Rather than a “New Cold War,” we are now witnessing the culmination of an economic war with Russia, where the financial, energy, and capital markets are the battlegrounds. In his timely book, Economic War: Ukraine and the Global Conflict between Russia and the West, political risk analyst and consultant Maximilian Hess takes the reader through the period in which the seeds of economic warfare are sprouting into full bloom: from the initial invasion of Ukraine in 2014 to Russia’s full-scale invasion in 2022 and beyond.
The book skillfully delves into various economic fronts around the world, demonstrating the weaponization of economic tools such as pipelines, mining, credit, and cryptocurrencies. Each chapter unfolds like a chess game between Russia and the West, allowing the reader to map the moves of the contestants both chronologically and regionally, including Russia’s response to Western sanctions and what is at stake for each party.
Q. Thank you for accepting our interview invitation. I would like to start with the role of Eurobonds in the economic war leading up to the Russian invasion of Ukraine. Were they important?
It is my pleasure to have this conversation with you about my book. I think Eurobonds played an important role in the first Russian invasion of Ukraine. In 2014, as I argue in the book, there was a series of estimative steps taken by both sides in the preceding years that essentially brought the international economy into this conflict, as Vladimir Putin sought to use economic tools to maintain leverage over Ukraine and push Ukraine into the Eurasian Economic Union in 2013. Even as there were major protests against this and against the then Yanukovych government in Ukraine.
Putin essentially engineered a bailout of the Ukrainian state using Eurobonds, which is not a way governments typically lend to other governments, and the effect of lending in this way and specifically changing and adding some sentences to the legal contracts that underpin the Eurobond was to ensure that any escalation of the crisis in Ukraine occurred —either a break between the Yanukovych government and Putin or a successful revolution— that not only would Ukraine be plunged into an economic crisis, but that this crisis would be elevated to a crisis over some of the fundamental roles and in particular the primary position of the United States in the international economic order.
I think it was a very clear and deliberate attempt by the Kremlin to bring this conflict, if it escalated into a conflict, as Putin ultimately chose to do, to a brink that would also bring the international economic order into this conflict.
Q. Initially, when the U.S. imposed sanctions on Russia after its annexation of Crimea… How did Russia take advantage of internal tensions in the West?
The Kremlin has long used natural gas, in particular, and other economic incentives to divide Europe both among itself and between the European Union member states and the United States. The clearest and most obvious way has been its strategy of building gas pipelines, such as Germany’s Nordstream 1 and Nordstream 2. What I would like to emphasize is that even Nordstream 1 was always a primary effort to give Russia more leverage over Central and especially Eastern Europe by bifurcating the European gas market.
There were a number of disputes in the early and mid-2000s between Russia and Ukraine over gas supplies and the terms thereof that led Russia to cut off deliveries and precipitated gas supply crunches in the wider European market. What I think people forget is that Nordstream 2 and Nordstream 1 were never intended to increase the total amount of Russian gas that could be pumped to Central Europe.
Instead, they were designed to ensure that Russia didn’t have to do it through Eastern Europe, in particular through Ukraine, so that Russia could then increase the leverage of its gas policy over Ukraine. We should have understood this risk at the time of Nordstream 2, because it was essentially designed to give Russia the same kind of leverage over other Eastern European states that it had gained over Ukraine.
Q. Why do you think Putin choose to invade Ukraine specifically in February 2022?
I think he thought it was an important time economically, when the West was weak and divided. He hoped that the sanctions response and the economic response would be less intense than it might have been at another time. Thinking in terms of change in 2020 and 2021, the end of the Trump administration and then the Biden administration that follows made it clear that there would be a concerted sanctions strategy.
He hoped that European unity would be weak and insufficient to resist him. Inflationary pressures from COVID-19 had already increased, and Russia had already begun to cut off its gas supplies to Europe. At the same time, he was preparing his troops to invade Ukraine and saw it as a moment when the West would be relatively weak economically and relatively vulnerable. Therefore, less likely to act against him and less likely to act in support of Ukraine. Which, of course, turned out to be a very big strategic miscalculation on his part.
Q. Has Russia’s strategy of crippling Europe with gas cuts failed?
Largely, I think it has failed. Not because of any failure within the strategy itself but because of collaborative actions on the part of the West. Intelligence was shared by the United States, by officials who had spoken on the record and had reached the assessment that there was a small chance that Russia wouldn’t invade Ukraine in October 2021, simply the brutal nature of Russia’s onslaught in February, and the fact that the Europeans saw an army of the largest form that had taken this action in Europe since World War II, made it clear to many European leaders that they had no other choice.
