Gennady,
Hello! It’s a long time since we’ve spoken. I still remember our adventures in New York with pleasure.
Of course, we’ve noticed the posts you’ve been making recently on RSB 117. Don’t worry, you aren’t in any trouble, these are all reasonable questions to ask. Have we really thought about the long-term economic consequences of our actions? Do we actually understand the likely effects in the markets, and the way they will affect our macroeconomic stability and growth prospects? Are we really willing to sacrifice all the benefits of a convertible ruble and access to world capital markets, just for Crimea, and part of the Ukraine, and perhaps some tiny, insignificant pieces of Estonia or Moldova?
The questions are reasonable ones, but that doesn’t actually mean that we would prefer that you continue to ask them in public in such an acute and penetrating way, simply because we’d prefer that not many people deduce their correct answers at this point. So Higher has authorized me to share with you some of the actual logic of our overall strategic thinking. Of course, we must ask that you exercise the utmost in discretion, as usual. But we thought it would be useful to give you, at least, some idea of what is really going on, and where we are headed with it, as it may be necessary to turn to you, at some point, for advice on tactics.
First, the strategic objective. It’s true, as you say, that our hand has been forced by recent events, but in fact we are exploiting an unexpected opportunity, not fighting a fire, executing a contingency plan developed some time ago, one of several we have available to take advantage of likely occurrences, one that will significantly advance our long-term strategic goals. If it hadn’t been Crimea, now, it would have been something else, in the next few years.
An opportunity to do what? Our public story has always been that we are engaged in some kind of atavistic gathering of the Lands, doing our best to recreate the good old days of the vanished Soviet Union. This is a convenient belief, so we have encouraged it. It is convenient because it allowed us to establish, in Georgia and elsewhere, the principle that we could still use naked force in inter-state relations, without provoking the alarm that a more obviously open-ended program of conquest might have. But really, one should think in more ambitious terms.
Of course, the Lands must be gathered, but there are two other things driving our overall strategic approach, one a problem and one an opportunity. The problem is America. The opportunity is Europe. The moment to move against both of them is now. This is our chance to finally break NATO. We’ll get away with it because we’re going to do it subtly, destroying the alliance by snipping threads, here and there, that will cause the whole thing to unravel under the stresses of the coming few years. Our opponents have forgotten the difference between lies and the truth, and as a result they typically have no idea, themselves when they are bluffing. It is finally time to call a bluff – the claim that NATO would defend former Soviet republics – that our opponent never knew was a bluff, and so invalidate even their more serious promises.
How? We are about to do something that we have seen the Americans do several times now, most recently against Iran; fight a largely economic and financial war. The twist is that we are by far the weaker power, so we must do it in a clever way. But our opponents are, for now, so poorly led that they have put themselves in an enormously vulnerable position. We can withstand another crash in world markets – all we’ll have to do is arrest a few people, it will be salutary – but none of our opponents will win the next election if there’s another crisis like the one in ’08, or an even worse one, so for them finding some way to accommodate us before we can bring that about is a matter of political life and death.
Of course, the real reason the markets have to crash, sooner or later, is that the Fed and the Bank of Japan and the ECB would have to keep geometrically expanding the volume of money printing to keep the bubble they’ve already blown up from bursting, but instead the Fed has already reached its limits and is starting to taper. Even if they flinch this time, and re-expand QE, as we expect them to, continued geometric increase is impractical for very long. So the effort to prevent a crash in financial markets by surrendering to our demands will ultimately fail, but before it does, we can expect our opponents to offer many valuable concessions.
Once the final panic in the market does get underway, we will be able to take advantage of its disorganizing effects, while they will be crippled by them. Democracies are easily distracted. Who knows how long from now that will be? Not I, or anyone. It could happen tomorrow, or not for another five years. In the meantime, it is very much in our interest to keep the threat that we will precipitate a crash alive.
