The Economic Consequences of the Russia-Ukraine War

The Economic Consequences of the Russia-Ukraine War
(David Goldman, July 1, 2022)

Transcript available below

About the speaker

David Goldman is an American economist, music critic, and author, best known for his series of online essays in the Asia Times under the pseudonym Spengler. He is the Wax Family Fellow at the Middle East Forum, a Senior Fellow at the London Center for Policy Research, and a member of the Board of Advisors of Sino-Israel Government Network and Academic Leadership (SIGNAL). According to the Claremont Review of Books, the “Spengler” columns in the Asia Times have attracted readership in the millions.

His analyses of global events have become highly regarded. Former C.I.A. National Intelligence Council Vice Chairman Herbert E. Meyer said, “Ask anyone in the intelligence business to name the world’s most brilliant intelligence service, and we will all give the same answer: Spengler. David P. Goldman’s ‘Spengler’ columns provide more insight than the CIA, MI6, and the Mossad combined.” Goldman concealed his identity under the “Spengler” pseudonym until 2009, when he revealed his identity in the Asia Times article, “And Spengler is…” and the First Things article “Confessions of a Coward”.

Goldman regularly appears as a guest on CNBC’s Larry Kudlow Program, where he has been an outspoken critic of Federal Reserve efforts to resuscitate the American economy. He is the author of How Civilizations Die: (And Why Islam is Dying Too) and It’s Not the End of the World, It’s Just the End of You: The Great Extinction of the Nations.

He previously spoke at Westminster on the subject of Will China overtake the U.S. as the world’s leading superpower?



Robert R. Reilly:

Hello and welcome to the Westminster Institute. I am Robert Reilly, its director. Today, it is my great pleasure to welcome back to the Westminster Institute, an American renaissance man, David Goldman. David is an economist, financial analyst, music critic – actually, more than that, he is a music theoretician. David is also a prolific author. He is best known for his series of online essays in the Asia Times under the pseudonym Spengler. He is the Wax Family Fellow at the Middle East Forum and a Senior Fellow at the London Center for Policy Research.

His analyses of global events are highly regarded. Here is a sample from Herbert Meyer, former CIA National Intelligence Council Vice Chairman. He said, quote, “Ask anyone in the intelligence business to name the world’s most brilliant intelligence service and we will all give the same answer: Spengler. David Goldman’s Spengler columns provide more insight than the C.I.A., MI6, and Mossad combined,” unquote.

David previously spoke at the Westminster Institute on the subject of: Will China Overtake the U.S. As the World’s Leading Superpower?, one of our most viewed videos with over one hundred thousand views. Another talk was given on his latest book: You Will Be Assimilated: China’s Plan to Sino-form the World. And most recently, David spoke on the topic: Western Survival Depends on the Sacred. David is also the author of How Civilizations Die: (And Why Islam is Dying Too) and It’s Not the End of the World, It’s Just the End of You: The Great Extinction of the Nations. Today, David will be speaking on: “The Economic Consequences of the Russia-Ukraine War.” David, welcome back.

David Goldman:

Bob, it is a real pleasure and honor to be back with you. Thank you so much for that kind introduction. I have to say, regarding Herbert Meyer’s effusive praise, that doing better than government intelligence agencies is a low bar because spies are paid to tell their masters what they want to hear and not what they really think, so you know, if you are not being paid by a government, it is not hard to do better.

Unforeseen Consequences of the War

Robert R. Reilly:

David, you have been speaking on the Russia-Ukraine conflict and one aspect is on, let’s say, the unintended effects of Western sanctions. What are the economic consequences, the unforeseen economic consequences of this war?

David Goldman:

Well, we see that every day at the gas pump and elsewhere. I think there is a short term and a long term. The short-term problem, obviously, is higher energy and raw materials prices, particularly for food. The long-term problem is the threat to the dollar’s status as the linchpin currency of the international monetary system. I do not think we are going to see anything happen in that long-term regard for a year or two because everybody is so deeply bought into the dollar monetary system, particularly the Chinese, that nobody wants to see it go down, but everybody is making preparations as an alternative, so I will explain.

When President Biden imposed and persuaded other countries to impose sanctions on Russia, he tweeted (I believe it was April 6th) that Russia’s economy would be cut in half, and Russia would not even be among the world’s 20 top economies. It is now among the top 10 with an economy roughly the size of Italy or Texas. No such thing happened.

The Russian economy has taken a substantial hit. The International Monetary Fund thinks that it will shrink by about 8 percent this year, but by the standards of the kind of pain that Russia has sustained in terms of economics since the fall of communism, that is something, well, that is not going to deter Putin, that is not going to cause a mass uprising against his regime.

Exacerbating An Energy Shortage

We already had an energy shortage in the works when the war started. The oil price had risen into the $80-90 dollar per barrel range by February 24th when Putin began his reprehensible invasion of Ukraine. That was largely due to American policy errors. The American oil output had fallen by about 20 percent during the COVID period, partly because of COVID, but even more because the Biden administration started a witch hunt against oil drilling under pressure from the radical progressive environmentalist wing of his party, which discouraged the majors and independents from drilling oil. We had had a boom in American oil drilling. America had become a major oil exporter, [the] largest oil producer in the world during the Trump administration.