Putin was preparing, and did prepare, for a scenario in which Europe was fully on board with the sanctions regime through Russia’s fortress balance sheet strategy, the Kremlin’s process of building up large reserves of ‘hard currencies’ and gold. But now that the initial pain of that gas strategy is being felt, and inflation has been at such high levels for a year and a half. There are obviously still many politicians, particularly in Europe, such as former French President Nicolas Sarkozy, who are calling for a softer approach to Russia on these issues. That’s why Putin’s strategy is not one that is over; by threatening more economic pain, he can also undermine support for Ukraine in the long term. Global gas markets are much more fragile, and we could still see a new spike in gas prices this winter as a result of the Kremlin’s actions.
Q. Did Putin pull out of the Black Sea grain deal in an attempt to revive the inflation weapon?
I believe very strongly that this is what he is trying to do. It also gives him the tool of offering grain to African countries to gain more support there. I think we should be prepared for more actions by the Kremlin to deliberately try to stir up inflationary pressures, possibly trying to find a way to drive up prices, as well. The Kremlin really has only one major option, which is to threaten an export embargo and actually take action to make it look credible. That option is difficult because Russia’s budget is now so skewed toward the military.
Q. Do you think that cooperation is still a challenge within Europe, or the relations between the US And EU? What are some of the risks in the West’s strategy?
I do think there’s been a tremendous improvement in U.S.-EU cooperation, as well as inter EU cooperation over the last year and a half. There is, of course, a lot of issues still within the EU to governments that are susceptible to Putin’s argument. Be it Hungary looking after their own interests, Belgium blocking action on sanctions for Russian diamonds, or Greece resisting certain shipping sanctions.
Then, of course, there’s the potential for more Russian friendly governments to come to power in various places, although, at the same time, in some of the European markets that get lesser attention, we’ve seen moves the other way. Bulgaria, for example, is taking action to weaken Russia’s economic influence over it for the first time in decades.
To address the second part of your question, I think Putin is aware that he could also stoke divisions over time. Right now, there’s broad alliance. The real risk to this strategy is around the U.S. election next year: it will almost certainly be a re-run of the 2020 election with Trump and Biden, and if Trump is elected he has made clear that he will abandon the West strategy and sue for peace immediately by succumbing to Putin’s attempts to annex Ukrainian territory, and that will have a far larger impact on the fundamental alliance than carping about whether XY or Z European country hits it’s 2% NATO defense spending target, and that would have much longer term impacts on the cohesion and effectiveness of the Western Alliance.
Q. Do you see BRICS creating a potential alternative economic order? Do you see any developments in the 15th BRICS Summit that could potentially hurt the West in the economic war?
The thing about BRICS is that there’s a lot of division among the internal members. India and Brazil are very reluctant to accept new members. The Kremlin has talked about using the conference to create a new monetary order; that’s not going to happen, Putin couldn’t even attend this summit.
While BRICS announced plans to accept new members at the summit, it remains an organization that is primarily a public relations attempt for existing members, and even the institutions it has set up —most notably the New Development Bank, which it claims is an alternative to the World Bank— remain subject to the influence of the international economic order and U.S. hegemony within it.
For example, Russian officials have complained that the New Development Bank has suspended lending in Russia as a result of sanctions imposed on the Kremlin after the full-scale invasion in February 2022, but no workaround or even an attempt to find one was announced at the summit. I don’t think Russia can win the economic war, but the West can lose it.
So much more than focusing on the summit, the things that I advocate for understanding is, even if each member state of the European Union gets its defense spending up to 2% of GDP next year, the ultimate impact on NATO’s military capability is going to be because of how much bigger the U.S. defense spending is than all these countries put together.
I think we should really focus on having a better understanding of what is the bargain in the heart of the Western alliance, and essentially that is the military and U.S. defense spending helps provide a security shield for NATO and in return, the European Union, which is the only bloc that has an alternative currency that has been successful and developed over the last 30 years. It could serve as a very important market for a BRICS alliance or any other currency order, or China to essentially have a deficit market to invest in.
So, we need a better understanding of this fundamental exchange, and broadly speaking, that is, where the U.S. provides the security guarantees, provides the bulk of the defense, spends the default of the bulk of the defense posture, and in exchange Europe remains within the U.S. sphere of influence on the economic order— and a supporter, not a challenger of the dollar order. That is what should be understood as the fundamental exchange there.
Q. In this equation, where does gold come in?
Gold has been talked about as a potential strength for the Russians, because of how much gold they produce, and of course because of the historical role of gold-backed currencies. The idea that a gold-backed currency would not only be more stable, but it would be something that every other country would demand.
But we’ve lived in a world where most countries have had a gold-backed currency for over almost a hundred years, and one where there has really been no convertibility between the gold standard and international currencies for over 50 years since the end of the Bretton Woods structure in the early ’70s. I certainly argue that gold is not an effective tool for backing an international currency in today’s world of free capital flows, because everyone would essentially just try to take the gold and not use the currencies.
In the case of Russia, it would be particularly predatory. There was a lot of talk about this in the beginning. By, I think, misinformed observers who saw the Russian actions and talked about a possible gold standard. What they did was, and still is, a botch-up. But what the Kremlin offered was a fixed price in rubles for gold, which a gold standard would involve a fixed amount of gold for a number of rubles, and the other way around. That didn’t happen.