We are facing opposing powers that are intrinsically much stronger than we are, governed by people with no real survival instincts, who have made no effective preparations of any kind for a military or economic conflict. In that kind of strategic environment, great things can be accomplished with slender means. Fortune favors the bold. The trick will just be keeping the conflict non-kinetic and unconventional, and achieving as much as we can before they finally wake up and make a real stand. Each action must seem independent, each move must seem like it might be the last one we’ll make. Bit by bit, step by step, we will back them into a corner, simply because their planning horizon is three days, and ours is thirty years. The risk is limited, because our opponents are desperate for peace, and will gladly let us switch off the war the minute it begins to go against us. (This is the meaning of the American president’s endless “exit ramps”; what he is actually telling us is that we can end the confrontation whenever we please.)
By now American voters are very tired of their endless imperial wars, which started so many weary years ago, and as far as they can see, have achieved exactly nothing for them. The whole project of empire has been publicly discredited, though no part of the empire has been relinquished. That’s the paradox of Obama’s presidency – he still carries on all the various wars of empire and meddling provocations, but at the same time doubts their necessity, and is constantly tempted to repudiate them. The tentacles of the jellyfish continue to sting, like independent creatures, even after the brainless animal has lost interest in the fight. He wants to overthrow several of the world’s governments, and is actively undermining them – but his heart really isn’t in it. He starts wars that he has no will to win.
This, to our minds, is a strategic vulnerability that simply has to be exploited, because it means he can be fought – and beaten – fairly easily. Nothing can enhance a state’s prestige and influence more than taking on and defeating the currently paramount power, so America’s current strategic stance – impressive means, incoherent goals, absolutely no political will to achieve them, an attention span of three days – is a standing invitation to attack. We have done quite well against them in Syria, and there is no reason to think their performance on the Ukraine will be any better. Samantha Powers will still be piously scolding us and threatening to un-friend us on Facebook as the tanks roll into Kiev; she might well go on doing the same thing if we took Warsaw, or Berlin, though of course we currently have no plans to send tanks to those two places.
The natural tendency of the American voter is isolationism – he has difficulty seeing why other peoples’ troubles should matter to him, though he’s a good fighter once he’s reluctantly become involved in them. The trick is just to find some way to tip him back into his pre-1942 state of selfish indolence without doing any actual fighting. A much higher oil price and a deeper depression might do it, at this point, so it’s fortunate that we’re in a position to bring that about. The people who make up America’s current political leadership won’t really put up much resistance – they tolerate the existence of the empire because it’s lucrative for powerful constituents, and costs them, personally, nothing, but they are presiding over an inherited political system and an inherited security architecture which they fundamentally don’t believe in, don’t understand, and have no will to defend. If they have to choose between health care and Europe’s security, of course they will choose the good they understand and believe in – freedom from pain and the postponement of personal death for as long as possible – over the one they’ve never understood or sympathized with.
If we are really determined to restore full Russian sovereignty, up to and including the right to go to war on other powers without seeking anyone’s permission, as is our sacred obligation as guardians of the security of the Russian people and nation, war with America or her proxies can’t be avoided anyway, because as things are now, we won’t ever again be able to exercise our sovereign rights to make war and peace without fighting them, they will always get involved at an early stage. Since war can’t be avoided, and we’re the weaker power, if we want to win we must attempt to control the time and circumstances of the fight. We must fight a limited war when we can win, in a clever way that allows us to win, to avoid having to fight a war when we can’t. That means we have to start the fight ourselves, instead of waiting for them to start it. We must attack, because we are the weaker party, and need to keep the strategic initiative to achieve our goals.
So much for the problem, now for the opportunity. Only a year or two ago, the European Union seemed to be teetering on the verge of dissolution. I think that it would be very much in our interests to see that actually happen, especially if NATO goes with it. (This is why Estonia is essential; NATO thinks they will defend it, we must show them that they will not. Once one NATO member has been abandoned to our mercies, the principle will have been established, and we can deal with the Poles – our single biggest problem – at our leisure.)
The EU, as it presently exists, is a relic of an American-backed project to create a European super-state, a United States of Europe, that specifically and deliberately excludes us. In any such confederation, German hegemony is virtually certain. That is intolerable. We, of course, would prefer to see a European political architecture that includes us, one in which we have a chance at playing a leading role. But only by destroying the existing EU, and NATO, and starting over from scratch will we really be able to arrive at a satisfactory outcome.
