Energy, Food, and War in Eastern Europe

The world will lose 5 million barrels per day of Eurasian crude and between 5-10 billion cubic feet of natural gas to Europe within the next few weeks due to the Russia-Ukraine conflict and insurance/shipper refusal to enter conflict zones.

“we're going to lose 5 million barrels per day of earl's euros crude within the next few weeks and somewhere between 5 and 10 bcf of natural gas going to europe”

A global recession is now baked in due to the combination of rising food and energy prices, tightening financial conditions, and de-platforming of Russian commerce; the 2-10 basis point swap curve indicates severe tightening and signals recession is likely.

“it's in the bag at this point”

China faces a complete food cycle collapse because: (1) African swine fever killed more hogs in China 3 years ago than exist in the world's total commercial farms, (2) China is trying to rebuild herds but the rebuilding workforce has no farming experience and has never eliminated the disease, (3) as a result, when herd size reaches tens of millions, there won't be enough fodder, (4) China has been buying inappropriate food (broken rice from India, croissant-grade wheat from France) to supplement globally, (5) this is all wasted because the disease was never eradicated, (6) therefore China has decided only rice production is guaranteeable and has seized all phosphate from the global market, creating a global phosphate shortage and forcing the world into a mono-food system while China faces collapse.

“three years ago the chinese were infected with african swine fever and they ended up killing culling more of their hogs than the world's commercial farms have they're now trying to rebuild it but almost all the people who came in to rebuild have no experience in farming and they have never gotten rid of african swine fever so when you want to build up a herd of hogs that are in the tens of the millions there isn't enough fodder so what the chinese have been doing is buying food from everywhere even things that are wildly inappropriate not just corn from iowa but broken rice from india and even food grade wheat like croissant grade wheat from france anything they can find that's what's drawn everything down and it's all going to be wasted because they never got rid of the disease in the first place so the chinese have decided that all that is left the only thing they can guarantee is rice so they've pulled all the phosphate off the market phosphate that the rest of the world needs for other fertilizer so we're going onto a mono food system in the world's single largest population with an economy that is dependent upon globalization and globalization is going away there's no way this ends well for the chinese”

Russia will eventually need to control Moldova, Romania, Poland, Estonia, and Lithuania in addition to Ukraine to achieve full gateway security; the question is whether Russia can accomplish this given current military performance and sanctions pressure—Zeihan believes it will take longer but is achievable as long as Russia remains focused.

“does that seem like an achievable goal given the performance we've seen of his military and the fact that sanctions and are tightening around him”

Sanctions against Russia surprised everyone, including Putin and Zeihan himself; Western (particularly European) sanctions response was much faster and more severe than expected, limiting Putin's flexibility.

“the sanctions did surprise him the sanctions surprised me i think the sanctions have surprised everyone i don't think anyone thought the europeans were gonna get this stiff back so quickly and he was certainly thinking that he was gonna have more time and more flexibility”

The post-WWII US guarantee that 'geography no longer exists' and the US would protect everyone and enable free trade was designed to buy an alliance against the Soviet Union during the Cold War; that Cold War ended 30 years ago, and in the last eight US presidential elections, voters have consistently chosen candidates wanting to move away from free trade and globalization.

“when world war ii ended the united states told everyone that geography no longer exists we're going to protect everyone we're going to allow for trade among everyone and that is what gave us free trade in the world that we know but we did that to buy up an alliance to fight the cold war cold war in it 30 years ago we've been edging away ever since and in the last eight presidential elections we voted for the guy who wanted to move away from free trade and globalization the exception of course is this last one where there was not a pro-free trader running”

Russia has undersea pipeline infrastructure to Europe that cannot be disrupted (no insurance or shipper requirements like surface exports), and these pipelines will be the last to go offline; Russia will use this to directly pressure Berlin and Ankara with the threat of cutting lights while everyone else is 'screwed,' leveraging this as political coercion to make NATO non-functional.

“if you look at the pipeline infrastructure going from russia to europe there are a couple of undersea pipelines that no one can disrupt that you don't have to get insurance from you don't have to worry about a shipper or a ukrainian sapper they're going to be the last ones to go and the only way they'll go is if the turks and the germans directly sanction those projects that's the only weak point they have so we're going to be moving into an era here within a month where the russians can directly and accurately go to berlin and go to ankara and say look we can leave the lights on for you but everyone else is screwed there's a price of course and that's making sure that nato can't function”

China's centrally controlled economy does not actually have more effective tools to manage this crisis than other systems; Xi Jinping has become so paranoid and insular that he has killed the messenger repeatedly, so bureaucrats are afraid to bring him bad news, causing cascading policy failures (e.g., power outages that started in May but were not addressed in policy until February, a 9-month delay).

