Hurting Ourselves to Help Russia? Predictable Errors

One Action that led to Russia’s Rise and America’s Fall

These truths are never popular as they do hurt. None of us wish to admit the mistakes of those we admire. Even fewer are willing to admit they were wrong and others were right in predicting the disastrous decline in Europe and the USA in recent years.

If we’re objective, accept the mistakes, we can learn and move on.
For those willing to understand and learn for the future, enjoy the read!

My focus is on one major error that triggered a chain reaction of considerable impact on the US economy and that of Europe. The conflict in the Ukraine is at the heart of this message. And while many will cite hindsight as a great thing, it’s important not to deny those who predicted the inevitable results.

I remember the first time I heard about Biden placing sanctions on Russian Oil. My wife said “that’ll fix ‘em”. I wasn’t so sure. I remember my reply vividly:

“No, this will only hurt us more”

While I couldn’t know the exact outcome, we do now.
To me the consequences were always going to be against us and not that of our ‘enemy’. And here’s why.

Sanctions on Russia and Global Oil Supply

The Biden administration’s actions in response to the Russia-Ukraine conflict and the sanctions on Russian oil have had several cascading effects on the global economy, contributing to rising costs in the United States. Here’s a detailed explanation of how these measures impacted U.S. economic conditions:

1. Sanctions and Oil Supply Disruptions:

• Sanctions on Russian Oil: Following Russia’s invasion of Ukraine in February 2022, the Biden administration, along with European allies, imposed significant sanctions on Russia. These included bans on Russian oil imports, which disrupted global oil supply chains.
• Impact on Global Oil Prices: Russia is one of the world’s largest oil producers. The sanctions led to a reduction in the global oil supply, causing oil prices to spike as markets adjusted to the sudden drop in available crude oil​.

2. Rising Energy Costs:

• Increased Gasoline Prices: The spike in crude oil prices directly affected gasoline prices in the U.S. At their peak in mid-2022, gasoline prices in the U.S. soared to around $5 per gallon, significantly higher than pre-invasion levels. These elevated prices at the pump increased transportation costs, contributing to overall inflation​.
• Heating and Utility Costs: Higher oil prices also led to increased costs for heating oil and natural gas, raising utility bills for households and businesses. This increase in energy costs contributed to higher living expenses and operational costs for companies .

Broader Economic Impacts

1. Inflation:

• Consumer Price Index (CPI): The rise in energy costs is a significant component of the Consumer Price Index (CPI), which measures inflation. As energy prices soared, the CPI reflected these increases, leading to higher overall inflation rates. Inflation in the U.S. peaked at over 9% in mid-2022, driven by the surge in energy prices as well as supply chain disruptions exacerbated by the conflict​.
• Food Prices: Higher energy costs also affected food production and distribution. Increased fuel costs for transportation and higher costs for energy-intensive farming processes contributed to rising food prices. This further strained household budgets, especially for lower-income families .

2. Supply Chain Disruptions:

• Global Supply Chains: The Russia-Ukraine conflict disrupted global supply chains, particularly for commodities like wheat, fertilizers, and metals, in which both Russia and Ukraine are significant producers. These disruptions led to shortages and increased costs for these essential goods, adding to the inflationary pressures in the U.S. and globally .
• Transportation and Logistics: Higher fuel costs impacted transportation and logistics, increasing the cost of shipping goods both domestically and internationally. This had a ripple effect across various sectors, contributing to higher prices for consumer goods .

Policy Responses and Mitigation Efforts

1. Strategic Petroleum Reserve (SPR) Releases:

• Oil Releases: To mitigate the impact of rising oil prices, the Biden administration authorized releases from the Strategic Petroleum Reserve (SPR). These releases aimed to increase the domestic oil supply temporarily and help lower gasoline prices. While these measures provided some relief, they were not enough to fully offset the broader impact of reduced global oil supply .

2. Legislative Measures:

• Inflation Reduction Act: The Biden administration also pursued legislative measures to address inflation and economic challenges. The Inflation Reduction Act included provisions to lower prescription drug prices, extend health insurance subsidies, and promote clean energy investments. While these measures aim to provide long-term economic benefits, their immediate impact on inflation was, at best, limited​ (Mission Local)​.

