Russia may pay a price for Putin’s Ukraine misadventure

Ukraine war and global economy
The world is still in the shadow of a global recession with total economic losses due to the Russia-Ukraine conflict touching $1 trillion.

The Ukraine crisis that has erupted into a military showdown with Russia’s intervention has manifold regional and international implications amid the pandemic-induced backlash. The attack came at a critical juncture when the global economy was slowly recovering after two years of uncertainty and setbacks. The Russians might live to rue Vladimir Putin’s impetuous decision to militarily settle years-old scores with the regime in Kyiv.

The arguments put across by Putin are all-too-familiar to everyone who has watched this geopolitical game over the years. The Kremlin’s ‘legitimate’ concerns about security—with a long border of nearly 2300 kilometres with Ukraine—are now more than a pretext for intervention. Moscow-Kyiv relations already saw their worst scenario after Russia’s takeover of the Crimean Peninsula from Ukraine in 2014.

The goal of the present Russian military intervention, as set out by Putin, is demilitarisation and denazification of Ukraine, no matter what economic costs Moscow will have to bear. The geostrategic imperatives he tried to bring in to justify the action are also well known. Moscow has to ‘ensure’ Ukraine as a vital bulwark against NATO’s eastward expansion. It has all too obvious geoeconomic objectives too, with energy circuits of Russia are in high demand of uninterrupted headway.

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Putin further sought to justify his recognition of Donetsk and Luhansk—territories in Ukraine—saying that the Russian-speaking people in these eastern provinces were already suffering under the hegemony of the Kyiv regime under Volodymyr Zelensky. There were also serious allegations of neo-Nazis having intruded into the state apparatuses, including the military.

Putin was reported to have said that Russia’s action is in response to the address of the leaders of Donbass republics: People’s republics of Donbass approached Russia with a request for help. In connection therewith, I made the decision to hold a special military operation. Its goal is to protect the people that are subjected to abuse, genocide from the Kiev regime for eight years, and to this end we will seek to demilitarize and denazify Ukraine and put to justice those that committed numerous bloody crimes against peaceful people, including Russian nationals.

President Biden rejected all Russian allegations and said: We saw a staged political theatre in Moscow — outlandish and baseless claims that Ukraine was — Ukraine was about to invade and launch a war against Russia, that Ukraine was prepared to use chemical weapons, that Ukraine committed a genocide — without any evidence… We saw a flagrant violation of international law in attempting to unilaterally create two new so-called republics on sovereign Ukrainian territory.

Meanwhile, Putin also bragged about the historical connectivity between Russia and Ukraine with his reference to the centuries-old links—dating back to 9 CE—which continued until the disintegration of the Soviet Union in 1991. Moscow always considered Russia’s geopolitical location across the Black Sea vital for its global economic as well as strategic engagements. Putin made this clear on many occasions.

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What has patently antagonised Russia in the post-disintegration phase was the expansion of NATO over the years, incorporating Soviet Republics like Lithuania, Estonia and Latvia. Moscow suspected, legitimately, that Ukraine joining the supranational Atlantic alliance would further weaken, if not undermine, Russia’s power and influence globally. Hence Putin’s demand that Ukraine and Georgia (another former Soviet Republic) should not join NATO so as to offset Moscow’s geopolitical stature. This is something which neither Washington nor any other power in the Atlantic alliance could guarantee. Moscow’s anxieties have grown due to the possible repercussions for it being a big power.

Even as Moscow took over Crimea on the Black Sea in 2014, it began to support the Russian-speaking rebels in Donetsk and Luhansk and, in the ensuing conflict, tens of thousands of people have lost their lives. In fact, the first spell of military intervention started in these eastern provinces of Ukraine and it soon began to spread to other cities, including Kyiv, causing extensive damage and loss of lives.

Big power forays

Successive US administrations, by refusing to consider Moscow’s reservations and fears about NATO’s eastward expansion, used Ukraine as a strategic bargaining point within its wider geopolitical game. This reluctance only emboldened Putin, escalating the situation and leading to a full-scale war. This was, however, not a new strategic stocktaking perception.

Many American scholars had forewarned in the post-1991 years itself that Russia would, in all likelihood, come back as a strategic threat to the West. One of the arguments was that Moscow was still under the fear of American hegemony, NATO expansion, and the US missile defence, and therefore as a traditional big power, Russia would sooner or later restore its power against the West.

Zbigniew Brzezinski, former national security advisor to US President Jimmy Carter, wrote in his Foreign Affairs article in 1994 that as an imperial power, Russia had the compulsion to come back to play the balance-of-power game as soon as its susceptibilities were addressed. This became evident right from the beginning of Putin’s election to the Kremlin.

Occasionally, there were statements from Russian leaders saying they would reinstate the Soviet Union to all its former glory. But the stifling economic conditions in Russia never allowed them to go beyond rhetoric. However, when the Baltic states began to join NATO one after another, Moscow felt the necessity to prevent the remaining neighbours from falling into the Atlantic alliance trap. The whole Russian mobilisation started in the background of such fears and anxieties.

Economic costs of Ukraine invasion

Predictably, the US response was threefold: (i) impose sanctions on Russia, (ii) militarily support Ukraine directly and through its allies, and (iii) generate world public opinion through intensified campaigning both within the UN and outside. By enforcing sanctions, President Biden called Putin the aggressor and said that he and his country will bear the consequences.

