China and his conundrum Covid Policy - Adam Tooze

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Chartbook #177 Beijing's tragic COVID dilemma

ADAM TOOZE DEC 2

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A dictator’s embarrassment is generally a cause for celebration. But what if it also threatens a national tragedy and a bona fide global problem? 

Xi Jinping’s assertion of total personal control over the Chinese regime in October was an ominous turn in Chinese history and a cause for mourning amongst friends of liberty everywhere. Since 2020 a major anchor of Xi’s personal authority has been the “all out people’s war to stop the spread of the corona virus,” that has put “the people and their lives above all else” i.e. Zero Covid. 

Amongst Xi’s regime’s proudest boasts is the fact that China has registered only slightly more than 5000 COVID deaths compared to more than 1 million suffered by the US. From 15 May 2020 to 15 February 2022, whilst many thousands around the world were dying from COVID every day, there were only two COVID-19 deaths in mainland China. Even allowing for propagandistic understatement of the Chinese numbers, Xi’s China has clearly been far more successful in protecting its population from the worst effects of virus than any country in the West. As a result, it cannot be stated too often, China’s life expectancy overtook that in the United States in 2021, a truly historic marker. 

But now, only weeks after Xi’s triumphant party Congress, the zero covid policy is in crisis. The disease is spreading and China’s population is no longer willing to put up with it. 

Desperate locked-in workers and indignant students have taken to the streets. Bottle-throwing residents have waged pitched battles with riot police. Chinese diaspora communities have braved the ominous presence of embassy security officials to stage protest meetings. 

This is clearly a test of Xi’s authority, the most profound since he has taken power. One must profoundly admire the courage of the protestors and sympathize with the outrage and desperation triggered by successive waves of capricious lockdowns. In large parts of China, ordinary life has become hard to sustain. At the same time it is hard to resist Schadenfreude at the expense of Xi. Xi Jinping’s ‘myth of infallibility’ is being tested.

But as attractive as it may seem to side with the protests against Zero Covid this begs the question. What is the policy alternative? The fact that abandoning zero COVID would be a blow to Xi does not make that the right policy. The dilemma facing Beijing goes beyond the question of Xi’s legitimacy. As ludicrous as zero COVID has come to seem, as oppressive and capricious as its intrusions are in the everyday lives of Chinese people, it has saved huge numbers of lives. And if Beijing were to follow the demand to abandon the policy, this would likely result in a public health disaster not just for the CCP but for China. 

Omicron is less dangerous than Delta but its infectiousness is extremely high. If the pandemic is allowed to run unchecked, hundreds of millions of people will become infected. Even with a low rate of severe cases, China’s medical system will be placed under impossible strain, not just in a handful of cities as in 2020, but across the country. Hundreds of thousands of vulnerable people, if not more, will likely die. 

It bears repeating that though China may be a remarkable economic success story, it is still a middle-income country and its welfare net and health care provision are fragile, especially in the countryside, where hundreds of millions of people still live. 

All told, by the end of 2021, 970,036 community hospitals had been established in mainland China, employing more than 3 million healthcare workers (around 1 community hospital for every 1,400 residents)6. These millions of local healthcare workers could provide a frontline force with which to contain a nationwide COVID-19 outbreak, but they would require training and investment, which Beijing has so far failed to deliver. 

In May 2022 during the emergency in Shanghai, a paper in Nature Medicineestimated that lifting China’s COVID restrictions could results in a “tsunami” of infections. Based on the vaccination rate as of the spring of 2022 the Nature authors predicted that China would need more than 15 times the number of intensive care beds that are actually available. Their modeling suggested a likely toll of 1.55 million deaths. That is a grim figure. An estimate by The Economist, predicted something closer to 680,000, assuming that all intensive care needs can be met, which is far too optimistic. 

It is worth noting that even the worst case scenarios do not foresee a catastrophe for China on the scale of America’s or Europe’s botched handling of the crisis. Scaled to population, America’s 1 million deaths would be equivalent to over 4 million in China. That does not seem on the cards. But the figure of between 500,000 and 1.5 million deaths are predicted by most studies would nevertheless be a shattering disaster. Scenes of chaos in hospitals like in Wuhan in January and February 2020 or Hong Kong in early 2022, played out hundreds of times across China are a nightmare that no one can wish for. 

In 2020 Beijing avoided this horrifying scenario with a short, sharp national lockdown that contained the epidemic to a cluster of cities in one province. Omicron is so infectious that at this point the outbreak may already be too widespread to be contained without truly draconian nationwide measures - something akin to a nationwide application of Shanghai’s measures in the spring of 2022. But that is itself a horrifying prospect and, as Shanghai now demonstrates, it is not one that offers any long-term solution. Nothing guarantees that Shanghai will not have to go into lockdown again some time in the coming months. 

Some optimists say that Omicron is simply not that dangerous. But, if Hong Kong is anything to go by, elderly Chinese should go in fear, especially those who are unvaccinated, of whom there are far too many. 