After a year of Biden, we were now importing oil again, so the market was already somewhat squeezed, and by pushing oil off the market, we got to prices now in the $110-120 dollar [per barrel] range. We have been higher, and it is likely prices will go higher, unless of course we have a world recession and people stop driving their cars, in which case the world price might go down a bit, but that is not the kind of way we want to see the oil price go down because it means people are suffering.

Even worse, what the sanctions did in the short term was to create a two-tier oil market because contrary to our expectations, India fell off the bandwagon and began importing Russian oil massively, and China became a major importer of Russian oil. Now, we do not know exactly how much they are importing, but most of the analysts who look at this believe that Asia has taken up all the Russian oil that Russia cannot sell to the West because of sanctions, and of course, the Europeans have made exceptions for themselves because they are heavily dependent on Russian oil as well as Russian natural gas.

Inflation and Rising Interest Rates

So for Europe that has meant inflation in the 8 percent range, which they have not seen since World War II. In the way Germany measures inflation, energy is a much larger component of their consumer price index than it is here, but it is certainly hurting people badly. Gasoline at the $5-6 dollar [per gallon] range at the pump is a major hardship for many American families. At the same time, China and India are buying discounted oil from Russia, which means they are paying the old price. The countries which refused to go along with the sanctions regime or pretended to go along but are buying energy under the table are getting a break. So Putin is building up political chips with India, which has been Russia’s ally for decades, really since the 1950s, China is cementing its relationship with Russia, and the West is suffering.

Now, in response to this, the central banks of the West are raising interest rates. Now, this is not going to do anything in my view to reduce inflation. There are times when [raised] interest rates are the right cure for inflation, [and there are] times when it is not. Back in the 1970s, Paul Volker raised interest rates drastically. The federal funds rate went up to close to 20 percent briefly. That is when we had inflation of 11 percent, the last time we were in this kind of mess. But that was a circumstance, Bob, where everyone in the market was borrowing all the money they could from banks, and buying all the hard assets they could, on the theory that hard assets would continue to increase in price, and you would pay back your loans in cigar coupon buy.

That is when private equity and leveraged buyouts became popular because you would buy companies with real assets and you would issue debt, but the real cost of debt service would fall because of inflation. That was also great housing all through the 1970s. With inflation for ordinary investors, housing was the one asset class that generated positive returns. Stocks went down, bonds went down, cash had negative returns, but houses kept going up. So there was a huge incentive on the part of borrowers to get all the debt they could and to buy hard assets, and that created an inflationary spiral driven by credit. So when Paul Volcker cut the credit, that had a big effect.

At the same time, Ronald Reagan of blessed memory introduced the biggest tax cut in U.S. history, which brought an enormous amount of supply onto the market. People worked harder, people started businesses, and the increase of supply meant a reduced amount of money in circulation, and the result was a very rapid cure for inflation in common with economic growth.

Nothing like that is happening today. This is a very specific kind of shock.

We had two stages of inflation. First, the federal reserve expanded its balance sheet by $6 trillion dollars and the U.S. government took its spending up to 30 percent of gross domestic product. That is an astonishing number. All through the last 40 years, government spending as a percent of GDP in good times and bad varied between about 7 to 23 percent. It was roughly 20 percent [in 2019]. Then with the COVID pandemic, the massive $6 trillion dollar stimulus pushed us up to 30 percent of GDP.

Now, fair enough, Donald Trump started this, but Donald Trump did this when the economy was completely prostate, people were hunkered down in their homes, you could not buy paper towels, nobody would go to work, the subways were empty, midtown Manhattan looked like a ghost town. You needed an emergency measure given the external shock of the pandemic.

The economy had already begun to recover pretty nicely by the time Joe Biden was elected, and Joe Biden doubled down on the stimulus. Now, that is like taking a guy who is having a heart attack, or his heart has stopped for whatever reason. You inject him with adrenaline. Then he gets up, he is up and ambulatory, and then you inject him with the same dose of adrenaline again. It is not going to have a very good effect. That is what Biden did. Instead of using the stimulus for emergency purposes, he offered a gigantic handout to democratic constituencies, so it is the doubling down on the stimulus which created the inflation. So the Federal Reserve, remembering that higher interest rates brought down inflation in the late 1970s and early 1980s, said, well, we will do the same thing again.

The Federal Reserve reminds me of the New Guinea cargo cults after World War II. If you recall, there were neolithic peoples who saw American aircraft bringing cargo during the war. They built air bases, and planes landed, and all these wonderful things came out of the planes. And then, of course, after the war, the Americans packed up and left. The planes stopped coming, so the neolithic people built airfields, and they built airplanes out of grass, and they built, you know, control towers out of grass, thinking that if they built these totems, cargo would return. Now, that is basically what the Feds are doing. They are doing what made sense under Volcker and Reagan, but makes absolutely no sense now, so whatever problems we have, the Federal Reserve has compounded them by applying the wrong kind of medicine.

A Divided, Weakened NATO

Robert R. Reilly:

How does this play into the now soon to be seventh round of sanctions we have put on Russia, and our constraining of the oil market, and our sanctioning the sales of Russian gold? And what was the most recent thing? Apparently, there is going to be an attempted G7 cap on the price of Russian oil. I do not know how they would do that.

