Credit: Daily Times


Opinion by Pavel Felgenhauer, Dan Wang, and Jeevun Sandher

The Russians are paying the price for the invasion of Ukraine. Commodities are becoming more expensive as the ruble depreciates and economic sanctions begin to be imposed, but could the rest of the world be affected as Russia's invasion of Ukraine triggers some of the toughest sanctions ever imposed by the West? They are designed to hurt Russia's economy and deprive President Vladimir Putin of money to pay for the war. The ruble has fallen one-third against the US dollar. Some Russian banks have been banned from using the SWIFT messaging system for international transactions. The United States, the European Union, and their allies are blocking access to most of the country's $640 billion foreign cash reserves. Russia's central bank is trying to limit the fallout by raising interest rates to 20pc. The Kremlin insists the country will alleviate the pain, but fear has run rampant in the banks. For the last few days, everyone has been running between ATMs to withdraw cash. It is unknown at this time what people will do if SWIFT turns off all foreign goods to be paid for by card. Of course, sanctions will also have an effect outside Russia, as it is the world's 11th largest economy and a major exporter of fuel and food. War can raise global prices.

Russia produces 10% of the world's oil. Prices in November were about $85 per barrel, now they are over $100 per barrel and growing. Moscow supplies 40% of Europe's natural gas. Prices on the continent have risen by a third since the attacks began. Russia is the world's largest wheat exporter. Last year, prices were already 31% higher than in 2020, according to the United Nations Food and Agriculture Organization. Economists fear they could climb even higher.

Read more: Energy monopoly of Russia

Vladimir Putin’s claim to be indifferent to sanctions:

Russia was already preparing for further sanctions. In fact, Russia has been under sanctions for eight years since 2014 and knew that more was to come. There were reserves of various items such as chips, aircraft components, and other materials. Russia has, of course, built up huge currency reserves as oil and natural gas prices have risen. It was believed that Russia could wither the storm. Sanctions will have more effect, but not immediately. It turned out differently. The West quickly agreed to freeze the central bank's assets that was a shock and awe event. (Felgenhauer, P.) Sanctions were not really surprising. That seems to be the case. However, energy products are still an exception under sanctions. Therefore, the pain will not be so great to deter Russia yet. There is a need for consistency and unity among Western countries so that they can do the real damage they want to see. (Wang, D)

On the other side of the picture, these restrictions are clearly punitive and drastic. We must be clear that the Russian economy is in crisis by this morning. The ruble is collapsing with rising inflation. We are also seeing that Russia is basically much poorer this morning than yesterday. These sanctions will have a huge and detrimental effect. Ironically, since 2014, Putin has sought to build up these reserves by selling the Russian economy to its western neighbor. And by selling little debt abroad and banning imports means that the sanctions will have a relatively small effect on Western economies. Putin played everything on this card to attack Ukraine. He thought he had a war chest ready. It looks like he's going to lose badly. (Sandher, J.)

Impact on 145 million people in Russia: Unpopular war

As soon as a central bank stepped in today, they managed to stabilize the situation. They have raised their basic lending rate from 9.5 percent to 20 percent. Twenty percent means that Russian industry will stop functioning as a normal industry cannot operate at such a rate. This means that there is going to be a severe economic recession that is going to hurt the population a lot. There will be shortages because the problem in imports will be not due to the absence of money as Russia is still selling oil and making some money, but there are logistical problems. Logistics companies are refusing to bring containers to Russia. Russia will not have pre-courses to make generic drugs. This will have a very bad effect on the internal political situation. There is going to be a huge dissatisfaction in the coming months. Thus, there will be a war that will not seem to be very popular and successful. (Felgenhauer, P.)

At the moment people are shocked because their gadgets are not working. People are trying to get something, buy something, do something or just sit back. They are frustrated. Many Moscow residents were traveling abroad but there are no Russian planes around. Even the Russian Foreign Minister could not go to Geneva. Therefore, it is a kind of very serious frustration. There is some anti-war movement in Russia. It's not huge yet, but it's there. It is also eating away internal political stability. This is not a political issue for the Kremlin yet, but it could happen soon if all these things continue to worsen.

Response by Russia:

Russia will resolve to the real harmful weapon. It is undoubtedly a major exporter of energy-- the second largest producer of natural gas. And in London, 40% of electricity comes from energy. Most gas in the EU also comes from Russia. It may try to limit these exports. However, we must remember that Russia also needs to export so that the dollar comes to the country and the ruble crash does not escalate further. Beyond energy and wheat, Russia's economic sanctions on the Western world are very limited. Even with energy and wheat, it is difficult to see how effectively they can deploy it when they desperately need the US dollar. It does not seem that the Russian economy or the Russian government has a lot of tactics here to retaliate against the West. (Sandher, J.)

