Yves here. The Western sanctions war with Russia will not change the outcome of the conflict in Ukraine. Russia will prevail but what the settlement looks like is very much an open question. However, one thing that is more obvious is that the economies of most European countries, and the euro, will suffer. Michael Hudson argues that they are not collateral damage but intended targets.
Hudson points out that Europe has no prospect of getting adequate LNG from the US until at least 2024 due to the need to increase capacity at ports. Reader PlutoniumKun has described how an even bigger constraint is tankers. Only South Korea builds LNG carrying ships and they are already have a full book of orders. A recent OilPrice article pointed out that US frackers will also have difficulty in ramping up production, due to shortages of key inputs like fracking sand, equipment, cement, and even steel tubing.
Europe seems to be operating under the fond hope that the sanctions will so damage Russia that it will have to relent before the winter cold kicks in. But this ignores the fact that there’s no evidence that Russia is going through any real hardship yet, and its ability to manage around shortages of important Europe-supplied products like car and aerospace parts has yet to be tested.
Plus Russia in the 1990s endured tremendous privation, vastly worse than anything likely to occur in the near or even intermediate term, plus Russians regard this conflict as an existential crisis. Oh, and on top of that, the US has shown no intention of easing sanctions even if Russia were to capitulate tomorrow. What exactly is in this for Europeans?
Hudson explains that the current trajectory has high odds of the eurozone running sustained trade deficits with the US, which will prove difficult to manage given its lack of central fiscal authority and its hawkish central bank.
By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College. His latest book is “and forgive them their debts”: Lending, Foreclosure and Redemption from Bronze Age Finance to the Jubilee Year
It is now clear that the New Cold War was planned over a year ago, with serious strategy associated with America’s perceived to block Nord Stream 2 as part of its aim of barring Western Europe (“NATO”) from seeking prosperity by mutual trade and investment with China and Russia.
As President Biden and U.S. national-security reports announced, China was seen as the major enemy. Despite China’s helpful role in enabling corporate America to drive down labor’s wage rates by de-industrializing the U.S. economy to China’s benefit, the latter’s growth was recognized as posing the Ultimate Terror: prosperity through socialism. It is that clash of economic systems – socialist industrialization vs. neoliberal finance capitalism – that always has been the great enemy of the rentier economy that has taken over most nations in the century since World War I ended, and especially since the 1980s.
In this New Cold War against China, the U.S. strategy was to pry away China’s most likely economic allies, especially Russia, Central Asia, South Asia and East Asia. The question was, where to start the carve-up and isolation.
US strategists saw Russia as the best opportunity for isolation, both from China and from the NATO Eurozone. A sequence of increasingly severe – and hopefully fatal – sanctions against Russia was drawn up to block NATO from trading with it. All that was needed to ignite the geopolitical earthquake was a casus belli.
That was arranged easily enough. The New Cold War could have been launched in the Near East – over resistance to America’s grab of Iraqi oil fields, or against Iran and countries helping it survive economically, or in East Africa. Plans for coups, color revolutions and regime change have been drawn up for all these areas, and America’s African army has been built up especially fast over the past year or two. But Ukraine has been under attack for eight years, since the 2014 Maidan coup, and offered the chance for the greatest first victory in this confrontation against China, Russia and their allies.
So the Russian-speaking Donetsk and Luhansk regions were shelled with increasing intensity, and when Russia still refrained from responding, plans reportedly were drawn up for a great showdown last February – a heavy Western Ukrainian attack organized by U.S. advisors and armed by NATO.
Russia’s defense of the two Eastern Ukrainian provinces and its subsequent military destruction of the Ukrainian army, navy and air force over the past two months has been used as an excuse to start imposing the U.S.-designed sanctions program that we are seeing unfolding today. Western Europe has gone along whole-hog. Instead of buying Russian gas, oil and food grains, it will buy these from the United States, along with sharply increased arms imports.