David Goldman:

Yes, Bloomberg had a good laugh at this this morning, as did The Wall Street Journal. The financial press rang up a bunch of economists who said, well, this is silly. What possible motive do, for example, the Chinese or the Indians have to go along with a cap? Why would buyers accept a cap? This was a brainchild of a couple of very bright people, Mario Draghi and Janet Yellen, which is going nowhere. [The] basic problem is that the world is so beholden to Russian energy in a tight market, and the market is tight, as I said, largely because of Biden’s environmentalist fanaticism, [that] if the Russians do not provide oil to large parts of Western Europe, large parts of the Western European economy will shut down. So, Putin since the invasion has made more money than ever, 93 billion euros in the hundred days after February 24th, according to a Finnish think tank study, record world oil revenues for Russia, so Russia has no problem sourcing things that it needs, no problem financing the war, and the political pressure on Western European governments is enormous.

Now, Putin gave a speech a couple of weeks ago in which he boasted, you think you are going to depose me. No, the Western elites are going to go down. We are going to get new elites because of your blunders. And that, of course, is the danger that you have a political breakup of NATO because the pressure on governments due to the economic hardship is going to make some of these governments extremely unpopular.

Now, if Russia continues to shut off gas deliveries to Germany, Germany is getting only about 40 percent of the level of gas it would expect to store up for the winter, and you have a winter where industries shut down for lack of gas, and some people are actually cold, and the average family is heavily burdened, there will be a political problem in Europe. According to a calculation by the German newspaper Die Welte, the average German household is going to be paying in 2022 about $3,000 dollars a year more for home heating alone, not counting gasoline, than it did in 2020. That is for many households an impossible situation. For the bottom 20 percent of German households, that is an extreme hardship, so Germany is already talking about gas rationing, and you may have significant unemployment.

Look at the French elections a couple weeks ago. Emmanuel Macron was forced out of his majority in parliament by the Right and the Left. The Right under the National Front and Marine Le Pen gained the largest number of votes in history, and the Left coalition, which is also sympathetic to Putin, gained enough votes so that there is effectively an anti-NATO majority in the French Parliament. That does not throw Macron out of office, but it does constrict him.

In Germany, even before this latest surge in gas prices and the threat of a shutdown of large parts of the economy and real hardship because of lack of natural gas, even before that, the Social Democratic Party of Olaf Schultz, the Chancellor, the governing party was losing state elections one after another by the largest margins in its history. The opinion polls in both Germany and France show a lot of doubt about NATO policy. The most important opinion poll in Germany showed that two-thirds of Germans were against sending heavy weapons to Ukraine, so the support for the war was shaky to begin with, and the economic blowback of the sanctions could very well break up NATO.

Now, the reading that we got from most of the press, from the group of 70 that just occurred in Bavaria a couple of days ago, Wall Street Journal reports today that leaders were very divided, not happy about the idea of additional sanctions, which is why the kind of sanctions they talked about are these unworkable things like the cap on Russian oil prices and so forth. The strains were shown in the coalition.

So instead of having the great rally of NATO around the cause of Ukrainian sovereignty against, you know, the evil Russians, which so many American politicians have talked about, we may have instead a breakup of NATO, a decisive weakening of NATO, and I think if that happens, it will be our own fault because we got ourselves into a fight that we were not prepared for, and we vastly overestimated our economic power. That is the short-term side of it, and it is painful for everybody who you know has to heat a house, or fill up a car, or go to the supermarket. It could get a great deal more painful, and those political consequences will play out in a way that will not be pleasant for the leaders who got us into this.

What is Going on in Russia?

Robert R. Reilly:

Reinforcing what you said about Germany, David, there was a recent Wall Street Journal article about BASF, one of the largest chemical corporations in the world, which is in Germany, and has at least a score of factories there, saying that if natural gas is sanctioned in the winter and they receive – I forget the percentage – of you know less than what they need to power their factories, they will have to shut down, which will cause enormous unemployment. They are a major fertilizer producer, so that has effects down line in harming agriculture, and I imagine the political repercussions inside Germany will be enormous should that happen along with what you said, the normal household paying a great increase in their heating bill.

Now, President Biden recently said that, referring to the sanctions and how much the West is suffering from them as against the effects of these sanctions internally on Russia that this is a waiting game. In other words, who is going to say ouch first.

David Goldman:

Yes, we do not really know what is happening inside Russia. The Western media is not well represented inside Russia, but there is no indication of significant popular unrest. There have not been mass arrests, mass demonstrations. There have been a number of opinion polls by independent agencies. One never knows how candid people will be with pollsters under these kinds of conditions, but none of it has suggested that there is an upsurge of outrage against Putin. Quite the contrary, the first response of Russians is to rally around their government, feeling that the West is treating them unfairly.

I have no brief for Putin. I think he is a bad guy. Dealing with him is like dealing with Lucky Luciano. His role in Russia is capo di tutti i capi, but nonetheless, he seems to have that domestic situation well under control. And from people who have been to Moscow, from Asia Times’ own correspondent in Moscow, the restaurants are full. There are a lot of goods in the stores. You cannot buy Louis Vuitton handbags, and a lot of other things are missing, but the average shopper is not unduly burdened by this.