The near-dissolution of the EU a couple of years ago was the result of an economic crisis, and so the question of whether or not it is possible to bring another such crisis about naturally arises. It’s my belief, as I’ve already explained, that an eventual renewal of the crisis is not only possible, but inevitable. Given that inevitability, the only choice available to us is that of whether or not to take control of the event, and use it.
The strange thing, really, is the apparent conviction, on the part of many European and American elected officials, that another financial crisis can actually be avoided, forever. Apparently they think that they can indefinitely postpone the next recession. From the outside, however, it has become quite obvious that the “developed” economies are locked in a cycle of artificial booms and genuine busts. It’s useless to speculate on the ultimate reason – what we actually know is that this is a group of people who for more than a decade now have not achieved anything like the rates of economic growth they had expected and planned for. As any polity experiencing a growth shock of this kind would, they have been resorting to more and more desperate expedients to try to delay the day of reckoning with this huge ongoing shortfall, in the process making things worse and worse each time they lose control.
Russia, and Brazil and China for that matter, are simply carried along as passengers on this increasingly violent roller-coaster ride. If we don’t want our currencies to appreciate uncontrollably against the dollar, we have to print rubles or yuan to buy up the excess dollars the Fed is printing to try to keep the world economy from crashing, so we inflate our own economies and pile up huge reserves of foreign exchange in the upswing, and then in the downswing, when the panic finally comes, all that money tries to rush out of our economies at once, making our markets and our currencies crash.
So you see, Gennady, another crash in the ruble and the MICEX is inevitable, sooner or later, simply as a consequence of the Fed’s current policies, whether we annex parts of the Near Abroad, or not. The question is just whether we initiate it ourselves, and ride the storm, first using the threat of a global financial crisis to manipulate and damage our enemies, or else are mere passive victims of the cycle, as we were in the last two iterations. The question is whether we Russians are capable of learning anything from experience, whether we have learned not to be the greatest fools in an artificial bull market. Perhaps, if we can develop the political will to abandon convertibility quickly enough, we can even avoid being caught in the crash, this time. The reserves the Fed forced us to accumulate will allow us to postpone the decision for years, if we’d like, and in that amount of time, it may even be possible to complete the operation and escape default and devaluation. If not, well, those are both things we know how to do, and last time the pain only lasted two or three years, which is nothing.
Since another panic in world markets is inevitable sooner or later, we plan to try to use it, this time, surf on it, let it carry us to our strategic goals. In order to do that, we need to be, or at least to appear to be, in control of the timing of events. The threat of cutting off Europe’s natural gas is a threat of precipitating a European recession, which would reduce tax revenues and bring the Mediterranean bond markets back into difficulties. A shock from the price of oil at the same time would make things even worse. The Europeans will concede anything in order to avoid that, because it threatens their whole European project, for which they have already sacrificed so much. This great harm, which is actually going to befall them no matter what they do, can be made to look, for a little while, like something it is in our power to provoke or prevent. They will allow us to get away with murder, if we can just produce that illusion – and it’s our job to take as much advantage of this fleeting opportunity as we can.
In the end, though, we really may have to go so far that we do force them to give up the oil and gas, because another European recession or depression now is absolutely necessary to our longer-term strategic plans. We can promise to turn the gas back on, if they’ll just give us Ukraine, but then drag things out somehow during the negotiation of the details, insisting on various implausible principles in a tedious and impractical manner, so that the economic damage is done anyway… We ourselves are likely to get caught in the depression as well, of course, no matter what we do, war or no war – which is why we actually need an external enemy now, to justify an increase in political repression and the imposition of exchange controls. During a war, many ways of managing an economy that would be impossible during peacetime are perceived as legitimate, so a confrontation with Europe will, in some ways, give us more freedom of action.
