When faced with bad choices, we have to opt for the least bad one, even if this means to U-turn, or to admit tacitly that it was our own, miscalculating stance which has brought us to this point in the first place. A good start is to eat one’s words and to compromise.

A compromise is not about putting right where one has been wronged, or to enjoy being right, but to take a calamitous situation at face value and start from scratch. This means to be honest and accept painful trade-offs.

In the war in Ukraine the political will to choose any incrementally better outcome is lacking. I have written here several times in much detail how we have arrived in this mess in the first place, starting some 30 years ago when the Soviet Union disintegrated. This is spilled milk now. We cannot turn back the clock.

Shocked by Putin’s brazen invasion and cheered by Russia’s dilettantish opening moves on Kharkov and Kiev, we planned for maximalist victory in battle and the destruction of the Russian economy.

We imposed crippling export and import sanctions and dabbled in financial exclusion. Half of Russia’s foreign currency reserves were frozen and its banks excluded from SWIFT communication. Sort of to guarantee the flow of gas, we exempted Gasprombank and others, and prepared ourselves to pay in roubles. Quite in vain, as Russia itself throttles the gas tabs.

Meanwhile we ramped up armament of Ukraine while counting the days until total victory. We tightened sanctions to ever more complicated levels, convinced of the implosion Russia’s economy. As we should have admitted by now, both victory on the battlefield and in the realm of economy have been postponed indefinitely.

The reasons are manifold as are our strategic mistakes. But essentially, we are faced with an adversary who we do not wish to challenge too much and who is too wealthy and economically too well-connected to be sufficiently impoverished to change her mind.

Embargoes are ill-suited in principle to alter political behaviour. They are designed to punish, not to motivate. We have not managed, even with similarly crippling tactics, to force Iran or North Korea to our will. And over time, sanctions will become ever more porous. The more so when China, the world’s second-most powerful economy, comes to the aid, followed by Turkey and India.

Any additional pain we intend to inflict will have diminishing returns. More and more deadly weapons delivered to Ukraine cannot make up for its disadvantage in manpower. Russia’s advance can be retarded, some of its gains may even be reversed, but it will not be enough for a triumphant, all-out re-conquest. In the meantime, Russia’s time-proven naturalisation of territorial gains will continue.

This is why the US has changed the message of its war aim: “We want to see Russia weakened to the degree that it cannot do the kind of things that it has done in invading Ukraine” (Lloyd J. Austin III, US secretary of defence). Victory is not on the cards anymore, yet neither is the end of war.

The idea of crippling Russia will not go down well even with Russians opposed to Putin’s regime and the war. In the same manner, a general travel ban, as demanded now for all Russian tourists, will only nurture Putin’s narrative that the West is just hell-bent to demean Russia.

While we damage Russia, we damage ourselves too- Andreas Weitzer

For the record: Putin’s designs for a Great Russia are dangerous well beyond Ukraine. This is why wishing to tame his appetite is legitimate. Yet to hope that this can be achieved with a never-ending conflict in Ukraine is not only illusory but cynical.

Ukraine and its economy will be crippled beyond repair and people will die in vain. Besides, the public declaration of such war aims, even if harboured secretly, are strategically as harmful as Biden’s “Putin cannot remain in power” gaffe.

In the meantime, the Russian economy has weathered sanctions well. The rouble exchange rate has improved beyond pre-war levels and energy trade has not only made up for the losses of its frozen foreign currency reserves but are making Russia wealthier by the day.

Import embargoes may lessen the long-term prospects of its oil and gas industry and its manufacturers, yet as we are substituting Russian gas at enormous, time-consuming cost, so will Russia find replacement for embargoed parts and technology. While we damage Russia, we damage ourselves too.

There’s no hope for energy inflation to subside any time soon, particularly in Europe, so ill-connected to energy world markets and so highly dependent to Russian supplies.

This means four things: 1) energy-intensive or natural gas dependent industries, like aluminium smelters, electricity generators, fertilizer producers and as a consequence agriculture will become economically unviable; 2) small-margin businesses with a huge heating bill, like hotels and restaurants, will go bust; 3) households already made poorer by the recent bout in inflation all over Europe will have to decide if they want to eat or heat their homes; 4) central banks and governments shocked by the impoverishing effects of inflation will have to concede that we all are at war, and that our economies are on a war-footing too.

Malta, as I have pointed out previously, has weathered the energy crisis and the ensuing inflation somewhat better, if by sheer happenstance. While continental Europe could for decades enjoy ever-cheaper spot-market prices, we had entered into a terribly expensive long-term contract for LNG with Azeri SOCAR, which bought gas on-the-spot market and sold it at triple the price to us.

This – if ill-intentioned – move cushions us until next year from exploding energy prices in Europe. Yet, already now, the government has decided to support all and sundry with massive subsidies it can ill-afford, putting face-saving politics ahead of good policies. 

The problem facing the Bank of England and the ECB is that the inflationary shocks are both imported  hence unpreventable  – as well as pervasive: high energy prices will penetrate all sectors of the economy. We are confronted with an unprecedented loss of prosperity, not only through an inflation-induced depletion of purchasing power, but also through inflation-boosted higher taxes and shrinking savings.

Governments cannot stand by and watch as whole swathes of the populace drift into poverty. They will have to react with a mix of tax reliefs, transfer payments and costly price caps. This will lead to unsustainable budget deficits and worsening, inflation-importing terms of trade as exchange rates deteriorate.

In the end, it will render all attempts to lower inflation by monetary tightening futile, as governments will have to pump ever more borrowed money into an already stagnating economy.

As for our investments, well, there’s not much we can do. Only luxury goods and consumer staples will hold up well. The spectre of stagflation rears its head.

Andreas Weitzer is an independent journalist based in Malta.

The purpose of this column is to broaden readers’ general  financial knowledge and it should not be interpreted as presenting investment advice, or advice on the buying and selling of financial products.

andreas.weitzer@timesofmalta.com