Russia, of course, depends on many foreign components for its industry, semiconductors, for example, but there is a good deal of evidence that countries like Turkey, Azerbaijan, and others who have not agreed to the sanctions are acting as intermediaries. Russia imported roughly $100 million dollars of microchips in 2020. Not a great deal if you offered double the price, which they can easily do given their oil revenues, they will get all the chips they need for quite a period of time. It is very hard to enforce sanctions on a commodity, low-end computer chips of the kind that guide Russian artillery shells or control Russian industry.

So there is no guarantee that we are going to win the waiting game. Everything we have seen suggests that the estimates of Western governments were vastly exaggerated in terms of the vulnerability of the Russian economy. Germany’s Die Welt, the center-right daily, ran an article a couple of days ago under the headline, ‘the astonishing resilience of the Russian economy,’ in which they argued that Putin has been preparing for this for a very long time.

Russia’s Military Performance

Russia, for example, seems to have no shortage of artillery shells. From most of the reports we read, Russia’s firing rate is between 15 and 40 times that of the Ukrainian army. I am told by sources in Russia that the armaments factories are running 24 hours a day, three shifts, non-stop, and they do not have a shortage of ammunition. Of course, one never knows. On the other hand, we do know that the Ukrainians are very short of ammunition. A British think tank, the Royal United Services Institute, published a report last week in which they calculated that in 10 days the Ukrainian army fires off artillery shells equal to the entire annual production of artillery shells of the United States, so if the Ukrainians are indeed running short of ammunition as many reports suggest, it is likely to be the case that the storehouse of the West is inadequate to replace it.

There is an Austrian military analyst, Colonel Markus Reisman, who has been frequently quoted in the press and the news media. The Austrians are neutral, so they will say whatever they know, what they like. Reisner’s argument is that Ukraine cannot possibly win a war of attrition against Russia. So, the waiting game will not necessarily go our way, and the probability is – to the extent that we have information, I emphasize that any information we have is incomplete and sketchy, and to some extent suspect, but the indications we have are that the war of attrition is going the wrong way now. So, we may end up having worse economic consequences in the West than Russia suffers and lose the war on top of it, so the effect in terms of credibility of the United States as a military power, as a world leader, the credibility of NATO would be devastating.

Many analysts are trying to come to grips with that. For example, the lead of today’s Asian Times is an essay by my friend, Seth Cropsey, who was a senior naval official in the George W. Bush administration, a distinguished military analyst. His argument is that we need to put all the firepower we can into Ukraine because even if Putin wins, even if he succeeds in grinding through the country as Cropsey put it, we will be better off having made the effort in terms of NATO credibility that if we cut and run right now.

Now, when we get down to that kind of alternative, I am really sad because the implication is we should fight a losing war with tens of thousands of additional deaths and incalculable destruction in order to maintain our credibility because to give up now would make us look even stupider. That is the logic that the European powers pursued in 1915 and 1916. They got into a war they did not want. They realized they could not win it by the means they thought they could. They were stuck in it. They were being ground up, but as a matter of credibility they felt they had to pursue the war, and the result was the worst catastrophe probably ever for Western civilization, the First World War.

The Long-Term Consequences for the United States

That is the short term. Then there are the long-term consequences, which could be really, really scary for us. And I emphasize long-term because I do not think there is going to be a dollar crash, or a financial crisis, or anything like that in the next year or two, but the whole point of reserve currency is convenience, freedom, and rule of law reliability.

The United States is in an odd kind of position. We run a trade deficit now of, what, about a trillion and a half dollars a year? We have been running a trade deficit for more than 30 years. I have to go check the old data, but the result is we end up importing goods from people, goods and services, more than we sell [to] them, and the difference we give them in our paper. We give them our IOUs. We sell them assets, stocks, real estate, or whatever, so our net balance, what is called our net foreign asset position, the sum of all the paper we have given foreigners in lieu of the goods that we are buying from them, is now $18 trillion dollars negative. We are $18 trillion dollars in the hole to the rest of the world.

Now, for a long time people would say what is wrong with that, look at our giant tech companies, look at Microsoft, and Google, and Apple, and Tesla, and all these wonderful companies, Netflix maybe not so much anymore. We have the tech miracle. We have reinvented the internet. We invented Facebook and social media, all these great things that we have got, [which] people want to invest [in].

Well, that worked for a while, but we had something of a speed bump this year in tech stocks. The question we have to ask ourselves is how long will the rest of the world continue to want to take our paper in lieu of goods at asset values, which are, let us say, heavily, really generous, if not, you know, an outright bubble.

Seizing Russia’s Foreign Exchange Reserves

Now, on top of that, we did something which no one ever did outside of a declaration of war, namely, to seize roughly half of the foreign exchange reserves of Russia, $300 billion dollars worth of Russian reserves. We talk about a rule-based order, but I am not sure under what rule we have the right to seize Russian foreign exchange reserves. If we had a declaration of war, if we were at war with Russia, well, certainly, that would be enemy assets, and under international law a warring power may seize enemy assets. But we are not at war, we still have an embassy over in Russia, so what judge signed a decree giving the U.S. government the right to seize $300 billion dollars of someone else’s property?

Now, from the standpoint of other countries who have large amounts of money invested in the United States, that is a deal breaker. Our largest single investor is Japan. The Japanese are an ally, so I do not think they are worried about it. They joined the sanctions, but then we have China, which has, what, about three and a half trillion dollars worth of American paper? We have the Arab countries, Saudi Arabia and the Gulf states. From the standpoint of Saudi Arabia, whom President Biden has denounced as a human rights abuser, and probably with some reason, there are enormous reserves, hundreds of billions.

