Europe is painfully reliant on Putin

Vladimir Putin declared war on Ukraine in the early hours of this morning, starting with a massive air attack from the north, south and east, targeting military and civilian infrastructure.

This is the worst-case scenario. Putin's speech on Monday set the ideological groundwork. This morning he spoke again, calling Ukraine ‘our historic lands’. He said he was launching what he called a ‘special military operation’ with the goal, not of occupying the country, but of ‘demilitarising and de-Nazifying’ Ukraine. And Putin spoke too to us here in the West:

“To anyone who would consider interfering from the outside: if you do, you will face consequences greater than any of you have faced in history. All relevant decisions have been taken. I hope you hear me.

Forget everything commentators have said about sanctions in the last few weeks. The reality of a full-scale war at the edge of Europe will shift the debate, just as it has already shifted the debate in Germany.

Already the foreign ministers of the Baltic states have issued a joint statement this morning calling on the West to cut Russia off from the global financial transactions system, Swift. Poland has called for Nato Article 4 consultations — a member of the alliance is asking its allies to prepare themselves.

The immediate focus this morning will be on sanctions. The question is whether the EU will be able to find the necessary unanimity. On Tuesday, cracks emerged during the foreign affairs council, as Italy and Austria were stalling, and Hungary opposed outright. It's election time in Hungary, a moment for Viktor Orbán to show his true colours. The reason the Swift option is still alive is because it is easier to trigger. Swift is overseen by G10 central banks and the European Central Bank.

There was speculation yesterday in the German media about Nord Stream 2 and how it could be revived. Forget it. Nord Stream 2 is dead. The politics has shifted. Now that Putin has gone in, his friends in the SPD and in the German business community have been silenced for the foreseeable future.

The West also has to be honest about the purpose of sanctions. They won't deter Putin. The idea of phasing them in, corresponding to the scale of the invasion, was silly to start with. What we know is that Putin is driven by securing his place in history as the leader who restored Russia to its former glory after the humiliating collapse of the Soviet Union. He won't be deterred by western sanctions. The purpose of sanctions is to inflict so much pain on ordinary Russians that they will rebel against him. This could take a decade or longer. When Russian tanks ended the Prague spring, it took another 20 years for discontent to bring down the Soviet empire.

Since the West cannot and will not engage militarily, sanctions are all it has. The next round will be heavily skewed towards financial sanctions: the US will likely cut Russian banks off from the dollar markets and impose bans on all high-tech exports. What to watch out for is the degree of this exclusion, whether it includes all Russian banks. Also watch out for whether Joe Biden, in the spirit of his predecessor, cements his measures with secondary sanctions, targeting third-country financial institutions, to prevent Russians from circumventing the ban.

This would encourage large European banks to stop dealing with Russian money. The big question for the EU is not so much whether to target Putin directly, but to what extent Europe will try to cut Russia off financially. The EU can, in theory, go as far as the US — but in reality, it can't cut Moscow off completely because it has to pay for Russian gas, on which the EU is still dependent. When the Baltic foreign ministers demand that Russia be cut off the Swift payment system, they are essentially demanding that the EU no longer buy Russian gas.

Putin's warning of an asymmetric response to western sanctions should be taken seriously and literally. But what would that response look like?

It would likely consist of wide-scale cyber attacks against western websites, as happened overnight in Ukraine. Be prepared to hear the expression ‘distributed denial-of-service’ (DDoS) attack, where computer networks are so bombarded with information that they shut down. Already Russian DDoS attacks have been used to knock out the Ukrainian power grid.

There have been suggestions that Putin could now withhold grains, fertiliser, titanium, palladium, aluminium, nickel and timber. But when it comes to gas, he would be unlikely to cut the flow. Western Europe is dependent on Russian energy and this dependency is a source of Putin’s power. Europe would of course suffer, but it would then be forced to accelerate moves to reduce dependence on Russia.

The bottom line is that Russia and the West will be hurt by a sanctions war, but not crippled. China will support Russia economically — and Beijing will have a stronger hand at the global table.

This article was first published in the EuroIntelligence morning briefing. For a trial subscription click here.