Defense One Radio, Ep. 96: The impact of Russia’s Ukraine invasion

We assess the economic uncertainty stemming from Vladimir Putin's invasion of democratic Ukraine.

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Guests include:

  • Emily Kilcrease, senior fellow and director of the Energy, Economics, and Security Program at the Center for a New American Security (at the 2:14 mark);
  • And Elisabeth Braw, senior fellow at the American Enterprise Institute (at 12:00).

A transcript of this episode is below.

I’m Ben Watson and welcome to Defense One Radio.

Biden: Good morning, folks. Sorry to keep you waiting. I was on a couple of phone calls.

On Tuesday, March 8, U.S. President Joe Biden took an unprecedented step in response to Russia’s invasion of its western neighbor, Ukraine, in late February.

Biden: Today I’m announcing the United States is targeting the main artery of Russia’s economy. We’re banning all imports of Russian oil and gas and energy.

It was an extreme response, to be sure. But rarely has a leader united much of the world against him the way that Russia’s autocratic leader Vladimir Putin has with decision to invade Ukraine. As Charlie Warzel wrote in The Atlantic this week, Putin is pretty clearly the villain here—but the information war isn’t over yet. 

Nothing about Putin’s Ukraine invasion is over just yet. Many experts and observers think the pain and havoc it will wreck on Europe and the global economy has only just begun. 

Burns: Instead of seizing Kyiv in two days, which is what his plan was premised upon… 

After all, here’s CIA Director William Burns’s forecast, as he set the scene for lawmakers this week in Washington. 

Burns: …after two weeks, they still have not been able to fully encircle the city…As you said Mr. Chairman, I think Putin is angry and frustrated right now. He’s likely to double down and try to grind down the Ukrainian military with no regard for civilian casualties. But the challenge that he faces, and this is the biggest question that’s hung over our analysis of his planning for months now, is he has no sustainable political endgame in the face of what is going to continue to be fierce resistance from the Ukrainians.

So this could all go on for quite a while still. 

How do you change Putin’s calculus? Is it even possible? No one that I am aware of has any good answers to those questions. So today we’re going to look at a few more immediately useful questions about this conflict. Questions about dollars and sense—and how economic networks and supply chains are changing. And how those changes point the way toward a tomorrow that could be considerably different from the world we know today. 

Watson: Emily Kilcrease is senior fellow at the Center for New American Security. She's also director of their Energy, Economics and Security program. Emily, welcome to Defense One Radio.

Kilcrease: Thanks for having me.

Watson: Okay, so much of Russia's invasion has veered the international community into uncharted territory. Sanctions have never been used this fully or this quickly, as far as I understand, at any point in recent history. And I see today Putin repeated the line that “Western countries have, in essence waged an economic and financial war against Russia,” he said, But gradually, he told Russians, “people will orient themselves.” Also today, I guess Russian lawmakers are talking about nationalizing firms that have suspended operations inside Russia. I think that places like Ikea Nike, for example. So back in the States, we're trying to process this as best we can. CIA Director, William Burns, is talking to lawmakers this morning. And he said that Putin, “deeply underestimated the economic consequences of this invasion,” and that Putin has not, in fact, built the sanction proof economy that he thought he had. So that's a lot. That's a big overview. I'm just wondering, what sort of things are you preparing for, given our current understanding of the economic dynamics of Putin's invasion?

