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Thursday, May 26, 2022

Military economist sees Putin as ‘economic suicide’

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Marcus Matthias Keupp heads the Department of Military Economics at the Military Academy of the Swiss Federal Institute of Technology in Zurich and analyzes events in Russia and Ukraine in detail. He sees a lot of poor planning and explains in an interview with Tagesspiegel why the war for Russia could reach a tipping point in seven days.

Mr Keupp, Vladimir Putin only wants to provide gas supplies to “enemy states” like Germany for rubles, what is his goal?
On the one hand, I would describe it as a verbal intervention. This is something that central banks, for example, like to do. Mario Draghi got up in 2012 and pronounced the famous phrase “Whatever it takes”. Only with this ruling did he manage to stabilize the euro exchange rate. And now something similar happened with the ruble. So just because Putin said that, the ruble rate has already somewhat stabilized. That’s one side, this verbal intervention.

Until now, the supply contracts have been in euros and dollars, what is behind them?
The largest ruble market is in Moscow, and ultimately these transactions would always have to be settled with the Russian central bank. In other words, it is an attempt to circumvent sanctions against the central bank, whose euro reserves are frozen abroad. But now we must also consider that gas supply contracts are sometimes very long term.

So don’t imagine it like going to the weekly market and saying, today I need so many cubic meters and I buy them quickly, but they are contracts, some for 10 or 15 years. And they are traded in euros and US dollars. If he wants to enforce that, then he would have to break the contract. I can’t imagine how that should work. So I prefer to describe it as a verbal intervention.

In principle, he is trying to blackmail the West: rubles and euros for Moscow or freeze gas, but the federal government says, for example, that this would put hundreds of thousands of jobs at risk.
Of course, politicians stand up and create those images now. But first you have to get away from this vision, according to the slogan Europe needs so much and so much Russian natural gas. In Switzerland or Sweden, for example, it doesn’t matter at all. It can replace natural gas’s share of the energy mix fairly quickly. In Western Europe, Italy and the Netherlands in particular are now in trouble. So you need to take a close look at each country: how important is natural gas in the energy mix, and what percentage of natural gas comes from Russia? Then the situation is put into perspective. Under no circumstances should you make the mistake of simply buying these excited images broadcast by politicians.

Military economist Marcus Matthias KeuppPhoto: Private

Putin’s announcement has already caused gasoline prices to rise by around 25 percent.
Yes, but that is a kind of risk premium; because the market expects supply to be reduced. But so far, as much oil and gas comes out of Russia as before the war. But it is not that the world is now without natural gas, or that the world is at the mercy of Russia or at the mercy of Russia. We should now move to a globalized LNG gas market. The United States has already signaled that it wants to supply Europe with liquefied gas tankers.

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Can this really circumvent sanctions?
Well, in principle we don’t need the central bank to bring foreign currency to Russia, because they still have unauthorized banks that handle the gas payment business. The best example would be Gazprom Bank. So this step that Putin took yesterday, I really don’t need it at all. You could also take foreign exchange normally, ie through normal commodity trading. But of course if you look at the Russian economy, the Russian government now has a lot of problems to solve at the same time.

Which ones in particular?
It must stop currency devaluation, it must plug the holes in banks’ balance sheets as businesses slowly begin to collapse. And Russia will have to intervene very deeply in its national welfare fund. And on the other hand, it no longer sells oil or gas.

It is about cushioning the economic consequences of the sanctions for the real economy and for the financial sector. And this balance is getting worse every day.

And eventually the national welfare fund will be empty. So the state has to keep the country running with the money printing machine. And that is the great tragedy of this story. The war will not end, but the Russian real economy will completely collapse.

More about the Ukrainian war on Tagesspiegel Plus:

They say an energy boycott would not stop Putin’s war machine.
Exactly. The war would not stop. That is for two things. The Russian war machine is independent of the export business. In the West we talk a lot about exporting oil and gas, and that is also important for the Russian economy, but not for the Russian military. If you look at war in military economic terms, you have to look at two things. On the one hand, the arms industry, where weapons and vehicles are manufactured. And it is completely self-sufficient in terms of raw materials.

Does not depend on foreign exchange earnings for labor, technology, financing. And the second important point is logistics, that is, especially fuel, diesel, kerosene. And it all comes from domestic Russian production.

Of eleven million barrels of oil per day, three million per day are for Russia’s own consumption. And that includes the military. All this is delivered by Rosneft and billed in rubles. Likewise, the armed forces are paid in rubles.

This is exactly why this idea doesn’t work. Let people in the West say well, now we will boycott Russian oil and gas and then the war will stop. This is not the case and I can only caution against uncritically accepting this train of thought. The war will not end because of this.

What are you doing? Russian President Vladimir Putin, here at a judo unit.Photo: Mikhail Klimentyev/AFP

Economically, they already see a throwback to Soviet times.
Yes, actually we have to say goodbye to modern Russia. Every day it is getting more and more in the direction of the Soviet Union, where we say: there is this huge military apparatus that eats up most of the state budget and then there is also subsidized staple food for the population. And besides that there is nothing else.

And that’s why I say: It’s economic suicide. This is the investment of an economy towards a developing country.

Will there be a change to a war economy, even with the confiscation of foreign companies?
In principle, it is possible to turn an economy into a war economy, but not overnight. We are dealing with a total failure of the Russian leadership. This campaign in the Ukraine was designed for a few days’ operation, maybe four to five days. They then took kyiv, then deposed the government and installed a puppet regime.

Of course, if you plan with this, then you are not preparing the national economy for longer armed conflicts. But if they now say that we are preparing for a month-long campaign in a country that is one and a half times the size of Germany and has 44 million inhabitants, then they have to prepare the national economy years in advance.

Putin has already made such approaches, the central bank began to accumulate these reserves as early as 2018. And Russia suddenly changed its debt policy and began to reduce its external debt. On the other hand, one has to say: this is, of course, amateurish. You can’t run an operation of this size against a territory of this size with 200 billion in welfare funds. So you would really have to rebuild the entire economy.

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Even then, when war broke out in 1914, no one expected a long war. And even then, the national economies and the arms industry were not prepared for something like this. And already in the fall of 1914 artillery and shells were rationed, in other words, the troops were told that they could only fire so many pieces per day. And that’s the big question now; Can the Russian defense industry supply supplies quickly? She can produce, that’s not the problem.

The problem is more of a logistical type, so that she can take her production to the combat zone so that the war continues on that side. That will be the case in about seven days and it will be a major turning point in the war.

Putin seems cornered, do you fear a resurgence of the war, even with the nuclear option?
I think you should not overestimate that. Putin still has many ways out. For example, he can say: Yes, now I have achieved my goal of war. Ukraine declares itself neutral again and will not join NATO for the foreseeable future.

You don’t necessarily have to scale now. It is quite possible that he is also selling what the West sees as a military defeat as a victory at home. As long as he controls the propaganda and the security forces, that is entirely possible. There is then a parallel world of the official narrative, as in Iran or North Korea, for example. One does not always have to immediately think about nuclear escalation. Keep in mind that Russian rhetoric is very colorful and very self-assured. One should not overestimate that.

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