The Americans are in a position to take a more hawkish stance than the Europeans, and they may eventually begin to agitate for that approach, as things move on. Obama is in his second term, and the Democrats might not mind being out of power for the next two years, if they are going to be really bad ones for the voter, so even higher oil prices might be tolerable as far as they are concerned, as long as the other party can be blamed for their effects. Sooner or later, wise old men like Brzezinski, who still remember what it is like to have an actual thinking opponent, will be listened to. Or perhaps not, perhaps it will simply be impossible for the current leadership to ever wrap their heads around the idea of actually getting into a fight against someone with the means to fight back.
The European leaders, in any case, are, in our judgment, such complete pacifists that instead of welcoming their assistance in a crisis, they may easily be brought to resent the Americans’ hawkish interference, which perhaps can be used to drive a wedge between the two parties. We must try our best to seem, at some crucial point, both reasonable and conciliatory to the Europeans, and utterly insane and out of control to the Americans. Given the somewhat differing character of the two ruling elites, and the in particular the rather thoughtless jingoism of the Republicans, and their great love of draconian sanctions, that shouldn’t actually be all that difficult to accomplish. Perhaps a Republican victory in the upcoming American midterm election would serve our purposes – another way a crisis in financial markets could benefit us strategically.
Our immediate objective, by first threatening and then managing an economic crisis, is, of course, to regain control of the Ukraine, the whole thing, unopposed, step by step, perhaps annexing the East if that’s convenient, and at the same time to intimidate the Europeans, force them to publicly back down, to openly beg us to turn the gas back on, and have the Americans do nothing very effective to rescue them. The cherry will be Estonia; having failed to defend Ukraine, NATO will find it hard to rally to reverse the results of yet another referendum, even one conducted on the soil of a nominal NATO member. Kerry and Merkel may well abandon the Estonians to their fate – if so, that will be the last that will be heard of the North Atlantic Treaty Organization. If not, we can always drag out the crisis, and use it to extract more concessions in other domains. At the end, we want discredited European leaders bickering with each other as the EU and NATO crumble, and an exasperated America confined to the sidelines.
This will establish a precedent – if the Americans didn’t do anything about the first act of bullying, what is going to make them do something about the next one, or the next one, or the next one after that? It will show who really has the leverage in Europe, now. At the same time, the world economy will be crashing again. Nationalists will be rising to power in European countries, and the people who run Europe now will do anything to defeat them. One side or the other will end up as our allies. We’ll simply support whichever looks weaker. Beppo Grilli as Prime Minister of Italy or Marine Le Pen as Prime Minister of France would be a political windfall beyond our wildest dreams. We think we can manipulate such a combination of circumstances to our ultimate advantage, especially if we can get the Americans out of the picture – a protracted period of chaos and disunity in Europe is exactly what we need now.
While the threat of gas and oil cutoffs and the recession and crashes those could produce are our main point of leverage, there are other tools as well. It is important to keep direct military pressure on Ukraine. We can’t afford to let the situation stabilize as it is now, and we have yet to encounter any effective resistance, so the thing is to push on as quickly as is possible without provoking a real reaction. We need to discredit the Kiev government and, eventually, replace them with our allies. Ultimately we must use as much force as is necessary to achieve that goal, even if it means shooting some rioters in the streets. But here as everywhere, we can only win by fighting smart. I think you know what I mean by that, in a Ukrainian context.
Of course, as you’ve correctly pointed out, the Ruble will eventually crash, no matter what we do, if the crisis goes on long enough. Since we didn’t want it to appreciate in a way that would kill our economy, we were forced, by QE, to accumulate huge dollar reserves, enough to accommodate years worth of capital outflows without a crash, if we choose to spend them that way. We may not need to, though, if we can impose really effective exchange controls quickly enough.
Anyway, last time the ruble crashed, things were already going back to normal two or three years later. The people who will lose the most in a ruble crash are the European banks – our oligarchs own real assets, not paper money, and they are willing to be patient for the sake of the nation, as long as we subsidize them enough to keep them from going bankrupt.
