Ukraine is stuck in the middle. Despite the poor performance of the Russian military, President
Putin can afford to continue financing his invasion for a long time, thanks to the profits
generated from the country's natural resources. Similarly, the United States and western allies
can afford sending financial and military aid to Ukraine for as long as it takes. In fact,
they are getting a great bang-per-buck spent in Ukraine as you’ll see, but how this war will play
out depends almost entirely on how much the west is willing to push Russia, by supporting Ukraine.
But the real question is whether the collective west will continue to provide
weapons to Ukrainians until they liberate all of their territories – including all
of Donbass and Crimea, because the west may choose NOT to do so, and it's not because
they are afraid of triggering a nuclear war, but simply because Russia is too big to fail.
In 2022, the United States spent $40 billion dollars on aiding Ukraine, and plans to spend
an additional $38 billion in 2023. As a result, many American politicians, both Democrats and
Republicans, are calling to reduce that financial aid or even cut it all together. Their argument
downplays the risk from Russia. Basically, if Russia can’t win in Ukraine, they are obviously
not a threat to NATO. Those politicians proclaim that the money should be spent at
home. But if you look at it from a different perspective, the bang-per-buck perspective,
the western support for Ukraine is incredibly cost-effective, once you look at the numbers.
The United States spent $2.3 trillion dollars over a 20-year period on the war in Afghanistan,
which was about $115 billion dollars per year … only for the Taliban to
take back control of the country after the western forces withdrew.
Compare that to $40 billion dollars spent on helping Ukraine, which so far has accomplished
the destruction of nearly half of Russia’s conventional military capability. According to
American Intelligence, Russia has suffered 100,000 casualties, implying at least 25,000 dead. That's
half of the original fighting force that invaded Ukraine. On top of that, Russia lost huge amounts
of modern military equipment, including at least 1,600 tanks and more than 8,600 military vehicles.
Not only this would take Russia years to replenish, it’s quite an incredible return
on that $40 billion dollars, considering there were no American boots on the ground in Ukraine.
It's a clear bargain for the US – American weapons and Ukrainian blood.
Of course that $40 billion dollars pales in comparison to the total US Defense budget of
$715 billion dollars in 2022 – a mere 5.6% of total military spending. With that said,
Russia is a top tier adversary for the United States, just like China.
If you were to divide the US military spending proportionally to the threats that America faces,
Russia would probably be in the order of $100 to $150 billion dollars in “spend-to-threat”.
But spending only $40 billion dollars in 2022 eroded a threat value of $100 to $150 billion
dollars. That’s a 2 to 3-time return. Actually even much more since it would take years for
the Russian military to rebuild, and the US defense spending on threats is an annual event.
Helping Ukraine win this war has two additional economic benefits for the US: One is Europe
diversifying away from Russian energy, and as a result, purchasing American Liquefied Natural Gas.
The other benefit is that countries like Saudi Arabia, India, Pakistan and Egypt who
are big customers of the cheaper Russian military equipment, are now considering
purchasing western alternatives due to the poor performance of Russian equipment in Ukraine.
But does Russia have the resources to fight this war in the long term?
Even though the Russian economy is only $1.8 trillion dollars, a tiny fraction of the $40
trillion dollar economy of the west combined, Russia still has a lot of money and people to
fight this war. Russia has three times the population of Ukraine, meaning that it can
theoretically mobilize a much larger number of people for this war, with the only caveat being
the Russian’s willingness to fight. But as far as financing the war goes, Russia can pull it off,
all thanks to the revenue generated from the sale of their natural resources.
During the first 6 months of the war, Russia generated $158 billion dollars in revenue from
its fossil fuel exports. 54% of that money or $85 billion dollars, came from the European Union.
Speaking of the European Union, it appears that Russia could actually double its revenues from
the sale of natural gas to the EU, but they are not. Prior to their destruction, the Nord Stream
pipelines delivered about one third of the Russian gas to Europe. Ukraine accounted for about 24%,
Turkstream for 20% and the rest was Liquefied Natural Gas or LNG. In fact, the Russian gas
still transits through Ukraine at this very moment, and Ukraine is even getting paid for it.
The Ukrainian natural gas transmission system is capable of delivering every drop of the
Russian gas to Europe, since it has 1.5 times the capacity of Nord Stream 1 and 2 combined.
Back in 2014, a whopping 80% of Russian gas flowed to Europe through Ukraine.
But as part of the economic warfare against Ukraine, Russia reduced the flow to about 17%
of the maximum capacity which equates to 42.7 million cubic meters per day.
With the Nord Stream pipelines out of the picture, Ukraine reminded the EU that all of the Russian
gas could be shipped via Ukrainian pipelines, but President Putin doesn’t want to do that,
even though Russia already booked and paid for 109 million cubic meters of gas to flow
through Ukraine. It appears that Moscow is withholding the gas exports to Europe with
the intention of causing economic pain to the European leaders, which may push them
toward dropping sanctions against Russia and discourage their support for Ukraine.