Well, if the United States decides that they do not like Saudi Arabia for whatever reason, they could be subject to the same kind of problem, so we see the Saudis beginning to put money into Chinese currency. They are diversifying away. We see the Chinese creating what they call a liquidity facility in their own currency, the RMB, at the Bank for International Settlements.

At the BRICs summit last week – BRICs being an acronym for Brazil, Russia, India, and China, the largest non-Western economies, there is a proposal to create a BRIC reserve currency to create a basket of currencies among those participants independent of the West. The Chinese and the Russians have created messaging systems for international bank transfers that allow them to bypass in an emergency the standard American-dominated system for international transfers.

That is SWIFT, the Society for Worldwide International Financial Communications.

There was talk of shutting the Russian banking system out of SWIFT. Janet Yellen wisely pulled back on that because we do not want [to take that risk]. We probably do not want to know what would happen if we did that, whether the rest of the world could deal without us. There is significant diversification of reserves out of U.S. dollars.

Now, the United States has, as I mentioned, a net foreign asset position of negative $18 trillion. World central banks have, what, about $10 trillion dollars worth of our paper? The world banking system has about $16 trillion dollars worth of dollar deposits, which people use to finance international trade. All that money gets lent to American homeowners, American businesses, America consumers, and of course to the U.S. government, which has been the biggest borrower in the last few years.

What happens if the rest of the world does not feel like lending us money or demands a much higher risk premium? Well, when our national debt is $30 trillion dollars, and our gross domestic product is $23 trillion dollars, every one percent rise in [the] interest rate is going to cost us 1.3 percent of GDP, and the burden on debtors could be really serious. We could become Italy, where we pay a very high risk premium to borrow money and we have to undertake austerity measures. Worse comes to worst, we could even have a run out of the dollar into gold or other assets, and a disorderly breakdown of American financial markets.

Now, as I said, I do not think this is going to happen. People talk about what if the Chinese dump the dollar? Well, [the] Chinese own three and a half trillion dollars. Why should they blow up their own portfolio? The Chinese also are exporting roughly $700 billion dollars a year of goods to us. That compares to about $400 billion when Donald Trump put the tariffs in.

So, that American market has been very good to the Chinese. Even if they think there are alternatives to it, they are not short-term alternatives to it, and the result of a collapse of the dollar and American purchasing power would be to increase Chinese unemployment, so I do not see the Chinese, who are cautious, strategic players, doing something rash. As I said, this is not a short-term issue, but if we keep going down this road, it may become an issue in two or three years, and we may have a really nasty kind of situation, the kind the British had when the pound sterling ceased to be a reserve currency, which is high inflation, low currency, austerity budgets, and much lower living standards.

Does Russia’s Defaulting on Loans Matter?

Robert R. Reilly:

David, you mentioned that the seizure of the foreign reserves of a sovereign country is a unique thing to do with a nation at which one is not at war. Now, Russia has been forced into the first default on international debt in more than a century, even though it has the money to pay those debts. Well, how does that fit into the picture?

David Goldman:

Well, you know, somebody on the internet said if a country defaults in a forest, and there is no rating agency to hear it, is it really a default? It is a technical default because the U.S. government prevented American banks from transferring Russian money to its bondholders. Russia is swimming in money. It is a net lender to world markets, not a net borrower. For the foreseeable future, Russia will be swimming in money, so it has absolutely no need to borrow. It cannot buckle because of the sanctions, and it has the money to pay, wants to pay the money. The U.S. government has basically said your money is not good here, so we are going to declare you in default. That is really a technical and symbolic issue. It has no real impact on the strategic situation.

The Bite of Sanctions on Russian-Chinese Trade

Robert R. Reilly:

Just to refer to a couple of other items regarding the impact within Russia: there is a prediction that the Russian economy will decline [by] more than 11 percent this year. A Russian blogger, who is still allowed to operate, writes that auto production in Russia now is 15 percent of what it was on February 23rd before the invasion. She also maintains that there is a 12 percent decline in wholesale trade in Russia, and a 17 percent decline in retail trade. You have talked about the near term and the long term. Some predict that the real bite of sanctions on Russia will hit mid-term, that it is next year when they will be hurting more for it.

And they also mention such things as the brain drain, that the war with Ukraine has occasioned in Russia. Not only many of the wealthy Russians have fled to Turkey and the Gulf but young, talented people have left too because [of their own personal] opposition to that war. What do you think?

David Goldman:

I simply do not have enough information to make a top-down evaluation. The International Monetary Fund’s estimate was about an 8 percent reduction in output this year. I would not be surprised if the number is 11 percent. I would not be surprised if it is 6 percent.

A great deal depends on how Russia’s trade relations develop. Right now, for example, China could do an enormous amount to integrate Russia into its economy. The Russian economy is the size of one Chinese province, so China could swallow it fairly easily, and China certainly has virtually everything Russia needs for its industrial capacity. The Chinese have been laying very low. Russia’s imports from China rose spectacularly right up to the invasion, nearly doubled, and then they dropped off again back to, you know, previous levels, so they fell by more than half. They fell by about half.