To make a continuation of zero COVID bearable, the regime would need to implement a much kinder and more reasonable quarantine model than that applied in Shanghai. But how to implement that across the largest population in the world in tens of thousands of cities, small towns and villages? It is a mind-boggling challenge. On November 11 the regime issued a new playbookwith 20 key parameters to guide local officials in managing the trade offs. Whether that will be enough is anyone’s guess. The hard lesson from Shanghai was that targeted lockdown measures did not work to contain Omicron, whereas the blanket lockdown did. If, as seems likely, Beijing, the CCP and local authorities fail to find a compromise, they, like their Western counterparts in 2020 and 2021, will fail in every direction. They will fail to contain the epidemic. They will damage the economy seriously and provoke further outrage. 

If on the other hand Beijing abandons Zero Covid completely, given the infectiousness of Omicron it could be facing an epidemic running at the rate of tens of millions of new infections per day. The disruption of repeated Zero-Covid-lockdowns is huge, but as Europe and the US struggled to digest in 2020, a rampant pandemic has significant economic costs too. 

***

There are no simple answers. Xi’s regime is weighing huge risks. Anyone who imagines that that can be a matter of indifference to the rest of the world or is tempted to indulge in Schadenfreude has not learned the first lesson taught in February 2020 - what happens in Wuhan does not stay in Wuhan. 

Apart from the human catastrophe facing China, a new wave of the pandemic raises a serious risk of further mutation. Some medical experts argue that precisely because the Chinese population is largely immunonaive it is less likely to mutate new and dangerous strains of the disease. 

Let us hope they are right. But the very fact that we are weighing these options points to the basic fact that at this moment Xi’s China has become time machine taking us backwards in time, not decades, to the era of Mao, or centuries, to the age of the imperial dynasties - the vistas that came to mind at the time of the Party Congress - but to the dark days of 2020 - first to the drama of Wuhan and then on from there to the horror of Bergamo and New York’s chaotic emergency rooms. Our problems then are China’s problems now, how to weigh up mass casualties against huge economic loss. 

Unlike the first strain of COVID, the Omicron variant that is now overwhelming China’s zero COVID policy, did not originate in China. Omicron was a product of the sweeping global pandemic, which Zero COVID for two years protected China against. Now with the disease threatening to accelerate again, it is us who once again should guard against the assumption that China is “not our problem”. 

There is a way out of Beijing horrendous impasse: mass vaccination and an ample supply of anti virals to help patients fight the disease. But that begs the question. 

China was the first country to vaccinate. It has vaccines which when used in a triple dose are highly effective against hospitalization and death. The lack of mRNA vaccines is not the issue. Furthermore, the overwhelming majority of China’s huge population have completed the basic two-course regime. Where Beijing has failed is in rapidly delivering the third and fourth round of boosters and in ensuring that the most vulnerable population, those over 60, are properly covered. As of the latest figures cited by Bloomberg, “only 69% of those aged 60 and above and just 40% of over 80-year-olds have had booster shots.” That leaves tens of millions of elderly with no protection at all. They are the people who died in Hong Kong. 

As far as I am aware there is no fully convincing explanation for this failure to provide comprehensive coverage particularly of the elderly. 

There are a lot of good studies in the specialist literature in medical sociology and psychology that help to explain some of the vaccine resistance. 

China became a victim of its own haste in rolling out vaccines on a rough and ready basis to those under the age of 60. This created the perception that the vaccines were not properly tested or safe for use amongst more fragile elderly people.

China has an unfortunate track record of vaccine scandals and the lack of good data on the safety and efficacy of China’s shots among the elderly in homegrown vaccine's clinical trials does not build confidence. 

Health workers have been cautious about recommending vaccines for those with high blood pressure or autoimmune disorders and given the negligible chance of COVID infection, there seemed little reason to take the risk. In most of China, COVID has never been more than a news report. Thanks to the success of the 2020 measures, many cities have never logged a single case and elderly people regard the threat as very remote.

The Chinese population and the regime also suffered from “other people’s problem”-syndrome. Not unreasonably they convinced themselves that COVID was an issue for the failed and degenerate West. Rather than joining a broad global front to endorse precautionary vaccination and boosting with whatever vaccinations were too hand, Beijing allowed the media to spread questions about the efficacy and safety of vaccines in general. 

But the real question, given the CCP-regime’s supposed grip on society, is why personal attitudes and public opinion matter at all. Why did the regime not impose vaccine mandates? 

One part of the explanation may be that the primary aim of zero Covid was to minimize the number of cases. It thus made sense to prioritize vaccinating the more mobile, younger population, rather than elderly people who can be sheltered by simply staying at home. 

Remarkably, at the city level where the vaccination program have to be delivered, the authorities have repeatedly shrunk from forcing the issue. During the height of its bout with COVID, Shanghai city authorities gave cash rewards and did vaccination house calls for the elderly. That raised the delivery of a first course of vaccine to nearly 70% of the elderly group. But without a booster that offers only little protection. 