The consequences of Russia's invasion of Ukraine for the world and the US:

For a country like Ukraine, this war will have to hold its economy back at least five years. But unfortunately, the economic effects for the rest of the world will be severe at first but will soon fade away. We are now seeing a lot of adjustments in the stock market and people are rushing for safe assets. But given the historical experience, so to speak, after the Gulf War, the markets are usually in the normal range of one to six months. We are now seeing more opportunities for many countries to strengthen their ties with Russia, including China. Therefore, unlike Iran or Cuba, it is not the case that Russia is very isolated from the rest of the world. Russia still has friends and allies from other parts of the world. (Wang, D)

However, Russia is the world's largest supplier of wheat. If it is badly affected, it will affect the main item of bread which will have repercussions worldwide. And this is not something that will evaporate once the attack has stopped.

Food security is certainly a major concern, but its impact is once again quite uneven for countries in the Middle East and North Africa. They rely heavily on Russian and Ukrainian supplies, especially wheat and ripe seeds. We will see some disproportionate effects on the poor in these countries. If you look at countries like Turkey, the inflationary pressures are already very high, and more people will have to face higher living costs in the coming months. (Wang, D)

Further, there were the stock markets going slightly lower this morning. The more serious question is how much it affects energy prices as well as food prices. That's what matters for people on the street. We at OECD are definitely seeing rising inflation and declining living standards. Within the UK, we have seen the biggest decline or we will see this year for working households - the biggest drop in tax revenue in 30 years.

Threat from Medvedev to put a squeeze on gas flow and push up the price:

Russia's response and outcome are not yet known. Disruption of oil and gas supplies was a very dangerous weapon. Great care will be taken before using it. President Putin's first response was to threaten to denuclearize, announcing that a high-level preparation similar to that of the US Defcon had been taken up. In fact, it is possible for a nuclear weapon to explode in a safe place, such as the empty sea, somewhere in the North Sea, the Norwegian Sea, or the Atlantic Ocean where it causes no harm. It may be carried out as a demonstration of Russian determination. (Felgenhauer, P.)

Of course, the military power for Russia is very clear, but the real question is what does Russia want from this war with Ukraine? Economic sanctions are heavily anticipated before the start of this war. Most importantly, the force that Western nations use on Russia could be a weakness for the West. For Europe, severing its energy ties with Russia could not take long. This should be a temporary solution because Europe really depends on Russia for its energy supply. For the United States, it could certainly push Russia out of the SWIFT system, but it also means a weakening position for the dollar-denominated global order. So now it leaves all the countries in this tricky balance. Russia will not necessarily lose this war. Eventually, Russia-China trade relations will be closer and perhaps even more politically powerful than in Europe. (Wang, D)

Read more: Russia China Nexus: A powerful bloc

China's position in tricky balance: 

Russia is part of the Belt and Road Initiative. There is already collaboration on the ground such as technology, e-commerce, and infrastructure. There is even a currency exchange system. At a time like this, a friendly face in China would be a great help to Russia, and we have already seen further ground talks between the various trade representatives of China and Russia. Therefore, there are more opportunities for China to take advantage of this situation and for Russia to take a different path for its possible future development. (Wang, D)

Vladimir Putin’s position and oligarchs: Growing discontent?

It certainly sounds like Oligarchs have their own kind of interest that no longer corresponds to Putin. The British government is looking at seizing Putin-linked Oligarch property in London. The French are considering similar measures. Certainly, Oligarch can start thinking about leaving Putin. On the other hand, although we have seen the threat from the Oligarchs who decide to leave Putin, his survival will be determined primarily by whether he still has the support of the security and the armed forces. ۔ We must remember that dictators like Maduro can survive in office if they believe they have the support of men with guns. So, primarily for Putin when the oligarchs may leave him or most of them think about it, what really matters is his position and support in his own armed forces.

Of course, there will be unrest. There will be economic frustration for a large part of the Russian population. But it is certainly not enough to bring about any significant change in the government or the Kremlin's political agenda. What's more, there must be widespread dissatisfaction within the military as the security operators and a civilian bureaucracy are also very important in Russia. That's how things start to change in Russia. This war is not very popular and it is not very popular in the Russian army. From there came dissenting voices and hints that this was wrong. It does not appear that, in some cases, the Russian military is fighting to its full potential, or at least retreating. This is a complicated situation. Putin's government could begin to shake in the coming months. The question of whether there will be any change or not is very difficult to predict at this time. (Felgenhauer, P.)

 

Pavel Felgenhauer, a defensive military analyst 

Dan Wang, a Chief Economist at the Hang Seng Bank China

Jeevun Sandher, an Economist at King's College London

 

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