The West is waging a hot economic war against Russia. That Rubicon has been crossed. The West is fighting this war by arming Ukraine and imposing an economic blockade that explicitly aims to eliminate Vladimir Putin’s regime by destroying the Russian economy (and it will be destroyed). As part of this devastating economic offensive, the West has seized around US$400 billion—more than 20% of Russia’s 2021 GDP—from the Russian state by freezing Russian central bank reserves.

War is the continuation of politics by other means, and we are well into other means now.

Yet this war is destined to end in a terrible defeat for the West unless it changes its strategy. The reason is simple: you can’t wage an economic war against a hostile, nuclear-armed opponent if you accept whatever nuclear red lines your opponent chooses to proclaim.

If Ukraine does fall and Russia responds to the economic war with actions backed by nuclear threats, the West is either going to have to either call Russia’s bluff or choose defeat—with all of the terrible consequences that that would entail. So, if the West is willing to call Russia’s nuclear bluff in the unavoidable confrontation to come, then it only makes sense to do it now and intervene militarily to save Ukraine from a second Holodomor.

The economic blockade that the West is imposing upon Russia through sanctions will cripple the Russian economy. Paul Krugman writes that ‘Russia appears to be headed for a Depression-level slump’, and J.P. Morgan predicts a crash in line with that of the 1998 debt crisis. The enormous overall hit to the Russian economy that sanctions will bring about will manifest itself in myriad painful ways. For example, a fascinating Twitter thread suggests that the sanctions regime will largely eliminate Russian civil aviation. The devastating consequences of the West’s economic war on Russia will affect everyone in that country for decades to come.

Yet, as crippling as these sanctions are for the overall Russian economy, they won’t prevent Russia from completing the conquest of Ukraine (though they do have a useful role to play). At that point, Putin will be victorious—on his own terms. He will know that the West watched his forces slaughter Ukrainians because of his threat to go nuclear. He will know that the West has seized US$400 billion of his money and that the sanctions regime was intended to remove him from power. He will know that the sanctions regime will force Russia to rely upon China, in which case his legacy will be to turn Russia into China’s Belarus.

Putin will have to react. And that reaction will have to take the form of a direct confrontation with the West because he will have no other options left. When that confrontation comes, the West will have to either appease Putin by ending the economic war and recognising the Russian conquest of Ukraine or call Putin’s bluff.

The advantage of choosing defeat is that the West will reduce the risk of an immediate confrontation with Russia. However, choosing defeat will also create enormous adverse consequences and will not enable the West to escape from an eventual confrontation with Russia anyway, and on worse terms.

Choosing defeat means that Russia will have successfully waged a brutal war against a country in which the West invested enormous amounts of diplomatic and political capital. The lesson that other hostile regimes will draw is that the West won’t directly interfere in such conquests in the face of a threat to use nuclear weapons. This defeat will therefore encourage both nuclear proliferation and brutal conquests, the combination of which will lead to a far more hostile world for the West and Western ideas.

Choosing defeat will leave Putin triumphant. He will have conquered Ukraine and prevailed over the full diplomatic, political and economic might of the West. Putin has vast ambitions, aiming to do nothing less than ‘relitigate the end of the Cold War, revise the current Euro-Atlantic security system and recreate a sphere of influence in the states of the former Warsaw Pact’. Winning the war in Ukraine while humiliating the West isn’t going to temper them. Putin’s Russia is not going to stop with Ukraine.

Choosing defeat will in fact do little more than set up the next confrontation. In that next confrontation, Russia will once again threaten to go nuclear if the West crosses its proclaimed nuclear red lines.

And what are those red lines? First, Russia cannot lose a war and second, an enemy cannot threaten Russia’s prosperity (I guess that ‘no Russian figure skater shall be subjected to a drug test’ will come later).

These are fabulous red lines if your opponents believe them, because it grants you enormous power over their ability to act. But these red lines are not credible. The US has nuclear weapons precisely to ensure that it isn’t subject to this sort of nuclear coercion. As the 2018 nuclear posture review put it, ‘Potential adversaries must recognize that … any nuclear escalation will fail to achieve their objectives, and will instead result in unacceptable consequences for them.’