When Beijing attempted to impose the first vaccine mandate in China, the result was an embarrassment. Even with essential retail outlets exempted from the vaccine requirement, within 48 hours the public outcry against coercion forced a retreat. In September, China’s National Health Commission clarified that whilst cash incentives and insurance for “vaccine accidents” are considered acceptable, vaccinate mandates were rejected as national policy. A Health Commission expert declared that 

These practices (mandates) violate the principle of vaccination and also cause inconvenience to the masses. Wu Liangyou said that the new crown virus vaccination should be carried out in accordance with the principles of knowledge, consent, voluntariness and seeking truth from facts, and emphasized that the introduction of vaccination policies and measures must be rigorous and prudent, carefully evaluated, to ensure compliance with laws and regulations, and strictly aside by the bottom line of safety. It is reported that the National Health and Health Commission will guide all localities to make good use of health codes and vaccination codes, and resolutely put an end to the two-code joint inspection and compulsory vaccination.

The squeamishness of the regime when it comes to shots is remarkable. Clearly, the CCP-regime does not resist coercive measures. One can hardly imagine anything more coercive in peace time than the closed loop production system in which workers are confined to their factories. Nor does it shrink from costs. The gigantic testing apparatus of Zero Covid that allows a hundred million people to be tested in a single days is very costly. According to the Economist:

The 35 largest firms producing covid-19 tests raked in some 150bn yuan ($21bn) in revenues in the first half of 2022 alone. A broker, Soochow Securities, has estimated China’s bill for covid testing at 1.7trn yuan this year, or around 1.5% of gdp. That number, which some consider an underestimate, equates to nearly half of all China’s public spending on education in 2020.

This highlights the need to understand the complexity of CCP rule, the way in which the appropriate limits of its coercive power are defined and the way in which it prefers certain tactics and instruments to others. 

Even after the Hong Kong debacle was clearly visible in early 2022, rather than prioritizing vaccination Beijing preferred to counted on grit and generalized discipline. As the Economist puts it: 

In the spring of 2020 the collective self-sacrifice of hundreds of millions of Chinese surprised the world, when their willingness to stay indoors for weeks halted the outbreak that began in Wuhan. Mr Xi over-learned the lessons of that success, declaring self-discipline, vigilance and isolation the key to defeating the pandemic. 

Those worked against the original variants of COVID, but against a strain as infectious as Omicron, zero COVID is fighting a losing battle. Even now, in early December, Beijing is still shrinking from vaccine mandates and promising, instead, that “big data” will allow it to target the most vulnerable for special protective measures. Ironically, that confirms the common place of Beijing’s omniscience whilst actually demonstrating the limits of its grip. 

Even in the best-case scenario, assuming Beijing’s new vaccination targets are met, it will not be before early 2023 that the vulnerable elderly population have the protection they urgently need and will allow Beijing to escape its impasse. 

In any case, the dilemmas facing Beijing go far beyond the authority and legitimacy of Xi Jinping. As The Economist put it in a truly excellent summary of the situation: 

… Mr Xi faces the choice between enforcing zero-covid even more strictly, even though that would invite a recession and public fury, or allowing the disease to spread very widely, with calamitous loss of life. Attempting to chart a middle path is only helpful if he uses the time he gains to raise vaccination rates, stock up on antivirals and expand icus. And not only are all Mr Xi’s options unpalatable; he is running out of time to choose one.

Liz Truss’s Britain Is a Morbid Symptom of the World’s New Era - Adam Tooze (Foreign Policy)

  An expert's point of view on a current event. 

Liz Truss’s Britain Is a Morbid Symptom of the World’s New Era

The new British government is an economic disaster—and a symbol of a global political crisis.

By Adam Tooze, a columnist at Foreign Policy and director of the European Institute at Columbia University. 

Foreign Policy, October 12, 2022

 

In the last few weeks, we have witnessed the remarkable spectacle of a Conservative government in Britain deliberately taking on the financial markets. With a surprise mini-budget promising 45 billion pounds (about $48 billion) in tax cuts targeted at high-earners, Prime Minister Liz Truss and Chancellor of the Exchequer Kwasi Kwarteng unleashed a currency and bond market crisis the likes of which Britain has not experienced since sterling was driven out of the European Exchange Rate Mechanism in 1992. At that time, Europe as a whole was convulsing. This time, the crisis was Britain’s alone. The last time a Tory government was subject to such near-total condemnation by global expert opinion was in 1956 amid the Anglo-French invasion of Egypt over the Suez Canal.

Of course, Brexit in 2016 was condemned by most reasonable international commentators as well. But that was not the policy of David Cameron’s government. It was an insurgent campaign led by Boris Johnson and the UK Independence Party. It was Johnson’s boast that he had defied “Project Fear”—the mobilization of establishment opinion against the Brexit campaign. Faced with a phalanx of mainstream opinion that included U.S. President Barack Obama and Jamie Dimon of JPMorgan Chase, Johnson dismissed concern for the future of British business with an expletive. He thus marked the moment at which the leading group within the Conservative Party separated itself from any conventional commitment to the “U.K. economy,” in favor of a more nebulous idea of national destiny and the more specific interests of Tory cronies.

