Good Friday Morning, especially to Major League Baseball, which is finally returning after a work stoppage. It a short span, the sports world will give us the MLB and NFL free agency, March Madness, and the start of the MLB season with the Masters. It’s a fun time of the year if you’re a sports fan.
Today, I’m going to do a dive into the options available to the Russians and Chinese in navigating the Western response against them. Links to follow.
- BLS announced the February inflation report. Nationally, “The all items index rose 7.9 percent for the 12 months ending February. The 12-month increase has been steadily rising and is now the largest since the period ending January 1982. The all items less food and energy index rose 6.4 percent, the largest 12-month change since the period ending August 1982. The energy index rose 25.6 percent over the last year, and the food index increased 7.9 percent, the largest 12-month increase since the period ending July 1981.”
- Somewhat buried was the Real Earnings report. “Real average hourly earnings for all employees decreased 0.8 percent from January to February, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. This result stems from essentially no change in average hourly earnings combined with an increase of 0.8 percent in the Consumer Price Index for All Urban Consumers (CPI-U).” Additionally, “Real average hourly earnings decreased 2.6 percent, seasonally adjusted, from February 2021 to February 2022. The change in real average hourly earnings combined with an increase of 0.3 percent in the average workweek resulted in a 2.3-percent decrease in real average weekly earnings over this period.”
- The Federal Reserve meets this next week to discuss interest rate hikes. It’s a foregone conclusion they’ll hike interest rates. The question is whether they raise rates by a quarter or a half of a percentage point. The inflation and wage reports clearly say aggressive action is needed. However, the fact we’re in a war and rate hikes could trigger a recession will weigh heavy on the Fed’s mind. They’re very much behind the curve.
Where you can find me this week
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[03/06/2022] Hey Biden, call Canada, not Iran, Venezuela, or Saudi Arabia – Conservative Institute
[03/11/2022] Inflation climbs, Wages fall, and Biden shifts blame – Conservative Institute
Russia, China, and the votes they make in the conflict.
Russia’s war in Ukraine persists. I don’t have much to add to the war itself. The Institute for the Study of War has daily maps revising the progress of the Russian and Ukrainian armies. Between ISW and the UK’s Ministry of Defense maps, you can get an accurate idea of what is happening. I’ve found those two sources more reliable than media reports from “anonymous intel officials.”
The ISW’s March 10, 2022 afternoon update has signs of hope:
The likelihood is increasing that Ukrainian forces could fight to a standstill the Russian ground forces attempting to encircle and take Kyiv. Russian forces also appear to be largely stalemated around Kharkiv and distracted from efforts to seize that city. Russian advances in the south around Mykolayiv and toward Zaporizhya and in the east around Donetsk and Luhansk made little progress as well in the last 24 hours. Russia likely retains much greater combat power in the south and east and will probably renew more effective offensive operations in the coming days, but the effective reach and speed of such operations is questionable given the general performance of the Russian military to date.
There are as yet no indications that the Russian military is reorganizing, reforming, learning lessons, or taking other measures that would lead to a sudden change in the pace or success of its operations, although the numerical disparities between Russia and Ukraine leave open the possibility that Moscow will be able to restore rapid mobility or effective urban warfare to the battlefield.
Perhaps we’re heading towards a stalemate of some kind. But it remains to be seen to what extents Russia will stoop to cripple an independent Ukraine. The latest round of bombings included a Children’s Hospital.
That’s not where I want to go today, though. The economic side of the war is fascinating because we’ve never had a global response quite like this one. Russia is on the brink of default affording to US credit rating agencies. The best estimate is that Russia will default on its debt sometime in mid-April at current rates, which can change depending on many factors.
For me, two things come to mind. First, with Russia in this bind, what does China do? And second, how does Russia’s response impact the United States?
Does China take advantage of Russia?
Let’s start with China. The term to describe the China-Russia relationship for the past decade is “DragonBear.” The DragonBear partnership got built around balancing the United States. The relationship is not a friendship but political interests. If those stakes change, how does that alter the connection?
China has three different ways it can respond to the invasion. First, it can buy Russia’s exports cheaply, do little to help out if Russia defaults, and try to maintain a status quo between Russia and the world. That’s what China is doing right now.