“i'm not sure that they do have the tools anymore they might have them on paper they might actually have the policies in place they may even have the infrastructure but one of the things we've learned about g in the last year is he's become so paranoid in insular and he's literally shot the messenger so many times that no one wants to bring him bad news so i think the best example of that manifesting his policy is the power outages that started last may best guess he didn't find out about them until september we didn't get our first real policy to deal with them until two weeks ago and if you've got a one-man shop a cult of personality and the bureaucrats are afraid to bring clashing policy priorities back to the boss the whole thing breaks down”

Russia is experiencing a second wave of outmigration: in the 1990s, Russia lost 2-10 million people to outward migration; now, a second wave is occurring as young people (20s) who grew up under Putin see the stability and economic growth they thought Putin provided dissolving in days and are leaving the country, taking irreplaceable skills with them; this is a bigger threat to Russia than war deaths because the Russian education system collapsed in the 1980s and was never reformed, making these people irreplaceable.

“the bigger problem overall is that uh is the out migration in the 1990s based on whose numbers you're looking the russians lost between two and 10 million people to outward migration we're now having a second wave everyone who grew up under putin who is now in their 20s are seeing everything that they thought that putin gave them in terms of stability and economic growth dissolve in literally days and anyone who can get out is getting out and they're taking their skills with them and the russian educational system really collapsed in mass back in the 80s and was never reformed so these people these people are irreplaceable”

Between the shale revolution, COVID, populism, and anti-trade policies (Trump and Biden), manufacturing has become as cheap in North America as in East Asia; the only barrier is building new industrial plant capacity, which takes years; the US is now undergoing its fastest industrialization ever—faster than WWII—and is drawing a thick line between the North American system and the China-centric system.

“between the shale revolution covid populism anti-trade trump biden all of that combined there is now not a manufacturing process in east asia that can be done more cheaply than its equivalent in north america you just have to build the industrial plant first and i realized just uh that takes years based on the sector so the u.s right now is going through its fastest industrialization ever even faster than what we did during world war ii and this is only going to accelerate that entire process as we basically draw a big thick line between the north american system and this china-centric system”

Demographics determine economic behavior: people in their 20s-30s have children and consume; people in their 40s-50s are high-productivity savers; people in their 60s+ are retirees. Russia and many other countries now have more people in their 60s than in their 50s, 40s, 30s, and teens combined, which explains the timing of Putin's invasion—Russia knows its military capacity will only decline as demographics worsen.

“piece two is demography everything that you do is determined by your age when you're 20 years in your 30s you're having kids when you're 50s you're saving for retirement well the whole world has aged as we urbanized and industrialized under globalization well 70 years from 70 years on we now have a number of countries russia included that has more people in their 60s than their 50s than their 40s than their 30s and their teens so the return to geography explains the why of what russia is doing and its collapsing demography explains the why now if they don't do it now they'll never be able to”

Until World War II, geography determined economic success—countries needed access to strategic points and fortified borders; Russia has nine gateways to its territory and has been invaded through them 50 times, which is why Putin is now attempting to plug those gateways by controlling Ukraine and neighboring regions.

“until world war ii geography was with determined economic success you had to have access to certain points you had to fortify your borders in certain ways like behind mountains in the case of russia specifically they've got nine gateways to their territories and they've been invaded through them 50 times so what putin's trying to do right now is plug the gateways”

Russia conducts lightning-strike military operations ('thunder runs') with the intention of getting lucky (i.e., capturing cities like Kiev in one go); when these fail, Russia reverts to its standard doctrine of heavy artillery and house-to-house combat until cities are obliterated, which takes 1-6 months per city and is followed by insurgency management.

“they did what they call some thunder runs thinking they might get lucky on kiev that failed they're now fighting this russian style with heavy artillery until the city is leveled they're going to do that over and over again it's going to take them over a month probably no more than six though then there'll be an insurgency”

Zeihan's second book, 'The Absent Superpower,' contains a chapter called 'The Twilight War' predicting Russia's invasion of Ukraine and forecasting the next five countries Russia will invade (Moldova, Romania, Poland, Estonia, Lithuania) in sequence to secure all nine gateways.

“in my second book the absence superpower there's a whole chapter called the twilight war on russia doing exactly this as well as the next five countries that he's going to invade which i think we can look forward to later this year”

There are two distinct groups of Russian oligarchs: (1) those who stole in the 1990s and were tamed by Putin in the early 2000s; some have reformed and are now anti-war; going after their assets is justified and faces no blowback. (2) The 'silovarchs'—people who came up with Putin from the security apparatus and seized assets later—who are economically incompetent; going after their assets is also justified and desirable.

