Economics of cold war with Russia enter new phase

It’s hard to know if – in Churchill’s words – we’ve reached the end of the beginning or some other point in the West’s new cold war with Russia. Certain issues appear to be culminating, however.

Russia has been slowly turning off the energy tap on Europe, ratcheting up cost-of-living pressures, and is now threatening an all-out oil and gas embargo in response to the EU’s energy price cap proposal. European Commission president Ursula von der Leyen told journalists on Wednesday that that the executive would propose placing a cap on the price that can be paid for Russian gas.

A complete withdrawal of Russian energy supply, with the possibility of blackouts, and a full-blown recession across Europe is now more likely than not. This was posited all along as a potential outcome of Russia’s invasion of Ukraine. Ukrainian foreign minister Dmytro Kuleba said Russia was seeking to blackmail Europe with its energy resources.

Western sanctions

Where the Ukraine war itself is going is anyone’s guess. Russia launched its invasion on February 24th and now occupies about one-fifth of Ukrainian territory but is facing a Ukrainian counter-offensive in the south and east. Moscow’s sourcing of Soviet-era weapons from North Korea could be read as desperate. The move by Russia’s defence ministry indicates that “the Russian military continues to suffer from severe supply shortages in Ukraine, due in part to export controls and sanctions”, a US intelligence official said.

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All this must be juxtaposed with Russia’s ability to withstand the western sanctions, which has always been underestimated. The rouble has weakened in recent days in response largely to falling oil prices but the currency has remained relatively strong after its initial post-invasion slump while Russian stocks have also gained.

In a speech to an economic forum in Vladivostok, President Vladimir Putin insisted Russia was coping with the West’s economic “aggression”. He talked about confidence in the dollar and the euro plummeting and how Russia’s sovereignty was being strengthened.

Ultimately it seems to come down to Europe’s short-term pain versus Moscow’s long-term reversal. If Europe is facing a fierce winter of financial pain, Russia is facing a complete reversal of its anti-Nato strategy, political isolation and a more prolonged economic downturn.