And I think that is because the Chinese are very wary of secondary sanctions. I have talked to a number of Chinese companies. Chinese high-tech companies which had major operations, including research facilities, have pulled in their horns and steered clear of Russia because they do not want to come into the American gun. There is a lot of controversy about how China views this war, and that is a critical issue from Russia’s standpoint given their economic weight in this.

It is interesting that the Foreign Ministry official who specialized in Russia-Chinese relations, who arranged the great Xi Jinping-Putin get-together right before the war started, was fired a couple of weeks ago. There are some suggestions that China is not happy about Putin rocking the boat. It has its own fish to fry. It does not want a confrontation with the United States right now, it has its own problems at home, so it is somewhat put out at what Putin has done and reluctant to go all in terms of support, particularly when it might bring secondary sanctions down upon China.

So the Chinese have enormous leverage, as do the Indians and others. Just given the size of the Russian economy, feeding the microchips into Russia, the raw materials they need to deal with their industrial problems, is a really trivial problem. They do have other problems, for example, Siemens, for whom Russia was one of their top customers, maybe their top customer. Siemens was providing industrial software for a large number of Russia’s factories. Siemens is now no longer working in Russia, so they are not going to get software updates. That could be a serious problem.

The brain drain has been significant, but not crippling. It is very hard to get out of Russia right now, not that many people can emigrate, so you have a lot of Russians who have gone to Armenia where they can still travel. It is hard to go to China because of the COVID restrictions, so perhaps, when the war is over, you are going to have a flood of people leaving, but it has simply not been possible for that many people to leave. Armenia is probably going to emerge as a great center of software because of all the Russian émigrés.

Weaponizing Food

Robert R. Reilly:

Now, there is one very dire economic consequence which we have not addressed so far. There is a drought in Ethiopia, in Somalia, and Kenya. Africa receives some 40 percent of its grain from Russia and Ukraine. The figure in Egypt is startling, it is 85 percent of its grain, and of course, sunflower oil and other items. NATO and the United States are accusing Russia of weaponizing food. Russia, on the other hand, simply counters with the same accusation, that it is we who are weaponizing food, and it seems that a number of these countries that will suffer the most from this are taking not necessarily the Russian side, but they are saying that look, it is your sanctions that are imperiling us in this way.

David Goldman:

Yes, well, I think that the truth is both sides are weaponizing food. This is a prospective disaster. A lot of people will starve, and Russia is cold-bloodedly playing this, but from the standpoint of most people in the Global South, the American concept of a rules-based order or the issue of Ukrainian sovereignty is a very remote kind of thing. Two-thirds of the world’s countries did not vote for sanctions. The vast majority of the world, countries representing such as they do the vast majority of the world’s people, are outside the sanctions regime. That is virtually all of Latin America, virtually all of Africa, and most of Asia.

[That includes], most importantly, India, which is the world’s largest democracy. It is certainly no friend of China. If not an American ally, it pursues its own course, so to the extent that the politics of this have played out against us, I think it is because the Global South has never really identified with the cause of the United States as we would like them to do. Certainly, India is a disappointment to American diplomacy. On the other hand, what does the voice of Ethiopia count in the councils of the world? I do not mean to be cynical about this. Human life is human life, and loss of human life in Ethiopia is as tragic as it is anywhere else, but Ethiopia does not have a lot of cards to play.

The most important issue we should be worrying about strategically is India, which of course is a food exporter. They are not affected by this. You know, China, or Russia, or the BRICs can declare all the coalitions of countries of the Global South that they want. It will not make a great deal of difference to them. It may help China market their telecommunications equipment in Brazil or Argentina, for example, but that is a marginal issue. The real strategic issue which we need to worry about is the possibility that India ceases to be an active supporter of the United States in our strategic objectives in Asia. That would be a major flub.

Robert R. Reilly:

Well, but what about the substance of this issue of so many tens of millions of people at risk due to the grain shortages? One source said that because of the sanctions, Russia is having trouble exporting its grain because the shippers cannot get insurance, or they do not want to pay the premium for the insurance.

David Goldman:

One would think that it would be a humanitarian gesture on the part of the United States to find a way to get the grain to people who require it. Russia is not going to run out of money because of the grain issue. They are already making more money out of energy sales than they require to pursue the war, and our efforts to stop that have been completely misguided, so to the extent that our sanctions are a contributor, as I said, both sides have weaponized grain.

Robert R. Reilly:

Well, supposedly, according to the State Department, the United States has already said sanctions do not apply to the export of food, but to my knowledge food is not getting out in the Black Sea either from Russia or Ukraine. Am I correct in that impression, do you know?

David Goldman:

That is correct. Part of the problem is the Black Sea has been mined, and the Russians have asked Ukraine to demine the ports. It is a military zone. Now, it is possible they could do it themselves. This is an area where I am technically challenged. It may be possible for Russia to do that themselves as opposed to demanding a concession from Ukraine. It is possible that Russia does not require this, and is simply using this as an excuse, I really cannot judge that. But one thing that the leaders of the world should be able to do, given that the grain is there, and people need it, is find a way to get it there, whatever else happens in this miserable war.

Robert R. Reilly:

Well, as you know, they are trying to move it by rail with the problem that Russia [and] Ukraine has a different gauge of rail tracks than the rest of Europe, so it has to be unloaded, loaded, taken to Romania, shipped from there, which will not even put a dent in the problem in terms of the millions and millions of tons of grain that is in Ukrainian silos.

