Blain’s Morning Porridge, August 25 2022 – Why are we so scared of Putin, Russia and an Italy debt meltdown?
“Valar Morghulis”
This morning: Putin’s supposed cleverness haunts markets. How much harder will he squeeze Europe’s energy crisis? How will Russia change the geo-political order? Will Italy’s coming election be the crisis that breaks the Euro? We give Russia too much credit – it’s a weak nation that can only get weaker.
Sometimes I wake up confused. Other times it’s with a dash of blinding clarity. This morning I must have been dreaming about Italy… when a passing thundershower– bringing a much needed soaking – woke me. It left me pondering the biggest question of the day: Why is it Europe is so sh*t scared of Vladmir Putin?
Basically.. Putin is the unknown at the heart of all the economic doomsday expectations dominating today’s markets: making us wonder just how much more damage, instability and economic mayhem can Russia inflict? It’s a testament to the success and sophistication of Russian media-manipulation that a nation with such limited real real power is scaring the be-jesus out of Western markets. Fake-news is a much cheaper way to fight a war, and much more effective than missiles, tanks and planes that don’t seem to work particularly well.
The scenario most earnestly debated around the market is how Russian energy (the lack thereof) has triggered a massive destabilising inflation spike, will sink the European economy, precipitating global recession, and a global geopolitical reordering – from which China and Russia will emerge triumphant as America slinks off into isolationism. Yada, yada, yada…
The secondary order consequences include an Italian debt meltdown breaking the Euro, leaving the dream of European union in tatters, allowing a path for Russian hegemony over the Region (especially if a MAGA2 Trump America pulls away from Nato).
And Putin has planned it all this way…? Laughed…? I nearly s***. Its utter bollchocks.
Yesterday, I must have read half-a-dozen very learned articles on how the coming Italian election heralds the end of the Euro and a terminal north-south European split. Each variously said the splintering of the ECB and Euro is now inevitable as a result of the energy crisis and inflation. Newspaper comments pages were full of opinions of how this was proof the UK was right to Brexit. (Yes.. Brexit definitely stopped the sky from falling on our heads… whatever..) I made much the same mistake about 10-years ago when the European sovereign debt crisis looked unsolvable – till Draghi stepped in, and it became a massive buying opportunity.
Italy is a problem. But, to be fair… Italy has been, is, and will always be a problem. We live with problems. Italy does have significant “issues”, including political ineptitude on the grand scale, and demographic weakness – but I personally believe we will cope with declining population trends through automation. I can live with Italy problems – I love the place, the people, afogato and especially the wine – Cervaro for choice… Nothing wrong with Italian cars – out Fiat 500 is about the best fun you can have with your clothes on in an automobile.
Italy does have a Virtuous Sovereign Trinity crisis – its bond market is in trouble, and its politics are a mess… but it doesn’t have to worry about its currency. The Germans do that for them…
In about a month’s time Italy is likely to elect its first Lady prime minister, Giorgia Meloni, the populist head and brains of the Brothers of Italy (a “this time it’s different” brand of lightweight national socialists), who’ve adopted the Petty Patel approach to conservatism, immigration and social welfare. The Brothers and their confederates, The League and Berlusconi’s Forza Italia are making all the right noises about supporting EU membership and the Euro – but their spend and spend some more policies will result in a further hike in Italy’s burgeoning debt to 166% of GDP. They will say one thing and do another.
The ECB know Italy is a problem in terms of the “fragmentation” of European bond spreads. If/when Italy spreads balloon wider and Greece V2 threatens, the ECB will buy Italian bonds. They are hoping the mere iteration of the policy – already announced – will keep spreads in line. The Germans are already fulminating about their constitutional court, the dangers of back-door European debt-mutualisation, and German workers paying Italian pensions, but… that’s the way the Cannoli is going to crumble. Buy Italy bonds on weakness.
There will be an awful lot of noise between the ECB and Italy about sticking to debt cutting schedules vs the Brothers’ plans to spend their way out of an energy recession. But, here’s the thing… Christine Lagarde, the ECB and European political leaders are not going to allow an Italian debt crisis to sink the Euro in the face of Russian provocation. If they did it would be the biggest political failure since Sarajevo 1914. They will deliver, as Draghi did; “whatever it takes.”
And Gas – yes, Gas is a massive problem for the European economy – and it will hurt this winter.. but less next year, and less the year after that… and in few years.. Gas prices will have tumbled and Russia, not Europe, will remain in a long-term recession, which will only get worse as the crippling demographics of a declining aging population consign Russia to economic nothingness.
Going back to my opening point… why is Europe so scared of Russia?