Ever since, the political economy of Britain increasingly has resembled the annual showcase of Wimbledon—in cultural terms, a very British affair, celebrated around the world as such, but rarely a stage on which British players actually shine and certainly not an event to which the majority of the population is actually invited.

Preoccupied with Brexit and COVID-19, Johnson did not have time to develop an extensive program of government. Like the Cameron and May administrations, Johnson’s most important constituency appears to have been a rentier class of hedge funds and public-private contractors. But, as his electoral triumph in 2019 attested, Johnson also managed a broad-based political coalition ranging from patriotic working-class voters in the north of England to upper-class London types.

It is no secret that the Tory party has long included a more radical fringe. This includes figures such as Jacob Rees-Mogg, affectionately known as the member of Parliament for the 18th century. Johnson made sure to keep this wing of the party within his tent but balanced them with centrists like Rishi Sunak. Elected to Parliament in 2010, Truss and Kwarteng belong to a cohort of Tory politicians who have never known opposition. Neither has deep roots in the Tory’s traditional social milieu. Truss’s parents were Labour voters. She and Kwarteng were incubated by a coterie of free market, right-wing think tanks that first came to the fore during Margaret Thatcher’s rise to power in the 1970s and now thrive on obscure funding by dark money—some British, some not. When Johnson lost his grip, it was Truss and Kwarteng’s moment. Whom they represent apart from the 80,000 or so Tories who voted for Truss to replace Johnson is not obvious.

In style, their program was a quintessential post-Brexit manifesto, high on ideology and blustering self-confidence, promising a dramatic new vision of Britain’s future but lacking details. In substance, it was caricature of the rentier program, promising to slash taxes, roll back environmental and labor regulation, and cut already impoverished welfare benefits.

It stretches credulity to suggest that they actually believe this is a formula for national economic growth. It is certainly an agenda for greater inequality. They even appear to support an end to easy credit and low interest rates, despite the damage this will likely do to heavily mortgaged homeowners, once a core constituency of Thatcher, whom they claim as their hero. Trying to make sense of this seemingly perverse policy, some speculate that Truss and Kwarteng are so deeply beholden to rentier interests that they are exponents of disaster capitalism, provoking a housing crisis that would allow property companies to snap up large portfolios of distressed properties. The fact that analysts are driven to such far-fetched speculations points to quite how implausible the Truss-Kwarteng vision for Britain’s economic future seems.

It certainly didn’t make sense to the financial markets. The pound plunged. Bonds sold off. As yields surged, that triggered obscure derivative hedging strategies in the portfolios of private pension funds and threatened to unleash a fire sale of gilts, or U.K. government debt. That, in turn, forced the Bank of England to react. To stop the slide, it stepped in as the market-maker of last resort, warehousing debt that pension funds needed to sell for cash. The result is conflicting policies. On the one hand, like other central banks around the world, the Bank of England is promising to raise interest rates. At the same time, to prevent the financial system from imploding, it has to engage in another emergency burst of quantitative easing, buying bonds in exchange for cash.

In the short term, this has provided relief. The pension funds have been saved. The pound rebounded. Yields fell back. But it was not enough to save Truss and Kwarteng’s embarrassment. On the weekend of the party conference, they reversed the controversial tax cut.

The Tory party’s reputation both with the population at large and its own supporters is in tatters. Labour, under the uninspiring but reliable leadership of Keir Starmer, rides high in polls. Unless Labour finds a way to shoot itself in the foot, the party will, come the next election, inherit Britain’s ailing economy and threadbare welfare state. If the current opinion polls hold, it will have a giant majority. But given how parlous the state of the British economy is, no one governing in the U.K. faces good options. If there is a shred of reality in the Truss and Kwarteng program, it is a realization, after more than a decade of low growth and stagnating productivity, of quite how serious Britain’s economic impasse is.

 

The new prime minister is making Britain look like Argentina—in more ways than one.

One could dismiss the U.K. crisis as an idiosyncratic storm in a teacup. But that was not the view taken by global bond markets, which all experienced a moment of panic in reaction to the turmoil in London—and with good reason.

The British crisis highlights the huge stress that economic policy is under, worldwide, but particularly in Europe. The recovery from the COVID-19 shock was rapid but uneven. Inflation has tested the credibility of central banks. Now the energy crisis unleashed by Russia’s attack on Ukraine is convulsing the European economies. For lack of natural gas, it is not sure that any of them will get through the coming winter without drastic rationing measures and a severe recession.

The 45 billion pounds in tax cuts announced by Kwarteng made the splash that they did because they followed the unveiling of a far larger program, with cost estimates of up to 150 billion pounds, to stabilize energy prices. At the time, the program, valued at around 5 percent of Britain’s GDP, was the largest in Europe. This week, it was matched by a 200 billion euro ($195 billion) commitment from Berlin.