We must prepare for a temporary loss of our oil and gas export revenues, of the sort the Iranians have suffered, another reason to impose exchange controls and arrest our domestic political opponents ASAP. If the ruble does crash, the seven hundred billion dollars Russians owe European banks must of course be written off, which by itself may be enough to precipitate a financial crisis in Europe. In either case, the end-point is, yes, Gennady, another default on our debts and a retreat from full convertibility. And about damn time, too – there are serious drawbacks to full participation in the global dollar economy, periodic economic and political shocks that make it more trouble than it’s worth. The experience of a number of countries shows that it’s possible to do well behind the barrier of a non-convertible currency, as long as you manage sensibly. India has done well. Our strategic position will be greatly improved once that transition has been accomplished – we will no longer be dependent on Fed policy and world financial markets, and will be able to conduct counter-cyclical economic policy without always having to worry about the ruble’s exchange rate against the dollar.
Militarily, we are, of course, much, much weaker than the Americans, but we also are closer to home and fighting for something we care a lot more about. If we keep thinking outside the box, we can fight an asymmetric, unconventional, non-kinetic financial and political war and win, wring political concessions from an enemy who’s too urbane and sophisticated and hip and ironic to want to risk becoming involved in an open-ended nuclear brawl. We might actually benefit from the opportunity to machine-gun some protestors, if we could do it at a time when the enemy would have trouble coming up with a coherent response, for example in the middle of a financial panic. And, again, the enemy is dying to negotiate, so we can switch the war off at any time, if it begins to go badly. Since we’re by far the weaker party, we, as always, prefer a limited conflict. In an emergency, however, the use of nuclear weapons over our own territory – say, against an overflying satellite – would freeze our gains in place, while we negotiated a de-escalation.
So you see, Gennady, we are actually quite prepared to see the stock market crash, to see all the stock markets in the world crash, and the yields on our dollar bonds rise to whatever level. We are prepared for much worse things. We may, ourselves, be in a position to bring this outcome about, in at least two different ways – cutting off the gas to Europe, and suddenly defaulting on all our bank loans - and we think it favors us strategically, so we probably will try, sooner or later. The stock market will go back up some day, whether we win or lose, and if we end up defaulting, history shows that we’ll be borrowing in world bond markets again three or four years later. We risk a brief period of manageable economic suffering, while on the other side the whole global financial and political system is at risk, along with the retirement savings and medical plans of countless voters.
The inevitable economic setback may result in some political opposition within Russia itself, but in the context of an escalating confrontation with Europe it shouldn’t be too difficult to cope with. Stalin developed some very effective techniques for managing public opinion, both inside and outside of Russia; as his heirs, we must use them. The alternative is to wait for some other falling domino – China, Turkey, Thailand, Japan – to cause the next crash in world markets, and once again be caught in it as hapless victims. It’s worth taking the risks we’re taking because the other possible worlds in which we don’t take it aren’t actually all that wonderful either, and because we’re playing for all of Europe, and therefore ultimately for the whole world.
I hope that makes things a little clearer. Yes, it is a risky strategy, but a Europe dominated by Russia, or at least detached from the United States and disunited, is a prize worth risking everything for. Beppo is worth a crash. Of course, I can’t say anything about our more detailed military plans at this point, but this should suffice to explain the overall logic behind our willingness to, yes, Gennady, sacrifice the convertible ruble and the stock market for control of the Ukraine and a tiny part of Estonia, if necessary.
Think about what I’ve said – some of it may come as a shock, but in the end, I think you’ll agree that it’s actually good news that the long tense period of waiting is finally over. We can’t win a conventional or a nuclear conflict, but this plan really might succeed. If not, well, we Russians are used to overcoming adversity. In any case, it is what Higher has decided, so it behooves us all to get behind it, and push. A word to the wise.
It would be great to get together and talk in person sometime, though I’m afraid we won’t be meeting in New York again for a while.
Gennady, I remain, sincerely
Your friend, Sasha
Of course with a Russian twist: the Ukrainian Свобода армії will include a fair number of balaclava-clad, no-insigna, no-talk ppl who just happen to know how to handle an AK-47, RPG launcher, SAM or anti-tank missile launcher just as well as they handle a vodka bottle. Say ~40,000?