Ukraine: Economic perils for Russia and Europe

The wide-ranging economic sanctions unleashed by Europe in the wake of the Russian attack on Ukraine are not denting the Russian economy, but they are hurting Europeans as well. While the funds of Russian banks overseas have been frozen. Russia retaliated in a similar fashion. This has disabled countries like Australia and Norway from pulling out their sovereign fund investments in Russia.

The Russian rouble has fallen 30 per cent against the dollar, but the Russian central bank has increased the bank interest rate by 20 per cent from 9.5 per cent to counter the decline in the value of the rouble. The bank has also ensured that people can access cash through the ATMs so the rush on banks has been averted.

Russian Finance Minister Anton Siluanov said that the government will strengthen the commercial banks’ capital base to ensure that there is no strain on the day-to-day running of the economy. Nomura analysts have pointed out the if trade flows from Russia are snapped, then Russia’s trading partners will suffer too because the forex funds are denominated in US dollars, and this could lead to inflationary pressures in Europe, and it could end up in stagflation.

In a major corporate move, oil major British Petroleum (BP) has abandoned a $25 billion stake in state-owned Russian oil company, Rosneft. While BP may be willing to suffer the loss, it will be argued that it is Roseneft that will be the big loser at the end. So far, the sanctions have not touched oil and gas supplies from Russia.

Even as ceasefire talks are on between Ukraine and Russia at the Ukraine-Belarus border, the fighting is continuing to rage in the cities across Ukraine. The Russian troops are forced to fight their way through, and the progress has not been as swift as it was planned. Even as it wages an offensive war in Ukraine, Russia is fighting with its back to the wall on the economic front. And Russians are quite determined to counter the impact of the international economic sanctions.

European and American political leaders seem to believe that the economic sanctions will choke the Russian economy and it will be forced to compromise. But for many years now, the Russian markets are integrated with the global markets, especially in Europe, that while punishing Russia on the economic front, Europe too might end up paying part of the price. And for a global economy struggling to emerge out of the disruption caused by Covid, the war in Ukraine spells economic uncertainty if not gloom. It is due to the two-way flow of funds and investments, that Europe will feel the pain of shutting Russia out of the global market system.

Arms purchases from Russia by countries like India and Turkey will continue. The two countries have purchased S-400 surface-to-air missiles, and the Western countries have not so far penalised India and Turkey because the two are considered friendly countries. Similarly, Russia is likely to turn to China and Iran and the central Asian republics as a market outlet, the way it did during the Soviet era. There are too many cracks in the sanctions regime, and it does not serve the purpose of imposing damages on the country it targets.

The war between Russia and Ukraine must be won on the ground and through military means. But it does not appear that there would be a decisive military outcome as the West is now ready to pump funds and arms into Ukraine. The Russian aim of achieving its goal through swift military victory hangs in the balance. And Russia’s nuclear alert is unlikely to change the fighting because it is the Strategic Defence Operation and not the Strategic Offensive Operation that has been pressed into a state of readiness.