(by Sukhveer Singh, an IAS officer, 25th March, 2022)
In philosophy, the overall consequences of any event or action mean everything the action brings, including the act itself. The ‘action’ could produce long-term and short-term outcomes. The intensity and longevity of effects may depend upon the action, the context, and future conditions. However, the ‘present bias’ felt by individuals, the societies – and the politician they allow to take decisions on their behalf – have a limit to thinking about the future consequences of emotions felt today.
This essay will analyse how the world – especially the US and Europe – has dealt with the Russia-Ukraine Crisis. Everyone is aware, in due course, the consequences of events happening in the present time will be shared by all – in the short or long run, directly or indirectly. Who will benefit? The West, the East, or None.
The Russia-Ukraine war started with a statement from the Kremlin that it was the ‘denazification’ of Ukraine. President Zelensky said, ‘Russia’s criminal actions against Ukraine show signs of genocide during the battle.’ Similarly, the West is holding Russia responsible for the war crime. Moral turpitude is being mixed in the reports by the media, and both sides are raising allegations against each other. President Biden said Russia had miscalculated the US’s response to the war. In response to the war, the West has launched a barrage of sanctions against Russian trade, businesses, and financial system, including Russian President Putin and other Russian people residing in the western countries.
Could this war have been avoided? The answer is yes. The Ukrainian president has often said, ‘if Ukraine had been a NATO member, the war would not have started.’ The Polish Prime Minister Mateusz Morawiecki asserted that the wealthiest nations ‘overslept’ when it was required to stop Putin. He is of the view that the US and European Union should have financed the reconstruction of Ukraine after the 2014 war.
The feeling is that miscalculation of Russia’smove and under preparation by the West has resulted in a war. It would be worth mentioning here the US did not open doors for talks when the Russian military was building up encircling Ukraine. They believed in threatening Russia with harsh economic sanctions.
Some commentators from all over the globe consider the West has not acknowledged Russia’s security concerns. Russia has complained since 2000 that NATO has broken its commitment not to expand in the Eastern Block near the Russian border. Russian President Putin has demanded demilitarised Ukraine with a neutral status. Overall, NATO’s unwavering support for Zelensky’s regime -Which Putin calls a neo-Nazi regime- by offering financial, political, and military aid – hoping to join NATO subsequently– has antagonised Russia. Some also believe US’soverconfidence in economic sanctions has blinded it to see the war coming.
The US and the EU, along with its allies including Canada, Japan, New Zealand, Taiwan, and the UK, have imposed a series of sanctions against Russia targeting banks, military exports, commodities, and oil refineries. They have also imposed restrictions on the Russian Central bank to limit its ability to support Ruble and make settlements against trade.
Shelling economies with a barrage of sanctions is not a new thing world is experiencing. It was called a barricade in the good old days. President Trump instituted tariffs against imports from China in response to its aggressiveness in the South China Sea. Economic weapons for this kind of war are building over time. The super 301 provision of the US trade Act 1974 empowers US executives to impose sanctions extra-territorially and pressure them to change their laws and trade actions. When India tested its nuclear capabilities, the US invoked this clause.
Russia earns a good amount of revenue by selling oil, gas, and other commodities. It has worth $630 billion of forex reserves. Earlier, there were concerns in the West that Russia might impose sanctions on the EU by halting its oil and gas exports to the EU to undermine cooperation between the US and Europe. Besides, the West assumed that Russia could absorb its loss of revenue to other trade sanctions with its large pool of forex reserves.
Things did not go off as predicted, and the financial sanctions on the Russian Central Bank cut off its access to a large part of its forex reserves. Further, banning the Russian banks from access to the SWIFT financial messaging system has precipitated Russian Ruble to fall by 40 percent. In a policy response, the central bank of Russia was compelled to increase its policy rates from 9.5 percent to 20 percent to support its currency.
Nevertheless, if we take a longer view of consequences, a potential shortage of goods and services, a curb on imported technology would likely reduce Russian economic growth. Subsequently, hyperinflation and unemployment may follow. Devaluations of the Ruble will reduce its real GDP, consequently a lower per capita income and a muted economic growth. As a result, economic sanctions will cripple the Russian economy sooner or later.