Russia is going to attempt to win the war in Ukraine by repeating the tactics it used on the Chechen capital of Grozny in the 1990s. It will attempt to force the Ukrainian population into submission after the war by waging a campaign of murder and terror. The West can prevent this horror by directly intervening in the war with sufficient military force to ensure that Russia’s invasion fails. Russia is planning to get away with this horror anyway by cowing the vastly more powerful West into submission with nuclear threats.

Granting Putin victory in Ukraine will not lead to peace in our time; instead, it will ensure that Putin will confront the West again. At some point, the West is going to call Putin’s nuclear bluff. Let us call that bluff now and save Ukraine.

The way cyber actions have played out in the Russian invasion of Ukraine hasn’t followed the anticipated script. The attacks on Ukrainian government agencies and banks in early and mid-February were not unexpected, given Russian rhetoric. But the ‘cyber Pearl Harbor’ that some had anticipated hasn’t occurred.

Russia may well have drawn different conclusions to others from its experience in Georgia in 2008 and its 2014 invasion of Ukraine. Both were notable for their use of cyber—attacking infrastructure and government agencies, destabilising decision-making and sowing confusion regarding purpose, responsibility and the on-the-ground situation. The integration of cyber, political and psychological activities with conventional operations, progressively escalating effort from influence operations to full kinetic warfare, became known as hybrid warfare or the Gerasimov doctrine, after the Russian chief of the general staff.

Practice proved less smooth than theory. Russia’s effort in Georgia arguably was more successful than the more ambitious activity in 2014 in the more advanced Ukraine. Georgian government decision-making was disrupted, the Russians confused the issue and effectively defanged an international response, and Ossetian secessionists, with some support, proved good enough against the Georgian military.

In Ukraine in 2014, Vladimir Putin was progressively forced to show his hand and commit conventional forces as cyber, disinformation and his ‘little green men’ proved of limited value. Still, Putin succeeded in annexing Crimea and supporting limited secessionist effort in Donbas—enough to encourage his invasion this year.

Since then, cyber has proved useful to Moscow in other ways. Russia continued to improve its cyber capabilities, extending into active disinformation operations in the West, including the 2016 US and 2017 French presidential elections (and possibly the 2016 Brexit referendum in the UK). In 2017, the Russian group Sandworm launched the NotPetya malware. Though the targets were Ukrainian companies and the country’s government, NotPetya spread quickly, demonstrating the indiscriminate damage such tactics can cause.

Later Russian activity was both better targeted and more sophisticated and may reflect caution over possible consequences to its own systems and interests resulting from malware spreading unchecked in the wild. And as the 2019 SolarWinds attack showed, attacks ‘deep in the stack’ and supply chain can offer considerable breadth and scope for exploitation, including for intelligence purposes.

The limited cyber activity in the current Russian invasion of Ukraine may be a recognition of its constraints in warfare. In the heat of conventional battle, the use of cyber will be highly tactical—classic signals intelligence—aimed at disrupting enemy digital systems. Because of the dependence of all modern states on digital systems for their military capabilities, protagonists won’t want to suffer blowback from malware loose in the wild.

Still, we would expect continued efforts to place malware, prepare the ground for a Russian takeover and shape the information environment outside the immediate sphere of operations. There is, after all, the broader information war to prosecute.

In hindsight, Putin has been set on this course for some time. However, the unanticipated use of US and UK intelligence to expose Russian mustering and intent shouldn’t be underestimated in terms of garnering global support. And the Ukrainians—government, community and supporters—have used social media to great effect.

These factors have cast doubt on Russia’s superiority in maskirovka, the use of disinformation, intimidation and deception, which has been employed since the country’s tsarist days and was refined during Soviet repression. The Russian government’s previous actions in Georgia and Ukraine, as well as cyber operations during the 2016 US presidential campaign, all echo those of the Soviet Union. Antecedents to Putin’s ‘little green men’ can be found in Stalin’s tactics in Ukraine in the 1920s and 1930s.

