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What continued war is really buying: higher carry, thinner stockpiles, fractured payment rails, and slower trade
I. The LNG Trade: Windfall, Normalisation, and the Damage That Remains
The clearest beneficiary of the Ukraine war, in commodity terms, was the US liquefied natural gas export complex. For approximately eighteen months, the spread between European and American gas prices was so wide that the economics required no particular analysis to act on. European TTF peaked at €340/MWh in August 2022 against a Henry Hub below $9/MMBtu. That trade has normalised. What deserves attention is what it left behind.
European utilities and national gas companies, operating under acute political pressure, signed long-term US LNG offtake agreements at or near peak pricing. The 20-year take-or-pay structures now embedded in those contracts are increasingly underwater against current TTF in the €35–42/MWh range. Several European offtakers are understood to be in informal price review discussions with US counterparties — conversations that will be coloured by the geopolitical temperature in Eastern Europe for years to come.
The implications for Malaysia's Bintulu LNG complex and the broader Asia-Pacific market deserve direct treatment. The JKM-TTF spread that Asian producers briefly enjoyed has largely compressed. JKM has settled in the $12–15/MMBtu range, well below the $35–45 peaks of 2022. The contracted positions held by Petronas and other Asian producers are largely protected; the spot exposure is less comfortable. The war-premium era in LNG pricing was a loan, not a gift — and the repayment period is now running.
| Benchmark | Pre-War (2021) | Peak (Aug '22) | Current (Q1 '26) | Peace Est. |
|---|---|---|---|---|
| TTF Front Month (€/MWh) | 22 | 340 | 39 | 27–32 |
| TTF–HH Spread ($/MMBtu equiv.) | 4.1 | 68.0 | 7.8 | 5.2–6.5 |
| JKM Asia Spot ($/MMBtu) | 17.8 | 54.2 | 13.4 | 11–14 |
| European LNG terminal utilisation | 51% | — | 63% | 54–58% |
| US LNG Export Volume (Bcf/d) | 9.6 | 13.2 | 14.9 | 14.9* |
| * Take-or-pay volumes persist regardless of geopolitical resolution. Sources: EIA, ICE, S&P Global Commodity Insights. Estimates indicative. | ||||
The more consequential damage is to European industrial competitiveness. German chemical sector output fell an estimated 15% in volume terms in 2022–23. BASF accelerated its Zhanjiang investment programme — the largest single private industrial project in Chinese history — explicitly citing European energy cost disadvantage. That migration has a long tail and does not reverse when gas prices fall.
II. The Defence Ramp: What the Production Data Show
The conventional reading — that the wars have forced a salutary expansion of US defence industrial capacity — deserves examination, because the data support a different conclusion: the wars have exposed absence of capacity while actively depleting the stocks a Taiwan contingency would require.
Pre-2022 US 155mm production ran to approximately 14,000 rounds per month. The Army contracted for a ramp to 100,000/month by end-2025, requiring the reopening of mothballed lines, qualification of new propellant suppliers, and sourcing of forged steel casings from a domestic supply chain hollowed out over thirty years. Current output is estimated at 45,000–55,000 rounds/month.
The unit economics are equally instructive. M795 HE shells that cost approximately $800 pre-conflict now run at an estimated $1,800–2,200 — the cost structure of an industry being asked to sprint after two decades at a walk. Historical evidence from post-Vietnam and post-Gulf War production drawdowns suggests that durable capacity additions from conflict-driven ramps are partial and often lost within a procurement cycle after the demand signal fades.
| Article | Unit Cost 2021 | Unit Cost 2025 Est. | Cost Δ | Backlog |
|---|---|---|---|---|
| 155mm M795 HE Shell | $800 | $2,100 | +163% | 18–24 mo. |
| Patriot PAC-3 CRI Interceptor | $4.1M | $5.9M | +44% | 36–48 mo. |
| HIMARS GMLRS Rocket | $168K | $215K | +28% | 24–30 mo. |
| Stinger MANPADS | $38K | $53K | +39% | 30–42 mo. |
| M1A2 Abrams MBT | $8.9M | $10.8M | +21% | ~36 mo. |
| Sources: CSIS Defence Industrial Base Project; CBO; SASC testimony Jan 2026. Estimates subject to revision. | ||||
The interceptor exchange ratio deserves direct attention from every ASEAN defence ministry currently pricing its air defence requirements. A Patriot PAC-3 costs approximately $5.9M. The Iranian-supplied ballistic missiles it engages cost $10,000–100,000. The Shahed-136 drones running in Ukraine — whose design has proliferated across multiple regional actors — cost roughly $20,000 per unit. Adversaries have read this cost curve and written it into operational doctrine. Any ASEAN procurement planner taking US supply chain availability at face value is working from assumptions the current data do not support.
