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I was born in 1953 and over the 50-odd years of my adult life, the cold war between the NATO alliance and the USSR has played out. The collapse of the USSR following their disastrous withdrawal from Afghanistan in 1989 was a notable victory for America and President Ronald Reagan. The USSR was considerably dismantled and many of its satellite states like Poland and Ukraine became independent capitalist countries, some of which joined NATO.
At the start of the Ukraine war in February 2022, NATO was a fairly loose alliance with poor cohesion. The invasion has consolidated and united NATO in a way which was previously inconceivable. Furthermore, both Sweden and Finland have indicated their intention to join NATO, massively increasing NATO’s military power in Europe and securing the Baltic Sea as an area of complete NATO dominance.
At the same time, the sanctions applied to Russia by NATO and its allies have had an accelerating impact on the Russian economy. During 2022, the Russian economy’s gross domestic product (GDP) probably shrank by 3% instead of the 3% gain that it was expected to make as part of the recovery from the impact of COVID-19. Some economists are saying that the decline was as much as 4% instead of a 6% gain – which makes an overall impact of a negative 10%. Whatever turns out to be the final figure it is a very significant shift which will have long-term consequences for Russia going forward.
One of the major factors that saved the Russian economy during the first six months of the Ukraine war was its massive oil revenues partly caused by the spike in the oil price which followed the invasion. It is estimated that Russia brought in about $160bn during this critical time. By the end of 2022, however, the general shift away from Russian exports of oil and gas was beginning to bite and the year ended with the imposition of an oil price cap and a sharp 22% drop in its oil exports in December. This does not bode well for Russia in 2023.
With many of its overseas reserves frozen, the country is going to find it increasingly difficult to fund the on-going hostilities. It is worth remembering that prior to the commencement of hostilities, the Russian GDP in 2021 was approximately $1,78 trillion – slightly smaller than the American state of Texas ($2 trillion) and dwarfed by the USA’s total GDP of $23 trillion or the GDP of just Germany in 2021 which was about $4,2 trillion.
Russia’s only hope in Ukraine was to make a quick annexation in a few weeks and then hand Europe and America a fait accompli. Of course, this did not happen and now, ten months into the war, Russia is on the back foot and facing an increasingly confident Ukraine with massive support from the two largest economies in the world.
Of course, NATO and America are very happy to support Ukraine and allow it to test out all their latest military technologies while systematically degrading the military capabilities of its arch-enemy – and all of this without committing a single soldier to the battle.
Perhaps the story of Russia’s invasion of Ukraine is best told in the chart of the dollar price of North Sea brent oil:
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<figcaption class="figure-caption">North Sea Brent Oil: December 2019 - January 2023. Chart by ShareFriend Pro.</figcaption>
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The chart shows the collapse of the oil price following COVID-19 in February 2020 which was followed by a steady upward trend until July 2022. At that time President Biden visited Saudi Arabia – by far the largest exporter of oil in the world – and from that date the oil price began to fall. There was no public announcement of a deal involving oil – but the sharp downturn in the oil price at exactly the same time cannot, in our view, be a coincidence.
To us it seems clear that Biden quietly came to an arrangement with the leaders of Saudi Arabia to allow the price of oil to fall steadily and the chart shows that this is exactly what has happened. At the time of the Biden visit, Brent oil was hovering around $120 per barrel. Today it is at $83 and in a strong downward trend. The drop has been very good for Biden’s ratings at home, and it has been devastating for Russia, 50% of whose exports are oil and oil-related products.
What will happen in 2023?
In our view, at some point during this year, the war in Ukraine will be resolved in a manner which is strongly in Ukraine’s favour with some or all of its lost territories, including Crimea, back under its control. This resolution will almost certainly not be politically sustainable for Putin and we believe that in one way or another he will cease to be the leader of Russia as a direct result. That will leave the door open for Russia to re-join the rest of the world as a normal economy over time. Whether they will be willing to do that or throw up some new tyrannical leader remains to be seen – but whatever happens, NATO will emerge as it is now - a much stronger and more cohesive alliance and the world will be a more secure place.