A central focus of maskirovka is domestic audiences and bolstering internal legitimacy—typical of repressive regimes everywhere. Putin’s crackdown on internal dissent—arresting protesters, silencing the few remaining independent broadcasters, pressuring tech platforms, possibly with more to come—is likely to harden as the Russian campaign in Ukraine regroups. We should expect use of ‘fellow travellers’ outside Russia, of which there remain many, including in the Trump wing of the Republican Party, and of nations from which it can call in favours or leverage concessions. And we should expect use of cyber to block, intimidate and disrupt dissenters and simply to sow confusion.

It’s early days in this conflict. Russian pressure on Ukraine will increase, even as its military resorts to tried and true tactics of destruction. In the meantime, there are some conclusions that may be drawn for Australia.

First, cyber is a classic ‘grey zone’ tool: it is ambiguous and potentially valuable for intelligence, developing influence, seeding uncertainty and shaping the information environment for the first few days of a conflict. We should be as sceptical of reliance on cyber for substantive outcomes as we are of claims of a cyber Pearl Harbor.

Second, nation-states don’t have a monopoly over the use of cyber. Some hacktivist and criminal groups are taking sides in the current conflict. Others—including nation-states—will seek to exploit both the distraction of agencies and the disruption of conflict. Cyber defence is getting harder and commercial companies and researchers often take point. All this activity is muddying the information environment, making signalling harder and increasing the prospect of miscalculation.

Third, the role of technology companies is increasingly important. Governments no longer have such assets under their direct control and yet are critically dependent on them. It’s not simply content. The withdrawal of major tech companies will give Russia increased impetus to develop sovereign capability. We can expect China and other authoritarian states to increase their control over tech companies, and even Western governments will give pause to consider their dependence.

Fourth, the importance of communities outside formal institutions. As Peter Singer has noted, the Ukrainians have provided something of masterclass in strategic communications and activities, from formally applying for EU membership to videos of grandmothers offering sunflower seeds to Russian soldiers. Normal government approaches aren’t well suited to the irreverence and spontaneity of a fast-moving social media environment.

Fifth, Australia’s formal institutions need to show coordination, imagination, active engagement and transparency—much as the UK and US governments demonstrated with the release of intelligence analysis. In a competition with closed, authoritarian states, transparency, adherence to democratic values and support of human rights and liberties offer the best counter.

Despite the tragedy unfolding in Ukraine, we should not forget that the main game remains China; the one clear beneficiary of the invasion is the Chinese Communist Party. We should take care to understand the nature of cyber and information warfare in this conflict, not least to better prepare ourselves for increased pressure in the grey zone.

It’s still early days in the Russian invasion of Ukraine, but so far nuclear issues have enjoyed a much higher profile than might have been expected. A strategic missile exercise formed part of the lead-up to the invasion. And when first launching the military operation last Thursday, Putin warned darkly that any country that stood in Russia’s way would suffer ‘consequences that you have never encountered in your history’.

Since then, we’ve had statements that allege the invasion was motivated in part by a concern that Ukraine was a proliferation threat. We’ve had a Russian spokesman say that the reason Chernobyl was seized so early in the campaign was to deny Ukraine the option of making a ‘dirty’ bomb. And we’ve had voters in Belarus—in a disputed referendum—renounce the anti-nuclear clause in its constitution, opening up the possible deployment of Russian nuclear weapons there.

Perhaps most worryingly, on Sunday Putin instructed his defence minister and chief of the general staff to raise the alert level of Russian deterrence forces by putting them on a ‘special regime of combat duty’. It’s not clear what he meant. US defence officials observed that this was not a term of operational art with which they were familiar and stated that they had seen no subsequent ‘muscle movement’ in the status of the Russian nuclear arsenal.

The Russian ministry of defence confirmed on Monday that its nuclear missile forces and the Northern and Pacific fleets had been placed on ‘enhanced’ combat duty. Some reports spoke of Russia boosting staff at its nuclear sites—which might mean that all leave has been cancelled.

All of this has made for a hectic time in the world of nuclear strategists. Nuclear signalling is woven through the invasion of Ukraine in a way we haven’t seen since the days of the Cuban missile crisis. Naturally, it has fed a wave of speculation on social media about the potential crossing of the nuclear threshold, either deliberately or inadvertently.