Chancellor Olaf Scholz’s announcement ruffled feathers in the rest of Europe, but German bond prices barely budged. Unlike British debt, German bunds are anchored as the benchmark assets of the eurozone. The real question for the financial stability of Europe will arise when Italy is forced to announce an energy subsidy package of similar dimensions. Italy’s public debt is already far too high for markets to easily absorb a program of German or British dimensions. The only country with a worse track record of growth in Europe than the U.K. is Italy.

But the lessons of the U.K. debacle are political as well as economic. The disintegration of the Tory party points to basic questions haunting modern conservatism. We may not be in the 19th century, when defenders of the status quo struggled to contain the threat of revolution. But the pace of social, cultural, technological, economic, geopolitical, and environmental change in the 21st century is frenetic. How should conservatives respond? If you run to the center as Angela Merkel did with the Christian Democratic Union in Germany, you risk being outflanked by more credible liberal and environmental parties and challenged on the right by openly nationalist and xenophobic parties. If you move to the right, you can win success as Giorgia Meloni has done in Italy and Jair Bolsonaro and Donald Trump did in Brazil and the United States, respectively. All three demonstrate the appeal of an authoritarian, nationalist agenda. But as much as they grab the headlines, none of them is resoundingly majoritarian. Their positions are too extreme for large segments of the modern electorate. And it is altogether unclear how their promises and their vote-winning populism translate into a constructive agenda for government.

Of course, centrist and progressive governments fail, too. The COVID-19 crisis offers a veritable how-to guide of governmental failure. But tantrums like the one we have just witnessed in the U.K. are not accidents. They are part of a piece with the meltdown of the Trump administration in 2020 over COVID-19 and the Black Lives Matter movement; the Brexit shock; the dogmatism of Germany’s stand in the eurozone crisis; and the recalcitrance of Republicans in the United States during the 2008 financial crisis. Conservatism in the 21st century has a reality problem, and sometimes it bites.

Adam Tooze is a columnist at Foreign Policy and a history professor and director of the European Institute at Columbia University. His latest book is Crashed: How a Decade of Financial Crises Changed the World, and he is currently working on a history of the climate crisis. Twitter: @adam_tooze

 

A guerra de agressão à Ucrânia pelo lado econômico: dificuldades em todos os lados - Adam Tooze

Chartbook #146 The Russia-Ukraine War At Six Months: symbolic anniversary or economic and military turning point?

Adam Tooze Aug 24, 2022

It is six months since Russia launched its attack on Ukraine. 

 Amongst the anniversary coverage two long reads by the Washington Post are in a league of their own. One, by Shane Harris, Karen deYoung, Isabelle Khurshudvan, Ashley Parker and Liz Slycovers, covers the build-up to war. The other by Paul Sonne, Isabelle Khurshudvan, Sehiy Morgunov and Kostiantyn Khudov reconstructs the battle for Kyiv. Both are highly recommended. 

On the six-month anniversary, the celebrations of Ukraine’s national day serves as a counterpoint to the increasingly sober reporting of the war and uncertainty about the longer-term outlook. 

For much of the summer the talk was of an imminent Ukrainian counterattack, which was expected to be launched in the South around Kherson. The hope was that this might break the stalemate and perhaps create conditions under which a ceasefire could be negotiated on terms favorable to Kyiv. By early August it was clear that a large-scale counteroffensive by the Ukrainian military was, in fact, unlikely. Acute observers like Shashank Joshi, Defense Editor of The Economist noted a significant slippage in messaging by both Kyiv and its backers in the West. 

Indeed, there was anxiety in some circles that the drumbeat of expectation was putting unreasonable pressure on Kyiv to launch an attack prematurely. This thread by C.M. Dougherty is excellent on this score. 

Christopher M. Dougherty @C_M_Dougherty

3/22 This pressure may be pushing UKR may to launch an offensive, despite lacking the military means to do so effectively, as laid out brilliantly by @KofmanMichael & @EvansRyan202 in this @WarOnTheRocks podcast: Great Expectations? The Next Phase of the Russo-Ukrainian War - War on the RocksMichael Kofman joined Ryan for yet another conversation about the unfolding tragedy of the Russo-Ukrainian War. In this episode, they focus largely on thewarontherocks.com

August 9th 2022

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On the ground there are few illusions about the balance of forces. As the FT quoted Andriy Zagorodnyuk, a former defence minister of Ukraine. 

“The US gives us enough to stop the Russians from advancing, to reverse some gains, to shape the operational direction, but absolutely, clearly, not enough for a major counteroffensive,” 

This is a far cry from gung-ho talk earlier in the year about driving Russia back to the border. On Washington the turning point may have come in early July, as captured by a piece by Peter Baker and David Sanger in the NYT which flagged up growing unease in the Biden administration about the strategic rationale for US aid for Ukraine (h/t Ted Fertik). Baker and Sanger offered a startling insight into the complex, not to say confused, messaging from Washington:

Some officials, including Mr. Biden, cringed when Defense Secretary Lloyd J. Austin III said in April that “we want to see Russia weakened to the degree that it can’t do the kinds of things that it has done in invading Ukraine.” The president called Mr. Austin to remonstrate him for the comment, then directed his staff to leak the fact that he had done so. But officials acknowledged that was indeed the long-term strategy, even if Mr. Biden did not want to publicly provoke Mr. Putin into escalation.