Kilcrease: Yeah, Ben, you're right. It's absolutely a lot to unpack and you set the scene well, in that we are really seeing sanctions being used at a pace and an intensity that is unmatched, particularly when you think about the size of Russia's economy, or the 11th largest economy in the world. To the extent we have used very severe sanctions in the past—in Iran example—it just hasn't been, again, such a major economy. And it hasn't been nearly as quickly or with such a united allied resistance. And so that really has been remarkable. The actions, the statements that we've seen from Russia, are absolutely expected. You know, they have attempted to sanctions-proof their economy. I don't think that they were fully prepared for all of the central bank sanctions, which are really having an impact on their ability to conduct monetary policy to constrain the further fall of the ruble. But at the same time, I don't think anyone's terribly surprised that they're now taking additional steps to prevent capital flight from their market to expropriate foreign firms assets in the country. That does not surprise me that they are kind of going down that path at this point, which is all the more reason why a lot of companies are kind of looking at their operations in Russia today and just saying that that risk, it's not worth it, even if they could find a way to process transactions, even if they could find a way to try to make things work, kind of the political risk of operating Russia only gets greater if you have the government coming out and saying that they're just gonna straight up take your stuff.

Watson: I was I was thinking about that. You probably had seen that old Pizza Hut TV commercial with Gorbachev. Just a wild kind of contrast. The BBC's Steve Rosenberg was mentioning it this week. He said he was in line when McDonald's first opened in Moscow. It took like three hours for him to get a burger he was saying, and he was watching the McDonald's yesterday and it was, empty, closed. Are there specific products or industries that are facing big changes that you think we're not quite talking about enough yet because this is all so early?

Kilcrease: You know, I think the one sector that everyone is watching very closely right now, energy sector, of course. That is the area where Russia is still getting a significant amount of revenue. It's been carved out of the sanction packages to date, not because we want to let you Putin continue to have that revenue, but simply because Europe needs that energy. We are starting to see more pressure on that, obviously. The U.S. announcement earlier this week, that we would be banning imports of Russian oil and gas that followed Canada's announcement. Obviously, those are more minor actions when compared to kind in Europe, and in their continuation of their energy relationship with Russia. But I do think that's going to be where we continue to see pressure and action to get at current production capabilities and current ability of Russia to bring in revenue from that. Having said that, I mean, you raise some good examples with Pizza Hut. You know, we've all watched what happens with Nike and Apple. There's all these consumer products, where you've got these Western companies that just, they're not going to be willing to try to take that risk in the Russian market. They're pulling out. That does have some long-term implications for our soft power for kind of personal relationships. And it's just another striking example of how much Russia is really just being disconnected even from very nonsensitive goods. There's no national security threat associated with Burger King, etc. But just at the level and intensity and broad scope of the sanctions, they're really hitting every aspect of the Russian economy. And despite I think the efforts of policy makers to try to avoid impacts on kind of your ordinary Russians, it's kind of unavoidable at this point, especially when you see firms that are just giving up on the market, because it's become so hard to operate there.

Watson: Yeah. Are there things that you kind of are bracing family and friends for as you look ahead? For this conflict, I was telling my brother, he was considering moving someplace with his family. And I said, Well, maybe you might want to stay where you are, where things are somewhat predictable at this point, and not throw too much uncertainty in your life? Are there similar kinds of things that you've thought about over the last, say, 10 days or so?

Kilcrease: Yeah, I mean, it is such a fluid situation. I think, for Americans, you know, the energy prices are absolutely going to be what we noticed, particularly if there is increasing pressure from Europe to try to release it to reduce its reliance. That will increase energy prices. And I get that people don't like that. I guess that that's a political sensitivity. At the same time, not to put it in like completely hyperbolic terms, but it's an assault on liberal democracy and freedom. And therefore, I would argue that it's kind of worth us kind of taking that economic hit, and obviously, trying to mitigate the pain of that, to the extent that we can, in the American economy. Obviously, I think the equation is different for Europe. I mean, they're just so much more economically integrated with Russia, to kind of cut off the financial transactions and energy sector, if we ever get there, that is going to really have much more of a kind of a day to day impact on Europeans. And I think we're still kind of sorting through the implications of what does it mean if you take an economy of this size out of the global economy? Will that cause shortages in other areas? Will it cause disruptions to the semiconductor supply chain because Russia has certain key inputs? Will prices go up in other sectors? There're just so many ripple effects that I think we haven't even started to fully appreciate because the the situation is so fluid. And again, it's a major economy; we're taking them out of the the global economy. We don't exactly know how this is all gonna play out yet.