The Biden administration’s sanctions on Russian oil, in response to the Ukraine conflict, significantly disrupted global oil supply, leading to higher energy costs and contributing to inflation in the United States.

These effects were compounded by broader supply chain disruptions and increased transportation costs. While measures such as SPR releases and legislative efforts were implemented to mitigate these impacts, the challenges of rising costs and inflation remained significant issues for the U.S. economy.

The Unintended Consequences of Sanctions:

How Russia Benefited and the Rise of BRICS

The Western sanctions imposed on Russia following its invasion of Ukraine aimed to cripple the Russian economy by cutting off its access to international markets and reducing its revenue from oil and gas exports.

However, these measures have had several unintended consequences that have, paradoxically, bolstered Russia’s economic standing and geopolitical influence.

These sanctions have predictably helped Russia, the growing threat of the BRICS alliance, and the complex dynamics of the global oil market.

Strengthening of the Russian Economy and Currency

1. Rising Ruble:

• Despite initial expectations that sanctions would weaken the Russian ruble, the currency has shown remarkable resilience. The Russian government implemented capital controls and mandated that exporters convert a significant portion of their foreign earnings into rubles. These measures helped stabilize and even strengthen the ruble, making it one of the best-performing currencies in 2022 and 2023​​.
• The high global prices for oil and gas, driven by reduced supply, have resulted in increased revenues for Russia, further supporting the ruble. This financial cushion has allowed Russia to mitigate the impact of sanctions and continue funding its military operations and social programs​.

2. Shift in Trade Patterns:

• Russia has successfully redirected its trade flows towards non-Western markets, particularly in Asia. Countries like China and India have increased their imports of Russian oil and gas, often at discounted rates. This shift has lessened the impact of Western sanctions and provided Russia with alternative revenue streams​.
• Furthermore, Russia has increased its gold reserves and engaged in currency swaps with allied nations to maintain liquidity and stabilise its economy.

The Growing Threat of BRICS

1. Economic and Political Alliance:

• The BRICS (Brazil, Russia, India, China, and South Africa) alliance has gained prominence as an alternative to Western-dominated economic institutions. Russia has leveraged its membership in BRICS to strengthen economic ties and increase political cooperation with member countries. This has provided a platform for Russia to counteract the economic isolation imposed by Western sanctions​.
• BRICS countries are exploring the possibility of creating a new international reserve currency to reduce dependence on the US dollar. Such a move could undermine the effectiveness of Western sanctions and shift the balance of economic power towards the BRICS nations​.

2. Increased Trade Among BRICS Members:

• The trade volume between BRICS countries has been growing, with Russia playing a significant role as a major supplier of energy and raw materials. This intra-BRICS trade helps Russia circumvent Western sanctions and maintain economic stability​.

Complex Dynamics of the Global Oil Market

1. Indirect Purchases of Russian Oil:

• Despite sanctions, Europe and the US continue to indirectly purchase Russian oil and gas through intermediaries. Countries like India and China buy Russian crude at discounted rates, refine it, and then sell it on the global market, including to Western nations. This practice undermines the intent of the sanctions and allows Russia to continue profiting from its energy exports​​.
• The convoluted supply chains and the lack of comprehensive tracking mechanisms make it challenging to fully enforce the sanctions, leading to continued revenue streams for Russia.

2. Higher Energy Costs:

• The sanctions have led to higher energy prices globally, which ironically benefits Russia by increasing its revenue from oil and gas sales. European countries, in particular, have faced soaring energy costs as they scramble to find alternative suppliers and reduce their dependence on Russian energy​.
• This situation has led to economic strain in Europe, where businesses and consumers are grappling with higher energy bills, contributing to broader inflationary pressures.

The sanctions imposed on Russia were intended to weaken its economy and limit its ability to fund military operations. However, the resilience of the Russian ruble, the strategic redirection of trade towards non-Western markets, and the rise of the BRICS alliance have helped Russia mitigate the impact of these sanctions.

Additionally, the complex dynamics of the global oil market, including indirect purchases of Russian oil and higher energy prices, have predictably bolstered Russia’s economic position.

As the geopolitical landscape continues to evolve, it is crucial for policymakers to consider these unintended consequences and develop more nuanced strategies to address the challenges posed by Russia and its allies in the BRICS coalition.