On the basis of such muddled communication what, frankly, are either Kyiv or Moscow to think? Does Washington want to wear down Russian power or does it not?

What is more clear cut are the force ratios on the ground. Fro an offensive against prepared defensive positions, the attackers needs to have an advantages of 3:1 to have much prospect of success. If accumulating such an advantage was ever plausible for Ukraine in the Kherson sector, by mid-August that opportunity had slipped away. As Shashank Joshi, reported 

Konrad Muzyka of Rochan Consulting, a firm which tracks the war, thinks there were 13 Russian battalion tactical groups (btgs) in the province in late July (a btg usually has several hundred troops). Now there may be 25 to 30. “We believe that this window of opportunity has passed,” says Mr Muzyka. “Ukrainians do not possess enough manpower to match Russian numbers.”

As Joshi found to his cost, this was not a popular view. The comments on this twitter feed make for enlightening reading. 

Shashank Joshi @shashj

My piece on the “counter-offensive”: Ukraine is squeezing Kherson city, but its army may not be ready for a big offensive. Ukraine’s political imperatives—the need to demonstrate progress to Western backers—might be in tension with military considerations. A Ukrainian counter-offensive in Kherson faces steep oddsUkraine wants to show progress on the battlefield. But its army may not be readyeconomist.com

August 14th 2022

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But as other sources, such as The Guardian, reported, Joshi’s downbeat view is, in fact, widely held. 

Ukrainian commanders … concede that a big push in Kherson is some way off. “We have more weapons. Not enough to do an offensive now and to beat the enemy. It is enough to defend our territory,” said Roman Kostenko, a pro-European deputy who heads the parliamentary defence and security committee. 

Often the debate about Western support to Ukraine is concretized in the form of weapons systems. First there were the Javelins. Then there were the Himars rocket launchers. Now the talk is of ATACMS. 

Ukraine’s Himars rockets have a range of about 50 miles (80km). … So far the Biden administration is refusing to supply Kyiv with Army Tactical Missile System (ATACMS) rockets, which can be used in Himars systems and have a 185-mile range. Its reasoning is that Ukraine could use them to strike Russia itself, an act the US fears may lead to a third world war. Zelenskiy dismisses this scenario and has pledged not to attack Russian territory. Negotiations continue, as the Pentagon reviews the situation.

The focus on equipment makes for good headlines, but it deflects from the broader operational and strategic picture and the longer-term question of how the war can be continued and for what purpose. 

Dara Massicot in Foreign Affairs defines the objective in more limited terms. The aim is not so much a decisive breakthrough, as to foil Russian efforts to annex Ukrainian territory and to drain their military power, eventually forcing Putin to give up. To achieve this more limited goal, what may suffice is simply attrition. 

If Ukraine can create a highly contested frontline—just as it did outside Kyiv and Kharkiv—with attacks on command-and-control points, high rates of equipment losses, and large Russian casualties, it may again convince Moscow to withdraw.  But for such a Ukrainian strategy to have the best chance of success, it must be in progress before Russia attempts to annex the territory it holds; that way, Ukrainian attacks can deny Russia a foothold in an area like Kherson. And even if Russia does annex Ukrainian territory and tries to force an operational pause, Kyiv and its Western supporters don’t have to comply.

On the question of a “highly contested frontline” and the attrition of Russian strength, one of the fixed points in Western analysis of the war, is the evidence that the Russians are suffering much higher casualties than the Ukrainian side. But how accurate are our casualty figures and how are they estimated?

On this grim subject The Economist provides excellent analysis. It turns out that estimates of Russian casualties depend on a macabre parameter known as the “wounded-to-killed ratio”. This is a ratio that reflects the intensity of fighting, the sort of weapons used (shrapnel v. machine-guns) and the availability of rapid battlefield medical care. In the 20th-century a ratio of 3 or 4:1 was normal. But in recent conflicts thanks to rapid medevac the United States has been able to push the ratio as high as 10:1 - of eleven of its soldiers who are hit by enemy fire, one dies and 10 survive their wounds. Ironically, in the case of the Russo-Ukraine conflict, since we know the number of killed Russians with relative accuracy, a higher “wounded-to-killed ratio” would be bad news for Moscow, since it would imply a greater number of overall casualties. The consensus seems to be that the ratio probably hovers at an unremarkable 3.5:1, which implies an estimate of Russian casualties in the order of 70,000 killed and wounded. 