Watson: What do you think it's plausible that the economic response to Moscow has changed Beijing's risk calculus or appetite?

Kilcrease: Yeah, it's a good question. I mean, obviously, China is is watching this situation carefully. Does it impact their calculus? I'm sure it does. Particularly when you think of the broad range of measures, including all of the technology controls that we have put in place with respect to Russia. It is cutting them off from global supplies to things like chips, as well as a whole bunch of other technology areas. So I am quite sure that China has noted that with great interest. I think it's a harder question to answer in terms of whether that would deter China from trying to make a move on Taiwan, for example, because the economic relationship between China and the global economy is just so much different than that of Russia—particularly when you're thinking about the U.S.-China relationship. We have so much entanglement there. If we try to go after trainers, [the] chip industry or their electronics assembly industry, that could hurt us just as much as it hurts China. And so I think that that calculus gets much more complicated because of the greater degree of integration with China—between China and the United States, between China and the global economy as a whole given China's large manufacturing base, which is different than than Russia, which is really just kind of an energy country. And so it does get so much more complicated in the China context. But I'm sure yes, I'm sure China is watching this. And we're all going to have to see how they are they respond; if they move to backfill some of these products or markets for Russia, that will be an interesting situation to watch in terms of kind of how how much they tried to do that, and how the U.S. and allies tried to take enforcement actions against many companies in China. The only other question I've gotten that I think is on everybody's mind is how long is all this going to last? And I don't have a good answer for that. I mean, I think it's unrealistic to expect that any of these sanctions will be lifted as long as there's a Russian boot anywhere in Ukraine. And I think in the near term, we can expect things to escalate rather than de-escalate, unfortunately. So it's a bit of a depressing note to end on. But probably the most realistic one at this point.

Watson: I prefer realism. It's just true. So thank you. Alright, Emily Kilcrease of the Center for New American Security. Thanks so much for speaking with me.

Kilcrease: It's been my pleasure.

Watson: Elizabeth Braw is a senior fellow at the American Enterprise Institute. Elizabeth, welcome back to Defense One Radio.

Braw: Thank you for having me.

Watson: Okay, so your recent writing in Foreign Policy, published March eight. For me, it was a sober reminder that emotional appeals, mythologized soldiers like the "ghost of Kyiv," and hope—these things are powerful in a war, but they don't win wars. Please tell me a little bit more about your cold, hard dose of reality that you're kind of like telling us to temper our expectations with here now about two weeks into this invasion of Ukraine.

Braw: Yeah, so I think we all want Ukraine to prevail. And most of us have no other way of trying to help Ukraine prevail other than spreading up big news about how well the Ukrainians are doing. And I think that's, that's a human instinct. You want to see your friend succeed. And that's what we're doing. But we are deluding ourselves, I think, in doing that because what we are sharing is not just the real upbeat news, but also totally fantastical tales like the alleged "Tiger of Kharkiv," this cat that apparently that supposedly spots Russian snipers. There is no such cat. And it would be easy to figure out, even just reading the tweet, it would be easy to figure out that there is no way it can be true. But people share such news. And they share alleged downings of Russian fighter jets that are taken from video games. But we want Ukraine to succeed so badly, I think we're willing to suspend a belief. And it's entertaining to see news about sniper-detecting cats and spectacular downings of Russian jets. But the reality is that this is a war and it's not going to be won by sniper-detecting cats or any other fantastical alleged Ukrainian innovations. It's going to be won through ground battle, and the traditional standoff between the armed forces on two sides. And yes, we can accompany it with commentary on the sidelines; but we are not going to help Ukraine win through social media, through misinformation on social media. And I think we also have to come to the reality that if we spread this misinformation, these fantastical tales, they take attention away from the real fight, the real battle on the ground where Ukraine is squaring off against Russia, where it does need to win.