The European Union – including the former client states of the USSR in Eastern Europe – is one of the wealthiest, economically developed, and potentially most vibrant, regions on the planet. More Nobel prizes, more classic designs, more inventiveness, diversity and innovation than anywhere else. Russia, in contrast – is bleak, bleak and bleaker! Yes, Europe’s government is less than ideal, and the trend towards closer union has stalled, and its weighted against weaker economies… but it still kind of works.
There are 450 million EU citizens, with an average per Capita GDP of $38k free to consume and believe whatever they wish. Add in the UK (which remains clearly aligned with Yoorp whatever Lord Mogg thinks), with a further 67 million folk and per Capita GDP of $47mm. Look at Russia: a declining tightly controlled population of 143 million with a per Capita GDP that barely breaks $12k.
When I was young – we were probably right to worry about the USSR. We feared Nuclear War. The Red Army steamroller was set to brush aside Nato, and seize Europe up to, and maybe beyond, the Channel coasts. Today, we’ve seen Russian forces exposed as tactically inept in Ukraine. (We should not count our Ukrainian chickens too early – Russians historically start wars badly, but can finish them well – at enormous cost.)
In terms of economic power, the invasion in Ukraine should be an Elephant and the Ant scenario – but, of course its not. Europe has no appetite for a hot war. Reading though any comment section on the war or economics, you will inevitably find screeds of Russian Troll factory comments about how Russia losing 25k men is actually them winning, how Putin is right, and how Europe should envy Putin’s strong leadership. It’s all terribly blah, blah. You can spot Russian trolls in every stupid comment. I am deleting them from Porridge comments.
I am sure Russian fake news, troll-bots, and kompromat on European politicians are all terribly sophisticated – and we are right to worry about them – but, to be blunt.. Russia is a busted flush. Don’t give them more credit than they deserve. Its a nation as beset by stupidity as anywhere else. Vlad might be clever, resourceful and many things.. But he is nothing special. He’s just the lucky turd among many that floated to the top of the Kremlin sewer. He got lucky. Luck is not a lady. She is fickle. It does not necessarily last.
Valar Morghullis as they say in High Valyrian.
Let me illustrate just how dysfunctional Russia is with a story from very high up:
How clever is Russia? In the wake of global pushback in the wake of the seizure of Crimea, Putin allocated billions to the FSB (the successor to the KGB) to mount a long-term hearts and mind campaign to ensure a peaceful Ukraine takeover. But, corruption is endemic across the Rodina. FSB chiefs trousered the money, (deposited in their private Dubai accounts), and when Putin got real about an invasion they leaked the plans to MI5 hoping Putin would be forced to cancel! Hah, instead of choirs of happy schoolchildren and flowers, the underprepared Russians were flung back by well prepared and fully informed Ukrainian forces. Now the FSB guys are languishing in their own prisons.
What Europe needs is a fly-swat.
Despite being rich in energy (both fossil and renewable) Europe now faces a difficult few years weaning its economy off over-reliance on Russian oil. Energy security was a massive failure of state, but it will be solved. It’s a wake up call. In a few years, Europe will be in recovery, stronger and prepared. Italy will remain a perenial problem – so what? Energy prices will mean reverse. Russia will be isolated and stagnant behind its borders. And, yes, we probably should close our borders to every Russian, good or bad… let them all stifle back home in the Rodina and watch how well they enjoy it, and who gets the blame…
Five Things To Read This Morning
FT – Investors struggle to trade Eurozone debt without ECB safety net
FT – A second Trump term would imperil the republic
WSJ – Jerome Powell’s Dilemma: What if the Drivers of Inflation Are Here to Stay?
BBerg – Europe’s Energy Crisis Risks Dwarfing $279 Billion Rescue Cash
Torygraph – The EU has a trump card against Putin – why isn’t it playing it?
Out of time, and back to the day job…
Bill Blain
Strategist Shard Capital
13 Comments
Comments are closed.
excellent commentary, and spot on
“Why is it Europe is so sh*t scared of Vladmir Putin?” – Because he controls the gas valve maybe?
In 2009 a cartoonist for “Have I Got News for You” could see what happens when you put your energy sources in the hands of dubious neighbours: https://youtu.be/ruUT6wKPKV8?t=221
A guy dressed as a Russion turns off a valve and Europe goes dark! A cartoonist for goodness sake!
Why did governments across Europe not see this? Thousands of advisors and study groups missed this?
Your own Cumbrian coal opportunity squashed, Shale gas, squashed, German nuclear, squashed.
It is not Putin that is feared, it is that we gave him the opportunity to it, that scares people.