III. Critical Material Flows: The Supply Chain Analysis That Wasn't Done
Ukraine produces approximately 65–70% of global neon gas, used in the excimer lasers that drive semiconductor lithography. This was documented before February 2022, priced into supply chain risk models as negligible, and industrially invisible until it wasn't. Neon spot prices rose approximately tenfold in the six weeks following the invasion before South Korean and Chinese alternative sourcing began to compress the spike.
Neon gas (Ukraine, ~68% global share): Spot price +900% at peak. Now partially normalised via South Korea / China sourcing at a structural cost premium of 40–60% vs. pre-war baseline. Lead time for fully qualified alternative supply: 12–18 months from disruption.
Titanium sponge (Russia, ~35% aerospace grade): Boeing 787 uses approximately 15% Russian-origin titanium by weight; Airbus A350 similarly. Re-qualification of Japanese and Kazakh sources took 18–24 months at an estimated $800M–1.2bn aggregate procurement premium across the two primes.
Potash and ammonium nitrate (Russia/Belarus, ~40% global): Agricultural input cost inflation of approximately $15–22bn/year globally since 2022. Transmitted through Southeast Asian rice and palm oil economics via fertiliser cost pass-through. Philippine and Indonesian smallholder margins compressed approximately 8–12% during peak disruption.
Black Sea grain (Ukraine, ~12% global wheat, ~15% corn): 2022–23 global wheat prices at 14-year highs. Food import bill shock across MENA, sub-Saharan Africa, and South and Southeast Asia. Political instability externalities — partially visible in the 2023 Sahel cascade — are not in any Western aid appropriation but are present in every ASEAN foreign minister's inbox.
IV. The Fiscal Arithmetic
The United States has authorised approximately $175bn in Ukraine-related assistance and $14–18bn in expedited military aid to Israel since October 2023. Call the total $190bn. This was borrowed. At current rates, it carries a permanent cost.
The reconstruction figure — the one that attracts most political resistance — is not a concession. It is an investment with a return profile. The Marshall Plan disbursed approximately $170bn in today's dollars and built the Western European economic architecture that became America's largest trading partner. The current expenditure is purely consumptive. It generates no compounding asset and leaves no architecture standing when it stops.
We are precise about the deterrence counter-argument because it deserves more rigour than it typically receives. The claim is that maintaining support deters future aggression — making expenditure a form of insurance premium rather than pure consumption. This may be correct. We have not seen it quantified in a way that closes the NPV gap above. Arguments that cannot show their working tend, in our experience, to be arguments that on examination do not quite work.
V. The Payment Architecture Being Built in Plain Sight
The least visible cost of these conflicts — and the most durable — is in the plumbing. The 2022 decision to weaponise the global financial messaging system was rational in isolation and produced structural consequences that extend well beyond Russia, consequences being cemented month by month in regulatory frameworks and technical infrastructure across the developing world.
A widespread misconception deserves clearing up: SWIFT does not move money. Actual payment settlement happens through correspondent banking relationships — chains of accounts between financial institutions, mostly denominated in dollars, mostly clearing through US banks. What SWIFT does is carry the messages that instruct those settlements: who is paying whom, for what, through which intermediaries. This distinction matters because what makes SWIFT powerful as a sanctions instrument is not that it moves money — it is that it generates data. Every SWIFT message is a record of a financial relationship, visible to Western financial intelligence authorities.
Excluding Russia from SWIFT did not prevent Russia from making payments. It made those payments invisible to the Western financial surveillance architecture — and forced them onto alternative channels. The parallel decision to freeze approximately $300bn in Russian sovereign reserves held in Western custodians amplified the signal: assets held within the Western financial system are conditionally safe. The condition is good standing with Washington.
The universe of governments that have reason to consider whether they might one day not be in good standing with Washington is larger than Western analysts typically acknowledge. It includes very large economies with very large reserve portfolios, some of them nominal US partners. The signal was received. What followed was not a panic — it was a procurement decision. Governments began asking, quietly and systematically, how to reduce exposure to a system where a single jurisdiction can freeze their assets or blind their transactions. The answer being built is alternative financial plumbing.
Three systems deserve specific attention:
CIPS (Cross-border Interbank Payment System) is China's equivalent to SWIFT's correspondent banking messaging, launched in 2015 and dramatically accelerated post-2022. By early 2026, CIPS has approximately 1,500 participating institutions across 110 countries. Transaction volumes roughly doubled between 2022 and 2024. CIPS can settle renminbi transactions without generating a SWIFT message — and therefore without that transaction appearing in the data visible to Western financial intelligence.
mBridge (Project mBridge) is the more structurally significant development. Developed with BIS Innovation Hub involvement, and involving the People's Bank of China, Hong Kong Monetary Authority, Bank of Thailand, and Central Bank of the UAE, mBridge allows direct settlement between central bank digital currencies without any correspondent banking intermediary. No SWIFT message. No dollar clearing leg. No US bank involved at any point. Thailand and the UAE are already participating. Saudi Arabia has been in observer status. The platform moved from pilot to minimum viable product phase in 2024.
