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Business

The Ukraine war

CROSSROADS TOWARD PHILIPPINE ECONOMIC AND SOCIAL PROGRESS - Gerardo P. Sicat - The Philippine Star

Half a world away from us in Eastern Europe, the Russian armed military exercises near Ukraine’s borders, which US President Biden publicly decried as a preparation for invasion, became a reality on Feb. 24. Vladimir Putin, Russia’s leader, after many early denials, ordered his armed military to move into that country, thus effectively starting the Ukraine war.

Russia’s Ukraine War

Putin’s invasion of Ukraine has a world-shaking impact. It is the first shooting war in Europe involving two sovereign nations since the end of World War II.

Though Ukraine is a medium-sized country, the main protagonists involve primarily the big shots – the major powers. Russia is the principal destabilizer, and confronting it is not only Ukraine, but the United States and its major European allies.

Thus, the problem is as big as it can get, because we have the major powers clawing at each other, and not surrogate countries acting as covers for the principals.

As a result, the impact on world economic markets is large. The impact on countries like the Philippines depend on unique country factors. (For some hint on this, the pandemic has weakened the national economy, unlike our neighbors, which have benefited from market changes arising from the China trade war and their own economic policies, which enabled them to encourage larger foreign investment inflows. Yet, there is the promise that recent economic reforms achieved recently could help to change and improve current direction.)

Let us then review the economic shocks as events unfolded in the new theater of war.

Winds of war

When the winds of war blew stronger and more indicative, economic markets showed their nervous changes. Commodity prices (petroleum crude and gas, metals, food) indicated potential crunches, which lead to scarcities, so their prices moved northward.

Brent crude, which was at $80 per barrel around Jan. 10, was already at $90 one month later. Financial markets (stock markets), in turn, became edgy, with equity prices falling for most companies when peace is threatened.

At the close of December 2021, the Dow-Jones industrial index (the bellwether guide for the world’s equity markets) was at 36,400; by mid-February 2022, it was around 34,000. Market volatility has risen, creating market fear.

Invasion unfolds

When Russia’s invasion of Ukraine began on Feb. 24, the economic market indicators overshot their directions. Commodity prices rose even more.

For instance, Brent crude spot price reached the $101 per barrel the next day. The Dow-Jones fell harder and reached the 33,000 level. Market volatility became one of heightened fear. All these events will push inflation.

US response of strong economic sanctions against Russia were immediate, as announced by President Biden. This response was coordinated with America’s European allies.

Thus, the US, the United Kingdom, and the European Union announced the sanctions in unison. The European Union represents the voice of 27 member countries that include the largest economies France and Germany). The financial sanctions targeted major sectors and individuals within the Russian economy.

The individuals targeted (for financial sanctions) begins with Mr. Putin and major Russian officials connected with the invasion decision and also important “oligarchs” associated with supporting the Putin government.

In addition, they closed their skies to Russian planes.

The freezing of financial assets through regulation is an important measure to remove economic assets from being used. Additionally, if major financial institutions are excluded from availing of the global payment system, financial transfers and payments will be choked, making it impossible to transact business.

Exclusion from the SWIFT global payments system could hasten economic collapse. (SWIFT stands for Society for Worldwide Interbank Financial Telecommunication.) Placing specific sanctions on the Russian central bank and excluding some banks and financial institutions from the SWIFT global payment system would choke off major financial flows from ever getting done.

Switzerland broke its neutrality and joined the European Union’s sanctions against Russia. This includes freezing Putin’s personal assets and closing its airspace to Russian aircraft and barring specific people targeted by sanctions from entering the country.

In addition, major trading countries like Japan, South Korea, and Australia joined in supporting the economic sanctions.

How goes the shooting war? Rapid developments on the ground could influence the outcome of this war. Strong Ukrainian defense against the invading forces has stalled a hoped-for quick victory for the Russians.

Impressive national leadership during the first days of the battle for survival has created favorable support for continuing military assistance from the US and Europe.

Apparently, Ukraine’s President Zelensky’s appeal for assistance helped to change earlier hesitations in this regard. If they survive the superior military force of the enemy at their gates, Ukraine could achieve their goal of joining the European Union sooner, based on encouraging statements of the president of the European Commission. Germany’s new chancellor’s decision to raise the defense budget strengthens the thread of reliance on European defense assistance.

Russia’s backdoor problem

In the meantime, Putin is suddenly confronted with the economic crisis that the invasion of Ukraine has created at home, the internal front.

The financial sanctions against Russia have produced an immediate crisis at home by causing panic and financial distress. The value of the ruble fell precipitously in one day, by 30 percent, and this is just the start. The Russian central bank had to raise interest rates to 20 percent and the financial markets were suspended for a day.

In the meantime, Russian banks are facing runs on their deposits. Some banks could fail without central bank support. And the central bank has no international friends to extend help to them.

With domestic financial chaos likely to multiply as a result of the sanctions, only withdrawal from the invasion would induce immediate relief from distress, but such a move signals defeat to Putin.

Could this be the reason why Putin’s last resort is to put Russia’s nuclear forces on high alert? To signal willingness to employ nuclear warfare is a desperate move.

Only a mad man will choose the nuclear option in such a case. Thus, it would seem that if he is sane in his calculations, he would choose the disgrace of losing a local war than endanger mankind’s survival or his nation’s, not to mention his own being.

 

 

For archives of previous Crossroads essays, go to: https://www.philstar.com/authors/1336383/gerardo-p-sicat. Visit this site for more information, feedback and commentary: http://econ.upd.edu.ph/gpsicat/

RUSSIA

UKRAINE

WAR

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