ShiftingWealth

 From Putin´s abstruse historical perspective, Russia´s military invasion of Ukraine is more akin to civil war than to a war between two sovereign nations. Putin´s war has been explained by either his greed or by Russia´s grievance as NATO has expanded East closer to Russia´s border over the past decades. “No grand theory can explain the Ukraine crisis”?[1] Take a little one then[2], the seminal Collier-Hoeffler Model, a model well known in conflict and development research[3]. It suggests to emphasize Putin´s greed and to act accordingly through aiming at his wealth via targeting his oligarch trustees.

Using a rich dataset of wars (mostly for Africa) during 1960–99, Paul Collier & Anke Hoeffler found political and social variables that are most obviously related to grievances had less explanatory power than economic variables. For the current Ukraine context, it means that we should give little credence to views that look at NATO´s enlargement as a root cause for Russia´s military invasion(s). Rather, we should emphasize economic motives for Putin´s war and identify targeted economic instruments to stop him, beyond and above rapid military equipment of Ukraine to withstand brutal Russian assault.

Putin has excelled at manipulating the psychology of grievance. For years, he cultivated a narrative of humiliation by the West. That narrative supported Russia´s occupation of Crimea in 2014, when Putin´s popularity levels shot up to their highest ever levels. Again, Putin's approval rating seems to have soared since he sent troops into Ukraine late February 2022. Economic sanctions by the West hit the population, not Putin, and are adding to Putin´s popularity.

Large-group psychology and social conflict have been investigated by psychiatrist Vamik Volkan who conducted fieldwork in regions of war and unrest. Volkan found that if societies don’t work through their sense of loss (of power, status, or prestige) through a process of mourning, it can become central to group identity – which in turn makes them vulnerable to manipulation by destructive leaders who play on old wounds. Apart from Putin, Serbia´s Milosevic and Trump (MAGA) are similar cases[4].

No doubt, Putin is greedy (and very wealthy).^[5] According to financier Bill Browder,  since “Khodorkovsky's conviction (in 2003), Russian oligarchs went to Putin and asked him what they needed to do to avoid sitting in the same cage as Khodorkovsky. From what followed, it appeared that Putin's answer was, "50%" He wasn't saying 50% for the Russian government or the presidential administration of Russia, but 50% for Vladimir Putin personally."

In Ukraine, Putin´s greed can be satisfied by the extortion of the victim´s natural resources (cereals, oilseeds, gas) because annexation would make Russia a world leading supplier of fossile energy and staple food. A recent Information Note published by FAO (Food and Agriculture Organization of the UN) has highlighted the critical role that Russia and Ukraine play in global agriculture. In 2021, both countries combined held major percentage shares of global exports in wheat, barley and sunflowerseed oil (between 30 and 60%). The annexation of Ukraine would give Putin a huge extortion potential as a quasi monopolist over staple food items, most crucially important in poor Africa and Asia.

The annexation of Ukraine would also consolidate Russia´s de facto monopoly of gas exports to Europe as it would capture the all important pipeline North Stream 1 run by Ukraine´s Naftogaz. Russia has been also denying Central Asian countries access to its own gas transport network, and consequently depriving them of access to Ukrainian transport towards Europe.

Sanctions are unlikely to be the best way to stop Putin. Bill Browder (the largest foreign investor in Russia until 2005, and now a leading campaigner to expose Russia's corruption and human rights abuses), likens broad economic sanctions to nearly killing the patient to target the cancer. Instead, he has suggested to sanction Putin´s oligarch trustees, probably along international adoption of the US Magnitzky Act ((named after his murdered Russian lawyer, Sergei Magnitsky).

Since Russia's aggression against Ukraine, Europeans have already frozen billions in assets belonging to oligarchs. Recently, the EU Commission drew up an initial balance sheet: By April 8, assets of oligarchs and companies worth a total of 30 billion euros had been frozen in the member states. According to the Commission, these include ships, helicopters, real estate and works of art worth almost 6.7 billion euros. In addition, transactions worth around 200 billion euros had been blocked.

Some countries are obviously further along than Germany in tracking Putin´s Mafia. Italy has long recognized that fighting anti-money laundering is a prerequisite for successfully combating the Mafia. Germany, by contrast, is a notorious bad performer in reviews by the experts of the Financial Action Task Force (FATF)[6]. Experience in the fight against organized crime also helps Italy freeze the assets of Russian oligarchs, with the powerful Guardia di Finanza having far-reaching rights.

So apart from military resistance and secret service sabotage against Putin: Make Putin Poor Again!

