The Ukraine War and the global economy: At a tipping point?


One of the big uncertainties of the global economy – and the Philippine economy – is the Ukraine War.

The war has already helped to escalate the tightness of food and energy prices, further aiding inflationary forces in the world economy.

The economic sanctions war. The side-effect of the invasion of Ukraine is the sanctions war, which the United States and its NATO and other allies have imposed on Russia for invading Ukraine.

The arsenal of sanctions unleashed against Russia was designed to help cripple the Russian economy and its capacity to wage the war against Ukraine.

Half of Russia’s $580 billion of currency reserves were frozen and most of its big banks were cut off from the global payments system. Thousands of Russian firms and high-profile individuals who were directly sanctioned were also excluded from the global payments system.

The US stopped buying energy from Russia, and Europe has undertaken a progressive plan to cut-off its economic dependence on Russian gas and oil. Foreign investments from the US and its allies in Russia have closed shop and moved out, and normal trade channels have been disrupted.

Russia, however, could unleash its own strengths against such sanctions. Its main economic strength is the enormity of its oil and gas resources and trade.

European dependence on Russian energy had grown heavily in the years before the war. It could choke off Europe’s economy by withholding all its supply of energy and cause a European economic downturn.

To skirt the financial sanctions against it, Russia demanded payment for its energy exports in rubles. (To avoid the collapse of the ruble, Russia’s central bank raised domestic interest rates sufficiently high to stabilize its value as an international currency.)

The importance of oil and gas to the world economy also has its many alternative buyers, especially if thrown at them at bargain discounts. China and net importers, such as India, have continued to buy Russian energy. Russia’s oil economy can still be used to support its war machine and the domestic economy.

The economic sanctions have not worked as expected.

In its most recent World Economic Outlook (July 2022), the International Monetary Fund assessed that Russia’s economy has weathered the economic sanctions against it “better than expected.” The high energy prices, which the Ukraine war helped to escalate, also enabled Russia to reap economic gains from its sales of oil and gas.

For this year, the IMF has estimated that Russia’s economy is contracting by six percent as a result of the sanctions. This takes into account the upgrade of the original low forecast by 2.5 percent that it made in view of the better-than-expected performance against the sanctions.

The Ukraine war has added to the gloomy picture for the world economy this year. The nuclear threat that Vladimir Putin has raised in connection with the prosecution of the war increased the level of uncertainty in the world economy.

Nuclear saber-rattling and the global economy. Russia’s objective of subjugating Ukraine has failed badly.

The Ukraine war is now into its 8th month. With the help of military support from the US and its NATO allies to defend itself, Ukraine has not only prevented Russia from capturing its capital city during the early part of the war, but has also been able to inflict humiliating destruction on the invading Russian forces.

Estimates of Russian soldiers lost in the war for the first six months of the war are large – some 80,000 killed and wounded, according to US defense estimates. In addition to destroying a great amount of military hardware, Ukraine also captured a great amount of abandoned, but usable military equipment.

A war of attrition along a 1,000 kilometer frontline in southern Ukraine has been pierced by Ukraine’s summer counter-offensive, retaking an increasing area of occupied lands. As of this writing, the offensive moves on its path further deeper into these lands.

Putin’s response to these adverse developments against his war in Ukraine is to increase the stakes. He set in motion the annexation of occupied lands into Russia and a partial mobilization of Russian males to raise more troops for war duty.

These actions are apparently end-game moves that could pave the way for a drastic resolution or a prolongation of the war.

In addition to these defiant moves, Putin is warning that he will not hesitate to use the nuclear option if Russia’s existence is threatened. The US and its Western allies do not recognize the annexation of Ukraine’s land into Russia.

The Ukrainians are moving in more deeply into its occupied regions, which Russia is now claiming as its own. Certainly, Russia’s conversion of the occupied lands into Russia will not be recognized by Ukrainians recapturing their own lands.

Diplomacy or armaggedon. Most analysts calculate that Putin is suing for peace by going into extreme moves in order to set the stage for a settlement.

Frankly, no one knows what’s on his mind. The danger is that even if he wants to avoid the use of the nuclear option, the fact is that as the leader of Russia, which owns nuclear weapons, he has the means to pursue their use.

Most analysts think that a resolution of the war could be settled by deadly battle on the ground or, more likely, by diplomacy. US President Biden has said no one wins a nuclear war. It is a warning to President Putin of Russia.

When the Ukraine war broke out, the world witnessed an additional complication to an already darkening, bearish mood in a global economy that has been affected by trade wars, the COVID pandemic, and supply-chain logistical entanglements.

In the very small chance that the nuclear option is used, all estimates about global recession, economic growth or recovery, inflation, and peso exchange rate will be of no relevance.



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/

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