The Russian attack on Ukraine will have far-reaching global political and economic repercussions. It has already fundamentally changed the security architecture in Europe. Further developments depend on the outcome of the crisis.
If a ceasefire is reached soon, the worst could still be avoided. On the other hand, if Russia escalates the war, permanent damage to the global security situation and to Russia itself can be expected. One way or another, President Vladimir Putin is threatened with pariah status.
The current crisis clearly shows that, since the fall of the Soviet Union in 1991, the West has not succeeded in binding Russia to the Western alliance and in securing partnership-based cooperation. The Ostpolitik of the USA, the European Union and also Germany must admit this failure. The western alliance has failed to turn an enemy into an ally.
On the contrary: Putin has been formulating imperialist goals for many years – and, as in the case of the annexation of Crimea, is implementing them with military means that violate international law. What a contrast to the early 1990s, when close cooperation between NATO and Russia was discussed and even the country’s accession was not ruled out!
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It is to be hoped that the right lessons will be drawn from this development. Tough sanctions must certainly be imposed on Russia now, and there is no way around strengthening the West’s military defense capacities.
At the same time, even in the current situation, it is important to keep the way back to the negotiating table open. From an economic point of view, the development of the coming months will be characterized above all by great uncertainty about Russian oil and gas supplies and the sanctions in the financial sector. In addition to the loss of primary products from Russia and Ukraine, the blocking of transport routes is likely to further intensify existing production disruptions. For the global economy as a whole, the war in Ukraine has significantly increased the risks of inflation and the economy.
Moscow loses access to Western technologies
Western sanctions will mean that Moscow no longer has access to urgently needed Western technologies and will be cut off from the international financial market. This should further weaken the Russian economy – but not lead to its collapse. Because of the high energy prices, the Russian economy is in better shape than it was when Crimea was annexed in 2014. Moscow’s national debt is extremely low in relation to gross domestic product at 19 percent, and its foreign exchange reserves are very high at around 630 billion dollars.
The budget is largely balanced due to high oil and gas prices, and Russia has generated current account surpluses for many years. However, the use of foreign exchange reserves, which are held in dollars, euros, pounds, francs and yen, is now severely restricted by the sanctions. It is not known what proportion of the total foreign exchange reserves the respective currencies have. Already last year it could be observed that the dollar holdings tended to be reduced and, in return, the shares of gold reserves and the Chinese yuan were increased.
The exclusion of Russian banks from the Swift international payment system is likely to have massive repercussions for Russia, but also for the western world. It is questionable to what extent mutually existing financial claims will still be settled. It is also conceivable that Russia, as a counter-sanction, will stop energy supplies to the West, although energy trading can continue to be processed via Swift. Putin’s thinly veiled nuclear threat shows he’s run out of red lines.
Russia has lost importance as an export market
All of these developments will set back the Russian economy in its development and modernization in the long term. Western countries are now keenly striving for independence from Russian energy sources. Moscow’s increased cooperation with Beijing will make up for some deficits, for example in the exchange of technology, but Russia has a weak negotiating position with China. For Beijing, on the other hand, there is the possibility of getting additional amounts of energy and raw materials from Russia – and at low prices because of the East-West conflict.
China will be able to increase its influence over Russia and increase the importance of the yuan as a reserve currency. Beijing is one of the winners of the crisis. For the Western world, the war in Ukraine means rising inflation rates and greater economic risks. In particular, those European countries that, like Germany, are highly dependent on Russian energy supplies will feel the negative effects. On the other hand, for net energy exporters like the US, the rise in energy prices will not have a negative impact as long as general inflation remains under control.
Russia has lost importance as an export market for the West in recent decades because Moscow has neglected to modernize the economy, which would have opened up a wide range of opportunities for cooperation with Western countries. In view of the already low level of exports of goods, further setbacks in the course of the Ukraine crisis should remain manageable outside of Russia. What is certain is that Moscow is intensifying trade and capital flows with China.
The peace dividend is history
The crisis will also have short-term effects on western central banks. The increased economic risks are likely to prompt them to proceed more cautiously than recently planned when exiting the expansive monetary policy, which will tend to delay the rise in interest rates. The central banks will not react to the energy price-related inflation impulses in the same way as they would to demand-induced inflation. Because drastic energy price increases are always a particular risk for the economy and have often caused recessions in the past. Central banks will take this risk into account.
Even if it is still difficult to foresee the outcome of the war – and possible political negotiations – four trends are emerging: First, the western countries will become less dependent on energy imports from Russia in the long term. Russia must therefore look for new markets in Asia, for example. Secondly, President Putin has for a long time gambled away his trust in the western world and can no longer expect any concessions.
Third, the West will arm itself massively in view of its even nuclear threats. The peace dividend is finally history. Fourth, higher arms investments by the West will also force Russia to continue investing a very large proportion of national income in the military and not in economic and social development. All of this points in a deeply regrettable direction.
More: How the economic war against Russia is shaking the global economy.