China could pivot, however. The looming prospect of Russia’s default, which should surpass the 1998 Russian financial crisis, creates an opportunity for China. Russia is weak and needs funding to stay afloat. That presents China with a few options.
The second thing China could do is sell Russia out to improve relations with the West. Selling out Russia, declaring the war terrible, and offering Russia up would re-open the world to China. All the ill-will they’ve earned from COVID-19 and supporting Russia would evaporate. Long-term US policies on containing Chinese expansion would become more complex. Chinese diplomats would get new leverage.
This option would require double-crossing Russia. It’s unclear whether or not this is something China would do.
The third option would involve supporting Russia but driving a tough bargain. Even in its weakened financial state, China has the resources to keep Russia afloat. But there’s no reason China has to keep Russia afloat out of the goodness of their heart. China could negotiate its way to more territory.
During the 18th and 19th Centuries, China experienced what they call “unequal treaties.” With other European powers, Russia and Japan used their superior military and diplomatic advantages to force concessions out of China. There were several treaties where China lost considerable land under previous dynasties. These losses happened under the Qing dynasty, the last dynasty in China before the republic and communism eras.
China could offer Russia cash if Putin gives back territory to China’s north (segments towards Siberia, the Arctic Circle, or near the Pacific). It’d be a way for China to regain areas rich with rare earth minerals and other things. That brings up Russia. How badly does Putin want Ukraine, and what cost will he pay? That’s an unknown.
This avenue would allow China to exert pressure, expand its empire, and reverse historical losses under the Qing dynasty. China gets the benefits from a war with Russia without the combat.
The other aspect to consider about China is the big political meeting in November. Suppose the leadership is experiencing hard decisions due to an economic slowdown in China (which is occurring). In that case, a large land grab is a huge political win ahead of the next communist party shakeup.
I don’t know what opportunities China could take here, but there are options. They could play it safe like their current course or decide to take advantage of the situation. I suspect we’ll learn more about the ambitions of the Chinese Communist Party in a month or so as Russia faces reality on its impending default.
What are the impacts of Russia’s actions?
James Mattis has this line where he reminds people, “The enemy always get a vote.” Plans never survive first brush with an enemy because the enemy answers. The United States and its allies have enacted massive sanctions again Russia, and those sanctions are working. Russia’s economy is cratering. Russia has yet to answer.
The Russian plan did not survive first contact in the slightest, and they’ve hung on for dear life ever since. Ukraine got a vote in the war.
Russia hasn’t responded to Western sanctions. They have talked of sanctions and nuclear saber-rattling. So far, however, Russia didn’t bring out the big gun: ending oil and natural gas flows to Europe. Russia isn’t doing this for two reasons: first, they need the oil and gas money. And two, Russia hasn’t built up enough pipelines with China to offset the loss of European business.
However, Russia is not entering this war in a vacuum. Europe needs oil and energy. They also need other Russian exports. The American and Chinese economies are not at peak strength entering this match either. I’ve written of China’s issues coming into this year with the default of companies like Evergrande.
Aside from oil and gas, Russia can influence other sectors.
Russia banned exports on about 200 hundred different products and commodities it exports. There are three items I’d bring to your attention. Russia is banning exports of grain (until August 31), fertilizer, and the war has stopped the export of neon, an essential component of some semiconductors.
There’s already a mass shortage of semiconductors, which is why it’s harder to get things like cars and electronics. I had to send my car to an insurance-approved mechanic the first of this year and only recently got it back. The mechanics said that there was little they could do due to parts shortages but that I was lucky because none of my parts required chips. They had other cars needing parts with semiconductors that had wait-times of six to nine months or longer.
Semiconductors, especially those made in the US, are vital to military equipment too. The US is concerned about Chinese-made chips because of the risk of hacking or sabotage if used in military equipment. That means US military equipment is struggling under similar issues as their private counterparts.
The potential food crisis.
The items that concern me are wheat and fertilizer. Russia and Ukraine are significant exporters of grain to that region of the world, including the Middle East. Here’s a recent report from the Washington Post highlighting the risks here:
Together, Ukraine and Russia account for nearly 30 percent of wheat, 17 percent of corn and over half of sunflower seed oil exports. The conflict-inducted bottlenecks at Black Sea ports — where cargo vessels have been struck by Russian rockets — and other complications of war have slammed Ukrainian exports. Boycotts of Russian ports by shipping companies and the knock-on effects of sanctions have also disrupted the flow of foods and feeds from Russia — creating problems that could grow as the Kremlin now threatens to impose export controls on some food commodities.
