I must repeat once again that this is not just a war, but a economic war, and not just a crisis but a metacrisis. As such, Moscow’s latest attack has always been obvious to those who expected both sides to deliberately hurt the other while bolstering their own geostrategic position: to use Russian energy as a weapon against Western sanctions.

Russia’s main Caspian pipeline is to be closed ‘for repairs’ that will last two months, removing about 1 mb/d from circulation; but, eclipsing this, in a week Russia will demand payment in rubles for its gas from “hostile countries” – which stands for Europe.

This is obviously a breach of contract.. Shock! Horror! Contracts maybe broken! You think about freezing foreign exchange reserves, sanctions, talking about naval blockades, proposing the introduction of letters of marque allowing privateers to seize Russian property at sea, as well as Russian forced nationalizations – not to mention blowing up civilians and to threaten to use nuclear weapons on state television– is business as usual? Contract, shmontract.

Obviously this has a mild interpretation and a serious interpretation. The most benign is that Europe will exchange the EUR for the RUB, then return the RUB to Russia for gas. Except Putin introduces this drastic new measure because he says there is no point in selling russian gas or oil for dollars or euros if he can’t spend them: these are funny money for him under sanctions. As such, the serious interpretation is that Putin is trying to get his own fictitious currency accepted as the equivalent of the dollar and the euro, even if it is run by a central bank where everyone quits or tries to quit , and as the last remaining Russian liberal, Anatoly Chubais, leaves both the Kremlin and the country opposed to the war.

Yet paying Russia in rubles would support the RUB and undermine Western sanctions. Putin would chisel them clearly:Yes, I have the euros: but now I need you to remove the following measures so that I can benefit from them….“Indeed, EU countries are already saying that they will not pay in rubles. But don’t expect Putin to blink: he’s “losing money” by not selling energy, but it’s money he literally can’t spend. Better to escalate, “shake the box” and try to divide the West, as I have repeatedly warned, that was the risk.

The story continues

As such, we could envision the scenario where Russian energy draws are extinguished. Helpful for Russia, Germany has just pointed out that this will mean a crippling recession. Gas prices in Europe jumping 30% was a knee-jerk reaction that is just a down payment on what we would eventually see. We were already getting calls from the market that oil was going back to over $150 in the near future, and Brent was at $121.50 at the time of writing: this benchmark also overlooks the much greater pressure on industrial fuel what is diesel. This is what drives the trucks that transport goods from farms, factories or ports to warehouses or retailers.

As early as Friday, the United States could announce a plan to help Europe move away from Russian gas: well, it had better come into effect before the following Friday. And it’s the same United States unable to square the circle of its own energy needs, its own shale energy (due to green policies), Canadian energy (due to green policies), energy held by the Venezuelan geopolitical opponent and energy held by the traditional Middle East. Eastern allies (due to the policy of Iran, which is the reverse of what the United States is doing against Russia, and yet it expects good results – as dismembered in this Wall Street Journal op-ed.)

The EU was already planning to spend a lot on energy subsidies. Some US Congressmen are talking about stimulus checks if retail gasoline prices rise above $4 a gallon. The UK government, whose Office for Budget Responsibility predicts the biggest one-year drop in living standards since records began in the 1950s, has just cut fuel taxes by 5 basis points per litre, which brings prices back to where they were a week ago (!), and changed national insurance thresholds while promising income tax cuts, which will help the middle class and not the poor. Clearly, even if we don’t do enough, budget deficits and public debt will rise – and as rates rise too.

Also, unless the spike in energy prices is short-lived – which depends on war and meta-crisis resolving suddenly (!) – that’s how you go back to something like a price-wage spiral in the style of the 1970s. Yes, it’s not companies that pay higher wages to compensate for inflation, it’s the state, via direct transfers – but is the end result better? If we don’t, we face stagflation, recession and the rise of populism. But if we do world market prices will not fall, and that is the of the world the poorest who will bear the brunt of rising prices. They also do populism.

Indeed, fertilizers are skyrocketing – leading to titles like “Coffee farmers face ‘mega emergency’ as fertilizer costs soar talk about Central America; Ukrainian media report “Russian invaders try to undermine Ukraine’s seeding campaign” and are “chaotically exploit Ukrainian territory and deliberately destroy agricultural machinerymeans that staple food prices will rise for another reason; steel prices are soaring, which will affect manufacturing and construction; and LME Nickel raised its limit yesterday – as trades were closed and trades rolled back *again*. This is what the major commodity “markets” look like today: a total mess.

Related: Big Oil Is No Longer ‘Unbankable’

So much so that commodity traders are calling for emergency central bank intervention, as evidenced by a letter sent by the European Federation of Energy Traders pleading for emergency liquidity support. The warnings of “it smells like 2008” for the real economy are now out there for all to see.

Yet the lesson of 2008 is that printing money drives up asset prices without solving the underlying structural problems. If we don’t get central bank support, the current volatility and margin calls could, as some industry players are warning, lead to corporate bankruptcy. However, if we CTRL-P in a market with not enough energy, fertilizer, Ukrainian wheat, steel, etc., then what do you think will be the impact for everyone except those who market them – who had made huge profits until recently? Higher prices, until we address the real underlying problem. Who is the whole world order. What the rise in prices destabilizes.

Meanwhile, Russia Today chief Simonyan said: “Next step – barter payments with planes, high-speed trains, whatever we need.” I warned against the return of barter and countertrade last week. Except who will trade stuff with Russia to help them evade sanctions?

As NATO meets today and US President Biden holds a pow-wow with the EU, what might be their response to Russia’s decision on the rouble? Logically, either: kick the pot on the road – for a week; blink and let Putin win (which is unlikely); or climb – which is most likely.

If so, how? More weapons in Ukraine and more sanctions against Russia. But that will not solve the energy problem. In which case, the risks increase that the West will try to put economic pressure on China to obtain this put pressure on Russia – all the more so if the coming scenario is anyway a Western recession – which itself hits all Asian exporters.

Oh, how clever we thought we were with our 70s-proof savings! Oh, how clever we thought we were with our overall 20s and 30s proof architecture!

By Zerohedge.com

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