Of course, there are those in the Kremlin who think that this is still an alternative central bank. However, so much of the additional gold that Russia got at this time, including by expanding its influence in Africa, and where the Wagner Group’s involvement in a number of gold mines, Sudan in particular, and Central African countries has gotten a lot of attention. From what we can tell, that gold was almost certainly stolen by Prigozhin and other kleptocrats rather than actually added to the Russian states gold reserves.
Q. What is the potential of Russia’s Africa policy after Wagner’s mutiny, followed by Prigozhin’s death?
What is interesting about a lot of activities in Africa, such as gold mining operations, is that they are self-sustaining. They probably actually earn a profit. Just as the gold doesn’t go to the Kremlin’s coffers, I think, the profits from those operations are probably pilfered by Prigozhin and others around him.
There are many other Russian “private military companies” that have the state’s backing which have played roles in not only Ukraine, but also Syria and elsewhere in Africa. Amongst the more prominent ones are Patriot and Shchit, which is shield in Russian.
What I expect will happen is that some of the individuals from these other networks will be given more of the responsibility and put in charge but the fundamental structure of the operation will remain the same. It is very easy for the Kremlin to put new people in charge or to rebrand it slightly.
Prigozhin’s death will accelerate this effort and could lead to some infighting within the security services over the spoils of Wagner’s activity in Africa, which would risk weakening it as a tool of influence but I expect Putin will take a more active role in determining which Russian partners are favored there to attempt to mitigate this.
Q. Do you think China’s interests are aligned with the Russia?
I certainly don’t claim to China expert but I believe for now, China is trying to replace the U.S. as the core node of the international economic order and to challenge it, and to have a long-term strategy to do so. Whereas, I believe that Russia wants to destroy the international economic order and as a result of that, China and Russia’s interests are not as aligned as they claim them to be.
We see that Putin wants three things from China: He wants direct military support, new loans, and a deal on the Power of Siberia 2 gas pipeline project- Which has had no progress for over 18 months since the beginning of the war, and which Russia needs to develop an alternate gas market. Putin has not gotten any of these things yet. I worry that sometimes the West approach to China risks pushing it closer to Russia and making it more likely that China will overtly support Putin but we have not seen that yet.
Q. How does the U.S. balance its relations with China given its competition against the backdrop of the Russia Ukraine war?
It’s a very difficult, delicate, balancing act. But I think right now too much of the focus is on record levels of economic and military support for Ukraine. I still think that the potential for China to more actively support Russia on these matters is under-appreciated when talking about China policy itself.
Q. What is the Kremlin’s long term strategy?
I think the Kremlin’s long term strategy is to show that it is willing to fight this war without stopping and even if it becomes a front line spreeze, the Kremlin will not stop launching missiles across Ukraine until Putin has something that he hopes can save more face.
For him, that is at minimum the full occupation, if not only Donetsk, Luhansk but Zaporizhzhia and Kherson Oblasts— which Putin claims now are part of the Russian Constitution and and Russian territory even though he only ever held sham referendums there and has never controlled all of their territory.
Putin’s strategy is to try to show that he can continue to fight this war for longer than the West can. That is why we worry so much about a renewed use of Russia’s economic weapons this coming winter.
Q. Would Russia be able to build an alternative economic order if it won the war in Ukraine?
Winning this war would so damage U.S.-European long term cooperation that the Kremlin would seek further divisions within Europe and seek more gains from potential allies and new parties coming to power in Europe in the aftermath. Some of the technical issues about an alternative currency order is needing a deficit market in which states, like Russia and other surplus countries, can export their savings.
So, if Russia had China’s full support, and Europe and the U.S.’s relationship was heavily damaged, then the prospects of Russia being able to leave that order matter a lot more. Also, to reiterate, Russia’s strategy is not about building alternate economic order, it’s primarily about destroying the current one because of how much more power the U.S. has in the current order than any other country.
Q. Finally, what are the ramifications of Russia’s default?
Russia’s default has not affected its ability to continue the war, nor its ability to continue funding the war because their surplus is from hydrocarbon exports. But it will be sword of Damocles hanging over the Russian State for any resolution to this conflict, whether that be with Putin in the helm or future without Putin. Russia has tried to buy back some of the debts and swap them out in its local market and has succeeded handing over ruble contracts to Russian investors, but these are debts that are taken out under English law.
English court has final provision, and Russia owes its bond holders according to the terms written under English law, and it could be decades that the default keeps Russia out of Western capital markets and out of the international economic order as a sovereign borrower until it’s default is resolved.
There’s precedent for this in the Soviet Union’s default on the Tsarist Imperial debts in 1918, which wasn’t resolved until 1999, eight years after the Soviet collapse. I think that the default from Putin will not be resolved until he is no longer top the Russian State.
Stay informed by subscribing to
our weekly newsletter.