“two groups of oligarchs you've got the ones that stole from russia in the 1990s putin tamed all of those in the first half of the 2000s and some of them are now the ones that are saying things against the war from outside of russia uh going after their assets is all well and good they started as crooks some of them kind of reform themselves that's a personal or political preference i don't think there'd be any blow back from going after those guys the second group are called the sylvarks they're people who came up with putin from the security apparatus who then have seized other things they are absolutely economically incompetent and i heartily encourage everybody goes after those people's things”

If NATO policy remains in place (assuming Russian attempts to split Turkey and Germany succeed), Americans would be unlikely to defend Poland or the Baltics because the US needs base access in Turkey and Germany to forward-project; violence against Poland and the Baltic states would be significantly worse than Ukraine, with deliberate destruction of civilian infrastructure (similar to Grozny post-WWII).

“assuming for the moment that the russian gambit to split off turkey and germany works because if it doesn't then nato is a very different place but let's assume that that works in that specific scenario the americans would be unlikely to function because they need those bases in turkey and germany in order to forward projected to these countries however if we get to that point i think that the violence would be significantly worse and the damage to civilian infrastructure wouldn't be incidental it would be very deliberate the russians have been agitating against these countries since the soviet union fell and while there are a lot of people in russia who see ukrainians as brothers and sisters and cousins there is no one in russia who's like oh yeah i just want to go and hug a pole so just the obliteration level of artillery use that we would see in places like warsaw and riga we really have not seen that anywhere in the world except grozny since world war ii”

Putin's rhetoric regarding various nations over the past week is not new—he has used similar language before (notably regarding Chechens in the early 2000s), suggesting his current justifications for military action follow established patterns rather than representing a sudden ideological shift.

“all the rhetoric that he has used in the last week he has used before it's just been a while uh he had some rather colorful things to say about the chechens when he first became president back in the early 2000s”

The Ukrainian government and military are performing better than expected militarily; there is no reason to believe Ukraine will fall within one month; resistance is more organized than initial expectations.

“nobody expected ukraine to fall within a month”

Political unrest and food riots are now 'baked in' across the Middle East due to wheat prices potentially quadrupling globally; in regions more exposed to Russia and Ukraine as food sources, price increases will be 'significantly worse' than the global average; this will trigger political upheaval exceeding the Arab Spring.

“the price of wheat between now and the end of year the year is going to quadruple the reference that jacob made about what happened in the middle east was when in one region it tripled we're talking a global quadrupling in the places that are more exposed to these producers it'll be significantly worse so yes some degree of political unrest that is significantly worse than anything that we've seen with the arab spring is baked in now for the entirety of the middle east”

Without the Iran nuclear deal and with civil war in Libya, there are no alternative oil sources available to replace Russian Urals crude; this creates a scenario with no upper limit on oil prices absent political intervention.

“if let's say you don't get the iran nuclear deal the civil war in libya kicks off and then nobody wants to buy russian oil i don't i mean is there an upper limit on how high oil can get we haven't been in a situation like that um at least in 73 and maybe that wasn't even the perfect analogy”

India is slowing its demographic growth but has decades of growth ahead, unlike China; Africa is highly vulnerable to supply chain breakdown because it imports most inputs needed for modern life, so if global supply chains break down, many African countries will dissolve.

“india is more like mexico and that it's slowed down but there's still decades left ahead of them the problem with africa is that they are such a huge importer of all the things that is necessary to maintain modern life most notably agriculture that if you break down global supply chains a lot of these countries are going to dissolve”

Latin America is in a good position because it industrialized and urbanized late; most Latin American countries have healthy demographics; Venezuela is an exception and has committed 'suicide' as a state.

“latin america is a pretty good spot they've industrialized a little late and they've urbanized even later but as a rule they're kind of like a step behind mexico in terms of the health of their demography there there's no country in latin america that i'm overly concerned about except for of course venezuela which has committed suicide”

Russia's military performance in Ukraine on day 8 is consistent with Russian doctrine (heavy artillery, house-to-house combat), not evidence of failure; the Russian plan was never to capture Kiev in one month, and from the Russian point of view, the campaign is 'par for the course' despite not being 'all sunshine and chocolate.'

“we're on day eight uh nobody expected ukraine to fall within a month they did what they call some thunder runs thinking they might get lucky on kiev that failed they're now fighting this russian style with heavy artillery until the city is leveled they're going to do that over and over again it's going to take them over a month probably no more than six though then there'll be an insurgency the russians know how to deal with that as well so from the russian point of view sure this hasn't been all sunshine and chocolate but it's kind of par for the course for how they fight wars”