from Russia. Where will we put so much gas if we don’t supply it to Europe? Nowhere. We’ll have to stop lifting the gas. This means that the world market will lose these volumes, and immediately there will be a large deficit of gas in the supply-demand balance of the European Union,’ says Yushkov.
‘No matter what anyone says, Europe will have nowhere to take such volumes of gas from. The world is not able to increase production by 150 billion cubic meters. Europeans will try to switch to other energy sources. An attempt to switch to coal will fail, since Russia is also the largest supplier of coal to the EU. The Europeans will try to launch everything that is possible: all the shut-down nuclear power plants [to reopen], the closed coal deposits in Germany and Poland.’
‘But this will not save Europe from being plunged into darkness. Electricity will be supplied by the hour in portions and only to individual consumers. If this happens during the heating season, then Europeans will also remain without heating. The world energy crisis of 1973 will seem like flower show,’ Yushkov argues.
As for LNG, Asia will not just give away the gas it needs and has contracted for. A price war will begin for suppliers who will earn good money on this. But consumers will definitely feel the withdrawal of 150 billion cubic meters of Russian gas from the market. There are more European buyers than Asian ones. Europe accounts for about 70% of Russian gas supplies and 50% of oil. Hydrocarbons bring in almost half of the state’s budget revenues. This will be a serious blow to Russia.
‘But when there is an economic war, cars, flights abroad, are no longer needed, and basic needs like food, light in homes, and fuel come to the fore. And Russia is provided with all this, unlike most countries of the world and Europe. The availability of a resource base allows us to set up any form of production, though it will take time and organization. But at least that is real, whereas without raw materials any industry becomes useless,’ Ananyev concludes.”