Watson: Alright, so we're speaking on Wednesday, March 9. Today, there are reports of Russian troops arresting Ukrainian civilians in the city of Kherson over in the over in the east; some 400 or so have been arrested as internet services cut in the city this morning. What's your read on that sort of approach to this invasion? 

Braw: Now, it doesn't seem terribly promising or terribly wise at all. And it seems, in fact, extremely likely to be hugely counterproductive. So I think everybody who even paid the remotest attention to the U.S. efforts with the counterinsurgency in Afghanistan knows that if you make one enemy among civilians, or if you if you kill one civilian, you will have a whole group of civilians who all of a sudden detest you, even if they didn't detest you before that happened. So how can this possibly be intelligent strategy? But I have to say, this is something that the Russians seem to have missed out on and misunderstood for many, many years, not just now. My own encounter with the Red Army or the Russian Armed Forces is from the former East Germany in the in the early 90s. I was going to university then, and they were still there. I think your readers, your listeners will recall that they were down to 1994. And they were supposedly there as brothers and friends of East Germany. They were allowed to stay on tonight the night before, because the Russians had to find housing for them to return to. But they were there, but they were not allowed to interact with the civilian population; they lived in completely sealed off quarters. So they had no interaction with the local population. And if you're going to be a hostile force in the country, at least you should go to great lengths to interact with the local population to at least make them feel that they are your friends. But not even then did they make that effort. And they seem, in fact, completely convinced that the right strategy was to do the opposite. And that seems to be the case, again, here in Ukraine.

Watson: So you've written quite a bit about logistics. I'm wondering if, as we look to the south, can you describe for our listeners some of the importance of Odessa?

Braw: I think most people now are intimately familiar with Odessa and are watching every development there. But it is important, even under less tragic circumstances. The Black Sea is and to lesser extent, the Sea of Azov—those two bodies of water are Ukraine's access to the world; it has no other ports. Russia has other ports; Ukraine only has those ports. And we have to remember that in early February, Russia conducted the navy conducted exercises in the Black Sea that so frightened the insurance industry, that the insurance industry body that rates bodies of water regions of the world according to risk, they put them into their highest risk category, which made it extremely difficult and expensive for shipping companies to travel to the Russian and Ukrainian parts of the Black Sea. So already before the invasion, Ukraine was being cut off from from global shipping, which is a big deal if you have no other ports. And now of course, it is no longer possible to send any cargo by shipping to Ukraine simply because the Ukrainian government has closed the ports, understandably, because there is a war going on. It's a tragedy for the people who will now struggle to receive the goods they ordinarily receive through their ports, especially the ports of Odessa. And it's also a tragedy, if I may mention for the seafarers who are stuck at the port of Odessa, because it's too dangerous to leave. But clearly they have no other way of getting home because they have to stay with their ships.

Watson: What kind of impacts do you think lie ahead for ordinary Europeans on the rest of the globe? Eventually, given the current trajectory of this Russian invasion, I think as we talk we've got a headline that came out of the Wall Street Journal said Russia is set to ban commodity exports. Nobody knows exactly which ones but you know, I mean, that's obviously a wide open question, but I think the IMF had a statement on Saturday was saying, you know, families around the world, especially poor ones whose largest expenses are food and fuel are going to find price shocks ahead that are possibly the most simple packed full, but everyone will.