The reality is that the entire world is incredibly interconnected with Russia's resource-rich
economy. It’s not just gas that Russia holds as a bargaining chip, but also the uranium that fuels
European nuclear power stations, the titanium that is still used by Airbus in their manufacturing,
and even the ammonia that is in the fertilizers that farmers around the world use to feed the
Earth’s population. Ukraine is in fact is in the heart of the fertilizer crisis.
Ukraine happens to have one of the largest ammonia pipelines in the world which transits 2.5 million
tons of ammonia gas from Tolyatti in Central Russia to Odessa in Ukraine.
The pipeline is 1,500 miles long of which 634 miles are in Ukraine.
After the Russian invasion, Ukraine stopped operating the pipeline on their end which resulted
in an increase in the price of fertilizers throughout the world. The United Nations is keen
to restore Russian ammonia supplies to ease the global food crisis. Normally, most of the Russian
ammonia that transits the pipeline gets shipped to Turkey, Morocco, Southeast Asia and Africa.
Just like the United Nations, Russia also wants to restore the shipment of ammonia through Odessa,
probably not because they care about the food situation in Africa, but because
the sale of ammonia through Odessa generate $12 billion dollars of revenue for Russia per year.
Currently Russia is pressuring Ukraine to resume the operation of the ammonia pipeline
by threatening to cut Ukraine access to the grain export corridor. President Zelensky says he is
willing to resume pipeline operation if Russia frees up all of the Ukrainian prisoners of war.
But even if Russia frees up the prisoners, it's a catch 22 situation.
Allowing Russia to export ammonia through Ukraine will fund the killing of more Ukrainians.
The United Nations and the collective west are pushing to resume the operation of the
pipeline in order to combat food inflation, and Ukraine … is stuck in the middle.
As I discussed earlier, it is actually beneficial for the west to drag the
war out as long as possible since it further weakens Russia. Sending weapons to Ukraine
upholds NATO deterrence and shows Russia that aggression doesn’t pay off. More importantly,
it sends a message to China to stay clear of Taiwan. But at the same time, the West doesn’t
want to push too much, because it could risk the internal collapse of the Russian Federation.
If Ukrainians receive all the weapons that they need to liberate Donbas and Crimea,
President Putin’s regime is likely to fall, risking the disintegration of the country.
What would happen as a result of the collapse is anyone's guess, but it would definitely have
a profound effect on the global economy in the form of increased energy and food costs, not to
mention the real risk of nuclear weapons falling into the wrong hands. This is why the collective
west may indeed offer President Putin an exit ramp, and force Ukraine to the negotiation table.
Let me put it this way, he is not open but you are open to pursuing peace.
This of course would imply permanent cession of Ukrainian territories. In other words,
the west may conclude that the risk of a Russian internal collapse outweighs
Ukraine de-occupying its territories. And this would make Russia “too big to fail” … AGAIN!
Believe it or not, Russia was previously bailed out by the collective west for the very same
reason. In his book “Megathreats” Nouriel Roubini, who was an economic advisor to President Clinton,
mentions how he attended a meeting in the situation room in the basement of the White
House in 1998. The concern was that a Russian default “could lead to the breakup of the country,
which in turn could put some of its nuclear weapons in the hands of bad actors.”
If a political vacuum does develop,
that concern in the west will center around the security of the Russian military assets,
especially its nuclear weapons. Analysts warn there could be some nervous days ahead.
Both the politicians and the military officials were extremely concerned. As a result, on the
13th of July 1998, G-7 nations along with the IMF approved a $22.6 billion dollar aid package
to stabilize the Russian economy, in the hopes of preventing a possible breakup of the country.
But the bailout failed to stop the deteriorating situation, because a month later, on August 17th,
1998, Russia defaulted on its debt. Although the western fears of a Russian breakup ended
up not materializing as Russia quickly recovered after the default due to increased oil prices.
If you’re wondering what happened to the bailout money, it eventually turned out that at least
$5 billion dollars were stolen shortly after the arrival of the funds in Russia.
Only a year later, due to concerns over nuclear weapons falling into the wrong hands,
the US Treasury and the IMF helped Pakistan avoid economic collapse by injecting in money.
Ironic, isn't it, how having nuclear weapons make you “too big to fail.”
Of course Ukrainians are well aware of this.
According to Oleksiy Arestovych, one of the most popular people in Ukraine at the moment,
western officials admit off the record that they cannot picture Russia without Putin. That is,
they don’t want an outcome where the Russian Federation breaks up into smaller pieces. And yet,
Arestovich seems to remain optimistic that western partners would get over
their mental block of a united Russia and let things play out. After all, at first the
collective west said NO to supplying Ukraine the artillery, NO to HIMARS, NO to Patriot systems,
and NO to Bradley and Marder fighting vehicles . So who knows – maybe one day the Western
leaders will also change their mind about the prospects of a Russian Federation falling apart.