The Prospective Fall in the Euro/Dollar Exchange Rate
It therefore is appropriate to look at how this economic war is likely to affect Western Europe’s balance of payments and hence the euro’s exchange rate against the dollar.
European trade and investment prior to the War to Create Sanctions had promised a rising mutual prosperity among Germany, France and other NATO countries vis-à-vis Russia and China. Russia was providing abundant energy at a competitive price, and this energy supply was to make a quantum leap with Nord Stream 2. Europe was to earn the foreign exchange to pay for this rising import trade by a combination of exporting more industrial manufactures to Russia and capital investment in rebuilding the Russian economy, e.g. by German auto companies, aircraft and financial investment. This bilateral trade and investment is now stopped – for many, many years, given NATO’s confiscation of Russia’s foreign reserves kept in euros and British sterling.
In its place, NATO countries will purchase U.S. LNG – by the time they can spend the billions of dollars building sufficient port capacity by perhaps 2024. (Good luck until then.) The energy shortage will sharply raise the world price of gas and oil. These countries also will step up their purchases of arms from the U.S. military-industrial complex. The near-panic buying will also raise its price. And food prices also will rise as a result of the desperate grain shortfalls resulting from a cessation of imports from Russia on the one hand, and the shortage of ammonia fertilizer made from gas.
All three of these trade dynamics will strengthen the dollar vis-à-vis the euro. The question is, how will Europe balance its international payments with the United States? What does it have to export that the U.S. economy will accept as its own protectionist interests gain influence, now that global free trade is dying quickly?
The answer is, not much. So what will Europe do?
I could make a modest proposal. Now that Europe has pretty much ceased to be a politically independent state, it is beginning to look more like Panama and Liberia – “flag of convenience” offshore banking centers that are not real “states” because they don’t issue their own currency, but use the U.S. dollar. Since the eurozone has been created with monetary handcuffs limiting its ability to create money to spend into the economy beyond the limit of 3 percent of GDP, why not simply throw in the financial towel and adopt the U.S. dollar, like Ecuador, Somalia and the Turks and Caicos Islands? That would give foreign investors security against currency depreciation in their rising trade and its export financing.
For Europe, the alternative is that the dollar-cost of its foreign debt taken on to finance its widening trade deficit with the United States for oil, arms and food.
For the United States, this is dollar hegemony on steroids – at least vis-à-vis Europe. The continent would become a somewhat larger version of Puerto Rico.
The Dollar vis-à-vis Global South Currencies
The “Ukraine War” in its full-blown version as the New Cold War is likely to last at least a decade, perhaps two as the U.S. extends the fight between neoliberalism and socialism to encompass a worldwide conflict. Apart from the U.S. economic conquest of Europe, its strategists are seeking to lock in African, South American and Asian countries along similar lines to what has been planned for Europe.
The sharp rise in energy and food prices will hit food-deficit and oil-deficit economies hard – at the same time that their foreign dollar-denominated debts to bondholders and banks are falling due and the dollar’s exchange rate is rising. Many African and Latin American countries – along with North Africa – face a choice between going hungry, cutting back their gasoline and electricity use, or borrowing the dollars to cover their dependency on U.S.-shaped trade.
There has been talk of IMF issues of new SDRs to finance the rising trade and payments deficits. But such credit always comes with string attached. The IMF has its own policy of sanctioning countries that do not obey U.S. policy. The first U.S. demand will be that these countries boycott Russia, China and their emerging trade and currency self-help alliance. “Why should we give you SDRs or extend new dollar loans to you, if you are simply going to spend these in Russia, China and other countries that we have declared to be enemies,” the U.S. officials will ask.
At least, this is the plan. I would not be surprised to see some African country become the “next Ukraine,” with U.S. proxy troops (there are still plenty of Wahabi advocates and mercenaries) against the armies and populations of countries seeking to feed themselves with grain from Russian farm and oil or gas from Russian wells.
The world economy is being enflamed, and the United States has prepared for a military response and weaponization of its own oil and agricultural export trade, arms trade and demands for countries to choose which side of the New Iron Curtain they wish to join.