People now ask the questions: “If we can give that power to Russia, what other powers are our governments giving away? We’ve lost manufacturing to Communist China, we’ve lost Energy to Communist Russia, just what exactly are our leaders doing?”. European, and Western leaders in general are all lost, Australia included. Where is there leadership of any sort that is actually looking out for its citizens?
I don’t think people are scared of leaders in non-Western countries, I think they are genuinely becomming scared of their own Leaders, if that is even the correct word,
Yours,
Pete
Perfect! From the land of Winston Churchill (although no Scot)
Putin and his support from Russians can be explained by an observation made by another populist leader, Benito Mussolini, nearly a century ago:
“All people [are] shaken to their inner-most core by an irresistible desire to submit to a strong man and, at the same time, to hold sway over the defenseless. They are ready to kiss the shoes of any new master as long as they too are given someone to trample on.”
This, along with the desire to ravish and pillage the populace is what motivates the Russian Army.
As for the Italian imbroglio facing the EU, the EU bureaucracy and the EU Central Bank:
“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
Going forward it will be interesting to see how long the Germans the French and yes the British populations submit to the lash of inflation before they defenstrate their leaders and replace them with God knows what new masters.
I owned a Freedom sailboat for a while Mr. Blain. Being the nautical man you are, you would remember its stay less carbon fiber mast. I soon learned there was no middle ground. People either believed in the system or not. And facts did not matter. And hence to Russia. I disagree with you strongly. But unlike my beloved sailboat, we will see the end to this story in the next year. I actually hope you are right. But I fear not.
This comment will probably never see the light of day because I am apparently a Russian bot for saying anything remotely pro-Russian so here’s to nothing…
“ There are 450 million EU citizens,… free to consume and believe whatever they wish.”
Except for the food and energy inflation, soon to be rationing, along with censorship. And who is responsible for this sorry mess? Don’t look to the Fauci Flu or Mr. Putin, it’s all down to the lunatic green, eugenics, colonial policies of Davos handed down to their puppets in Washington, London, Brussels and beyond. Those are the true commies.
And if anyone thinks Russia is on the brink of defeat in this war, they’d better find more reliable sources than MSM.
If you are Marks Mott – and I suspect you are not – you really ought to stop reading whatever the US equivalent of the Daily Mail is.
Energy and Food inflation is real in Europe. Rationing – not yet and is unlikely to be. THat said I recently found rationing tickets issued to my dad after the 1973 oil-shock – but rationing was never actually enacted.
Censorship is a thing in Russia – and Russian shills who will claim their distorted version of the truth is real. I can say whatever I want – and I shall.
I am frankly staggered how many ‘Mericans think Russia is winning the war. They clearly are not. If they were, it would have been over months ago. What have the Russians put in Republican state’s water to persaude them Putin is a truthful man, while every democratic leader is not?
Give me a single demonstratable proof Russia is winning.
They are getting thwaked. TOday Putin has announced 137,000 further troops to be sent to theatre – that’s not winning. That’s reinforcing failure – the antithesis of Russian tactical doctrine.
THere are a number of perspectives to cover here:
1) History
Take a blast through Russian military history – they are brave, fearless, and obey orders, but have taken absolute thrashings from every nation they’ve fought with on the basis of repeat leadeship incompetency – the Teutons, THe Swedes, THe Poles, The Prussians, The Austrians, The French, THe Germans, The Brits, and the Germans again. Sure, they won the last war – but because the Germans made bigger strategic errors and even larger stupid assumptions. I would recommend John Erikson’s books the Road to Stalingrad and the Road to Berlin.
2) Doctrine
THe Russians are repeately whapped because they can’t trust NCOs and junior officers. THey have never developed initiative – far to dangerous a concept in an autocracy.
The Red Army’s key tactic is mobility – reinforce success to keep the front moving forward. But there litterally is not a single tactical front in Ukraine where they have made sizable gains to exploit.
Allied weaponary has bottled them up.
But, its not killing infantry and stopping tanks that will wins the war. Russia’s logistics have been compromised to the extent they can’t reinforce even small advances, allowing Ukraine to counterattach and destabilise gains – hence the length of the casulty lists.
3) Corruption
Thrives across the Rodina – and especially at NCO and junior officer level in army. Supplies are sold to private markets. Russian trucks have been captured in Ukraine with Chinese Carboard tyres!!!
4) Tech
Russia is good (not as good as China) at ripping Western Tech – They achieve a rough balance on capabilities, cheaper weapons vs great weapons, but are discovering their inventory levels were way too low to fight a serious war in Ukraine, and now struggling even more to replace stocks because they have zero access to spares and modern chips.
As for your claims Russia will win because we’re a bunch of LGBT+, don’t dare say that in our local tranny club – Ray (or Shiela) will rip your eyes out in millisecond – she/he’s an absolute killer for her rights.
