Sanctions on Russia and its implications for global trade, economics, and finance

By Dr Aparaajita Pandey

The economic conditions of two of India’s neighbors – Sri Lanka and Pakistan are in a state of complete ruin and while this might not seem like the most immediate and direct repercussion of the Russia- Ukraine conflict, a closer look at the projected economic ramifications of this war hint at more failed states, breakdowns of established supply chains, and an overall slowdown of global economy.

A path towards minimizing the scale of war and yet having a prohibitive impact on Russia was found in the way of economic sanctions, and the US was quite quick to announce a whole gamut of them to arrest Russia’s economy hoping that it would eventually lead to a retreat by the Russian troops, however, this has not exactly been the case with this conflict. The economic sanctions against Russia were implemented not only on the financial institutions and trade of the country but also on specific Russians. The wealthy and influential oligarchs of the country found themselves on the sanctions list, with their assets being seized and their travel and trade being prohibited. This was targeted and not only bringing their business to a grinding halt but also barring them from possible access to their cash and wealth reserves around the world. The thought process behind such sanctions is the stifling of the Russian oligarchs who primarily control and fund the Russian economy.

These sanctions have been lauded and supported by the US, EU, and allies to the US like South Korea, and Japan. The secondary function of these sanctions has been to have a deterring impact on the countries of the Indo- Pacific like India and China who have not outrightly condemned Russian actions and continue to have a cordial and robust relationship with Russia. The sanctions against this aggression also came in stages. While the first stage was riddled with exemptions for countries across the EU and South Korea, the second stage was more unforgiving. Initially the sanctions seemed malleable enough for certain countries and certain goods and services to carve their paths through the sanctions. Russia is a major consumer of luxury goods and also a supplier of not just non-renewable hydrocarbon energy derivatives, but also diamonds.

Countries within the European Union like Italy and Belgium were already weary of the impact that these sanctions might have on their trade and revenue, and so was the US when it exempted the business empire of Alisher Usmanov worth 19 billion USD. The rationale behind these exemptions were quite easy to understand; in an economy so intertwined it is almost impossible not to be influenced by the after effects of economic sanctions imposed on one country. However, as the war and Russian aggression continued it was felt that harsher sanctions were needed and all EU trade with Russia was halted. More importantly, the Nord Stream II was abruptly shut down and Germany desperately started looking for alternate and renewable sources of clean energy.

While the war has not yet ended, the economic impact of this conflict has now become apparent. The World Bank announced two days ago that the Ukrainian economy was set to shrink by 45 per cent due to the invasion by Russia. At the same time one can observe a slowdown in the Russian economy, a depletion of its reserves, and an almost doubling of its interest rates. As the Russian economy has started to unravel, a similar pinch is being felt by EU members who were already trying to recover from the economic slowdown due to the pandemic. Greater economic instability however, looms over the countries that have been facing economic troubles and are heavily indebted to financial institutions like the IMF, or are a part of the Chinese debt trap diplomacy.

As more countries inch closer to economic ruin, it is imperative to realize this for what it is; a ramification of highly globalized economies that depend on one another so intrinsically that economic sanctions eventually start to affect every economy involved in the Russian trade routes. The arbitrary breaking down of supply chains with no replacement or alternative supply chains was bound to have an adverse impact on a world that is yet to emerge and recover from the economic shrinking caused by the Covid – 19 pandemic.

The world stands at a precarious precipice of a game of dominoes, as nations more proximate with the Russia – Ukraine conflict have begun to fear for their almost inevitable economic demise. The central Asian republics have already been impacted by the instability in Afghanistan that happened last year, coupled with their political unsteadiness, their reliance on China as part of the BRI and the extended invasion; the economic ramifications are enough to push these countries to the brink of ruin. Similarly, one can observe a tense eastern Europe that is fearful for its survival, sovereignty, and independence. While this invasion has caused Eastern Europe to desire a NATO and / or EU membership; any advances by NATO for inclusion would potentially trigger another act of aggression by the Russians. As Prof Mearsheimer has opined that NATO’s presence in such geographical propinquity was one of the greatest causes for the Russian invasion of Ukraine.

While economic ruin has not yet plagued all of the countries mentioned above, a fear of loss of independence has in the past had an impact on stock markets; although they are fickle and change their mind often. However, a shunning of ‘difficult zones’ by foreign direct investments does translate to potential loss of future business. Among all of these grim speculations, Russia and conventionally stronger and larger nations might survive the prophesied economic ruin.

A shift towards a ‘post-dollar’ world could be the key to not just surviving the sanctions but also developing an alternative path to global trade. A tilt towards using alternate currencies for trade might be the answer that the world has been looking for to escape the hegemony of the USD and move on to robust trade relations that no longer are a slave to the western economic institutions.

(Author is an independent political analyst and has a PhD in Latin American Studies from the Center for Canadian, US, and Latin American Studies, Jawaharlal Nehru University. Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited).

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