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Not Only the Military Forces, But the Banks Also Seem To Be On High Alert!
On 24th February, residents in several cities of Ukraine woke up to the sounds of explosions, air raid sirens, and terrifying booms. After years of tensions and hostilities bottling up between Russia and Ukraine, this one fine morning- matters escalated.
28 March, 2022

The Russia-Ukraine conflict

On 24th February, residents in several cities of Ukraine woke up to the sounds of explosions, air raid sirens, and terrifying booms. After years of tensions and hostilities bottling up between Russia and Ukraine, this one fine morning- matters escalated. Russian President, Vladimir Putin, announced a “special military operation” in Ukraine, declaring that Russia could not feel “safe, develop and exist” because of what he believed was a constant threat from modern Ukraine. Putin claimed that the goal of the operation was to “denazify” and “demilitarise” Ukraine. For years, Russia has opposed Ukraine joining NATO- a western military alliance that Ukraine has been willing and eager to join. However, Putin sees NATO’s expansion to Ukraine as a threat to Russia’s security, boiling down to another reason behind Russia launching a war against Ukraine.

The airports and military headquarters in Ukraine were attacked, troops rolled in from Russia and in no time, thousands of troops were deployed at Ukraine’s borders. As of March 22nd, air, land, and sea attacks by Russia, throughout Ukraine, have killed at least 977 civilians, 81 of them being children, and have left 1594 civilians injured, according to the UN’s Office of the High Commissioner for Human Rights.

In response to the attacks and the thought that past imperialism cannot and should not justify any sort of present-day expansionism, countries all over the world have either condemned the Russian attack or are engaging in regular talks with the leaders of Russia and Ukraine, in an attempt to de-escalate the situation. In addition, the US and other Ukrainian allies have imposed giant economic sanctions against Russia as means to wreak havoc on the Russian economy, preventing Russia from launching a long-feared full-scale war on Ukraine.

Giant economic sanctions and isolation from the West

The West intends on targeting the Russian economy, financial institutions, and hitting the individuals at the top with several forms of severe economic sanctions. The US has banned imports of oil and gas from Russia, the European Union also aims to cut gas imports by two-thirds within a year, and the UK strategizes to phase out Russian oil gradually, by the end of this year. Also, Canada, UK, and the EU have barred Russian airlines from using their airspace. 

Another heavy sanction comes with the major Russian banks being shut off from the International Society for Worldwide Interbank Financial Telecommunications (SWIFT) payment network, which allows a smooth international trade flow. The consequence of barring Russia from SWIFT would cut Russia off from many international financial transactions and could lead to a massive drop in profits raised by the nation from gas and oil production. This would, in effect, severely dampen Putin’s ability to finance a full-fledged war. 

Furthermore, many of the world’s strongest and biggest companies have pulled their businesses out of Russia or are reviewing their operations in the country. Apple stopping all exports to Russian sales channels; BP and Shell announcing their departure from Russia; Visa, Mastercard, and American Express announcing the suspension of all operations in Russia; and ExxonMobil pledging to not invest in any further developments have all joined the lengthening list of firms isolating from Russia. However, all these economic sanctions come bearing severe consequences not just for Russian homes, but for households all across the globe.

The oil shock

Even before the Russian-Ukraine conflict, stockpiles of several commodities were running low because of the restriction of economic activity caused by the COVID-19 pandemic. With heavy economic sanctions on the imports of oil and gas from Russia, the major oil producers are unable or unwilling to increase the output in the short run. 

With the demand-supply function in action, oil prices have hit a new high with Brent crude oil surging to $139 per barrel on a day of extreme volatility but settling back at $123.21, at the end of the day. This affects the civilians as well because as the refineries start paying huge sums of money for oil, they charge more from the distributor- who charges more from the petrol stations, in effect charging more from the consumers. Natural gas prices also hit an all-time high on March 7, climbing to €345 a megawatt-hour in Europe before settling back to €190. 

Abandoning Russia’s oil can have major consequences such as severe price spikes, an acceleration of inflation, tightening of nations’ financial conditions, and squeezing of individual household budgets. To dampen the severe repercussions of the oil shock on the common people, the West has strategized to pressurise OPEC for an Iranian nuclear deal and planned to lift some sanctions on Venezuela. However, these events are uncertain and fuel speculation. Oil, being a sensitive commodity that rises and falls in real-time, cannot bank on such uncertain events. Several EU nations have also put their coal phase-out plans on hold because they intend on cutting their reliance on Russian gas. Czechia, Romania, Germany, Italy, and Bulgaria have suggested that they might move towards an extension of coal mining as it is the most viable and the quickest solution at the moment when compared with other alternatives like investing in gas infrastructure back home or on other renewables. However, this strategic response will have massive detrimental effects on the environment.