David Goldman:

Yeah, rail is a problem. Just to give you an example, the total rail traffic between Russia and China in 2020 was about not quite 600,000 container equivalents. A container will hold about 23 tons of grain, and by my arithmetic even if China and Russia did nothing but ship grain and use that same capacity, that would only cover a fifth of China’s imports in grain.

It is simply not efficient to use rail traffic to ship grain. That is something you need to do with ships. You simply do not have enough containers to do that, so you would have to get shipping in, and of course, the problem with Ukraine at the moment, getting anything out, is that there is a war going on in the Black Sea. The Ukrainians are sinking Russian ships. They successfully sank the Moskva, the cruiser which was the flagship of the Russian Black Sea Fleet. The Russians did not say much about it, but their response, according to a number of American navy analysts I have spoken to, will be to try to wipe out all Ukrainian missile capacity on the Black Sea coast. That means taking Mikolaiv in the south and then eventually trying to take Odessa. So as long as there is a war going on in the south, it is going to be very difficult to get grain through.

Ukraine’s Economic Position

Robert R. Reilly:

David, of course it is not just an economic consequence, it is a direct consequence of the war. The prediction that the economy in Ukraine is going to decline by more than 45 percent this year. Ukraine is in a really difficult position.

David Goldman:

Remember Ukraine on paper had 45 million people before the war started, but there were only actually 33 million in the country because 12 million were working outside the country. A few came back. A lot more left. There are probably a lot fewer than 33 million in the country because [there are] five million refugees, much more than the re-flows, so let us say there are 25 million people.

The infrastructure damage is probably going to be in the range of, what, a trillion dollars by most estimates? Now, that is in a country with a gross domestic product of $160 billion pre-war, and maybe $100 billion, so you are talking about a repair bill of 10 times gross domestic product. That would be the equivalent in the United States of $200 trillion dollars. I do not see the Western democracies coughing up a trillion dollars to repair Ukraine, so my guess is large parts of the country will end up being depopulated, ruined for many, many years, perhaps permanently.

Ukraine already had an extremely low birth rate. Its population was shrinking [with] a very large number of people working overseas. I think many of the refugees will never come back. They will not have anything to come back to, so it will be like the fictional U.S. Army officer who was quoted by that horrible CNN reporter, [Peter Arnett], in Vietnam. It was, “It became necessary to destroy the village in order to save it.” That was never said, but we may end up destroying Ukraine in order to save it for real, and that would be an unspeakable tragedy.

How Does This End?

Robert R. Reilly:

Which brings up my last question; what does this look like at the end? What is the most likely outcome and where does it leave Ukraine? Where does it leave us and Russia? As you know, Putin has been repeatedly referred to by President Biden as a war criminal, and other leaders have used similarly harsh language. You do not usually negotiate with a war criminal, and by any measure as Putin said some time ago, we are at economic war with Russia, and you pointed out very specifically in what way that that is true.

So as I have listened to and examined various sides to this question, no one seems to have the answer of how this unwinds, and what it looks like at the end, and what kind of approach can bring negotiations about that will bring about an end. I mean right now it seems that a decisive military advantage on one side or the other is the only thing at the moment. What do you think?

David Goldman:

I think we will need different people to make peace. I think we will have a change in administration in the U.S. in 2024. If Donald Trump comes back, he will be able to take a fresh approach. He has been very unspecific about what he would do, but Trump is a tough negotiator, but not a regime changer. He does not want Putin out of office. He is willing to deal with him. Putin at some point is also going to have to leave. He has been there too long. Putin has been grooming any number of provincial governors who the West does not know [about], like obscure state governors in the U.S., as prospective successors.

The easiest thing would be for a new president, untainted by Biden’s extravagant language about Putin as a war criminal, to come in in a couple of years, and for Putin to resign, declare that his war objectives have been met after taking the Donbas and maybe some parts of the Black Sea coast, and let someone come in who is completely fresh, untainted by war issues, and then peace can be made.

My guess is the war of attrition will go on. The Russians have found a formula they like, which is to use artillery to grind up Ukrainian cities and take small pieces of strategic territory. I think it is highly probable that at some point the Russians will say, well, we got what we want. The Ukrainians will be unable to throw them out, so they will sit there, glaring at each other, for a year, and at some point, new leaders will come in who will be able to negotiate without the baggage of the Biden administration, or indeed Putin himself. So, I think it will be a two- or three-year process.

Robert R. Reilly:

Which means a lot of interim damage as the war continues.

David Goldman:

Yes, absolutely tragic. I mean one thing I have got to say, Bob, is that every American diplomat who knew this situation, from Henry Kissinger to William Burns, said repeatedly Ukraine’s NATO membership was a red line for Russia, we better not do it, we would get into violence. Then when Ukraine got to the point of being considered for NATO membership, Putin reacted in the violent way he did, every American commentator said, you see, Putin is an imperial fantasist who wants to restore Russian glory and so forth. We forgot everything we had been saying about it for a dozen years, so I think there were missteps, gross missteps on the American side, not to condone Putin, who did something illegal and horrible, but you know you bait the bear, and you get bitten by the bear, to some extent, well, you should not have baited the bear.