Project Nexus, the BIS / MAS Singapore initiative linking domestic instant payment systems across ASEAN and South Asia, operates at a different scale — retail and SME cross-border payments. But it is connecting India's UPI, Malaysia's DuitNow, Singapore's PayNow, Thailand's PromptPay, and the Philippines' InstaPay into a single interoperable network. The payment rails built for an Indonesian garment exporter to receive payment from a Malaysian buyer could, in a different geopolitical temperature, carry commodity trade flows that a sanctions regime would prefer to see.
Payment rail fragmentation would be reversible if the regulatory environment permitted unified global financial data architecture. It does not, and increasingly cannot. A set of data localisation laws enacted across major economies over the past five years is cementing fragmentation at a level below the payment system itself — in the data financial institutions must hold, where they must hold it, and with whom they may share it.
China's PIPL (2021) requires data on Chinese entities to be stored on servers within China. India's DPDPA (2023) constructs a similar architecture. Russia mandates domestic storage of financial data on Russian residents. Indonesia, Vietnam and Thailand have moved toward financial data localisation requirements. The EU's GDPR creates its own sovereign data zone. For a global correspondent bank running unified KYC and AML compliance across these jurisdictions, each localisation requirement creates a silo. At some point, for some markets, the compliance cost exceeds the revenue from the correspondent relationship.
When the compliance cost of a correspondent banking relationship exceeds its revenue, global banks exit that relationship. The number of active global correspondent banking relationships peaked around 2013 and has been declining since. The post-2022 acceleration of data localisation requirements has steepened that decline.
The consequence is not abstract. A Cambodian textile exporter seeking a letter of credit finds fewer correspondent banking options, higher fees, and slower settlement. The ADB's trade finance survey documents a persistent global trade finance gap of approximately $2.5 trillion, concentrated in developing Asia and disproportionately affecting SMEs. This is not primarily a capital problem. It is a compliance-cost and data-architecture problem — and the conflicts, by accelerating both sanctions-driven fragmentation and retaliatory data localisation, have made it materially worse. The diffuse costs of geopolitical financial architecture fall on exactly the economies that have the least voice in producing them.
| Indicator | 2019 | 2022 | 2024 | Direction |
|---|---|---|---|---|
| CIPS participating institutions | 763 | 1,304 | ~1,500 | ↑ Accelerating |
| CIPS annual transaction volume | $14.7tn | $22.1tn | ~$30tn est. | ↑ Accelerating |
| Russian oil settled in non-USD currencies | ~2% | ~18% | ~40% | ↑ Structural |
| Global correspondent banking relationships | 180,000 | 163,000 | ~150,000 | ↓ Declining |
| USD share of global FX reserves (IMF COFER) | 60.9% | 58.4% | ~57.4% | ↓ Gradual |
| mBridge: jurisdictions in live operation | 0 | Pilot | 4 (MVP) | ↑ Expanding |
| ASEAN instant payment cross-linkages | 1 | 4 | 7 | ↑ Planned 10+ |
| Sources: SWIFT, CIPS public disclosures, IMF COFER, BIS, S&P Global, Penaga estimates. 2024 figures partially estimated. CIPS volume includes domestic clearing; cross-border subset ~35% of total. | ||||
The critical structural point: this infrastructure does not go away when the wars end. The incentive to maintain payment capacity outside US Treasury visibility — for China, for the Gulf states, for any economy that observed 2022 and updated its risk model — is structural, not situational. The infrastructure, once built and integrated into trade flows, generates its own network effects. Every additional participant makes the alternative system more useful. Every transaction that clears through mBridge is a relationship and a technical integration that persists for the next one.
From where we sit, this observation carries a weight that is difficult to convey in the language of policy analysis. Southeast Asia lived through the 1997–98 financial crisis — shaped by dollar-denominated debt, IMF conditionality, and the speed with which US-intermediated capital abandoned the region when sentiment turned. The memory of that episode has never fully left the region's central banking community. The post-2022 diversification moves are being watched in Kuala Lumpur, Jakarta, and Bangkok with a mixture of professional detachment and something that resembles quiet recognition — the recognition of people who have been through a version of this before and did not enjoy it.
We are not arguing that the dollar system is ending. It is not. We are arguing that its share of global financial activity is declining at the margin, that the pace of that decline has been measurably accelerated by the post-2022 sanctions decisions, and that the infrastructure being built to enable that decline is durable in ways that a diplomatic settlement in Ukraine or Gaza will not reverse. ASEAN central banks have collectively increased non-dollar reserve allocation by an estimated 2–4pp since 2022. That is a quiet but consistent signal from institutions that remember what it cost to be on the wrong side of a dollar-denominated crisis.