In early June 2020, Russia published an official outline of the principles underpinning Russian nuclear deterrence. (The online English translation seems currently inaccessible, perhaps as a result of the attack by the group called Anonymous against Russian governmental internet sites, but a quick summary can be found here.) The document lists four instances in which Russia might resort to use of nuclear weapons:

• in response to the use of nuclear and other types of weapons of mass destruction against it and/or its allies
• in the event of aggression against the Russian Federation with the use of conventional weapons when the very existence of the state is in jeopardy
• when there is reliable data on a launch of ballistic missiles attacking the territory of the Russian Federation and/or its allies
• in the event of an attack by an adversary against critical governmental or military sites of the Russian Federation, disruption of which would undermine nuclear forces’ response options.

Some of Putin’s comments suggest an effort to make out a case under the second of those provisions. That’s a stretch. The transfer to Ukraine of lethal conventional military equipment from NATO members and other countries, at a time when a daunting array of sanctions are hitting the regime and its supporters, certainly isn’t seen in Washington, European capitals, or Canberra, as ‘aggression’ jeopardising the ‘very existence’ of the Russian state. True, some commentators do see those actions as jeopardising the future of Putin’s regime, but most see them simply as incentives for Moscow to change course in relation to its intended subjugation of Ukraine.

Still, Putin’s behaviour has been more than a little odd lately—including his apparent fascination with long-distance seating arrangements. Driven by a long list of perceived grievances, a burning ambition to recreate Greater Russia, and wounded pride, Putin might well see his own role in more sweeping historical terms.

That means, of course, that escalation is still more likely than de-escalation. Might that escalation involve nuclear weapons? Yes. But, from the Cold War days, Western intelligence probably still has available to it a good-sized list of warning indicators for imminent nuclear use. I don’t think we’re close to that.

And remember that Putin has a range of other, more likely, options. Those include a more vigorous prosecution of his current strategy—the toppling of the current government in Kiev, the installation of a more compliant regime in its place, and the gradual incorporation of Ukraine back under Moscow’s control. Easier said than done, certainly, but Moscow has form in that regard. He might also choose to strike—with conventional weapons—at the supply lines through which military equipment is finding its way into Ukraine. Or he might have in mind a more distant target set, again without necessarily resorting to nuclear weapons.

Strategic deterrence today doesn’t turn merely upon the old division of weapons into the conventional and the nuclear. Conflict has become multi-domain. Long-range precision-strike conventional weapons, options in the cyber realm, and space and counterspace weaponry are all possibilities.

In short, nuclear weapons have so far played a larger role in the crisis than expected—but there are still many paths forward.

While the battle for Kyiv rages, the economic war between Russia and the nations of the West has barely begun.

The US, the EU and their allies are concentrating their economic attacks on Russia’s financial system while exempting the energy sector.

Russian President Vladimir Putin’s initial response to what he termed ‘illegitimate Western sanctions’ of putting nuclear forces on high alert effectively threatens world war.

If he pulls back from that brink, Putin is likely to exploit European dependence on Russian energy supplies to retaliate.

The financial and energy battlegrounds carry the most obvious risks for the global economy, but other, less obvious, economic threats lurk in the shadows, among them the dependence of microchip manufacturers on rare gasses sourced from Ukraine.

After several days of prevarication, Western powers announced that sanctions would be applied against the Russian central bank and that ‘selected’ Russian banks would be ejected from SWIFT, the secure global financial communications network used by the world’s banks for their international transactions.

The decision to sanction the central bank is stunning: on the eve of its invasion, Russia held US$643 billion in international reserves, the fourth largest in the world behind China, Japan and Switzerland.

Credit Suisse analyst Zoltan Pozsar told Bloomberg that about US$300 billion of that was held offshore. He estimates that about half is held in US dollars. There would also be a large holding of euros.

The joint statement on sanctions by the US, the EU, the UK, France, Germany, Italy and Canada did not detail how comprehensive the restrictions on dealing with the Russian central bank would be but said they would be designed to ‘prevent the Russian Central Bank from deploying its international reserves in ways that undermine the impact of our sanctions’.