So I think our leaders, particularly the Biden administration, deserve a great deal of blame for mishandling a situation, getting us into a war that we were not prepared to win, that will [unintelligible] economically, caused a great deal of suffering, a horrible loss of life and catastrophic suffering in Ukraine, and a great deal of suffering elsewhere, including the hunger that you mentioned in many countries. I think the Biden administration will bear a very grave burden as historians look at its role in this in the future.

European Conscription

Robert R. Reilly:

By the way, Trump said to Zelensky a long time ago, cut the best deal you can with Putin, and politically, perhaps that was not a course that was possible for Zelensky to pursue at the time, but now he is going to get a much worse deal than if he had done that, unfortunately.

Well, I want to just raise one other point, and that is the perception that has led NATO countries and the United States to so avidly support Ukraine against Russia. Many on the presupposition often voiced by Baltic countries, Lithuania and so forth, [is that] if you do not stop Putin here, he will go on. And former Secretary [of State] Mike Pompeo just said that the other day, we are fighting for America in Ukraine because Putin will try to restore the Soviet empire if he is not stopped here.

Now, it is not only Americans or Europeans who are saying this. I refer to Mikhail Krazyanov, who is in the Russian opposition but had been Putin’s prime minister from 2000 to 2004. Let me quote from him, “If he,” Putin, “is allowed to conquer some territories, and Europe and the U.S. end up swallowing that fact, he will simply keep going forward,” unquote. What do you think?

David Goldman:

Well, I cannot read Putin’s mind, but what I think is that the Germans should have never given up conscription. When you were in the Reagan administration, they had an army of 1.2 million people and a thousand main battle attacks. They were probably the best army, and certainly the best army in Europe. Now they have got a couple hundred thousand [soldiers] and maybe a hundred operational tanks. They are a joke. The French army, I am told, reliably has ammunition for a week of combat. The British army is a shadow of what it used to be, and it was never much of a land army. So, the Europeans are reaping the consequences of their own silly pacifism and belief in the end of history. They need to create a deterrence which will make sure Putin does not do that.

I do not think the American public is going to want to send tens of thousands of American soldiers to fight in Europe against Russia, nor should we have to. Europeans are perfectly capable of this. Russia is no longer that big a country. It does not have the manpower reserves.

Robert R. Reilly:

It, too, has a demographic problem.

David Goldman:

Yeah, absolutely, so a serious effort by [Europeans should deter Russia]. Look at the Poles. A point Edward Luttwak has made. They are buying F-35s for show and coastal vessels, but they do not have conscription. The Finns have conscription. Finland is a small country, but they can put 300,000 soldiers in the field if they have to. The Russians are not going to mess with the Finns because the Finns will fight. The first thing that the Poles should do is reintroduce conscription, and put people under arms, and arm and train them properly. We need that kind of deterrence.

Robert R. Reilly:

Well, as you know, NATO is now talking about expanding greatly this rapid reaction force, which I believe currently is supposed to be 40,000 troops, to more than 300,000 troops.

David Goldman:

Yes, I read that. I would like to see the details. Where are they going to come from and how we are going to get them without conscription. That is a lot of soldiers.

Robert R. Reilly:

It is a lot of soldiers, and like you, I followed the expansion of NATO from 1991 when it was 16 members up to 30 members. The expansion of NATO seemed to principally serve as an excuse to disarm by its member nations as you just pointed out because, after all, Russia is no longer a threat they thought to some extent, though what is this expanding defense alliance defending against if not Russia? So, we will just rely on the United States, leading to this anomalous situation after Russia invades Ukraine, that we have to send 12,000 troops over there.

David Goldman:

Well, we are sending 12,000 troops, [but] they are not going to fight there.

Robert R. Reilly:

No, no, I understand that, but just to reassure the members of the NATO countries that we have their back because they do not have their own backs, as you just pointed out, so one salutary result of this disastrous war maybe that NATO finally takes itself seriously.

David Goldman:

Well, let us see what the Germans and French do. Nothing would please me more than to see a return of wehrpflicht conscription to Germany and the sourcing of a thousand main battle tanks again, plus the required aircraft. I do not know if this yuppie, tree-hugging generation of Germans is up for that though. [I] have to be convinced, and they have that choice, or they can depend on the United States, which is not going to fight a land war in Europe against Russia, or they can be beholden to Putin.

NATO Membership for Finland and Sweden

Robert R. Reilly:

Let me just close with one, last, very quick question. What is your opinion of this prospective membership of Finland and Sweden in NATO?

David Goldman:

I am surprised the Swedes would give up neutrality. I am not sure what they gain from it. They produce their own arms. They have their own military tradition. The Finns clearly want a tripwire. You have to hand it to the Finns. I mean they are tough. They fought the Russians brilliantly in 1940 in the Winter War, but they still have, you know, apart from Israel and Switzerland, they have one of the best reserve military programs in the world. I respect the Finns, and if they think that being part of NATO would help their effort, then you know they probably know that better than I do.


Robert R. Reilly:

Well, great. I am afraid we are out of time, and I would like to thank our speaker, David Goldman, for addressing the question of the economic consequences of the Russia-Ukraine war. I invite our audience to go to the Westminster Institute website, where you will find many other Westminster lectures by David Goldman under the titles which I mentioned in the introduction, as well as other speakers on this subject of Russia and Ukraine, China, Taiwan, the Middle East, and other vital national security questions. Thank you for joining us today. I am Robert Reilly.


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