Thoughts on the War in Ukraine

There was an overwhelming feeling of doom, despair, and terror when Russian troops entered Ukraine on Thursday.  It seemed that there were two outcomes possible, each terrible. Either Russia would crush the Ukrainian resistance and occupy Kyiv. They would then install a puppet government and throw Zelensky (or worse) in prison. Or, the Ukrainian resistance could be stronger than anticipated and cause a bloody, horrific carnage. This would result in the Russian winning the war thanks to their superior force and resulting in thousands or hundreds of thousands of deaths.

But I hadn’t foreseen the third possibility:  that the Allies could deploy a weapon powerful enough to force Putin to reconsider the wisdom of what he was doing and bring him to the negotiating table. That is actually what seems to have happened.

While I am writing this, both sides are currently meeting at the Belarus-Ukraine frontier to see if a negotiated settlement might be possible. It is remarkable and even amazing that the meeting took place at the Belarus-Ukraine border. Russians Zelensky was invited to join the discussions by the person who initiated them. The invasion continued on Day Four.

This does not seem like someone who is confident that he has the right situation at his disposal. After Zelensky refused to go to Belarus, Putin made a compromise and agreed that they could meet at the border.

That’s a great idea.

It could be that it is all just bluff or bother. It feels to me that the tide is already turning. After four days. Was it really?

There were two things that happened. First, it appears that the Ukrainian resistance was stronger than originally thought, so the steamroll in Kyiv took longer.

Not to minimize in any way the quite extraordinary bravery and valor that the Ukrainians are demonstrating,** my guess is that, standing alone,This didn’t cause Putin much concern. Putin had deployed only a small percentage of his troops. The overwhelming superiority and size of the Ukrainian army surely indicated that the steamrolling-into Kiev strategy would still be possible. However, this would have to mean suffering and bloodshed.  These consequences are not very important in Putin’s calculations, and I don’t think so.

** I grew up in a household where, to be entirely candid, Ukrainians were not held in terribly high regard. My great-grandparents fled this part of the country; Jews suffered in rural Ukraine, and their stories about the Ukrainian experience were very unpleasant. It’s difficult not to feel inspired by the extraordinary courage of so many Ukrainians who are defending their independence.

Another thing was that the Allies unveiled their “sanctions” on Saturday, the same day that Putin made his offer of negotiations. The weapon is capable of inflicting catastrophic damage on Russia’s economy and Russian citizens. It has been inflicted already.

The sanctions package announced on Saturday not only included kicking several large Russian banks off of the SWIFT network – the main global network for bank-to-bank transactions – it also …

“…prohibits United States persons from engaging in transactions with the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation, and the Ministry of Finance of the Russian Federation. This effectively blocks any assets of the Central Bank of the Russian Federation that are located in the United States, or by U.S. citizens.

This is quite a breath taking in its simplicity.  Of course, the Fed is an “United States citizen.” This means the Fed won’t honor any requests by the Russian Central Bank for “cash-in” of any dollar held.

Putin’s 600-billion dollar stack is what Putin and his friends have put together to win the war.  It’s now worth a good deal less than it was on Friday, because a substantial portion of that stack is “held”** in US financial institutions that are ultimately under the Fed’s control, and the Fed is now prohibited from transferring control over those funds to the Russian Central Bank (or to anyone else designated as the recipient by the Russian Central Bank).

** The use of “hold” in its various forms in connection with these accounts is antiquated and, worse, confusing. Putin’s or anyone’s stack is not “held” in any way these days. It doesn’t even contain tangible items, such as dollar bills that can be “held”. The stack can’t be held. It consists of ledger records, which are interlinked with various obligations of global financial institutions. These ledger entries require them to adjust as instructed by the “holder”.

The stack becomes smaller if more people get aboard, including the Germans and Swiss and British who also “hold” the assets “belonging” to Russia.

Because Putin will be relying on those dollars to stabilize the ruble, it starts a sort of death-spiral. It’s probable that he did this to create a reserve fund in order to buy up rubles and keep the prices stable.  As of today, it has fallen by one third. Because the sanctions tighten, a ruble cannot buy more things. The drop will accelerate as people try to sell off rubles and turn them into value.

Russian Central Bank could stop it all by promising to continue purchasing rubles at a stable and fixed price in exchange for the good old American dollar.

It won’t, at least not right now.

It is this kind of thing which brings down governments – the bread price goes up by 500% due to your leaders doing something extremely stupid. The Russian economy is going to be in freefall if it becomes isolated from the international financial system.  Putin knows this. It is also known by his oligarch buddies.  It will result in immense suffering for the Russian people. Some of them might not like having that forced upon them by Putin’s imperial dreams. They shouldn’t be concerned about it if they don’t.

You never know what could happen.  You could be mistaken and it could all turn out differently. These sanctions may not be implemented and Russia could end up being excluded from the international financial system. The future is the hardest thing to predict, according to the old saying.

The sanctions are already working. However, the ruble has collapsed, Russia’s stock market has lost 40%, the Russian Central Bank raised interest rates by 20% and Putin requested a meeting.

It is my feeling that this moment is more than just an turning-point in this war. I also believe this may be the turning-point in war’s long history. It looked terrifyingly like Thursday was the day we would be reliving something from the 1940s: an all-out war on Europe with tanks, infantry, and other support.

However, if the Allies can find a way for them to wreck havoc on Russia’s entire economy, without firing one shot, then this war won’t be remembered just as a throwback, but as the debut of a new type of warfare that is played not on the battlefield, but in the global network. It’s not clear if this will be possible, but I think it is likely. And, perhaps more important, the Russians seem to believe it could work.