Dizzying spike in commodities prices

The oil shock is accompanied by a grave cascading effect, meaning everything becomes more expensive. The Russian and Ukrainian economies are key suppliers of commodities, like wheat, corn, titanium, and palladium. Disruptions to the supply chain of such commodities, as a result of the conflict, would cause dizzying spikes in the prices of these goods, which would further impact civilians when the manufacturers use such commodities as inputs. This would keep the prices immensely high, not only in those two nations but worldwide. Companies with complex global supply chains, such as the automakers, are already feeling the effects.

Adding further trouble to an already troubled market

As the headlines about the developments of the Russia-Ukraine conflict have been flickering every minute, the stock market, also known as a headline-driven market, has seen a multitude of swings. The FTSE 100 index in London finished 21.75 points in just thirty minutes in the afternoon of 25th March but went back 1.25 points up, later that afternoon, suggesting that nervous investors were taking some chances ahead with expectations of positive talks between Russia and Ukraine. The German, Italian, and French stock markets have also tumbled to their lowest levels in several months and even years. However, the shares of major US aerospace and defence companies have widely soared since the conflict began.

Higher uncertainty and increased military spending 

Political risk and immense uncertainty about the developments of the conflict may, economically speaking, drive up the saving ratios among households across the globe and even make firms more hesitant to invest in the already shrinking global markets.

In addition, in the wake of the conflict and increased threat to NATO from Russia, Germany has ramped up its defence spending. Chancellor Olaf Scholz announced a major boost to the military spending in Germany and claimed that his government has decided to set up a €100 billion fund to upgrade its military forces. Some sources also suggest that the UK is most likely deciding to increase its defence budget to best respond to the increased threats from Russia.

Since capital is finite, more capital drifting into one spending category suggests less money for something else – be it the education sector or healthcare. 

Major refugee crisis

Finally, large-scale emigration from Ukraine is another devastating experience – both emotionally and economically, for those who take refuge and those who offer it. The UNHCR says that there could be 4 million refugees as the Ukrainian crisis unfolds. The journey of refugees has not been easy- being forced to move to a new and unknown land with no knowledge of the housing conditions, work opportunities, and whereabouts of food and other necessities is extremely emotionally draining. 

Economically, nations look at the large influx of refugees as an added impediment to the development efforts of the host country. The demands of refugees on the already severely strained economies, due to the pandemic, are seen as overburdening the administrative capabilities and local financial institutions, and further raising the unemployment rates for low skilled native and refugee workers. However, hosting refugees can create an opportunity for overall economic development if there is appropriate external financing. Thus, unless the economic institutions of the countries giving refuge spare no effort in planning and ensuring that their economy settles down, the short-term impacts of the refugee crisis could be dramatic. 

Is this economic warfare serving the purpose?

In this case, the financial sanctions do seem to be doing real damage and blowing holes in the Russian economy, which was indeed the main purpose. The rouble has depreciated, the Moscow stock exchange has closed, Russian oil trades are on the verge of dismissal by most of the countries, and the bond default risk has spiked.

However, what is more nuanced behind the economic warfare is how- in the long run- we could certainly have some surprising winners and losers. The conflict between Russia and Ukraine is being seen to be a big gain for the weapons manufacturers in the West. By March 7, the US and other NATO members have so far sent 17,000 anti-tank missiles and 2,000 stinger anti-aircraft missiles to Ukraine. Also, as the defence spending is intended to rise in most European nations due to increased threat from Russia, the defence markets are, in effect, expanding and the arms makers, especially in the US, are the surprise winners. 

Countries like Turkey and Mexico, which have not yet imposed financial sanctions on Russia, could also be seen as winning the economic war. If a product from Russia is required in one of the countries that have imposed sanctions, these non-sanctioning countries could purchase the good from Russia, resell it, and act as middle-men between Russia and the rest of the world. Countries whose economies could benefit from the drift of highly skilled Ukrainian and Russian workers who enter their nations as immigrants would be another set of winners in the conflict.

However, it is essential to argue that if this war drags on and it does turn out to be an insurgency, it must happen because the Ukrainians, as civilians of a sovereign state, want it. Not because Wall Street and countries in the West can mint money.

3 Comments

  1. D N

    Educative, thought provoking, novel leads towards likely outcomes. Well done.

    Reply
  2. Karuna

    Very welll summarized. Well done Surmai I am proud of you dear.

    Reply
  3. Don Augustine

    Well done surmai, You covered all aspects of the Russian economy and the role played by Western countries. I think western countries (U.S) always earn profit from selling military equipment.

    Reply

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