What is more distinctive here is how sanctions on Russia would affect the rest of the global economy in terms of growth, unemployment, and price stability, and how the globalization, economic world order, and political stability shape out in the end? Economists worldwide reckon that financial weapons may not have the capability to produce military war-like devastating scenes. Still, they might have harmful effects that could painfully hurt society in the long run. They have the potential to imperil global economic integration, regional cooperation, technology sharing, and trade. Developing countries may suffer indiscriminately by this process.
Integrated globe gives all nations access to a broader labour pool. Developing countries get access to knowledge workers to kickstart new technological-based industries, while the workers from developing nations get better job opportunities in developed nations. Trade with other nations gives access to natural resources not otherwise available in the importing countries. But the most significant advantage lies in its power to create an opportunity for nations to specialise in specific service or product, knowing they can trade excess production quantities to other countries. Globalisation also promotes cross-border investments.
It is well known that the globe’s interconnectivity and free trade have empowered more significant and bigger economies indiscriminately. The weaponisation and blatant use of their economic power regarding currency, reserves, global corporations, international financial institutions have trembled low-income countries.
Though, banning Russia’s access to SWIFT for international transactions would encourage other big economies like China and India or a regional group– formed through cooperation to protect its economies- to develop a SWIFT-like system. For example, China has developed a CIPS system. However, as of now, CIPS has the capabilities to run its messaging system; though, it is using SWIFT as its communication system. Changed realities will motivate China to use its messaging system and integrate it with other SWIFT-like systems.
Indiscriminate sanctions on Russia have seized a significant part of Russian foreign reserves, mainly kept in the US dollar or kept in the banks located in the West. It had raised a question on Bretton Woods II, which was based on the inside money, crumbled when the Westseized Russia’s FOREX.
The whole incident poses a question. Which country would like that some other government controlling its financial resources? Thus, the de-dollarisation looks likely. The world’s reserve currency, the UD dollar, may see a backward drag on its value following de-dollarisation in the longer run. To maintain FOREX reserves, many countries’ central banks might diversify away from dollar-denominated securities to other assets such as gold, renminbi, the Euro, Rupee, Yuan, or even crypto-currencies.
China and India, which make around 22 percent of global GDP, plan to shift away from the dollar, it could lose their relevance faster. For instance, India is looking for a direct India-Russia settlement mechanism to import oil from Russia at a discount. Earlier, India had entered into an instrument with the Persian Gulf nations in 2018, when the Indian and Iranian governments signed an agreement for oil payment in Rupees. China buys more than 25 percent of the oil from Saudi Arabia. Similarly, If China convinces Suadi Arabia to trade in Yuan currency, it could boost the standing of its currency. These are a few examples, but what is inviting is that the present-day situation forces countries to challenge the Dollar or Euro individually or through forming an Axes to maintain their financial and economic sovereignty.
How could this change in economic order affect the US? Today, the West depends on cheap imports from emerging nations, mainly India and China. The imports are relatively inexpensive due to two reasons. One, abundantly available cheap labour to produce goods in exporting countries.Two, the overwhelming strength of the dollar against foreign currency. Thus, offshoring manufacturing of goods undoubtedly contributes to the lower level of inflation experienced in the US in the last few decades.
During the process, If countries learn to cooperate with their neighbours to create a standard currency zone or a mutually developed mechanism to settle trade payments, a simultaneous shift from dollar to keep reserves in other assets could challenge the US’s economic hegemony. After this, if the dollar falls in value, it will create inflationary pressure in the country. A lesser interest of other countries to hold the US treasury bonds could force the Fed to repurchase them, which will further compound inflationary pressures. This process may cripple its economy.
War is still on, and media is divided. Social media companies are manipulating news streaming and taking sides. No one is certain about how this war will transpire. Whether more impending to come? How might Russia respond to the economic sanctions?
However, what is certain is that the weaponisation of financial institutions, global corporations, trade, currency, and media will produce bad outcomes. There will always be temptations for wealthier nations to flex their economic muscles to use newly discovered weapons. Hard to restrain them. Humanity is bound to lose in this battle. No one will win. Nonetheless, the US has inadvertently risked its economic hegemon status already.