When the Trump administration sanctioned the Iranian central bank in 2019, it placed it on the ‘specially designated nationals’ list, which meant that not only was the central bank banned from dealing in US dollars, but so too was any organisation around the world that transacted with it.

The Credit Suisse analyst said the freezing of Russian funds held offshore would have a destabilising impact on world financial markets, pushing the margin between borrowing and lending rates higher.

It will make it difficult for Russia to defend its currency, which could suffer a sharp depreciation, pushing up prices and forcing interest rate increases.

Russia would likely characterise moves to freeze its foreign exchange reserves as theft—the country sold down its holdings of US Treasury bonds in 2018 precisely to avoid such sequestration.

China, which still holds a third of its US$3.3 trillion foreign exchange reserves in US Treasury bonds, would be shocked by any freezing of Russia’s reserves. The financial ructions that would be caused by the Chinese quitting their Treasury bond holdings have often been the topic of speculation. Any such move would come at great cost to China, whose interest is in a stable global economy, but Chinese authorities would doubtless be considering their options.

If the Russian central bank is put on the US specially designated nationals list, it would be difficult for China to provide financial assistance because it would risk being sanctioned. China largely abided by US sanctions on Iran.

The G7 leaders didn’t specify which Russian banks would be ejected from the SWIFT network; however, it’s assumed they won’t include the institutions that European nations need in order to pay for their Russian oil and gas imports.

A note from the German statistics bureau last week estimated that Germany alone spent €19 billion ($A30 billion) on Russian oil and gas last year.

US President Joe Biden said the toughened sanctions package was designed to enable energy payments to continue. ‘We are closely monitoring energy supplies for any disruption,’ he said.

There are echoes here of the early 1970s, when a burst of inflation, which started with excessively easy monetary policy, was pushed far higher by the 1973 OPEC oil embargo that followed the Yom Kippur War.

Facing congressional elections later this year, the Biden administration desperately wants to avoid an energy crisis. However, provoking such a crisis is Russia’s most obvious means of retaliation for Western sanctions.

When Germany cancelled the certification of the huge Nord Stream 2 gas pipeline from Russia last week, former Russian president and chair of the Russian Security Council Dmitry Medvedev tweeted, ‘Welcome to the new world, in which Europeans will soon pay €2,000 euros per 1,000 cubic meters of natural gas!’

In fact, Europeans were paying €2,200 euros, or double the rate of the previous week, by last Tuesday as markets conjured the implications of losing a third of the EU’s gas supplies. The oil price spiked to US$106 a barrel, the highest level in eight years.

Russia has leverage because energy markets are already tight—all fossil fuels are in short supply because investment in the energy sector has been so weak over the past two years amid the pandemic and concern about climate-change abatement policies. It would not take much of a cut from Russia, which is the world’s third biggest oil producer and the largest exporter of gas, to send oil and gas prices spiralling higher. Markets are already talking about US$150 a barrel for oil.

The last time prices approached that level was in 2008 as Russia was preparing its invasion of Georgia.

Until early this year, many central banks, including the Reserve Bank of Australia, were viewing rising inflationary pressure as a ‘transitory’ response to supply pressures, but an energy crisis would cement it, raising the risk of 1970s-style ‘stagflation’ with both rising unemployment and rising prices.

While instability in financial and energy markets is the most obvious global economic risk from the crisis, there will be other disruptions. Russia is the biggest source of wheat exports globally, while Ukraine ranks fifth, just ahead of Australia. If Russia gains control of Ukraine, it will control up to 30% of global wheat exports. Like many commodities, wheat was already in short supply with fast rising prices before Russia invaded. It’s not clear whether the Western nations will exempt wheat sales from their sanctions, as they have with oil and gas.

Russia is also an important exporter of aluminium, nickel, titanium and palladium—all metals with crucial high-tech applications—and, along with Ukraine, is a major supplier of gasses used in the manufacture of microchips.

While neither Russia nor Ukraine is deeply integrated into global value chains in the way major Western and Asian economies are, both are advanced nations with links to the rest of the world that can only be broken at a cost to both themselves and the global economy.

The world is not enduring a ‘Ukraine crisis’, but rather a Russia crisis. So said Germany’s new foreign minister, Annalena Baerbock, at the most recent Munich Security Conference, which was dominated by the situation in eastern Europe.