As bad as it is — a key wheat future surged 70 percent over the past month — the situation is poised to get worse. A new report by the Food and Agriculture Organization of the United Nations (FAO) due out Friday estimates food and feed prices could surge 7 percent to 22 percent above already elevated levels due to the war.
In real terms — with prices adjusted for inflation — costs are approaching, but not yet surpassing, the global food crisis of 2007 and 2008, when droughts, the rise of biofuels and a barrage of trade protectionism merged into the worst food inflation since the Soviet grain crisis of the 1970s.
In the short run, the FAO says, large grower countries — Australia, Argentina, India and the United States — could make up for a portion of the grain shortfalls from Ukraine and Russia. But important factors could worsen the problem.
If the war halts planting in the rich, black soils of Ukraine, wheat shortages will worsen in the coming months. The FAO’s preliminary assessment is that, due to the war, 20 percent to 30 percent of wheat, corn and sunflower seed will either not be planted or go unharvested during Ukraine’s 2022-2023 season.
Critically, Russia is also a major exporter of fertilizer, the price of which has already been soaring. Significant disruptions of Russian exports could see that price jump more — further driving up the cost of food production globally.
Note where we are: wheat/grain prices on par with the last financial crisis of 2007-08. Food prices briefly hit similar amounts in 2013-14, which was one of the contributing factors to the Arab Spring.
Aside from Russia and Ukraine, countries like China, Egypt, Turkey, Bangladesh, Indonesia, Eritrea, Kazakhstan, Mongolia, Armenia, Azerbaijan, Georgia, Lebanon, and Somalia all depend on Russia/Ukrainian wheat. Food is already high from global inflation and the aftereffects of the pandemic. The Washington Post piece added this:
Pandemic-era inflation and supply chain woes caused dramatic spikes in food and energy costs even before the Russian invasion, making it more expensive to aid countries in crisis even as millions across the globe fell into poverty and the risk of hunger grew. Between 2019 and 2022, the number of people at the brink of famine rose from 27 million to 44 million, with additional 232 million people one step behind that category, David Beasley, executive director of the U.N. World Food Program (WFP), wrote in The Washington Post.
The agency, which delivers emergency food aid, was already paying 30 percent more for supplies than it was in 2019, amounting to an additional $50 million every month, Beasley wrote. “If the Black Sea transport corridors are disrupted further by this burgeoning war, transport prices will spike in lockstep, doubling or even tripling,” he added.
Aside from oil, gas, and various supply chain issues, this is the new problem facing the world. Countries are banning exports of grains to keep their populations fed, at least temporarily. But all this is speculation for now. For farmers, the planting season starts now.
Because the planting season is now, that means it’s already too late for Congress to step in to offset food and agricultural costs. A lot of these issues are already baked into the cake. I’m not saying Americans will go hungry. I am saying that global demand for grain/food could drive up costs. America is a breadbasket country, which means shortages aren’t likely.
Russia doesn’t have as many economic levers it can pull as the United States and Europe, but it’s not toothless either. The enemy always gets a vote. That’s true in war and sanctions. If you’re Russian, though, you should also be concerned about China. They get a say in how this war plays out too, and it’s not clear what they’ll do.
Links of the week
No, There Are No U.S.-Funded Bioweapons Labs in Ukraine: False claims are going viral on social media. – Alec Dent, The Dispatch Fact Check
Democrats are in denial about inflation – Catherine Rampell, The Washington Post
Putin’s war exposes the cracks in the world order — can we fix them? – James Dubick, The Hill
The Grown-Ups Are Losing It: We’ve turned schools into battlefields, and our kids are the casualties. – George Packer, The Atlantic
Hundreds of Ships Trapped by Ukraine War, Endangering Sailors and Global Trade: Port closings and missile strikes on vessels have ripple effects on trade, including grain markets; terror aboard a Bangladeshi ship – WSJ
If the Ukraine war hasn’t scared the West straight on energy, nothing will – Rich Lowry, NYPost
The Receding Democratic Majority – Matthew Continetti, Commentary Magazine
Twitter Thread(s) of the week
Satire of the week
Thanks for reading!