I am writing this at 10:00am on April 27th, 2022. This is important because in War, the mornings intelligence briefing is obsolete by the time it reaches the hands of the President, and the decisions he’s made in response to that briefing is obsolete because the next intelligence briefing is already on the way with updated information. This is one reason why Truth is always the first casualty of war. So this article will likely be obsolete by the time it publishes.
The news I read this morning went something like this: Russian state Gas corporation Gazprom has cut off Poland and Bulgaria from their supply of Liquid Natural Gas. Poland’s response has been “We are going to be OK”, Bulgaria has responded with “This is a breach of contract.” This is all I know.
All of this is interesting to me because it represents a discussion of Economics and Currency as well as War by Other Means. Lets try to get a feel for what’s going on:
The European Union sanctioned Russia by cutting them off from the mechanisms of Foreign Exchange. This had the effect of making Russia’s supply of foreign currencies useless, and the Ruble useless to other countries.
Russia responded by saying that payments to Gazprom must be paid in Rubles. This had the effect of turning the tables on the European Union–now their currencies cannot be used to pay for Gas, and because they cut Russia out of the mechanisms of Foreign Exchange, they cannot get more Rubles than what they already have in reserve.
The European Union prior to this morning has responded that requiring payment in Rubles is a breach of contract plus a lot of other legalistic hemming and hawing. Russia and the European Union know that if Russia cuts off the gas supply then there will be extraordinary human suffering on a massive scale in Europe–my understanding is that this gas supplies power and heat to most of the population of Europe.
Let’s start by talking about Currency. Why does the denomination of Currency matter? Here in the US, my experience with foreign exchange has been that when I get a Canadian Quarter I can’t use it in vending machines, and in the past when I visited my family in Canada I would come back with a lot of colorful bills that I can’t use. Some banks will accept foreign currencies and exchange them for US dollars, but that is a bit of a hassle. I have the knowledge that I can exchange Canadian bills for US Dollars but I choose not to because I don’t have enough to make it worth the trouble.
When we talked about foreign exchange in my graduate studies, it was treated as a given. There is a calculation you can do to decide whether to “Build or Buy” a given product in a foreign country, so you plug in the inputs and make decisions based on the exchange rate at the time. There was no discussion of the specific mechanism of foreign exchange.
We know based on our discussions here that Currency represents the delegated authority of the sovereign and that the denomination someone uses tells you who their king is because we put the sovereign on the bill (American dollars say e pluribus unum which means “out of many, one”–a perhaps accidental reference to the fact that the people are sovereign in aggregate).
So why does the denomination of currency matter? Because the denomination tells you who is boss; the denomination determines who matters when you make decisions; the denomination determines how challenging a given transaction is.
The EU wants to be boss, so the EU wants gas to be paid for in Euros. The EU doesn’t want to consider Russia when making decisions, and so far Russia hasn’t cared enough since foreign exchange was relatively easy, so the EU wanted to pay in Euros. When the world cut Russia out of the foreign exchange system, that particular sword cut both ways, and made Foreign supplies of Rubles useless. Immediately after this decision, Russia put limits on how much money Russians could send outside the country or even carry with them, because the supply of Rubles suddenly mattered a great deal. This move by Gazprom to require payments in Rubles is a way for Russia to call back foreign reserves of it’s currency, which struck me as a very clever way of turning the tables.
Considering the Economics of the decision allows us to factor the actual gas into the calculation. When Russia was supplying gas, nobody really was motivated to address the Rubles demand–they felt Russia would keep supplying and accept whatever they paid. Russia turning off the supply is simultaneously increasing demand for the gas, and when demand increases we know also that price increases. Poles and Bulgarians who were previously comfortable in their heated and powered homes will clamor for Russian gas at any price if a cold snap strikes. Honestly–I think Russia waited as an act of mercy, supposing that the human suffering would be limited in warmer weather. I don’t know how much warmer it is at the end of April than it is at the end of February, but I am sure it is noticeably warmer in both countries.
Russia in this move has created a domestic popular demand for Russian gas, and Poles and Bulgarians will be advocating on Russia’s behalf in short order, when gas shortages are felt. The price of gas will increase, which will increase Russia’s demand for Rubles, and amplify the difficulty of the decision before the European Union. Russia is turning the economic screws.
Now we can talk about War by Other Means with a complete understanding. I mean by this phrase to invert an old saying I heard somewhere that “War is politics by other means”–now, politics has become war by other means.
If the international order exists in a state of Anarchy, the levers of war are pretty sparse. If Russia has no connections to the United States, the United States has no means of influence over Russia. The Global Order is a way of inventing ways for the United States to be able to influence Russia and conduct a war by other means. Every Embassy, every trade deal, creates a bond which can be leveraged for conflict or to avoid conflict. The world responded to Russia’s invasion of Ukraine by isolating them and cutting them out of the global mechanisms that have been invented. But the mistake they made was to cut them out all at once. Now Russia is figuring out how to operate in a globally isolated way, and everyone else has run out of levers. Russia’s biggest levers are it’s gas supply and the threat of war, which it is now using to the fullest extent. And Russia didn’t make the mistake of cutting off the entire gas supply, but doing so selectively. After they see the reaction, I bet they will evaluate the decision and either cut off more countries or negotiate some concessions.
All of this is supremely interesting political gamesmanship, if one completely ignores the massive human suffering the depleted gas supply will cause and the ongoing war in Ukraine is causing. That is where world leaders need to remember their role as custodial sovereigns: the care of their people ought to be the foremost concern, not the preservation of their regime. The war is not a just war, and both sides are in the wrong in their conduct and both sides are victims in their own way. Aggravating human suffering as a bargaining chip is an inhumane act of cruelty.
O Lord, Jesus Christ, have mercy on us, and on the whole world.
AMDG
