Ukraine: War is coming, part 2

Maybe I should have called this post ‘How wars start by accident’

In my last post I made the Afghanistan comparison to show that in the face of a smaller less well equipped enemy the Russians could not win a decisive war. The same for Chechnya, they basically had to destroy the country and even then the Chechen militia were not finished off, in the end the Russians had to change their strategy from direct military intervention in order to bring some form of order to that country.

Ukraine is different, yes her fighting force is smaller but ironically, in many ways is better equipped than their Russian counterparts, Ukraine was until recently an exporter of arms to Russia, but they stopped exports due to the current crisis, in fact it is one of the global leaders of arms exports as its quality control and engineering is seen as being of higher quality that of the same systems which are made in Russia. You can read part 3 of this series here.

I don’t believe Russia really wants to see war in Ukraine and I don’t think the Ukrainians want war either but both sides are playing a game of Chicken, to see who will blink first, the problem with that is the mentality that one can never back down, they are going to stumble into a war that neither side really wants to have. The USA and EU are also partly to blame, they are trying to push Russia into a corner over the situation in Ukraine and that will simply make the situation worse, Putin will feel he has no choice but to come out fighting. I am no fan of Putin but I don’t believe he wants to have a war but he feels that the options left open to him are becoming fewer by the day. This is going to become an accidental war.

Consideration should also be given to the economic consequences of any war between Russia and Ukraine. Ukraine is effectively broke and is only being kept going by foreign loans. How they will ever be paid back is anybodies guess. More dramatically, Russia might also get into serious trouble. There is a huge amount of capital flight, money being withdrawn from Russia, by businesses and individuals alike. Something I heard today that was very interesting is that companies have been using their shares as collateral for bank loans. I hadn’t realized this but apparently it is common practice. The problem is that the value of shares in Russian companies are plummeting due to a lack of business confidence and uncertainty about the future related to the situation between Russia and Ukraine. The banks have made loans against the value of shares and are now well into negative equity territory. The Russian banking sector is now trying to call in these loans but the cash isn’t there as much of it has already been deposited outside the country. Russia is potentially facing a full on banking crisis to rival that of the USA in 2008. Their central bank has been using its huge cash reserve to maintain liquidity in the system but the money is being used up fast. The longer uncertainty and instability continues between Russia and Ukraine, the worse the situation will become. Even if war between the 2 countries is brief, the long term consequences will be felt for a long time. The Russian banking system could effectively be bankrupted. Even without a war between Russia and Ukraine things could be about to become very difficult in the Russian banking system. If that were to happen, what would the political consequences be for Putin? You can read part 3 of this series here.