Biden authorised ‘strong sanctions and new limitations on what can be exported to Russia’. He warned that this would “impose severe costs on the Russian economy, both immediately and over time.” Biden also said that he had “purposefully designed these sanctions to maximize the long-term impact on Russia and to minimize the impact on the United States and our Allies.” Reminding that the US was building a coalition representing more than half of the global economy, Biden told Putin that these coalition partners will limit Russia’s ability to do business in dollars, euros, pounds, and yen. He said this will limit Russia’s ability to finance the Russian military.

Biden said Russia had already seen the impact of the West’s actions on the rouble which hit its weakest level in history. And the Russian stock market plunged. The Russian government’s borrowing rate spiked by over 15%. Consequently, Russian banks would “together hold around $1 trillion in assets.” The US will also cut off Russia’s largest bank from the US financial system. Biden warned that every asset Russians have in the US would be frozen, including VTB, the second-largest bank in Russia, which has $250 billion in assets.

Biden also sought to assure that the country would provide more than $650 million in defensive assistance to Ukraine this year. However, he made it clear that Atlantic community forces will not engage Russia. The US is well aware of the nuclear and missile capabilities of Russia.

Even as the global energy sector witnessed unprecedented surge in oil prices, the US sought to ensure that American oil and gas companies should not hike prices to profit from the crisis. Biden said US sanctions had been designed to allow energy payments to continue, thereby monitoring energy supplies for any disruption. The US was already coordinating with major oil producing and consuming countries toward their common interest to secure global energy supplies and, if necessary, will release oil as conditions warrant. Alongside the US, Britain, EU, Japan, Australia, and several other countries have also announced restrictions on Russian citizens with connections to Vladimir Putin.

The US and the EU already have sanctions in place on Russia’s energy and defence sectors, with state-owned gas companies and their oil arms facing various types of curbs on exports/imports and debt-raising. Germany also stopped the Nord Stream 2 Baltic Sea gas pipeline project, designed to double the flow of Russian gas direct to Germany, after Russia formally recognised two breakaway regions in Ukraine. In the meantime, the pipeline project had faced opposition within the EU and the US on the grounds that it would increase Europe’s energy dependence on Russia. On the harsh measures being put in place, a Russian spokesman said his country is capable of mitigating the damage.

On February 25, the Committee of Ministers of the Council of Europe voted to suspend Russia from the council over Moscow’s special military operation in Ukraine. But a Russian official replied that those who initiated and supported this decision will bear full responsibility for the collapse of the common legal and humanitarian space in the continent. Without Russia, he said, the Council will lose its pan-Europe identity.

Implications for the global economy

The Ukraine crisis undoubtedly generates enormous risks for the global economy which is yet to recover from the Covid-19 setback. The war came in the wake of prolonged uncertainty and tensions that already triggered shocks through the world economy by growing energy prices. However, the oil price began to fluctuate with an initial rise crossing $100 a barrel for the first time after 2014, while European natural gas jumped as much as 62%. On Friday it began to fall following the news that sanctions were not imposed on the energy industry.

Kristalina Georgieva, managing director of the International Monetary Fund (IMF) warned that the conflict would have serious economic impact. She said that the crisis came at a time when the global economy is recovering from the pandemic. She also pointed that beyond Ukraine, the conflict poses economic risks around the world.” IMF is assessing the implications, commodity markets, and the impact on trade partners of countries in the region.

Bloomberg economists put across some scenarios that scrutinise how the conflict could impact growth, inflation and monetary policy in the US and other countries. First, a quick end to the war prevents further increase in commodity prices, keeping the US and European economic recoveries on track. Second, a prolonged conflict where tough Western response and disruptions to Russia’s energy exports would deliver a bigger energy shock to global markets. And in the worst-case, the fallout would see Europe’s gas supply cut off, triggering a recession, while the US would see tighter financial conditions, a bigger hit to growth, and a markedly dovish Fed.

The economists suggested that some countries like Saudi Arabia and other Gulf oil exporters might benefit. But for most emerging markets — already suffering slower recoveries — the combination of higher prices and capital outflows could deliver a major blow, and exacerbate the risk of post-Covid debt crises. There are also risks emerging from cyber attacks by Russia. The New York Fed estimates that an attack impairing five most active US lenders could affect 38% of all banking assets. However, the economists agree that Russia with all its vulnerabilities would be the worst-hit among the major economies and the price Putin will have to pay for his action will be very high.

Moscow knows that 2022 is different from 1956 (intervention in Hungary), 1968 (intervention in Czechoslovakia), and 1979 (intervention in Afghanistan). The Soviet Union at that time had enormous resources, capability, and strategic partners. Although Moscow today looks upon China, India, and a few other countries in other regions, their potential and constraints are self-evident. Both BRICS and SCO are more or less mute spectators (though the latter was designed as a counterweight to NATO).

More importantly, all these countries including Russia and organisations like BRICS are operating within the rules set by the global techno-capitalist order. Plausibly, countries like Russia and China will not risk prolonged military adventures given the pay-offs from the current trade and technology regime. This must surely be the reason why Moscow is now ready to talk to the Ukrainian President Zelensky who has apparently accepted Putin’s proposal to negotiate peace and a ceasefire.

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The author is ICSSR Senior Fellow and Director, Inter University Centre for Social Science Research and Extension (IUCSSRE), Mahatma Gandhi University, Kerala. He also served as Dean of Social Sciences and Professor of International Relations and Politics at Mahatma Gandhi University.