When the history is written about the current war in Ukraine, the economic fallout will be seen as one of the critical determining factors. The West grossly miscalculated that Russian sanctions would create sufficient stress and pressure among the Russian population to force Vladimir Putin out of power. This is one of the greatest intelligence failures since the end of World War II. There are two possibilities — 1) intelligence community analysts failed to warn policymakers about the critical resources Russia controls and Russia’s ability to operate as a largely self-sufficient economy, or 2) policymakers were warned and ignored the intelligence analysis. I am not privy to the intelligence community product on this front, so I cannot tell you if it is #1 or #2.
The world is facing a global economic contraction that is exacerbated by the sanctions on Russia, supply chain disruptions in China and out of control fiscal policies in the United States and Europe. The following video out of Estonia is symptomatic of the mounting economic perils:
Winter has arrived and there is no immediate rescue available to solve the energy shortage created by trying to close down Russia’s role as a supplier of oil and gas. Mr. Ann Veskimägi, head of Estonia’s largest furniture factory and president of the furniture union, talks about the real economic situation in his country and other European countries. He notes:
Massive reductions of stuff in the company, productivity decreasing and falling, non-competitiveness, bankruptcy and ruining.
Industries such as woodworking, metalworking, chemical industry and fertilizer production have suffered. Siemens is laying off more than 2,000 people. The main cause of total economic problems is the rise in electricity prices.
Equally bad news from the UK:
The UK faces its biggest drop in living standards on record as the surging cost of living eats into people’s wages, It also expects the number of people who are unemployed to rise by more than 500,000.
UK Finance Minister delivered the grim
news on Thursday:
The United Kingdom has slipped into recession, the country’s finance minister Jeremy Hunt said Thursday. The last time the U.K. was in recession was during the 2008 financial crisis, which shattered the global economy.
Hunt, the Chancellor of the Exchequer and the second-highest ranking member of Britain’s government behind Prime Minister Rishi Sunak, made the anxiety-inducing declaration to lawmakers gathered in the House of Commons to hear his hour-long financial address, called the Autumn Statement.
In it, he outlined the state of the world’s fifth-largest economy, which has been battered by soaring inflation and energy prices. The economic woes are due in large part to the war in Ukraine and supply chain disruptions lingering from the COVID-19 pandemic, but also a self-inflicted wound by the previous prime minister and her top economist, whose plan to slash taxes sent shockwaves through financial markets.
In fact, all of Europe is facing an escalating collapse of economic activity. The deadly mix of rising unemployment and inflation will force the European governments to make hard, wildly unpopular policy choices.
Do you think that Europe can sustain its current policy of continuing to fund Ukraine? Compounding the daunting challenge is the success of Russian missile strikes in destroying Ukraine’s ability to continue to supply electricity to its major cities. The lack of power means that water cannot be pumped to the upper stories of the condos/apartments that dominate the Ukrainian cities. It also means those apartments will not have heat. With no water, no lights and no heat those civilians will have to abandon their homes. Normal life is no longer feasible.
Ukraine’s ability to sustain military operations is diminished, in part, because the United States does not have unlimited weapons and ammunition to sustain them. According to CNN:
As the first full winter of Russia’s war with Ukraine sets in, the US is running low on some high-end weapons systems and ammunition available to transfer to Kyiv, three US officials with direct knowledge tell CNN.
The strain on weapons stockpiles – and the ability of the US industrial base to keep up with demand – is one of the key challenges facing the Biden administration as the US continues to send billions of dollars of weapons to Ukraine to support its fight against Russia. One of the officials said the stockpiles of certain systems are “dwindling” after nearly nine months of sending supplies to Kyiv during the high-intensity war, as there’s “finite amount” of excess stocks which the US has available to send.
Among the weapons systems where there’s particular concern about US stockpiles meeting Ukrainian demands are 155mm artillery ammunition and Stinger anti-aircraft shoulder-fired missiles, the sources said.
Some sources also raised concerns about US production of additional weapons systems, including HARMs anti-radiation missiles, GMLRS surface-to-surface missiles and the portable Javelin anti-tank missiles – although the US has moved to ramp up production for those and other systems.
Tough talk and promises of continued support to Ukraine cannot reverse the reality of the West’s limited ability to continue to pour scarce resources into Kiev’s black hole. Republican control of the House of Representatives creates an even bigger problem for Joe Biden to make good on his promise to send more money and weapons to Ukraine, if his administration can find them.
We are witnessing a consequential historical moment that is going to change the face of the international order. The ability of the United States to dictate terms and remain in charge of the international economic order is now in question.
One final observation. Europe is being kept in the dark in terms of honest information about the situation in Ukraine. One of my friends, a retired US Naval officer, recently visited Paris and reported that getting any legit information about the progress of the war in Ukraine is very difficult. The populace is still being inundated with propaganda. Yet, the economic chaos is real and palpable. At some point, reality will compel authorities to dispense with the propaganda and try to figure out how to placate angry workers amid a contracting economy.