Just a month ago I wrote “We may be witnessing one of the greatest geopolitical gambits in recent history. Or, we may wake up one morning in the coming days/weeks to news that Russia has invaded. Interesting times”.
The situation has now expanded where President Putin of Russia has officially recognised the Donetsk and Luhansk People’s Republics which had self-proclaimed their existence in 2014. At the time Russia refused to recognise them but that changed on Monday. “I deem it necessary to make a decision that should have been made a long time ago — to immediately recognise the independence and sovereignty of the Donetsk People’s Republic and the Luhansk People’s Republic” Putin said.
Consequently, the Russian president directed the Defence Ministry to send troops into the areas for “the function of peacekeeping”.
Should we have seen this coming? Hindsight is a great thing but all the signs were there and it was just a matter of connecting the dots which stretch back before the fall of the Soviet Union. Firstly, we need to look at the Crimea.
The Crimea has been part of Russia for well over 200 years. Linguistically, historically, ethnically and socially the Crimean Peninsula, which is almost an island, is Russian. Vast numbers of Russians have died defending it (over 150,000 in WW2 alone) and the Crimean port of Sevastopol has hosted the Russian Black Sea fleet since the early 19th Century.
Then in 1956, the Crimea was “transferred” to the Ukraine as a gift to celebrate 300 years of the Ukraine being a member of the Russian Empire. When the USSR collapsed in 1991 and the Ukraine came into being again as a sovereign nation, the occupants of the Crimea sought then to be part of Russia rather than Ukraine. To avert civil war the Crimea was granted special autonomous status – it had its own President, constitution, parliament, made laws applicable only within the Crimea, exercised rudimentary “border” controls of Crimea/Ukraine boundary etc.
But, in 1993, the central Government in Kiev abolished the Crimea’s special status, cancelled the constitution and dismissed the President. Crimean’s were enraged but Russia could not assist them as Russia itself was teetering on collapse and any military incursion was out of the question. Moscow protested but could do nothing.
It is a matter of history that Russia resumed control of the Crimea in March 2014 and the Ukraine government were unable to stop it. Now, the retaking of the Crimea has direct parallels with what is occurring in the Donbas region of the Ukraine.
In considering that proposition, we should recall how Putin publicly bemoaned the demise of the USSR from early 2005: “First and foremost it is worth acknowledging that the demise of the Soviet Union was the greatest geopolitical catastrophe of the century” adding “As for the Russian people, it became a genuine tragedy. Tens of millions of our fellow citizens and countrymen found themselves beyond the fringes of Russian territory”. He has re-stated that position many times over the years.
If nothing else, that could have been seen as an omen.
It is clear that Russia substantially bolstered their economic position since those events of 2014. For example, government held gold reserves lifted dramatically from 1,000 tonnes at the time to over 2,300 tonnes today.
Similarly, Russian foreign exchange holdings rose to a record $US630 Bn. Then in June 2021, the Russian Treasury announced that it was ditching the US dollar entirely and would instead convert their holding to 30% Chinese yuan and 40% Euro with the balance in other currencies.
This currency shift partly stems from agreement between Russia and China where the two countries agreed an initial currency swap deal worth 150 billion yuan ($24.5 billion) back in 2014. The deal has been substantially extended and rejigged but it now allows each country’s central bank to gain access to the other’s currency (in addition to some other currencies) without trading via the US dollar.
Then in 2016 the Russian alternative to the SWIFT financial transfer scheme arrived. Named the System for Transfer of Financial Messages (SPFS) it is similar to SWIFT in terms of technology and infrastructure. Undoubtedly a minnow by comparison to SWIFT but that isn’t the point. Russia’s banks are all connected and if Russia is cut off from SWIFT, they will transition to the intra- and interbank messaging which now includes the Chinese banks and those of a few other countries.
Further, Russian banks are all well advanced with introducing blockchain and using it in international payments and have been doing so since 2017.
Which brings us to international trade.
Russia’s largest reciprocal trading partner is unquestionably China who account for 15% of exports and almost 25% of imports and the value of exports, in particular, grows yearly. Large quantities of Russia’s top five exports of crude and refined petroleum, gas, coal briquettes and wheat all find their way to China and recently, Russia signed a 30 year deal to supply even more gas to China via a new pipeline.
The point of all this background is to query whether any sanctions imposed on Russia by western governments will have a significant impact – or has Russia sufficiently fortified their economy and amplified their relationship with China whilst having an ulterior motive in mind?
I can’t help but wonder whether the genesis of the Russian push into Ukraine had its beginnings so many years ago. Perhaps Putin has swapped notes and learned from Chinese President Xi who became President in 2013. Or perhaps President Putin merely feels Russia is economically ‘insulated’ and that retaking the Donbas, and potentially more of Ukraine, is now viable.
Let your plans be dark and as impenetrable as night, and when you move, fall like a thunderbolt.Sun Tzu