If the West is increasingly counting on attrition, that shifting outlook has not been lost on the Russians. An interesting view from the other side is provided by a piece in Kommersant by Russian think tank director Andrey Kortunov. As he remarks: 

… Western historians today recall the “miracle on the Vistula” a century ago, when in the summer of 1920 the Polish state managed to stop the Red Army’s advance on Warsaw and push it far to the east. A hundred years later, in the United States and Europe, they started talking about the coming “miracle on the Dnieper”. It seems that one more effort, one more strain, one more week or a month - and the Russian military machine will start to falter, rolling back to Donetsk and Lugansk, and even to Rostov and Belgorod. But week after week, month after month passes, and the dates of the expected "miracle on the Dnieper" are shifting further into the future, like an elusive horizon line. The growing supply of Western weapons strengthens the Ukrainian army, but still is not able to change the overall picture of what is happening. Russian forces, albeit cautiously and without spectacular breakthroughs, continue their stubborn advance in a westerly direction. The situation on the battlefield, albeit slowly, is changing in favor of Moscow, which, in turn, is tightening Russian conditions for future political agreements. Is the West able to reverse this trend? Such an all-in game would involve a sharp increase in the scale of military support for Kyiv. But in this case, it is likely that NATO would be directly involved in the Ukrainian conflict, after which the twenty-year Afghan saga would most likely seem like a cakewalk. It is clear that any decision on a truce, and even more so on a peaceful settlement, should be made in Kyiv. However, a lot depends on the position of the West. If "Plan A", that is, the victory of Ukraine, looks less and less realistic, then the West should, apparently, already now think about a "Plan B", which involves achieving at least a temporary compromise not only between Moscow and Kyiv, but also between Russia and the West.

What hangs over the entire discussion, on both sides, is the risk of escalation. In February and March, as the war began, as the West surged its support for Ukraine and ramped up its sanctions against Russia, as Putin responded with nuclear saber-rattling, talk of escalation was everywhere. Since then, fears have calmed somewhat. For a cool-headed assessment of the risk of escalation as of July 2022, a report by a RAND team is worth reading. The punchline is this: 

although escalation risks stemming from the Ukraine war are real and significant, the preceding analysis helps to bound those concerns: A Russia-NATO war is far from an inevitable outcome of the current conflict. U.S. and allied policymakers should be concerned with specific pathways and potential triggers, but they need not operate under the assumption that every action will entail acute escalation risks.

The great hope of Western governments was that Western economic sanctions would have a material effect on Russia’s ability and willingness to sustain the war against Ukraine. Battlefield attrition and economic attrition would combine to force Moscow to sue for peace. This, of course, depends on actually making a serious dent on the Russian economy. Six months into the conflict, how far that has been achieved is hotly contested. 

As Nick Mulder pointed out in his very timely history of The Economic Weapon, already during the Allied blockade of the central powers in World War I, sanctions were the incubators of economic expertise. And that has been true with regard to Russia in 2022 as well. A lot of people have learned a lot, very fast about Russia’s economy. But, as was true in previous episodes of economic warfare, this collective learning process has not let to consensus. 

Over the last month starkly contrasting analyses have been offered on the state of the Russian economy and its likely future development. 

At Yale a group pulled together by Jeffrey Sonnenfeld of the Yale SOM have published a sprawling analysis of an impending economic catastrophe in Russia. Their conclusion is that Russia faces not just a long-term deterioration of its position as a commodity exporter, but the prospect of immediate disaster. Their conclusion is that: 

Looking ahead, there is no path out of economic oblivion for Russia as long as the allied countries remain unified in maintaining and increasing sanctions pressure against Russia.

The Sonnenfeld report, has elicited numerous replies. Ben Aris has provided one detailed response. Another has come from Elina Ribakova, at the IIF - the think tank and lobby of the international financial industry - who has published in-depth analysis, which is far more skeptical of the weakening of the Russian economy and the extent of the pullback by Western firms. 

Elina Ribakova 🇺🇦 @elinaribakova

1/ Sanctions on Russia are proving to be porous not only in energy. While self-sanctioning has been an important contributor to sanctions impact, many companies are still sitting it out. @SelfSanctions @JeffSonnenfeld

August 18th 2022

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At the macroeconomic level, opinions are similarly divided. Forensic analysis of trade data by Matt Klein at the Overshoot newsletter suggests that Russia is suffering a ruinous squeeze on its imports. But a broader assessment of the Russian situation, again by Elina Ribakova, or by The Economist magazine suggests that the Russian economy is, in fact, in stronger shape than many imagine. Amongst other indictors, imports to Russia, as captured in the export data of its major trading partners, may be down on their prewar peak, but are currently recovering to their pre-COVID level. 

Of course, no one disputes that the war and sanctions will be terrible for Russian growth in the long term. The loss of investment and human capital and reputation is irreparable. But, any prospect of an imminent squeeze serious enough to force a change in policy in Moscow seems remote. 

The same cannot be said for Ukraine. By contrast with the serious disagreement about Russia’s economic position, there is little doubt that Ukraine is living on borrowed time. To put it simply, Ukraine cannot afford the war it is fighting. The aid it is receiving, though substantial, is an order of magnitude smaller than Russia’s fossil fuel earnings and is entirely inadequate to cover the running costs of the war. As a result, Kyiv is resorting to financing the war by printing money. It can only be a matter of months before Kyiv faces crippling choices between continuing to fight the war and upholding any semblance of normal economic life on the home front. 