 

Russia is now as totalitarian as is China. On 24th February, Putin´s Russia has invaded Ukraine, resorting to murderous shelling while Ukraine was fighting for its freedom. This followed upon Russia´s invasion of Crimea and the seizure of Ukrine´s Eastern Donetsk and Luhansk regions in 2014.

For at least a decade, Putin has built his country´s food self-sufficiency by doubling its grain production since 2012. The two inputs you need to sustain a long war are grains and energy - of which Russia has plenty. The current account balance was switched from negative to positive during that period, resulting in a built-up of a war chest at Russia´s Central Bank, with foreign exchange held in China (12%) and gold reserves (22%) vaulted at home; just 6.5% of Russia´s FX reserves were recently held in the US.

Xi Jinping has been the paramount leader of China since 2012; he has hardened his grip ever since. He has suppressed democracy movements in Hong Kong, threatened Taiwan and other neighbours. Last not least, he forced internments, mass sterilisations, forced assimilation, "re-education", and coercion of detained Uyghurs to work in factories.

In 2022, geopolitical rupture looms. Global governance is disintegrating into an American-dominated bloc and a Chinese-dominated bloc, with Russia and the EU countries as junior partners. Such hypothesis was pronounced by Clemens Fuest (IFO Munich) and by Martin Wolf (FT)[1]. Will economic divisions follow? The link between geopolitical and economic division will be calibrated by sanctions, to the extent they are effective.

The BRICS and much of the “Global South”, a risk overlooked by Western observers, might opt for the China-dominated bloc. With a deep and prolonged division between the west and a bloc centred on China and Russia, economic divisions will follow. Lack of mutual trust and humanitarian concerns call for disintegration of the world economy after four decades of intense globalisation. Military buildup will shrink the peace dividend for the world; just as it did in Putin´s Russia except for the super rich oligarchs over the past two decades.

Both China and Russia are important drivers of the BRICS (official website)[2], joint with Brazil, India and South Africa. The BRICS, except South Africa, lead the list of countries with the highest foreign exchange (FX) reserves, ahead of Germany. Combined, they have built up official FX reserves worth round $ 6 trn, mostly over the last two decades. Approved at the 2014 BRIC summit in Brazil, the BRICS Contingent Reserve Arrangement (CRA) provides protection against global liquidity pressures. Since the 2015 BRICS summit in Russia, a BRICS payment system conceived as an alternative to the SWIFT system has been established and largely backed by China: Cross-Border Interbank Payment System (CIPS).

Despite a growing membership, the OECD share in world GDP expressed in Purchasing Power Parities (PPPs) stabilised around 50% between 2011 and 2017 (latest benchmark year), according to the International Comparison Program (ICP). Similarly, the share of large emerging economies (China, Brazil, India, Indonesia, the Russian Federation and South Africa) also stabilised at around 30% of world GDP[3].

Political scientist Rachel S. Salzman (SAIS, Johns Hopkins U) has documented in a fascinating study Russia´s leadership in establishing the BRICS group[4]. The desire to end US hegemony, rewrite rules and build new institutions is a shared commitment of the group. In a time of alienation from the Euro-Atlantic world, BRICS provides both China and Russia with international support.

Sanctions will drive geopolitical rupture and economic division on a global scale. To which extent is less certain than our own propaganda wants us to believe.  Notably the exclusion of Russian banks from SWIFT was hailed by banner-waving economists and politicians as the ´nuclear´ sanction to bring Putin quickly down. However, Alistair Milne, Professor of Financial Economics at Loughborough University (UK) has convincingly explained that throwing Russia out of SWIFT will be quite ineffective, unlike freezing the reserve ssets of the Central Bank of Russia that include gold reserves held at home[5].

The UN General Assembly Resolution against Russia on 2nd March was an eye opener for many. To be sure, the “world wants an end to the tremendous human suffering in Ukraine” (UN SG Antonio Guterres). Only 141 of the total 198 UN member states of the UN General Assembly adopted a resolution demanding that Russia immediately end its military operations in Ukraine. Five countries - Belarus, North Korea, Eritrea, Russia and Syria - voted against it, while 35 abstained. Africa´s voting behaviour must be a special downer for DAC donors. Half of the (too) many African countries did not condemm Russia´s attack on Ukraine. They rather preferred to abstain, go to be absent, and Eritra was one of the very few countries to vote against the UN resolution.

The West may have thought that the atrocities commited in Ukraine might entirely isolate Russia. However, it may have overlooked to what extent non-Western countries have intensified economic links aside from the West and how that may have created political ties, supported by new institutions not ruled by the US. In short, the West has ignored Shifting Wealth[6].