The Australian and world cost structures will remain inflated by the repercussions of the Ukraine war for a long time, which will create extensive damage to western economies.
That’s the assumption at the base of Russian President Vladimir Putin’s strategy.
He believes that the resolve of the US and Europe will weaken and he has become optimistic that he can win any elongated struggle by destroying Europe via economic and migration pressure.
Accordingly his agenda is to prolong the war so as to inflict as much damage on western countries as is possible.
If he is right – and, of course, there absolutely is no certainty that he is – then Australia’s interest rate and economic settings must at least take into account the Putin strategy which I have set out below.
The Reserve Bank needs to prepare for the possibility of another year of much higher costs as well as the revenue benefits derived from energy and food exports.
I am grateful for the research of Catherine Belton of the Washington Post in mapping out the Putin strategy.
Her analysis pivots on a statement by Nikolai Patrushev, the hawkish head of Russia’s Security Council, who served with Putin in the Leningrad (St. Petersburg) KGB and is increasingly seen as a hard-line ideologue driving Russia’s war in Ukraine.
He is one of a handful of close security advisers to have access to Putin. He boldly declares in Russian newspapers that Europe is on the brink of “a deep economic and political crisis” with rising inflation and falling living standards which are impacting the mood of Europeans, who face a fresh migrant crisis that will create new security threats.
“The world is gradually falling into an unprecedented food crisis. Tens of millions of people in Africa or in the Middle East will turn out to be on the brink of starvation — because of the West. In order to survive, they will flee to Europe. I’m not sure Europe will survive the crisis”, he says.
And on the basis of those assumptions he declares that Russia is “not rushing to meet deadlines in its military campaign in Ukraine”.
Broadly, the upper echelon of Putin supporters agree that he had not expected the West’s strong and united response, but now the President is trying to reshape the situation and believes that in the longer term, Russia will win because European public opinion can flip.
The Russian view is that the embargo on its seaborne oil exports announced by the European Union this week — hailed by Charles Michel, president of the European Council, as putting maximum “pressure on Russia to end the war” — will have little influence over the short term,” because Russia can sell to China, India and other parts of Asia.
It’s possible the Russian strategy will fail because the full impact of Western sanctions is yet to be felt. A ban on hi-tech imports is just beginning to bite while shortages of some goods are emerging. Russian inflation is set to exceed 20 per cent – twice the level of Putin’s pension increase.
Russia is facing its deepest recession in 30 years.
Many leading world economists are already carefully differentiating the outlook for Europe to that of the US and Asia including Australia. But Europe is a vital part of the total world economic fabric. If it encounters a crisis of anything, like the proportions that Putin is banking on, then it will severely impact the global economy.
And the US is stretching its already big budget deficits with massive military aid to Ukraine.
Most analysist’s catastrophic conclusions involving Ukraine have concentrated on the possibility of a much wider war involving nuclear weapons creating horrific destruction.
But Putin clearly believes that he can destroy Europe without nuclear war and with that destruction will come great damage to the western economic system already struggling to cope with carbon reduction at a time when China insulates itself by increasing its carbon emissions.
I emphasise that today’s commentary, on the eve of the historic June 7 Reserve Bank board meeting, makes depressing reading and, like most Australians, I hope that Putin is wrong. But we do need to understand his assumptions and devise strategies to make sure that an elongated war does not prove him right.
And those strategies must include much more detailed consideration of the looming world food crisis.
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