VI. Red Sea: The Houthi Tax on Global Trade
The Houthi campaign against Red Sea shipping, initiated in October 2023, is the most direct channel through which the Gaza conflict has imposed costs on the global economy beyond direct military expenditure — and, of the costs examined in this note, the most immediately reversible.
Approximately 12% of global trade volume and 30% of global container shipping transits the Bab-el-Mandeb / Suez corridor in normal conditions. Through 2024 and into 2025, a material share rerouted via the Cape of Good Hope: approximately 10–14 additional sailing days per Asia-Europe voyage, $400,000–600,000 in additional bunker fuel per large vessel per trip, and war risk insurance premiums that peaked at 0.7–1.0% of cargo value against a pre-conflict baseline of 0.03–0.05%. Several P&I clubs withdrew war risk cover for the strait entirely.
Cargo rerouting cost (fuel + port congestion + schedule displacement): $38–48bn, based on Drewry vessel deployment data and bunker price indices.
War risk insurance premium uplift above baseline: Approximately $8–14bn aggregate, based on Lloyd's Market Association volume data and average disclosed premium rates.
US and allied naval operating costs (Operation Prosperity Guardian and successors): Estimated $1.0–1.4bn per month; approximately $24–34bn over the full 2024–2025 period.
Total estimated cost attributable to the Houthi campaign: $70–96bn over two years. This is money spent routing around a problem. It does not solve the problem and stops generating costs the moment routing reverts.
We assign approximately 65% probability that a durable Gaza ceasefire reduces Houthi operational tempo sufficiently to allow insurance market normalisation within 90–120 days and cargo flow restoration within six months. Approximately 60% of ASEAN trade by value transits this corridor. A Gaza ceasefire is the single most actionable near-term lever for reducing friction in the trade flows this region depends on.
Five structural costs. All running simultaneously. None fully captured in any aid appropriation. All compounding.
The defence industrial base is depleting faster than it reconstitutes, at rising unit cost, and the gap between what America can produce and what a major conflict would consume has been made visible in a way that cannot be unseen. The European industrial migration toward Chinese production, triggered by the energy shock, has a long tail that gas price normalisation does not reverse. The fiscal carry on $190bn borrowed at 4.6% is $8.7bn per year, permanently. The payment and data architecture being built outside the Western financial system does not dismantle when a ceasefire is signed — the incentive that produced it is structural, and the infrastructure generates its own network effects. And the Houthi tax on global trade — approximately $70–96bn over two years — is paid by manufacturers, consumers, and exporters across the globe, disproportionately in economies that had no voice in producing it.
Against this, the open-ended position offers deterrence — a real argument, an important argument, and one that has not been quantified with anything approaching the rigour the dollar figures above require. If the deterrence value is real and large, it should survive quantification. We would like to see the attempt.
The transition costs of a negotiated settlement are real and bounded: reconstruction commitments, the political difficulty of settling for less than stated objectives, some near-term strain on alliance architectures. The continuation scenario has no natural bound. The carry compounds. The payment architecture shifts at the margin every quarter, in a direction that does not easily reverse. The stockpiles deplete further. And somewhere in the data centres of Hangzhou and Riyadh, another institution completes its onboarding to CIPS.
Somewhere in the Strait of Malacca, an LNG tanker is making its run. The cargo was priced at a contract signed in panic in 2022 and is worth somewhat less on the spot market today. The tanker will arrive regardless. The question is whether the financial and physical infrastructure around it will look the same in a decade. We are reasonably confident it will not. The only meaningful question is who shapes the transition, and at what cost to the shape that follows.
- [1] LNG pricing: EIA, ICE, S&P Global Commodity Insights. Contract terms: Penaga desk inference from public disclosures.
- [2] 155mm production data: Senate SASC public testimony, Jan 2026. Consumption estimates: IISS; open-source battlefield analysis.
- [3] Unit cost inflation: CSIS Defence Industrial Base Project; CBO; Penaga estimates from public procurement records.
- [4] CIPS data: CIPS public annual disclosures. 2024 volume estimated from Q1–Q3 public data plus Penaga projection.
- [5] Correspondent banking decline: BIS CPMI; FSB; World Bank remittance data.
- [6] Trade finance gap: ADB Trade Finance Gaps, Growth, and Jobs Survey 2024.
- [7] mBridge status: BIS Innovation Hub public releases; central bank participant communications through Q1 2026.
- [8] De-dollarisation: IMF COFER; BIS; S&P Global; Penaga estimates.
- [9] Red Sea costs: Drewry Container Forecaster; Freightos Baltic Index; Lloyd's MLA risk circulars; Penaga model.
- [10] SEA exposure: MAS, BNM, BI published data; Penaga desk estimates.
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