I could go on, but you are just too far below my patience threshold…
So commrade – FROAD marching with the Glorious Red Army…
A Nation who had 23 million casualties during WW2 isn’t going to take the prospect of hostile troops and missile systems on their borders laying down. Can you imagine China doing that to the US or UK? Missile and troops in Mexico or Ireland? There is a lot of hipocracy out there.
On another but related topic, trade is circular. Energy flows in one direction while finished goods/services run in the opposite direction. If Russia can no longer have access to Western Europe’s goods/services due to sanctions then there is no point Russia exporting it’s energy to Western Europe.
Thirdly, a prediction. 70% chance there will be a military coup in Ukraine in 2023. This Winter, Ukraine will have no oil or gas from Russia, no coal from the Dombass regions, no electricity from the Zaporigia nuclear power plant, no gas transit fees going to Western Europe. The US will cut and run, they always do.
No mention of the fact that German and Italian demographics are as bad or worse than Russia’s? You have some good points, but overall I think Europe is right to be afraid. In the long term prediction is tough, but in the short term this piece might look optimistic when Germany is forced to shut down huge chunks of its industry, and the Euro is at 0.85 to the dollar. Even as things look bleak, people who have no understanding of energy double down on their ideological fantasies. I am less convinced good times are ahead.
European demographics are generally bad, and getting worse because young folk can’t afford to buy accomodation or have family due to insane childcare costs.
But, Europe is inventive and innovative – meaning as workers retire the productivy gains neccessary to pay their pensions will come from increasing automation – one of the likely big Occidential investment themes of the next decade.
Russia will become increasingly isolated, and vulnerable. Unless it caves completely, I reckon it will be denied access to modern tech and will be unable to replicate automation tech – meaning their aging population faces poverty and a rapid tumble into instability, becoming a target for a Chinese resources grab.
I very much favour an imperfect Europe over a utterly dysfunctional Russia..
Germany depends on Russia for 25% of its power – a mistake they now realise. THeir economy will adapt. In 2 years German dependence on Russia will be zero. Russia will then have to sell to any bid – always a losing strategy.
I do think Putin chose this moment for a number of reasons. 1) He perhaps thought his toady Trump would be in office and look the other way when he invaded Ukraine. He likely started his planning before Nov 2020, but even after, he could see the political unrest in the U.S. that may have presented as weakness. 2) Covid made a mess of supply chains, and Putin sees opportunity in messes. Plus, people were sick of Covid restrictions, and unlikely to put up with new demands, such as energy restrictions, at a moment when the economy/travel/spending were coming back. 3) Covid also did a job on governmental budgets. All the harder for them to ramp up military spending, and all the easier for them to look the other way when he rolled his tanks across the border. 4) Nationalists and right-wing extremists have been on the ascent, and he wanted to ride that wave. The specific timing of Feb. 24 seems to have come down more to weather and getting through fields while they were still frozen.
As for the euro, companies, individuals and governments are saving huge sums in transaction costs by using a common currency, and selling to a common market. Nobody wants to go backward. Reforms are needed, especially in laggard countries like Italy and Greece, but it usually takes a big crisis to generate the will to make the necessary changes–and a crisis is when reform is the hardest on the poorest. Nobody wants to tighten the rules during boom times.
Personally, I’m repairing the weatherstripping on my windows and making other energy-efficient changes, while planning to wear many sweaters this winter. Being a little cold is better than being under Putin’s thumb.
Hi Bill,
Nice article…in my humble opinion, bang on! Onto another topic: Italy and Italians. I have worked, vacationed and lived in la Bella. I have studied and somewhat speak the beautiful lingo…”Speak Italian to me…”. And I too have loved them. To answer your queries; if one has lived in Italy, one understands why Italians are so politically inept, and can’t get it together. It’s called “FURBIZIA”, yep, the practice of f…g up your neighbor with “fox like cunning”. Nowhere else is it done sooo well and with such consistency. As a visualization, picture San Gimignano where each new Torre was built higher than the previous neighbor built his/hers, so, yep you could p..s on them, or shoot arrows, depending on your mood. In modern days this means throwing boulders in the way of anybody’s efforts at progress you might know about. Even one’s best friend’s. So there it is…but I still love ’em.
Bruce
We know about Russian corruption.
What about German incompetence and greed.
How did they get themselves and the EU into such a desperate situation because of the ridiculous dependence on Russian energy.
Don’t forget Gerhard Schroder got a plum job at Gazprom.
Merkel was a resident of East Germany when Putin lived there as a KGB operative.
Ite all looks a bit murky from here….