Braw: Yes, but it's not just about Russia banning commodity exports. We have to remember that the world's largest shipping lines, which happened to be European, have already said a few days ago that they will no longer travel to Russian ports. So in essence, the Western shipping lanes aren't going to deliver any cargo from Russia, they're also not going to collect any cargo from Russia. And on top of that, the UK has already banned Russian ships, Russian ships that have any associated with Russia—is either owned or managed by Russian companies. The UK has already banned them from traveling to UK ports; so has Canada, and the EU is expected to do the same. So there is very little chance of any Russian goods reaching Western camps at the moment anyway. And so the Russian suspension of commodity exports will have little effect, I think simply because there's no way for that cargo for those goods to reach the West. But the effect is the same. Ordinary people will suffer. And we should remember, it's not just ordinary people in our countries here in the West, it's ordinary people in developing countries. Countries like Kenya are big importers of grain from Russia and Ukraine. That is clearly not going to happen. And more that grain is not going to get to Kenya or indeed anywhere else. And while people like you and I can probably afford to pay a bit more for our food, what about people who make much less money in developing countries? And indeed, in our own countries? Yes, it's it's a tragedy in so many ways. It's a tragedy for ordinary people in Ukraine, it's a tragedy for the whole country of Ukraine, it's a tragedy for ordinary people in Russia, the farmers of Russia will now no longer be able to export their grade and thus earn an income; it's a tragedy for people in developing countries who will now face food shortages and or and or highly expensive food. And it's a tragedy for for to lesser extent for us here in the West.

Watson: Previously, you had written into one the border crossings could very well hinder like a NATO response to conflict in Europe. What are your thoughts nowadays in terms of border crossings given the present stress on Ukraine's Western neighbors?

Braw: Yeah, so when we last paid attention to border crossings in Europe, it was in November, and subsequently at Poland's border with Belarus, and also Latvia's border with Belarus and Lithuania border with Belarus. And we should remember these were not spontaneous crossings. This was a form of aggression engineered by President Lukashenko of Belarus, who had vowed to flood the EU with drugs and migrants, and that's what he did. He started flooding the EU with with migrants that he brought to Belarus, to Minsk. And from there, Belarusian authorities helped them get to the borders of these three countries, especially Poland and Latvia. The objective was to make the EU look weak because Poland and Latvia, Lithuania—the idea was, the EU wouldn't be able to respond or wouldn't be willing to respond and they would let all these migrants through and there will be a new migration crisis in Europe. All three countries stood firm, and they took some heat from the EU for doing it because they were seen as heavy handed, especially Poland. But now, a totally different border crossing scenario, right? Where we have already seen more than 1 million people—more than 1 million Ukrainians across into Poland and receive the most welcoming treatment. What a huge difference! But the Poles clearly knew that they would be the first country that would need to act or and or react in case of a war in Ukraine, and they planned ahead. One aspect that is really important to bear in mind, I think is, first of all, I will be watching: But all that cargo that was on its way on Russian ships to various Western destinations—what will happen to those seafarers? And we should remember that Russia and Ukraine account for 14% of the world's seafarers. Without Russia and Ukraine, global shipping would collapse. So that's one aspect worth watching. Because of the Western shipping lines decision not to travel to Russia anymore. So Russia can only rely on, for example, Cosco of China. And of course, Ukrainian ports are closed. Then the other thing that is worth watching is what happens to the Western companies that have said they are leaving Russia? How are they going to get their property, their belongings out of Russia? And we're not just talking about some books; we're talking about massive factories. How is that all going to work? And that's something I've been watching closely. It is a massive logistical undertaking to have all these Western companies deciding to leave or having to leave Russia and then doing so at the moment when there is very little opportunity, almost no budget needed to travel, or to transport anything to or from Russia. So a logistical nightmare.

Watson: Yeah, I mean, a story that I'd heard today was a law was being drawn up in the Duma, which would seize the property of companies, foreign companies that leave.

Braw: Yes, that legislation is on its way. So it's now imperative for these companies to get out as quickly as possible. How do that when there is almost no shipping and certainly no air traffic going in and out of the country, towards the west? So a totally chaotic situation and with almost no time to get anything done.

Watson: Elizabeth Braw of the American Enterprise Institute, thanks so much for speaking with me. I kind of think we might be talking again soon.

Braw: Always happy to talk.