In fact, Russia’s crisis goes even deeper than Baerbock probably meant. We are witnessing the latest instalment in a longer process. Russia is trying to decide whether it is a nation-state or an aspiring empire, and until that fundamental question is resolved, conflicts like the one over Ukraine will continue in various forms.

On paper, the Soviet Union was a multinational federation of republics. In reality, Russians were solidly in command of a tightly controlled regime headed by the Communist Party. One reason for the Soviet collapse was that many of its constituent republics had become aspiring nation-states, or, as with the Baltic republics, sought to recover their independence. The single most important factor was Ukraine’s December 1991 referendum, in which an overwhelming majority voted for independence. But Russian President Boris Yeltsin’s behind-the-scenes efforts to assert Russia’s own sovereignty were also important.

At the time, Soviet President Mikhail Gorbachev was still struggling to preserve certain state structures, and he responded with hostility to the three Baltic republics’ expressed aspirations. But he was undercut by Yeltsin, who had recognised the independence of Estonia, Latvia and Lithuania even before the Ukrainian referendum.

That was the start of today’s Russia crisis, fuelled by the conflict between building a modern state and economy, on the one hand, and indulging imperial nostalgia, on the other. As a result, Russia’s economic and political modernisation has been hampered, and its neighbours’ security has been in doubt.

The best way for Russia to guarantee its own security would be to foster friendly relations with its neighbours, so that they can feel secure and stable themselves. But it has not done that, and now a growing number of Ukrainians want to join NATO. Unrealistic as that seems, they recognise that their own national aspirations are directly threatened by Russian imperial revanchism.

In an infamous essay published last July, Russian President Vladimir Putin articulated his vision of a great Slavic empire, harking back to 19-century tsarist rule, rather than to the Soviet Union. Sensing an opportunity to promote that vision, he engineered the current crisis.

But Putin’s machinations are nothing new. In 2014, he annexed Crimea and launched an incursion into eastern Ukraine’s Donbas region because he wanted to prevent Ukraine from seeking closer ties with the European Union. Even though that would not have impaired Ukrainian cooperation with Russia or threatened Russian security, such developments ran counter to Putin’s quasi-imperialist dream.

Putin took his fantasy to a new extreme in his recent speech announcing that Russia would recognise the independence of the two breakaway Donbas regions that it has backed since 2014. Putin openly questioned the existence of a Ukrainian nation and insisted that Ukraine is a ‘historically Russian land’. Although there was a Kyivan Rus state long before any Russia had appeared, Putin attributes the emergence of a Ukrainian state to Lenin and the Bolsheviks.

The irony of this history-driven strategy is that if one were to survey the Europe of a thousand years ago, there would be no Russia to speak of. Rudimentary Slavic state structures had begun to emerge in the region stretching from Novgorod to Kyiv, along the old trading routes between the Baltic and Black Seas. But Constantinople was the imperial metropole. What we now call Russia wouldn’t take form until centuries later, following a gradual military expansion in different directions.

To ground imperial ambitions in old national myths is as dangerous in Russia’s case as it is everywhere else. Europe can enjoy peace only if all the borders and boundaries that history has produced (usually through bloodshed) are fully respected. Russia ought to have learned to live harmoniously with its neighbours by now. Following the Sino-Soviet split, the Soviet Union had vast military forces stationed along its border with China, and violent conflict erupted for seven months in 1969. But the two countries de-escalated, and now both are better off for it.

To be sure, the road to establishing the same kind of relationship between Russia and Ukraine is much longer. Putin’s behaviour has understandably left Ukrainians sceptical of Russia, if not hostile towards it. Unless Russia refocuses on building its future solely within its own borders, the region will remain under a cloud of insecurity, ultimately to Russia’s detriment.

I still remember a conversation I had decades ago with former German Chancellor Helmut Kohl, a statesman well versed in European history. Discussing Luxembourg, he noted that Germany was secure because even its smallest neighbour saw it as a close friend. Germany has come to terms with its past. Russia has not. Until it does, all of Europe, but especially Russia itself, will continue to suffer.