What Could Biden Have Done Differently?

During Donald Trump’s presidency, the relationship between Russia and Ukraine did not escalate into the full-scale conflict witnessed during Joe Biden’s term.

Several factors and policies during the Trump administration played roles in maintaining a relatively stable situation:

Diplomatic Engagements with Russia

1. Personal Diplomacy:

• Trump’s Relationship with Putin: Trump made efforts to establish a personal rapport with Russian President Vladimir Putin. This included multiple high-profile meetings and summits, such as the Helsinki Summit in 2018, where Trump sought to improve bilateral relations and reduce tensions
• Direct Communication: The administration maintained open lines of communication with Russia, aiming to manage disputes and avoid misunderstandings that could lead to escalation.

2. Cautious Approach to Sanctions:

• Selective Sanctions: While the Trump administration did impose sanctions on Russia, particularly for its actions in Crimea and interference in U.S. elections, these measures were more targeted compared to the broader sanctions implemented later. This selective approach helped to avoid a significant economic backlash that could have further strained relations​.

Military and Economic Support to Ukraine

1. Military Aid with Conditions:

• Lethal Aid: Trump’s administration approved the sale of lethal weapons to Ukraine, including Javelin anti-tank missiles, which bolstered Ukraine’s defense capabilities. However, this support came with conditions aimed at ensuring the weapons were used defensively and did not provoke further Russian aggression.
• Military Training and Support: The U.S. provided training and non-lethal aid to the Ukrainian military, enhancing their capabilities without escalating the conflict to a point of open war​.

2. Economic Assistance:

• Conditional Aid: Financial aid to Ukraine was often tied to specific reforms and anti-corruption measures, ensuring that the support was effective in strengthening Ukraine internally without significantly provoking Russia​.

Geopolitical Strategies

1. Balancing NATO Expansion:

• Cautious NATO Policies: Trump expressed skepticism about NATO’s expansion and the financial burden it placed on the U.S. This cautious approach reassured Russia to some extent, as one of its primary concerns has been NATO’s eastward expansion.
• Encouraging European Responsibility: Trump pushed European NATO members to increase their defense spending, aiming to balance the U.S. involvement in European security and reducing the direct pressure on Russia from U.S. forces​​.

2. Energy Diplomacy:

• Energy Independence: Trump’s policies focused on achieving U.S. energy independence, which included expanding domestic oil and gas production. This reduced the strategic leverage of Russian energy exports to Europe, potentially limiting Russia’s ability to use energy as a geopolitical weapon without escalating tensions directly​.
• Support for European Energy Diversification: The U.S. under Trump supported initiatives to diversify European energy sources, including promoting liquefied natural gas (LNG) exports from the U.S. to Europe, reducing dependency on Russian gas​.

Avoiding Provocation

1. Avoidance of Direct Confrontation:

• No Major Military Confrontations: The Trump administration avoided major military confrontations with Russia, instead opting for strategic deterrence and engagement. This approach helped in maintaining a status quo without escalating to open conflict​.
• Strategic Patience: The administration exhibited patience in dealing with Russian actions in regions like Eastern Ukraine and Syria, opting for diplomatic and economic pressures rather than military responses​.

Findings

The relative stability between Russia and Ukraine during Trump’s presidency can be attributed to a combination of diplomatic engagement, targeted sanctions, military and economic support with conditions, and a strategic approach to NATO and energy policies.

While these measures were not without their controversies and criticisms, they contributed to a period of managed tensions that prevented the outbreak of a full-scale conflict during his term.

Thanks for Reading

Sources:

• SFGov Crime Dashboard
• Mission Local
• Brookings on Sanctions
• International Monetary Fund (IMF) Reports
• U.S. Energy Information Administration (EIA)
• European Council on Foreign Relations — Impact of Sanctions on Russia
• National Bureau of Economic Research (NBER) — Economic Impacts of Sanctions
• World Bank — Russian Federation Economic Report
• Carnegie Endowment for International Peace — BRICS and the Global Economy
• United Nations Conference on Trade and Development (UNCTAD) — BRICS Countries Report
• Chatham House — The Future of BRICS
• OECD — Economic Surveys: Russian Federation