As Maria Repko deputy executive director of the Centre for Economic Strategy in Ukraine described the situation in the pages of Foreign Policymagazine. 

Scarce foreign funding is forcing the National Bank of Ukraine to buy government bonds (effectively printing hryvnia) to cover the enormous budget deficit, which reached $4 billion in May and almost $6 billion in June. In March to May 2022, the government’s own revenues covered just about 40 percent of the expenditures needed to run the country and pay the bills. Another 40 percent was covered by the National Bank of Ukraine. The rest is funded by grants (about 7 percent of expenditures during three months of the full-scale war), foreign loans, and local bond issues. … on July 20 Ukraine asked Eurobond holders for a standstill, because the commercial debt servicing becomes too much of a burden for the budget, as well as from the balance of payments prospective.

That standstill was granted by the bondholders. It buys Kyiv $5.9 billion in relief over the next two years. But that only covers a small part of the financial shortfall. In the mean time, 

The National Bank of Ukraine (NBU) was selling up to $1 billion per week to keep up with the pace of foreign currency demand and to defend the exchange rate peg. On July 20, the decision was made to shift the peg upwards, to 36.60 hryvnias to a dollar from 29.25 hryvnias to a dollar. Ukraine’s foreign currency reserves stood at $23 billion as of the end of June. The current pace of losses means that Ukraine will be shortly on the verge of financial collapse if aid inflows are not sped up. 

Ukraine’s situation is made worse by the disruption of its economy due to the war, the dislocation of its foreign trade by the Black Sea blockade and by the economic activity of its citizens who are now refugees spread out across Europe. Of the 5 million Ukrainian refugees many are working remotely. All of them are spending money from their Ukrainian bank accounts. The result is a monthly drain of c. $1.5 billion at the expense of Ukraine’s foreign exchange reserves. 

The basic point, as Oleg Churiy former deputy governor of the National Bank of Ukraine spelled out in the pages of the FT, is that Ukraine must come to terms with the long war it now faces not just in military terms, but in economic policy as well. 

A longer duration of the conflict alters not only the military strategy but the macroeconomic calculus. In the war’s early days, Ukraine’s macroeconomic policies aimed to control expectations and avoid panics. These policies were based on controlling prices — for example, the hryvnia-dollar exchange rate was fixed at the prewar level — and providing stop-gap measures to support businesses and households, such as suspending import duties. These responses were appropriate to address the initial shock. But as the war grinds on, they need to be adjusted or Ukraine will run into an economic catastrophe. 

As Churiy sees it there is no alternative to putting Ukraine’s domestic finances on a sounder footing. That means raising taxes and slashing all “non-essential” spending. But that is hard to do in wartime and is already producing conflict between the central bank, for which Churiy speaks, and the politicians who run the government. As the WSJ pointed out in its portrait of Ukraine’s finance minister Sergii Marchenko there is a simmering dispute between the bankers and the government over stabilization. Marchenko, of course, recognizes that this has become a war of attrition, but his priorities are clear. 

“Sometimes we have a different point of view from the National Bank,” said Mr. Marchenko. “We have to worry about winning the war. It is better to risk high inflation than not to pay soldiers’ salaries.”

In a country at war, the implication that the central bank has other priorities than national defense, is dramatic indeed. An independent central bank is ill suited to the needs of total war... 

The only way to relieve this conflict is to look for more support from outside. So far, Ukraine has received external support to the amount of c. $2.5bn-$3bn a month. For the second half of 2022 it is expecting $18bn all told. But it needs more. It needs $4bn-$5bn per month immediately. 

A lot has been pledge. But frustratingly little has so far been disbursed. Most flagrant of all is the EU, which has pledged €9 billion but delivered only €1 billion on account of internal disputes about the modality of funding. As the WSJ reports: 

Germany, which sent Ukraine a separate bilateral grant of €1 billion in June, objected to the commission’s plan to offer low-interest loans backed by guarantees from EU member states (Germany favors grants). Discussion about whether to offer grants or loans, and how to share the burden, has dragged on all summer. 

With a new proposal being tabled in early August. As Politco reports: “While there's no timeline yet, the Commission is aiming to obtain approval by the European Parliament and EU countries in September so that disbursement can start in October, one official said. “

Zelensky’s reponse was merciless: “Every day and in various ways, I remind some leaders of the European Union that Ukrainian pensioners, our displaced persons, our teachers and other people who depend on budget payments cannot be held hostage to their indecision or bureaucracy. Such an artificial delay of macro-financial assistance to our state is either a crime or a mistake, and it is difficult to say which is worse in such conditions of a full-scale war”.

As Zelensky knows, the stakes could not be higher. If, at the six-month mark, Ukraine now faces a long war, then stability is crucial. And that stability must be secured, not just on the frontlines, but on the home front as well, which is “highly contested too”. Otherwise, when Kyiv comes to mark the 12-month anniversary and the 18th-month anniversaries in 2023, the narrative may be less up beat than it is today.